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London Commercial Property Deals Jump on Foreign Buyers

London Commercial Property Purchases Jump on Foreign Investment
Skyscrapers, from left, the Swiss Re building, the Leadenhall building, 20 Fenchurch Street and the Shard stand on the skyline in the City in London. Photographer: Chris Ratcliffe/Bloomberg

Investors bought more commercial real estate in central London last year than in the rest of Britain for the first time as buyers from the U.S. to Malaysia favored the U.K. capital, according to broker DTZ.

Investors purchased a record 16.1 billion pounds ($25 billion) of income-producing office buildings, stores, and warehouses in London last year, a 48 percent increase, compared with an 18 percent drop to 15.9 billion pounds in the rest of the U.K., according to DTZ.

“The surge in investment activity in central London can be linked to very strong demand for prime U.K. assets from foreign investors,” Ben Burston, head of U.K. Research at DTZ, wrote in a report today. “London offers large lot sizes and liquidity.”

Overseas investors accounted for 16 billion pounds of U.K. commercial property purchases last year, 61 percent more than in 2011. Britain is Europe’s largest property market and the second-most liquid market in Europe after Sweden, London-based DTZ said in the report.

London deals involving overseas investors last year included the 330 million-pound purchase of Devonshire Square near Liverpool Street station by Blackstone LP, the world’s largest private-equity firm. Malaysian fund Permodalan Nasional Bhd. bought the headquarters of law firm Linklaters LLP in the U.K. capital and New York-based Brookfield Office Properties Inc. acquired a 518 million-pound portfolio of buildings from Hammerson Plc.

Liquidity Story

“Good liquidity is essential,” Hans Vrensen, global head of research at DTZ, said in a statement. “If you cannot buy into and then later sell out of a market, relative value is immaterial.

“We highlight the U.K. alongside the U.S., Germany, China and Japan as especially attractive to international investors,” he said.

While London may be seeing the greatest benefit, buying conditions across Britain are the best since 2002, according to DTZ. Assets outside the U.K. capital are fetching lower prices, increasing returns at a time when the yield on 10-year gilts remains below 2 percent.

Income-producing property values in U.K. regional cities fell at a slower pace in the first quarter as “sentiment improved around investment opportunities for good quality assets in the U.K.’s top tier regional cities,” research firm Investment Property Databank Ltd. said in April. “Rental growth continued to fall outside of London, showing occupiers are still struggling with austerity cuts and tepid economic growth.”

Alternative Financing

Real estate investors in the U.K. have been turning to insurers, pension funds and the bond markets for financing as banks are reluctant or unable to extend credit. The value of non-bank debt rose 35 percent to about 20.6 billion pounds last year, according to DTZ, a unit of Sydney-based UGL Ltd. New bond issuance globally rose 30 percent to $92 billion.

Private-equity firms bought $273 billion of income-producing real estate globally last year and were the “main driver of global growth,” DTZ said in the report.

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