London has a property problem.
Brexit is looming, potentially wiping out thousands of finance jobs, real-estate investment trusts are slumping, office values are dropping, and the city is losing money to places like Frankfurt and New York.
Funny, but Chinese investors don’t seem to notice.
Whatever travails residential landlords face, commercial property in London remains good value for the Chinese, and it isn’t all due to the post-Brexit plunge in the pound.
Beijing and Shanghai may offer relatively high returns for commercial landlords of more than 4 percent, but the yield spread – the difference between what government bonds pay and rental yields – is among the lowest of major financial centers. In London, it’s about 3.5 percent, versus 1.5 percent in Shanghai and 1.8 percent in Beijing, third-quarter data from CBRE Group Inc. show.
In China, investors are also accustomed to agreements that allow tenants to negotiate six-year leases after three years. In London, eight- to 10-year contracts are the norm. Brexit may have muddied London’s long reputation as a stable market, but on the whole, landlords can still count on reliable tenants.
Add to that closer ties between the U.K. and China (despite tensions that flared when Prime Minister Theresa May briefly held up the Chinese-funded Hinkley Point nuclear plant), and the allure is clear. A possible stock trading link between Shanghai and London would bring the two even closer, making it easier for mainland companies to set up shop.
Little wonder then that Chinese money flows into London are picking up again. Chinese investors, among the world’s most active buyers of real estate, are on track to plow 4 billion pounds (USD5 billion) into property in the city this year, beating the 2015 record by a large margin. Developer APB London and Citic Group Corp. are helping to build a new business district in the east while companies including China Minsheng Investment Corp. and China Vanke Co. are among those that have forked out millions on office buildings.
Investors from elsewhere may be rethinking their commitment to London – certainly the recent surge in U.K. government bond yields has lessened the appeal of commercial developments. But in China, people are not only coping with a weakening yuan and slower economic growth but government curbs that are starting to put pressure on real estate prices across the board.
Those domestic tensions won’t ease any time soon, giving this property gold rush West long legs. Nisha Gopalan, Bloomberg
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