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Saturday, September 29, 2012

UK remains the main destination

INVESTMENTS from Malaysia's private and government-linked organisations into prime Central London since 2009 have exceeded £3.5bil, according to syariah-compliant Gatehouse Bank plc.

This is consistent with the £3bil figure brought up by a few property consultants based in London the past two weeks.

“We expect overall purchases to increase (from Malaysia). The EPF (Employees Provident Fund) is looking for diversification and that is a successful strategy.

“The next question is: Do you want to keep it in British pounds or do you want to bring it back?” Gatehouse Bank chief executive officer Richard Thomas says during a trip to Kuala Lumpur for the Global Islamic Finance Forum last week.

The latest completed purchase is by Lembaga Tabung Haji, which bought 10, Queen Street Place for £165mil from Jaguar Capital. The property has an annual yield of 5%.

The deal was completed in the middle of September via Gatehouse Bank and Savills. The 221,200-sq-ft block is tenanted to international law firm S.J. Berwin. The lease expires in December 2025.

The other two deals which are pending are 5 Aldermanbury Square and 10 Gresham Street, both in London, worth £425mil, which are being considered by Kumpulan Wang Persaraan (KWAP).

KWAP has set up a wholly-owned subsidiary office, Prima Ekuiti (UK) Ltd, in Mayfair as part of its strategy to diversify its equity portfolio abroad, with Britain among its key target markets, KWAP chief executive officer Datuk Azian Mohd Noh tells Bernama.

The Malaysian private investment firm was set up with RM985.2mil (about £200mil) geared for equity investment there.

Since the financial crisis erupted in 2008, both private and institutional investors from around the world have been flocking into London to buy prime Central London assets.

EPF, Lembaga Tabung Haji and Permodalan Nasional Bhd (PNB) have been the largest investors in that city from Malaysia to-date. EPF has invested up to £1bil in seven properties since 2010 although what is listed (see table) today is only six.

An EPF spokesperson declined to give details of its seventh purchase. Separately, EPF chief executive officer Tan Sri Azlan Zainol says the fund may invest a further £400mil to £500mil in the next two years, thus expanding the kitty for the British property market.

Gatehouse Bank says in a July report that in the first quarter of this year alone, about £1bil from sovereign wealth and overseas pension funds from around the world have bought into that market. Coming a far behind is opportunity and private equity funds, which have invested up to £200mil in the first quarter.

PROPERTY JEWEL: The Whitefriars at 65, Fleet Street, London, which costs EPF £148mil, has a yield of 5.8%.

At the same time, the greatest sellers have been pension, life and insurance funds as well as open and closed-ended funds, the report says.

As the eurozone is expected to face greater challenges in the next 18 months, there is a possibility that more funds will be entering London.

Says BNP Paribas Real Estate chief executive office John Slade: “If the euro were to collapse, it will have an effect on the London property market. London will be as attractive, probably more so because whatever recession issues (we have) do pale in comparison. But, having said that, European politicians will not allow the euro to collapse. They will stumble through.”

Slade says if the eurozone is to stabilise, far eastern Asian funds may go into Europe, as some already has, such as from South Korea. “You will get better yields (there) but that is because it is very risky,” he says.

A source says EPF is planning to expand its diversification by buying into multi-asset portfolio which comprises 10 to 12 assets that is sold as a single entity. An EPF spokesperson declines comment, adding that “it is the EPF's policy not to comment on matters which are still at the planning stage.”

PROPERTY JEWEL: St James Square, which was acquired by EPF for £147.5mil, offers 5.4% yield.

The strategy may be similar to its Goodman Group purchase in Australia where it has teamed up with Australian integrated property company Goodman Group to seek logistics asset investment opportunities.

The initial investment in that venture totals about A$400mil (RM1.25bil) and comprises six stablised logistics assets.

“If it were to go into a multi-asset purchase, this type of asset portfolio may call for greater management,” Thomas says.

