On brisk winter day in central London, the cavernous ballroom of the Park Lane Hotel is packed with a diverse crowd.
Clutching glossy brochures, they chat quietly among themselves in English, Arabic, Urdu and Chinese.
This is the afternoon session of Allsop’s first commercial property auction of the year, where everything from swanky offices to garages, corner shops to warehouses, from Newcastle to Brighton to central London will go under the hammer.
The buildings up for sale in these glitzy surroundings are hardly glamorous by global property deal standards. The first item, a restaurant in a popular south-eastern commuter town, goes for £1 million (Dh6.11m); the second, a block of rundown shops and flats in Finchley, North London, goes for more than £2m.
But the bidding represents a new confidence in the commercial property market as the UK economic recovery gets underway.
Meanwhile, the diversity of the buyers represents something else, the increasing internationalisation of not just the UK residential property market – but commercial property, too.
While Arabian Gulf investment in residential property in London may not be anything new, a recent report claims GCC investors – led by sovereign wealth funds in the UAE, Qatar and Kuwait – are also eyeing the commercial property market in the United Kingdom.
Four of the biggest deals in British commercial property last year came from the Gulf and Deloitte Real Estate estimates this year – when 6.6 million square feet of office space is expected to be delivered in London – the trend is only set to continue.
The July opening of the Shard, 95 per cent owned by Qatar, was undoubtedly the headline deal of last year, but there were others, too. St Martin’s Property Group – owned by the Kuwaiti government – bought 5 Canada Square in January for £383m while a Middle East investor bought IBM’s London HQ from Amsprop for £120m in September, according to Deloitte.
But concerns have been raised in Europe that rising demand for European property is driving prices up and leading to fears of a renewed property bubble. In London, commercial property prices hit a six-year high last year, according to a report by the Financial Times, with non-UK buyers making up 72 per cent of fourth-quarter transactions in the City of London and Docklands and 75 per cent in the West End.
There are notable differences in investment in commercial and residential property in the UK, many of which are attractive to overseas buyers at both the high and low end of the spectrum.
Whereas in the residential property sphere, British law tends to favour tenants over landlords, in commercial property it is the other way around. In addition, letting commercial space is inherently more simple than residential – tenants are long term, unlike the usually shorter-term leases of residential.
“Commercial is a sound investment in the UK because of the tenure,” says Robin Williamson, the property industry leader at Deloitte Middle East. “There is huge protection for landlords because of landlord and tenant legislation, and leases are long. So add those two together and it is almost a bond style investment category.”
This is especially true in London’s West End or the City, where most of foreign investment has been concentrated. Letting prime commercial space to a top tenant is a secure, long-term investment class, whether it is a top investment bank in Canary Wharf or a luxury store chain on Oxford Street.
Then there is demand, says Mr Williamson, which is kept strong not just because of London’s location as a global financial hub, but because of the UK’s strict planning regulations. There is only a finite amount of space in the city and, unlike Dubai or Abu Dhabi, developers cannot expand indefinitely into the surrounding area. As a result, the commercial “bubble” is unlikely to burst.
“The issue with London is it doesn’t get any bigger height-wise or width-wise because of planning, so it is unlikely that you will see mass oversupply,” Mr Williamson says.
Richard Divall, at Colliers estate agent in London, goes further. He feels the significant boom in UK residential property over the past 12 months is actually pushing more investors towards commercial. He does not think the commercial upturn is likely to slow any time soon.
“Residential values have highly out performed commercial over the last four years but I think we are now at the point where commercial values have caught up with residential and there are signs that the top-end residential market is slowing,” Mr Divall says.
He points out that a lot of the money chasing commercial stock in London is coming from overseas and, as a result, represents new money. “I don’t think we are going to see any reduction in any areas of London as the investors are paying these levels anticipating strong rental growth as the economy improves. Actually, I can see the commercial market showing better returns than the residential market in the next few years,” Mr Divall says.
Still, there has been speculation in London some of the more recent Middle East forays into UK commercial property have not yet come to fruition. The Shard, for example, has experienced problems finding office tenants despite the unique nature of Britain’s tallest tower.
“The Shard had hoped to attract more private equity and venture capital companies from the West End market but they have not been keen to leave Mayfair and compromise their high net worth individuals easy access to their offices,” says Mr Divall.
“However, the owners of The Shard won’t put themselves under pressure if they don’t want to, especially now that they have established a record headline office rent for the area with the letting to NewsCorp.” That agreement came in June, when NewsCorp – which owns a number of British newspapers – agree to let the Place, next door to the Shard, from this year and leave its base in Wapping after three decades.
Mr Divall also points out that the Shard is a mixed-use development in a new area of London, one that is likely to see more growth in the years ahead. Letting issues at the eye-catching building only relate to the office floors, with the restaurant, shops, hotel and visitor centre all already let.
As for criticism in some quarters that Gulf investors in London are merely throwing their money around, Mr Williamson is dismissive. “I think the Middle East investors are very savvy in most cases, in most cases they are well advised. Gone are the days when people turn up on a whim and decide they are going to buy a building – it doesn’t happen.”
Back at the Park Lane Hotel, Allsop’s first commercial auction of the year ends as a success, with 85 per cent of properties sold having made or exceeded their reserve.
The final figure for funds raised is £34.9m, with buyers from as far away as Hong Kong participating via telephone and the auction house noting increasingly strong overseas interest.
“Demand has improved since the December sale, particularly for prime assets that could generate a reliable income stream,” says George Walker, an Allsop partner and auctioneer.
“It was the strongest market that we have seen for some time.”
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