The depreciation of the pound, coupled with a slight drop in capital values, has led UK commercial real estate to be discounted by 16% on average to overseas capital*, according to property firm JLL.
As Theresa May triggers Article 50, to start the process of withdrawing from the EU, JLL findings highlight that the depreciation has spurred increased investment in the UK from the Middle East and Asia Pacific regions even though the market has experienced less capital inflow from the United States and global funds. Although currency movements have not had a strong historic correlation with overall international capital inflow into the UK, they are part of the reason why the market has experienced a recent surge in demand from buyers from the Middle East and the Asia Pacific region, headlined by Hong Kong and mainland China.
Alistair Meadows, Head of UK Capital Markets at JLL said: “We continue to see the emergence of Chinese capital globally. Chinese investors now rank just behind US as the second largest source of global cross border capital and we expect them to have an increasing influence on the UK market.
“Many investors from China and the wider Asia Pacific region come to the UK with different motivations and return aspirations to traditional UK and global investors. They seek diversification and safe haven forms of investment, and attracted to the depth, liquidity and familiarity of the UK market.”
Chris Macfarlane, Director of Capital Markets at JLL in Scotland: “The broader trend of increased overseas activity seen across the UK has been replicated in Scotland. Last year, ninety three percent of Edinburgh office transactions were completed with overseas buyers. Scotland’s appeal as an investment destination has continued into 2017 with a number of key deals completed by international investors. Rasmala, a Dubai based investment house, has fronted the purchase of the 1 million sq ft Amazon Distribution depot in Dunfermline for c£54 million. Palm Capital, fronting for a French investor, has acquired the Centrica HQ in Edinburgh for c£15 million. And finally, PCN Capital, a North American Private Equity investor, has acquired The Lloyds Register Building at PrimeFour in Aberdeen for c£40 million .
“In the face of some stiff macro headwinds , there remains a healthy appetite for properly priced quality assets.”
Ben Burston, Head of UK Office and Capital Markets Research at JLL said: “For many long term investors, sterling deprecation provides an added fillip to the investment case, based on their perception that it will may appreciate once there is more clarity around Brexit and its economic implications, but it is not a case of one-size-fits-all.
“Private investors have responded to the depreciation more than institutions and global asset managers, and as a result they have become a more important driver of market sentiment and pricing. Despite the triggering of Article 50, as 2017 progresses we expect global funds and institutions to return their focus to the UK, in response to relatively attractive pricing and as more evidence of occupational market resilience comes to light.”
Overall, overseas investors accounted for 48% of transactional activity within the UK market in 2015 and a slightly higher 51% in 2016, with the increase likely to be due in part to the currency movement. Investment inflows from the Americas (primarily the US) fell from 32% of total overseas investment into the UK to 17% in 2016, with the share of global funds (where the ultimate source of capital is split across multiple countries) also falling. In contrast, Asia Pacific and European (ex. UK) based investors recorded a surge of investment, with the Asia Pacific share rising from 17% to 28%, and Europe from 14% to 23%.
*relative to pricing in June post-referendum