Abu Dhabi, UAEFriday 19 July 2019

London adrift after wave of Asian money dries up

Buyers from South Korea, Hong Kong and China have all made their own Brexit

Lights illuminate skyscrapers as the sun sets in the City of London. News reports describing political turmoil in Britain in the face of its withdrawal from the EU has hampered investor sentiment. Bloomberg
Lights illuminate skyscrapers as the sun sets in the City of London. News reports describing political turmoil in Britain in the face of its withdrawal from the EU has hampered investor sentiment. Bloomberg

Some of London’s biggest office deals have been left in limbo after the latest wave of Asian money into the British capital suddenly dried up.

South Korean investors plowed £3.2 billion pounds (Dh14.7bn) into the city’s commercial property market in the year through January, a record for the nation. The sudden withdrawal of support back in South Korea by investors, who were expected to buy stakes in the London properties, has threatened deals and stuck some Korean firms with properties they can’t offload.

More than a dozen asset managers, investors and brokers described in interviews the retreat of South Korean investors from London real estate deals and the impact on the market. They all asked not to be identified discussing confidential transactions. Units of Hana Financial Group and Mirae Asset Daewoo, Korea’s biggest brokerage by assets, are among buyers of properties they’ve struggled to sell on, they said.

Reluctance to sink more money into London offices isn’t unique to South Korea. Hong Kong investors that dominated deals in 2017 have slowed down purchases, while Chinese buyers, who were once the biggest investors before that, have also withdrawn from the market after the imposition of capital controls. News reports describing political turmoil in Britain in the face of its withdrawal from the European Union have been a major factor, according to Faisal Durrani, an associate at broker Knight Frank.

“London’s appeal as a property investment destination has clearly come under pressure as investors take a wait-and-see approach,” Mr Durrani said.

In South Korea the trade went like this: securities firms bought properties that that were cheapened by a weaker pound and sold them off in pieces back home to pension funds, insurance companies and wealthy families desperate for investments. Buy, offload, repeat. Trouble is, the negative press reports about Brexit, coupled with a reversal in hedging costs, damped demand for stakes in the buildings.

The London headquarters of Credit Suisse is among the buildings to fall victim to the change in sentiment. A unit of KB Financial Group, the owner of Korea’s biggest bank, entered talks last year to buy the property in the city’s Canary Wharf district. The deal has long since stalled as its Korean buyers struggled to find investors back in Seoul to help close the £450 million transaction, according to people with knowledge of the matter, asking not to be identified because the matter is private.

A sign sits on the U.K. headquarters of Credit Suisse Group AG at the Canary Wharf business and shopping district in London, U.K., on Saturday, Feb. 13, 2016. Banks are taking a hatchet to their bond-trading businesses and the biggest casualties are proving to be the people with the most experience. Photographer: Luke MacGregor/Bloomberg
A sign sits on the U.K. headquarters of Credit Suisse Group AG at the Canary Wharf business and shopping district in London, U.K., on Saturday, Feb. 13, 2016. Banks are taking a hatchet to their bond-trading businesses and the biggest casualties are proving to be the people with the most experience. Photographer: Luke MacGregor/Bloomberg

A representative for KB Securities declined to comment on the transaction.

It’s worse still for some South Korean buyers. Units of Hana Financial and Mirae Asset Daewoo haven’t been able to sell all of the properties they’ve bought, the people said.

Hana Alternative Asset Management’s £285m purchase of the Sanctuary Buildings in London in January, and Hana Financial Investment’s deal for the Gallagher Shopping Park near Birmingham in July last year, still haven’t been fully syndicated, the people said. Mirae has had difficulty selling stakes in an office building in London’s financial district, and a unit of Kiwoom Securities is in the same boat with the £120m Cannon Green building in the Square Mile, the people said.

Full marketing for the syndication of the Sanctuary buildings was delayed due to Brexit and changes in taxation for overseas investors purchasing UK property, a representative for Hana Alternative Investment said in an emailed response to questions.

“The sell down is in progress,” a spokesman for Hana Financial Investment said by telephone, without elaborating on how much they’ve managed to offload.

“Securities firms are struggling with investor syndication of UK real estate,” a representative for Mirae Asset said in an emailed statement. “The most important reason is the uncertainty with regard to Brexit.”

The planned sale of an office building at 45 Cannon Street to a Korean-backed consortium has collapsed for the same reason, according to people familiar with the sale, who didn’t identify the firms involved.

The reluctance of South Korean investors to buy into London property deals has coincided with increasing currency-hedging costs that are cutting into potential returns. Investors from the Asian nation typically seek a return of about 7 per cent, the people said. Broker Knight Frank estimates yields on the most sought-after City of London offices are about 4.5 per cent and the securities firms need to borrow about 60 per cent of their value to reach the targeted returns.

Securities firms are struggling with investor syndication of UK real estate ... The most important reason is the uncertainty with regard to Brexit.

Mirae Asset representative

That exposes them to hedging costs, which have moved against Korean investors over the past year, as the pound gained about 4.2 per cent against the won. Instead, South Korean investors are moving their focus to other parts of Europe, where political stability and lower hedging costs make deals more attractive.

A Mirae Asset Daewoo-backed consortium agreed to buy the Majunga tower in Paris for about 1 trillion won ($844 million) in March, and another Korean consortium is bidding for the Squaire complex in Frankfurt, the people said.

Some investors are also branching into new markets in central and southern Europe where higher returns are easier to achieve, the people said. The Valesco Group and Seoul based AIP Asset Management announced a deal Wednesday to buy the Twin City Tower in Bratislava, Slovakia, for €120m.

London is facing an uncertain future. Valuers at Knight Frank have now downgraded prices for the best City of London offices by a quarter of a percentage point, the first such negative shift since before the Brexit referendum in 2016. What’s different here is that the valuers didn’t base their calculations on transactions, but on weak sentiment, they said, because there weren’t enough deals to analyse.

Of the deals that did go through, there’s little evidence of a wave of new capital to replace Korean money. Citigroup purchased the Canary Wharf tower it had previously rented and two existing investors acquired parts of the Battersea power station project. Those two transactions accounted for more than 60 per cent of the total invested in the first three months of the year, and while it only represents a single quarter there’s little indication the current period will see an increase in activity.

South Korean investors are on track to end the second quarter without a single London office purchase. The risk now is that some securities firms that are holding UK properties on their balance sheets because they have been unable to sell down for a protracted period could eventually become forced sellers, the people said.

“In the absence of Korean and Hong Kong investors who made up the last two big waves of capital into London, who is going to pick up deals at current prices?,’’ Stephen Down, head of central London investment at broker Savills said. “We don’t know yet because it hasn’t been tested.’’

Updated: June 17, 2019 06:59 PM

SHARE

SHARE