London is the number one choice for commercial property investors around the world looking to invest in European commercial property markets, according to new research by CB Richard Ellis (CBRE).
The commercial property advisers discovered London attracted over £8bn, 39% of all non-European investment during 2010 and the first half of 2011. Paris was the second most popular after London, with £1.63bn, an 8% market share of the total £21bn reportedly changing hands during this period. Completing the top five cities for commercial property investment are Berlin, Moscow and Frankfurt. These three cities each registered between £600m and £700m, a 3% share.
CBRE highlights how, since 2008, “institutional-type, equity-based investors have played a bigger role” in global commercial property investment. These investors, which include pensions, insurance and sovereign wealth funds, are said to prefer “core assets in large, liquid markets”, which include some of the larger office and retail buildings in London. The “low returns on cash and top-rated Government bonds” serve to further heighten the attractiveness of commercial property yields in London, says CBRE.
This is in contrast to the pattern of previous years, “when a larger volume of global capital flows involved debt-financed property investment”, described as “more dispersed” across European commercial property markets, was the norm.
In August, the question of commercial property investment in the UK versus government bonds and currencies was tackled by Henderson. Noting that inflation was above target, the global fund management company described “well-managed” commercial property funds as able to provide “robust, steady streams of income” for “yield-hungry investors” looking at London and further afield. Interest rates would “remain low for the foreseeable future”, leading Henderson to compile a portfolio “composed almost 75% of prime assets” which “has been revalued upwards for 25 months in a row”.
The status of London as a global financial centre, its perceived openness and transparency, and its lease structures are all cited as reasons for the market for commercial property in London to be “the single most important” and “far ahead of other markets”. The structure of commercial property leases in London allows rent increases to occur more frequently than in other European cities.
Of the total ploughed into non-European commercial property, investment from North America represented 55%. Asia was second with 21% and the Middle East third with 18%. CBRE recognises this diversity as adding “depth and liquidity” to the market for commercial property in London and points out that London benefits from being viewed as a gateway for commercial property investors who subsequently venture further into Europe.
What of the future? New global investors are anticipated to gravitate towards London, amid an “international diversification of real estate portfolios”. CBRE expects that “sovereign debt problems and divergent national economic performance will lead to increased polarisation” in European commercial property markets. The difference between primary and secondary commercial property markets in London and the rest of the UK has been documented in previous blogs, and this is underlined by CBRE as a key issue; the advisers expect it “to continue for the foreseeable future and possibly intensify” in the commercial property market in London and beyond.
