The UK’s definitive exit from the European Union on January 31, three-and-a-half years after a slim majority of voters decided to do so in a referendum, is offering family offices in Asia the confidence to seek investments in the nation’s real estate market.
“We would [allocate further] if we see good opportunities,” Elaine Chow, Hong Kong-based managing director of family office Trinity Capital, told AsianInvestor. The 17-year real estate veteran has invested in three commercial properties in West End London and one in Edinburgh for Trinity.
Chow made a property investment in the country after the referendum, at the “lowest price per square feet in 10 years”, and her firm has bought more last year for rental income. They are mostly core-plus commercial buildings.
The investment have been steady earners, offering a capitalisation rate, or the expected rate of return on a property investment, of about 6.5%. All-told Trinity has spent about £200 million on property investing in the UK to date and is looking for opportunities to do more, both for their rental income and potential capital appreciation.
Another Asia-based family office, Ferretto Capital, is also positive on the outlook of UK real estate – especially upscale residential properties in London.
Family office executives are far from the only Asian investors to be looking with interest at the UK’s property market. In October Temasek-backed Mapletree Investments completed the acquisition of a pair of student housing properties, while the family office of Chinese property tycoon Cheung Chung-kiu agreed to buy a prime London mansion for more than £200 million in January, potentially breaking the London property records.
The appetite of Asian investors for UK property has been gradually building since last year.
“Globally, by the end of last year, the targeted investments in London was around £32 billion. Which region showed the most interest in central London? It's Asia,” said Henry Chin, head of research of Asia Pacific and Europe, Middle East and Africa at property adviser CBRE.
“All the global regions are still interested in London, but a huge jump is coming from east Asia. Compare to the number we saw in the second quarter of 2019, the figure was up by 16% from east Asia,” Chin added. Both institutional and wealthy retail investors from Japan, Korea, Taiwan, Hong Kong and mainland China were among those to show interest.
This comes despite UK property values not doing well of late. Commercial property values in the nation fell by 3.2% in 2019, largely because of weak performance of the retail market, according to the CBRE Monthly Index.
Given the uncertainty surround the UK's future, this level of interest might seem odd.
In part it's down to the historic weakness of the sterling versus many Asian currencies and the US dollar. The pound has seen its value slide against the dollar from $1.49 the day before the Brexit referendum on June 24 to $1.30 on Thursday (February 6). In addition, purchase opportunities have emerged as some European investors have begun to pulling out of the UK property market.
While this pullback indicates a lack of confidence on the part of European investors, property experts believe the UK’s economy should remain stable even after its divorce from the EU.
“We think Brexit is positive for UK in terms of the economy,” Chow said, noting that the country would have more control over their ports. She said that the country’s economy, which is expected to have grown by around 1.2% in 2019, would stabilise once the internal consumption is boosted.
“If they could price the British pound on the low side it will benefit their exports,” she said. “It was the kind of trigger event that allowed us to take this opportunity.
“The UK is a liquid market [for buying and selling property]. It's an international city with market depth.”
Another appealing point for would-be Asian investors is the fact that UK properties yield higher than those typically available in Europe or Hong Kong. Chin said the capitalisation rate for a grade A office building in the City of London would typically yield 4%. That stands moderately above the equivalent rates for buildings in Frankfurt, Paris and Berlin, which stand at around 2.9%, 2.85% and 2.7%, respectively.
Other real estate experts concurred that UK investments make sense for investors with an eye on the horizon and ability to absorb shorter-term volatility.
“Investors recognise that there are clear short-term risks associated with the UK. Nevertheless, they are taking comfort from the government’s majority and clear mandate [to execute Brexit and other policies],” said Paul Kennedy, head of strategy and portfolio manager for real estate Europe, JP Morgan Asset Management.
“In addition, they are optimistic that the inherent advantages of the City of London over key European markets will support demand and help to see the market through current uncertainties,” he added.
The financial industry, technology firms and professional services are among the sectors that contribute to the demand for London offices, Chin said.
While there appears to be broad agreement that now represents a long-term buying opportunity, the property experts that AsianInvestor spoke to were divided over the level of risks Brexit will raise over the coming year or two, as the UK seeks to hammer out the details of its departure from the EU.
“While we think that there are clear opportunities, it is likely to be a bumpy ride,” admitted Kennedy.
“We have seen a clear increase in both occupier and investment demand in several UK markets over the period since the election, but there is a clear risk that some of this will erode over the next few months as the reality of negotiations with the EU confront the post-election optimism,” he added.
The Conservative government has set itself a deadline of December 31 to negotiate a withdrawal agreement during a transition period. It could extend this for another year, but must do so before July. If talks break down it is possible the country could leave the EU in a disorderly no-deal withdrawal that would be almost guaranteed to have painful economic repercussions, not least on the property sector.
Ultimately, perceptions about the risks surrounding Brexit may boil down to how removed are investors from the issues. While Trinity’s Chow said she is not worried, that optimism is not shared by investors in Europe.
“I trust that it's going to be volatile in the next two to three years post-Brexit but we are aiming for a full seven-year cycle so we are okay. We also bought at historical low prices so we are not too concerned,” she said.
“When we talk to Asian investors, people does not pay a strong attention to Brexit; they care about the US and China trade conflicts more than Brexit. [But] in Europe, they only talk about Brexit,” said Chin.