Investors from China gamble on London's real estate
London's commercial property sector witnessed a sharp surge in Chinese investment in 2016, driven by the weaker pound resulting from uncertainties over Brexit, and investors hunting for better yields due to economic restructuring at home.
Chinese investors bought more than 3.15 billion pounds ($3.9 billion) worth of central London commercial assets in 2016, accounting for 22.5 percent of total central London transaction volumes, compared to their purchase of less than 1 percent in 2006, latest statistics by property broker JLL revealed.
The increases mean Chinese buyers have overtaken US buyers as the dominant source of capital investment into London commercial property, as they have bought about 10.2 billion pounds of London assets in the past 5 years, according to JLL.
Commercial property mainly comprises office buildings－which can generate more than 4 percent net returns for investors, according to estimates by Eric Zhao, an associate director and Chinese capital markets specialist at estate agent Savills.
Good tenant covenants and long-term leases for the commercial property investment market are contributing toward this favorable return, Zhao says.
Laurel Zhang, head of the China and Far East Desk at the law firm Sherrards Solicitors, said her team has also noted a very strong Chinese appetite for UK property.
Although Brexit uncertainties have led to some slight drops in property values, Chinese investors are still getting a bargain due to the depreciation of the pound, said Zhang.
The pound has depreciated just a little more than 10 percent against the yuan since the June 2016 UK referendum on leaving the European Union.
Zhang said: "Meanwhile, China's real economy is not performing as well as it should be, so many businesses in the real economy sector are witnessing reduced opportunities to invest, so they have more excess money to invest in overseas assets."
Eric Pang, director and head of the China Desk at JLL, said the trend of Chinese investors buying overseas commercial property started around 2011, led by sovereign wealth funds, insurance firms and institutional investors.
Pang said: "These investors are keen to diversify their asset base, and good asset accumulation they were experiencing in earlier years gave them further capability to invest overseas." In more recent years, private sector funds and investors and also property investment firms have followed, Pang said.
Deals have continued into 2017. CC Land Holdings, a property-holding firm backed by Hong Kong property tycoon Cheung Chung Kiu, bought an office building in Paddington for 292 million pounds in January.