The UK’s weak currency is attracting a surge of foreign investment to the post-Brexit country’s real estate market, according to property services company JLL.
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, and spurred increased investment in the UK from the Middle East and Asia-Pacific even though the market has experienced lower capital inflow from the US and global funds, JLL has found.
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, JLL found.
“We continue to see the emergence of Chinese capital globally. Chinese investors now rank just behind US as the second largest source of global crossborder capital and we expect them to have an increasing influence on the UK market,” said Alistair Meadows, head of UK capital markets at JLL.
“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 are attracted to the depth, liquidity and familiarity of the UK market.”
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, according to JLL research. 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 (excluding the UK) investors recorded a surge of investment, with the Asia-Pacific share rising from 17% to 28%, and the European from 14% to 23%.
“For many long-term investors, sterling deprecation provides an added fillip to the investment case, based on their perception that it may appreciate once there is more clarity around Brexit and its economic implications, but it is not a case of one-size-fits-all,” said Ben Burston, head of UK office and capital markets research at JLL.
“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,” he added.