Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

London has a property problem.

Brexit is looming, potentially wiping out thousands of finance jobs, real-estate investment trusts are slumping, office values are dropping, and the city is losing money to places like Frankfurt and New York.

Funny, but Chinese investors don't seem to notice.

Whatever travails residential landlords face, commercial property in London remains good value for the Chinese, and it isn't all due to the post-Brexit plunge in the pound.

Beijing and Shanghai may offer relatively high returns for commercial landlords of more than 4 percent, but the yield spread -- the difference between what government bonds pay and rental yields -- is among the lowest of major financial centers. In London, it's about 3.5 percent, versus 1.5 percent in Shanghai and 1.8 percent in Beijing, third-quarter data from CBRE Group Inc. show.

Mind the Gap
Shanghai and Beijing have among the lowest yield spreads globally
Source: CBRE Research

In China, investors are also accustomed to agreements that allow tenants to negotiate six-year leases after three years. In London, eight- to 10-year contracts are the norm. Brexit may have muddied London's long reputation as a stable market, but on the whole, landlords can still count on reliable tenants.

Add to that closer ties between the U.K. and China (despite tensions that flared when Prime Minister Theresa May briefly held up the Chinese-funded Hinkley Point nuclear plant), and the allure is clear. A possible stock trading link between Shanghai and London would bring the two even closer, making it easier for mainland companies to set up shop.

Where to Next
Investors from Asia are casting their millions far and wide, snapping up property assets around the world
Source: CBRE
Note: All figures are based on standing investments, which include, but are not limited to office, retail, industrial, hotel, residential and other commercial properties. Development site transactions are excluded.

Little wonder then that Chinese money flows into London are picking up again. Chinese investors, among the world's most active buyers of real estate, are on track to plow 4 billion pounds ($5 billion) into property in the city this year, beating the 2015 record by a large margin. Developer APB London and Citic Group Corp. are helping to build a new business district in the east while companies including China Minsheng Investment Corp. and China Vanke Co. are among those that have forked out millions on office buildings.

It's a Work Affair
Shanghai and Beijing enjoy high prime office yields but London isn't far behind
Source: CBRE Research

Investors from elsewhere may be rethinking their commitment to London -- certainly the recent surge in U.K. government bond yields has lessened the appeal of commercial developments. But in China, people are not only coping with a weakening yuan and slower economic growth but government curbs that are starting to put pressure on real estate prices across the board.

Those domestic tensions won't ease any time soon, giving this property gold rush West long legs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net