South Korean investors are backing out of major deals to buy London office space, after investing nearly £3 billion in 2018. Overall investment within the sector is on course for a huge drop ahead of the impending Brexit date this month.
Only 3 months into 2019 and investments in central London office have totalled £527 million, according to the property advisory firm CBRE. Essentially, to reach figures similar of that in the first quarter of last year, in the next 5 weeks there needs to be a surge in activity to even get close to the £2.8 billion-worth of deals seen in 2018. This figure is still far away from the first quarter average of £3.7 billion over the past five years.
The withdrawal of South Korean investors play part in this shortfall, who overtook Hong Kong as the most dominant overseas investor group last year (click here to read our article on this) accounting for almost a quarter of international investment.
According to investment managers and property investment advisers, the uncertainty of Brexit’s impact on the pound, combined with a limited appetite for UK property, seem to have led South Korean investors to retreat from buying this year.
Based in Seoul, KB Securities, a subsidiary of KB Financial Group, have backed out from a £460 million deal to purchase the UK HQ of Credit Suisse in Canary Wharf.
A consortium of South Korean investors and Hines (the American investment manager) is thought to have walked away from a deal to buy a £145 million office building on Cannon Street. An investment manager, who has worked with Korean investors, has said they will not make purchases this quarter as risk committees struggle to sign off deals.
Multiple South Korean purchases made last year were actually by security companies, whose investment model is to sell down a portion of the equity to domestic institutional investors after closing a deal. However, some deals are taking longer than expected to sell down to institutions in Seoul. There are worries regarding the stability of income from tenants, such as companies in financial services and flexible office providers.
“There’s a little bit of indigestion from Korean institutions at the moment.”
Head of central London capital markets at JLL, Julian Sandbach, said: “There’s a little bit of indigestion from Korean institutions at the moment.” He followed by highlighting that completed deals needed to be sold down further at home before the region returned to the market.
Head of central London investment at Savills, Stephen Down, mentioned that whether or not Korean investors return to the market this year depends on issues such as “prevailing interest rates at the time and currency”.
It’s not all bad news though. CBRE said that there are around £1.6 billion live deals at an advanced stage, including negotiations by Citigroup, to buy their HQ in Canary Wharf for £1.3 billion. There is currently around £4.4 billion of stock on the market.
James Beckham, head of London investment properties at CBRE, said: “As the noise around Brexit comes to a crescendo the buyer pool across the London market has noticeably narrowed. However, some canny investors are seeing this as an opportunity to step in against reduced competition. Private equity groups and family offices are leading the way.”
Since the Brexit vote, London office valuations have been sustained at close to record highs, with increased levels of overseas investment attracted by the weaker sterling, and a strong leasing market supported by the rapid expansion of flexi office providers such as WeWork.
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