Costly London Loses Allure for Commercial Property Investors

London, Europe’s most active commercial property market since the start of the global financial crisis, is losing some of its allure as high prices and prospects of a U.K. recession deter investors.

The British capital slipped to 10th place in a ranking of 27 European cities, according to an annual survey of more than 600 brokers, investors and money managers compiled by PricewaterhouseCoopers LLP. It came first in last year’s survey for new investment and fourth for the performance of existing properties.

Respondents “complain about the difficulty of getting hold of assets, strong competition and bubble-like pricing,” PwC said in the report, which it compiled in London for the Urban Land Institute.

The U.K. fell out of the top five countries for investment in a Jan. 25 survey by the European Association for Investors in Non-Listed Real Estate Vehicles, or Inrev. Investors and money managers favored Germany and Scandinavia, which they saw as the most likely to weather the recession threatening Europe.

The British economy shrank 0.2 percent in the fourth quarter as manufacturers cut output and services stagnated, leaving Britain on the brink of another recession. The median forecast of 33 forecasts in a Bloomberg survey was for a drop of 0.1 percent.

Istanbul was the most-favored city in this year’s PwC study because of its longer-term economic prospects, and Warsaw advanced into the top six. Munich, Berlin, Hamburg and Stockholm also featured in the top six investment locations in the study.

Few Sure Bets

“Few places are considered a sure bet,” PwC said, citing difficulties in obtaining bank finance, prospects of more distressed sales and depressed tenant demand that will come with an economic slowdown or recession.

The perception of London as a haven for real estate investors allowed the city to attract the most investment in the world in 2009 and 2010, while last year it vied with New York for the top spot, according to the latest data compiled by Real Capital Analytics Inc.

London was one of the first property markets to start recovering from the global financial crisis, rising in the second half of 2009 after two years of declines erased 50 percent from city-center office values. The pound’s 22 percent drop since September 2007 also made property more attractive to international investors.

Foreign Ownership

The flow of money from overseas means that for the first time more than half the office buildings in the City of London financial district are foreign-owned, according to a study commissioned by U.K.-based property company Development Securities Plc.

South African billionaire Nathan Kirsh acquired Tower 42 and neighboring buildings for 283 million pounds in December, while palm oil billionaires Kuok Khoon Hong and Martua Sitorus bought Aviva Plc’s base in the financial district for 288 million pounds in June.

Competition among international investors for prime properties powered a 35 percent rise in prices for offices in the City of London financial district in the 27 months through November 2011, data compiled by researcher Investment Property Databank Ltd. show.

Purchases of offices in central London totaled 10.2 billion pounds, or 30 percent of commercial real estate investment in the U.K. last year, according to data compiled by Staffordshire, England-based Property Data.

Capitalization rates, or rental income as a proportion of a building’s purchase price, rose to 5.73 percent in the final quarter from 5.6 percent a year earlier, reflecting weaker prices, Property Data said.

Slowing Economy

Britain’s slowing economy is likely to sap companies’ demand to lease more space, slowing rental growth and the appreciation of property values in the capital.

The survey’s reflect respondents’ view that “the city is overpriced and their anticipation that very little capital appreciation will occur” for prime properties leased to good tenants over the short and medium term, PwC said.

Paris, Europe’s second-biggest investment market, also sank in the survey’s rankings, although the decline was less pronounced than London’ slide because the French capital is less reliant on banking and financial services, PwC said.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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