Record capital targets UK real estate despite investment slowdown

Investors are still looking at the UK property market as an attractive destination for their capital.

December 11, 2019

Real estate investment in the UK may have slowed this year, but a record amount of capital is still seeking a home in the country.

More than US$80 billion of new capital is set to be allocated to London real estate, according to JLL research. However, lack of supply is holding back investors says Alistair Meadows, Head of UK Capital Markets at JLL.

“There is a huge weight of capital continuing to target the UK for a number of reasons: transparency, liquidity, attractive pricing compared with other developed markets, very strong occupational markets and the UK’s reputation as a hub for talent and innovation.”

At least US$1.5 trillion of new capital is set to target global real estate over the coming years, according to JLL. A record US$330 billion of dry powder is sitting in real estate private equity funds, and the majority of the world’s largest institutional investors are increasing their real estate allocations - for IPE’s Top 100 institutional investors to meet their current stated allocation targets, JLL estimate that a further US$860 billion will need to be invested.

In addition, more than US$300 billion of capital is set to emerge from new sources such as Japanese institutions, Middle Eastern sovereign funds and private wealth from Asia and the Middle East, according to JLL.

The UK is the second largest investment market in the world, and has accounted for 12.2 percent of global investment volumes since 2007, according to JLL data. 

“Using this figure as a proxy for the likely future share, we can estimate that around US$182 billion of the US$1.5 trillion global total of new capital is likely to be targeting the UK,” says Cameron Ramsey, Research Associate at JLL. 

“At current exchange rates, this is around £140 billion, more than the UK’s total combined investment volumes in 2017 and 2018, which were very strong years. London alone accounts for 5.6 percent of global investment volumes, which would equate to US$84 billion or £64 billion: a substantial amount of capital.”

In a recent example of the weight of interest in London, Pontegadea, the real estate business of Zara founder Amancio Ortega, last week completed the acquisition of The Post Building for around £610 million in what is understood to be the largest single asset real estate investment in the West End of London.

And it’s not just existing investors keen to increase their holdings, new investors are appearing from the global stage, says Meadows.

“For example, Japanese institutions are looking overseas as never before and Asia is generating huge wealth for individuals and families, for whom real estate is a prime target.”

Private buyers from Hong Kong dominated the London market in 2017, with notable purchases including the two billion-pound towers: 20 Fenchurch Street and The Leadenhall Building. 

After a quieter period, these groups are now “aggressively re-entering the London market,” says Meadows. Wing Tai purchased 8 Salisbury Square for £220 million in July, in the same month Singapore’s Stamford Land Corporation paid £260 million for 8 Finsbury Circus.

But, despite the growing popularity of real estate, UK transaction volumes for the first nine months of this year fell 27 percent, compared with the same period in 2018, to £32.5 billion. JLL attributes this decline to a lack of available stock, due to a mismatch in pricing expectations between buyers and sellers.

“Prices have softened a little after a year of political uncertainty, particularly with regard to Brexit,” says Meadows. “However, there is no distress in the market and sellers are not inclined to discount. They are more than happy to hold in the expectation that more clarity over Brexit and our future trading relationships will bring sharper pricing and a better opportunity to sell.”

“Good quality assets which have come to market and been fairly priced in relation to the current risk factors have been quickly snapped up. However these opportunities have been more limited this year and buyer and seller expectations have diverged.”

Following the UK general election, investors expect more clarity about the UK’s political and economic trajectory over the next five years. JLL expects this to lead to more capital arriving in the UK, especially London, and a bridging of the gap between buyers and sellers.