Bonanza Expected In London Real Estate Market

The deep decline in real estate values in London is turning into a bonanza for landlords, who are buying up discounted commercial properties in major office markets around the world and renting them out for a good return.

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The deep decline in real estate values in London is turning into a bonanza for landlords, who are buying up discounted commercial properties in major office markets around the world and renting them out for a good return.

The yield on global real estate is ranging anywhere from 4.5 percent to 9.5 percent, with a typical return of 6.5 percent, according to Simon Kinnie, a strategist with Standard Life Investments, the Edinburgh-based money manager with $240 billion in assets. “Prices have fallen close to 50 percent in the UK, and yields are rising as prices fall,” Kinnie says. “When you compare it to the yield on other assets, it is pretty good.”

On Thursday, the Financial Times reported that the financial sector in London is quickly outgrowing the market for available office space. Despite expressed fears that regulation will make the UK banking sector less competitive, financial institutions there are expected to add 11,000 employees during the next three years, according to BNP Paribas. At that rate, the City will require an additional 1.6 million square feet of office space, comparable to four or five office towers.

Given the tight market, property investors have been moving into higher end office areas such as London’s West End, a 19th century street known for its shopping, according to Kinnie. Retailers in the West End are paying 20 percent more than last year, Bloomberg said, citing Colliers International.

Crown Estate & Norges Bank sold a 25 percent stake in Regent Street to NBIM, which manages the Norwegian Government Pension Fund Global. NBIM took a 150-year lease for 452 million pounds. The deal was completed in April.

“Tenants are more willing to invest in their own businesses and we are starting to see rents rise. The market is similar in other cities such as Paris and some markets in the US,” Kinnie said.

In New York, the market for top office buildings in midtown tightened during the first quarter according to The Real Deal. It cited a CBRE study that found availability in top buildings in New York City “dropped sharply” during the first quarter to 7.3 percent from 9 percent.

And Union Investment said it has sold its Paris Marriott Hotel Champ Elysees to an undisclosed buyer for $311 million, a price that it said well exceeds its most recent valuation.

Office rents are surging in Asia, too. The rent for top buildings in Singapore rose 16.8 percent during the second half of the year.

Kinnie said he is geared toward investing in “better quality assets” with yields in the 4 percent range. While lower quality assets can offer a much higher yield, the risk of problems related to weaker tenants and income flows is much higher, too.

Prior to the financial crisis, real estate yields were driven by quickly rising property prices, high debt levels and financial engineering, according to Kinnie. Just now, thanks to lower property prices and a strengthening global economy, he said, “the fundamentals look good.”

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