Once shunned, London commercial property is now the flavour of Europe

Investors from Europe plowed £1.7 billion ($2.9 billion) into the capital’s offices, shops and warehouses this year through April 18, accounting for 31 per cent of the market, according to Savills. That’s up from £824 million and 14 per cent in the same period of 2016.

While the UK has its own political challenges, the hazards are widely seen as predictable and priced in compared with the rest of Europe. Opinion polls suggest Prime Minister Theresa May’s Conservatives will significantly boost their parliamentary majority at the election called for June, helping the PM negotiate a better settlement as Britain leaves the European Union. And many investors have already resigned themselves to the UK quitting not just the bloc but also its single market, and have made contingency plans to soften the blow.

“If anything, the snap election call in the UK decreases uncertainty regarding property values in London,” said David Hutchings, the head of European strategy for property broker Cushman & Wakefield. “If, as expected, May comes out stronger and in a better position to negotiate with the EU, our Brexit will be softer.”

Electoral uncertainty on the continent makes the UK seem a good place for buyers. Photo: Dominic Lipinski/PA via AP

Populist Threat

Centrist Emmanuel Macron’s victory in the first round of France’s presidential elections sparked a global market rally on Monday as a poll suggested he leads rival Marine Le Pen by more than 20 points heading into the May 7 runoff.

Still, the fact that the nationalist Le Pen got through to the second round will encourage foreign anti-EU parties such as Alternative fuer Deutschland in Germany and Italy’s Five Star Movement.

”Elections in France and Germany, and possibly in Italy next year, mean that there’ll be a certain degree of uncertainty vis a vis investing in Europe for a prolonged amount of time,” said London-based Mr Hutchings. “And due to changes that may come via Trump, the US is no longer a natural alternative to London for European buyers. Trump and Brexit taught us all not to be complacent.”

As well as the “comparative uncertainty” on the continent, pricing is a decisive factor, and the pound’s 10 per cent drop versus the euro since the Brexit vote means London is no longer the “most expensive place in the world,” said Mat Oakley, the head of commercial research at Savills in London. “Investors know where the UK is now with Brexit.”

Jumping In

As confidence increases, acquisitions are stacking up. Germany’s Deka Immobilien paid £485 million for the Cannon Place development in the City of London financial district last week, two months after it bought a stake in Rathbone Square, an office and retail site that acts as the UK headquarters of Facebook. Also this month, a consortium of German funds bought London’s Olympia exhibition centre.

Investors from outside Europe are also jumping in, with plans emerging in recent days for Kennedy-Wilson Holdings to buy Kennedy Wilson Europe Real Estate, and Teddy Sagi to acquire Market Tech Holdings.

“The commercial property market in London is 10 times the size of Frankfurt and nobody, not tenants nor investors, want to leave,” said Ronald Dickerman, founder of Madison International Realty LLC, an investor in the development that houses the London Stock Exchange. “Brexit just made London an even better place to invest.”

Election Impact

Paris, by contrast, has seen a “notable drop-off” in commercial property deals during the election campaign, and activity won’t pick up again until afterwards, according to David Ironside, chief investment officer for continental Europe at LaSalle Asset Management, which overseas $58 billion.

Pierre Cherki, of Deutsche Asset Management, said his company is on the lookout for London bargains. The firm’s global head of alternative investments wants to invest in a “large” office property in the city, and a deal will depend on what discount he can get compared with the top of the market.

Last month, the money manager predicted central London office values would drop as much as 20 percent this year as the UK economy slows.

“In Europe, it’s tough from the investment side, it’s expensive,” Cherki said from New York. “Yields in core European markets have gone down to 3 per cent compared to 4 per cent in London.”