CAPITAL WATCH

T here is a section of the UK press which rails against the influx of international money as being a form of invasion that should be restricted. The reality is, however, that this inflow merely reflects the growth of global capital and its inevitable permeation of every single asset class – be it bonds, equities, private equity or venture capital. The good news for concerned tabloid readers is that there will always be a part of London that remains in UK hands. The great estates in the West End have bestowed considerable wealth on the UK families that have had the foresight to retain ownership of their land. Landed estates such as the Grosvenor Estate (Mayfair and Belgravia), the Cadogan Estate, the Howard de Walden Estate (Marylebone), the Portman Estate (Marylebone to Paddington), the Bedford Estate (Bloomsbury) and the Crown Estate (Mayfair and St James’s) will almost certainly stay British. In the City, there is a parallel to the landed estates vested in the “Great 12 Livery Companies” and the City Corporation itself. The Great 12 were historically the most powerful and influential associations in the City of London, active in all aspects of daily life and trade (The Goldsmith’s Company, The Draper’s Company, The Grocer’s Company et al). Many have shrewdly retained their freeholds, enabling them to carve out long leases geared to ground rents – allowing them to control and take upside in rental and development growth as their land has improved and been developed over time. The Great 12 and the City Corporation likely account for around 50% of the Square Mile’s freeholds. Whilst the traditional landed estates in London reflect a constant in the market, the velocity of international capital has accelerated change over the last decade. The Investment Property Forum (IPF) looked at the growth of the international investor in the London market during the years 2003-2013; whilst this data is now five years old, it provides a good benchmark for recent trends. The IPF study found that 62% of investment property in the City was owned by overseas investors in 2013, up from 38% in 2003. Funds Name Country AuM (USD bn) Government Pension Investment Fund (GPIF) Japan 1,191 Norges Bank Investment Management (NBIM) Norway 862 China Investment Corporation (CIC) China 650 Abu Dahbi Investment Authority (ADIA) UAE 627 State Administration of Foreign Exchange (SAFE) China 594 Kuwait Investment Authority (KIA) Kuwait 548 National Pension Services (NPS) South Korea 429 Algemene Pensioen Groep (APG) Netherlands 417 Hong Kong Monetary Authority (HKMA) Hong Kong 391 Government of Singapore Investment Corporation (GIC) Sinapore 320 Qatar Investment Authority (QIA) Qatar 304 California Public Employees' Retirement System (CALPERS) USA 296 Caisse de depot et Placement du Quebec (CDPQ) Canada 237 Saudi Arabian Monetary Agency (SAMA) Saudi Arabia 230 Canada Pension Plan Investment Board (CPPiB) Canada 227 In the last ten years, Sovereign Wealth Funds (SWFs) have emerged as large lot size buyers of major assets across Central London, including the examples set out below: • More London Place, Southbank: £1.8B – Kuwait Investment Authority (St Martin’s) • The Canary Wharf Group and HSBC Tower: £4-5B – Qatari Investment Authority (QIA) • Broadgate Estate: £1.8B – GIC (Singapore) • The Regent Street Estate, St James’s/King Edward Street: £2B (Norges) What is interesting is that these SWFs currently only have between 2-5% of their assets under management (AUM) in real estate, whilst benchmark weightings are closer to 10%: therefore the purchasing power and volume of capital that is yet to come into the wider real estate market is still very substantial. Furthermore, larger SWFs such as Japan’s GPIF and the Saudi PIF have yet to enter the real estate market on a direct basis. Despite the uncertainty in the market caused by Brexit, interest from overseas buyers has continued. This is not surprising as these investors have enjoyed a currency advantage in the post Brexit referendum-era. The last five years has also been notable for the rise of Asian capital. Around 7% of the overall London market in 2013, Asian capital now accounts for around 40-50% of activity, and last year’s market was particularly dominated by Hong Kong and Chinese investors. Chinese investment has been more subdued this year due to capital controls, so Korean (pension funds and insurance) investors have taken the lead. What is clear is that real estate is no longer an alternative asset class, but rather a mainstream asset class particularly attractive to actuaries and SWFs looking to match liabilities and safeguard wealth. The mix of buyers has broadened hugely with ultra high-net-worth billionaires, overseas REITs, SWFs, overseas pension funds, insurance companies, private equity and property companies all competing in a declining investable universe. In time, this will mean that London property becomes more tightly held and less traded. Sovereign money in particular is likely to become increasingly important in ownership terms, and we might expect to see Japanese and petrocarbon-dominated SWFs become the new long-term London landed estate owners in the next 20-30 years. With hindsight, perhaps UK plc missed a trick in the 1980s when we had our own bonanza with North Sea oil. Had the capital been so directed, we might now be adding the UK’s own sovereign wealth fund into London’s ownership mix... The growth of the international capital Asia capital Top 15 Sovereign Investors by Aum Sovereign Investors' Assets 2020 (in USD tn) Conclusion The landed estates 5 0 10 15 2007 5.5 11.3 15.3 2008 2009 2010 2011 2012 2013 2014 2015 2020 9.4% 6.2% SWF PPF CAGR (Source: Preqin, SWC, PwC Market Research Centre) (Source: Sovereign Wealth Centre (SWC) & PwC Market Research Centre) In the five years since the IPF study, there has been a significant increase in investment volumes within the Central London market. What has been particularly evident has been growth in longer term horizon investors from sovereign states. CUSHMAN & WAKEFIELD CUSHMAN & WAKEFIELD 08 THE HOT ISSUE 09 THE HOT ISSUE