Commentary

Hong Kong Investors Optimise Investment Portfolio with London Commercial Property Investments

July 29, 2020

The key to optimizing an investment portfolio is risk diversification. Risk diversification is not something new, but corporations and businesses have recently become more aware of it due to the COVID-19 pandemic. Property investors are now reviewing their portfolios to ensure diversified sources of income by sector and by geography. London commercial property presents a good investment opportunity for Hong Kong investors and developers to diversify their geographical income with attractive returns and lots of potential upside.

Hong Kong investors’ love for London’s commercial assets has not waned as result of COVID-19. 20 Farrington Street was purchased by Tenacity Group for GBP 121 million, with the transaction completed in June 2020. It was also reported earlier this month that Link REIT is in talks to purchase 25 Cabot Square, which is a Grade-A office building in Canary Wharf, accommodating Morgan Stanley’s London headquarters. Hong Kong capital remains a strong engine fuelling investment activities in London’s commercial property sector.

Hong Kong clients like to invest in assets located in core areas of London, which are either close to the city’s prime streets or tube stations in London’s Zone 1 area. This is especially true for first time London buyers, as they prefer core assets. The West-End and City markets are usually favoured by Hong Kong investors, as there is a very limited new supply and investment appetite is diverse. For funds looking for larger assets, the Canary Wharf market is also worth considering. For many Hong Kong clients, the asset itself should preferably be held under a freehold title and committed with a long lease and a strong tenant covenant.

Currency is also one of the pull factors for Hong Kong investors in the London market. The exchange rate of the pound sterling to the Hong Kong dollar has remained below 1:10 for most of the last year. A few years ago, it hovered at 1:12, and was once even as high as 1:16. The fall of the pound sterling presents an opportunity for Hong Kong capital to snap up London properties at a ‘discount’.

The Brexit uncertainty was eliminated in January 2020 after the UK left the European Union. Brexit will enable businesses in the UK to trade more freely with global markets, especially emerging markets, where the major future growth opportunities lie. Clarity on Brexit provides greater stability in the London commercial property market and boosts Hong Kong investors’ confidence in purchases in the city.

The core London commercial property market has even been resilient during the COVID-19 pandemic. With COVID-19 affecting economies around the world, transaction volumes of commercial properties in London were substantially lower in the first half of 2020 compared with the same period last year. Deals with large investment sums were the initial casualties of the pandemic and a lot of the other potential transactions are on hold, with purchasers either undertaking limited due diligence or having paused their due diligence entirely – pending certainty and stable markets. There are currently also limited stock being actively marketed as core assets that are being tightly held by landlords. Yet, there remains a willingness from various local and overseas parties to pursue opportunities. As such, there have not been any cuts to prices for core assets in London. Instead, analysis from the recent en-bloc commercial property transactions in the core London area shows that transacting yields are standing firm at around 4%-4.25%, which is similar to the pre-COVID-19 period.

Arranging acquisition financing for Hong Kong investors is not difficult. The loan-to-value ratio from banks in the UK generally ranges at 50 to 60%. Other than traditional financing from banks, there is also an active debt market in the UK, which enables investors to easily tap into various sources of funds for London commercial property acquisitions.

Hong Kong investors are expected to become more active in the London commercial real estate market in the coming months, with capital from Hong Kong likely to remain one of the key driving forces in the market. Hong Kong investors and family offices that have yet to gain any exposure to the London real estate market will likely consider diversifying their capital there. For investors that have already tapped into the market, it is worth considering assets with a core-plus strategy or assets located in emerging areas of Greater London with different risk and return exposure. Despite lower transaction volumes in first half 2020, it is expected that the London commercial property investment market will be active again very soon, with Hong Kong capital depending on ability and confidence to travel.

This article was originally published on the South China Morning Post on 29th July, 2020.

Alvin Leung
Director, Capital Markets
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