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Investors chase London’s office market safe-haven status

Dubai - Greater China, led by Hong Kong SAR, set to be largest source of capital at £12.6 billion.

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Investors are looking beyond the Covid-19 pandemic to the strengths of London’s office market fundamentals and safe-haven status, with the UK capital’s reputation as a leading global city attracting investors worldwide, with returns currently very enticing compared to other European and global gateway hubs.

Around £46 billion of capital is targeting London’s office investment market in 2021, according to Knight Frank’s annual London Report, which outlines the opportunities and challenges facing the British capital’s real estate market.

“The amount of capital from the Middle East targeting London’s office market this year stands at £3.9 billion. Despite the UK’s lockdown restrictions and the impact on global travel due to the pandemic, London’s appeal remains unwavering to global investors,” said Faisal Durrani, head of London commercial research.

“This continues to be the case for Middle East investors who have spent £16.4 billion over the last 10 years on London offices, accounting for just over 10 per cent of all London office investment.”

Knight Frank has identified the top three locations with the highest amount of dry powder capital that has been earmarked for the purchase of commercial assets in London this year: Greater China, which encompassing the Chinese mainland, Hong Kong and Taiwan, at £12.6 billion; Singapore with over £5 billion; and the US with over £3 billion.

“The UAE is one of the UK’s largest export market in the Middle East. There is a consensus among financial analysts that the UK has consistently indicated a distinct interest for keeping up the most vigorous conceivable exchanging relationship with the UAE after Brexit. The UAE has also increased its investments in the UK since 2016 with Emirati banks increasing their investments in the UK by 23 per cent to $15.67 billion in the first 2020 quarter,” said Amit Gupta, chief executive officer of WebVizion Global.

“UK has encouraged Dubai and Abu Dhabi investors to engage in the post-Brexit UK economy since some huge European establishments plan to withdraw their base from Britain, it will be a great opportunity for Middle Eastern market leaders to step in and set their feet in UK market. Brexit will act as a catalyst for free trade between UAE and UK. The prospect of a free trade agreement with GCC and the reaffirming of bilateral ties with a number of GCC countries will underscore the UK’s restored dedication to its regional presence,” added Gupta.

Despite the pandemic leading to many companies temporarily adopting remote working, the longer-term picture is that London could face a substantial shortage of office space. Knight Frank is tracking 26.6 million square feet of pipeline office developments across London for completion over the next 15 years, but finds that only 3.2 million square feet will be delivered to the market speculatively (i.e. without having secured a tenant and available to let) by 2024.

In contrast, the long-run annual average take-up of new and refurbished space is 5.3 million square feet. Over the longer-term, this supply and demand imbalance will begin to put greater upward pressure on rents for best-in-class space.

“The UK offers transparent and robust regulations, hassle-free company setup, gives access to the world’s leading companies, service providers and most importantly global investors. Partnerships can be explored in areas like fintech, proptech and regtech. It’s a great opportunity for the Middle East companies to expand, learn and share the best practices. Shoreditch in London is a breeding ground for one of the world’s best startups. London startups saw a capital investment of over $9.6 billion in 2020 alone,” said Shantnoo Saxsena, founder of Encryptus Advisory.

“Without a doubt, the UK and the Middle East have successfully attracted one of the world’s best companies and talent to live and work in the country. As an entrepreneur, I see a close collaboration between the UK, Middle East and Asia. At least the fintech space will witness a few cross border tie-ups and collaboration that will fuel the overall growth. Language and ease of business are a few other reasons, why I think the UK will have an edge over Europe post-Brexit.”

The Covid-19 pandemic has accelerated a focus on high-quality offices, with businesses increasingly favouring modern workplaces that prioritise amenities, wellbeing and sustainability. Knight Frank predicts that demand for prime Grade A offices will intensify, relative to poorer quality buildings, creating a greater disparity between the prime and secondary markets.

In spite of the UK’s ongoing lockdown, London remains top of investor wish lists, supported by yields that remain above those of most major global cities. In addition, with the highest concentration of green buildings globally, at almost 3,000, London offers opportunities for ‘green’ investors and those looking to rebalance their carbon targets. Knight Frank expects activity to ramp up as pent-up demand combines with investors employing long-term strategies, post the Covid-19 pandemic.

— sandhya@khaleejtimes.com