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Eversheds comment: London commercial property must continue to attract investors to maintain world-leading status

  • United Kingdom

    02-01-2014

    Following news that commercial property investment in London has hit a six-year high, Bruce Dear, head of London real estate at global law firm Eversheds, comments:

    "The reasons for central London’s inward investment boom are not located in London, but in the countries where the money is born. The middle and far eastern sovereign wealth funds hold unimaginably vast surpluses. Equally, the recovering US economy has revivified the US vulture and hedge funds’ animal spirits, and reloaded their firepower. In a world where bonds are too low and equities too unpredictable, the managers of this money need to find yield and diversification.

    “London property is an attractive answer to their problem. Sterling’s weakness means profit on entry. Prices are still below the 2005/6 peak and UK interest rates are at a 320 year low. UK law allows structures that hugely reduce capital and income taxes. Within this framework, a relatively modest (in the world of sovereign wealth funds) capital allocation will secure multiple grade A blue-chip tenanted buildings. These provide steady income in unstable times, a reasonable inflationary hedge and useful diversification: performing better than bonds and more stable than equities. This inward investment is also stimulating a wider property market recovery. Priced out of their capital city, UK investors and institutions are turning to alternative assets and regions.

    “London’s inward investment boom is more about comparative international markets, the wider investment universe and the global imbalance in surpluses, than it is about London’s attractiveness or the quality of its real estate per se (strong though both are). So if these wider investment facts change, then (Keynes-like) inward investors may change their minds about London.

    “London went through a similar cycle in the late 1980s. Between 1988 and 1990, the Swedes and Japanese poured £2.3 billion and £3.2 billion respectively into UK property – 80% of it into London. Then the government raised interest rates to counter inflation. Between the end of 1989 and 1992, central London’s capital value index halved. The Swedes and Japanese sold up and went home.

    “So, no one should be complacent. The government’s tax and regulatory regime, and infrastructure investment, must better the global competition. Our industry must create sufficient grade A assets to satisfy investor demand. Only by viewing London in global context, and competing in the endlessly repeated “X Factor” for gateway cities, will we keep attracting investors to London and maintain its world status.”

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