EPF's current portfolio of assets, which comprises office buildings, have yields of 5% to 5.8%. Its first industrial purchase outside Central London is a Sainsbury's distribution centre in Dartford, Kent, which it acquired for £80mil from a fund managed by Tristan Capital Partners and AEW Europe. The property offers an annual yield of 6%.

London is competing with other European cities to attract money, with one of the closest competitor being Paris.

PROPERTY JEWEL: Aldermanbury Square, which is pending acquisition by KWAP for £225mil, has a yield of 5.3%.

Thomas says it is only in London that one is able to have long leases of between 10 and 25 years. French leases are generally short between three and nine years while Germany has a complicated tax structure.

Gatehouse Bank's primary focus in Britain is outside prime Central London, it is active in Leeds, Manchester, Aberdeen and Glassgow because of its emphasis on the syariah-compliant factor. Thomas says the bank has knowledge of London market.

“Prices are lower in the other cities and the quality of rental is equally good. A depressed location does not mean bad property,” he says, adding that it has bought into a 17-year lease at nearly 7% yield. Had it been in London, the property would have generated a 4% yield.

He says central London offers long-term secured value for the pension fund.

“It does not matter if you get a 4% to 5% yield if you have a prime location. The character of the transation is extremely important.

Thomas: ‘A depressed location does not mean bad property.’

“If you are careful, you buy into a low-rent asset and hope that when the property upturn comes around, you get to increase the rent and the value of the asset increases with it. That is the objective of long-term investors in London today,” Thomas says.

Jones Lang LaSalle director (city investment) Andrew Hawkins says in an e-mail that over the last three years, Asian funds have dramatically increased its spending in London offices.

He says that across Central London, the proportion of offices sold to Asian buyers has increased from 6% in 2010 to 16% in 2011 and 17% in the first quarter 2012.

Says Hawkins: “In the city, this is far more pronounced. Respective proportions have increased from 4% to 24% to 31% on an annualised basis and within this pool of investment capital, Malaysian money has been particularly active.

“The EPF alone has purchased just under £800mil of London office stock, from Paddington through to the City. More recently, PNB has acquired £865mil in just three assets, two of which were traded in the opening months of 2012.

“Looking forward, we can expect far more activity in the UK commercial and residential markets from Asian capital including Malaysia. Asian capital is focused more on the City as lot sizes are more palatable and the availability of stock, level of income yield and income is more appropriate,” he says.

Differentiating the Asian investors, Hawkins says South Korean and Malaysian institutional investors tend to be more income-driven while those from Japan, Singapore and Hong Kong tend to be more willing to embrace activity management (as oppposed to buying just a building for its yield).

In a July report, BNP Paribas Real Estate says that since the start of the year, 85% of investment into the City came from overseas investors.

Cruickshank: ‘Investments are coming from a range of countries and regions.’

The report also says that 71% of investment into the overall Central London market came from overseas investors, with North America, Middle East and Germany proving to be the most active regions. In addition, 61% of investments into the West End market has come from overseas the top investors are from North America, Germany and other European locations.

BNP Paribas Real Estate senior director for international investment Andrew Cruickshank says that this year alone, more than £6bil has been invested into Central London offices.

He says that over the decades, specific countries have been dominating the London investment market, “but this has now changed, with investment coming from a range of countries and regions, especially those with growing middle classes or a large amount of high net-worth individuals.”

He says pension and sovereign funds generally buy into commercial real estate with long leases as these leases cannot be broken. As rents generally only rise, yields will further benefit.

On cities on mainland Europe like Paris and Berlin, which have generated much interest, he says European cities generally do not offer the long leases which generally characterise the London market.

Cruickshank says that over the next 18 months, the eurozone will remain too risky to invest in.

“Some Malaysian investors have already shelved European aspirations. Some opportunity funds have been eyeing the Italian and Spanish markets but it is probably nine to 12 months too early.

“Bargains may exist but only if the assets can be let, and the occupational market in Europe remains uncertain. Looking further ahead, London will remain the favoured location for investment in Europe. However, some investors will look to create a balanced portfolio across Europe.”

By The Star

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