Conditions ripe for Japanese commercial investment boom in Central London

London is likely to see an influx of Japanese investment into Central London offices in 2019, as Yen buyers find office investments a third cheaper compared to three years ago, according to the latest research from Knight Frank.

Analysis of the Central London offices market reveals the significant currency discounts for global investors over time. Compared to the previous market peak in 2015, Japan has the biggest discount on the West End offices market, with Japanese investors paying 31.2% less in Q4 2018.

In 2018 Japanese investors spent £222 million on Central London assets. Major deals in 2018 included the £154m acquisition of First Avenue House on High Holborn, by a Japanese private client of Sumitomo Mitsui Trust Bank (SMTB) and Knight Frank. The deal was the sixth largest private purchase in London last year.

Edward Fairweather, Central London Capital Markets at Knight Frank, who specialises in Japanese cross-border investment, said: “Central London remains a compelling destination for long-term investment, with the value of the pound providing a strong incentive for international investors in 2019. Japan is in a leading position relative to other nations, and we expect to see Japanese interest in the London market translate into higher investment activity in 2019.

“Japanese investors are now expanding their Central London appetite into a wider range of sectors in 2019, including Hotel, Logistics and Residential as they look to diversify out of Japan. Investors can expect discounts of up to a third on 2015 values for West End offices, which combined with Japan’s ongoing programme to diversify its public purse, means London is very well placed for significant investment in 2019.“

“Overseas investment volumes into London continue to exceed expectations, despite the uncertainty around Brexit. London remains the number one global recipient of foreign direct investment in to commercial property, outperforming Manhattan, Paris and Tokyo.”

Faisal Durrani, Associate, Central London Research at Knight Frank said: “European investors appear to be capitalising on the weakness of sterling as well, with £2.55bn committed in 2018; the third highest level from Europe ever recorded, as investors seize on a perceived pre-Brexit advantage. This underscores the depth of London’s appeal. Even Norway’s sovereign wealth fund, already one of the largest property investors in the UK, has announced plans to further deepen its UK commitments with a 30-year investment horizon.

“Investors from the EU stand to benefit significantly from the weak pound, with a 27.8% discount for Euro buyers compared to Q1 2015. Germany was the fifth biggest investor in the Central London office market in 2018, spending £682 million, while Spanish buyers spent £591 million on Central London assets.

“Thailand’s stronger Baht could also drive an increase in activity by Thai buyers, with a 26.2% discount West End property.”

Conversely investors from those regions who acquired property in the West End in these currencies in Q1 2015 will have little incentive to sell, as the assets have depreciated in value by around a third. For India buyers, City offices are currently 0.7% more expensive than in Q1 2015 and West End offices are currently 25% more expensive compared to the to the previous market peak of Q2 2007.