- If sterling continues at a similar rate since the referendum, the UK will continue to see sustained interest from Middle East and Asia Pacific investors, JLL reveals.
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.
After Theresa May triggered 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.
Ben Burston, Head of UK Office and Capital Markets Research at JLL said: “For many long term investors, sterling depreciation 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.”
Will McKintosh Head of Residential, JLL, MENA added: “In the Middle East, we find that Gulf based investors and owner-occupiers have always had a tremendous affinity for the UK as a place to invest and to spend time. The capital largely flows into London from these potential investors, but there has been increasing interest in cities such as Birmingham and Manchester in the last couple of years.”
“These capital outflows have fluctuated in recent years due to the UK General Election in 2015 and then the vote to leave Europe last year. However, despite these factors creating uncertainty, we have seen many buyers seeing this as an opportunity and a time to take advantage of the weaker pound against dollar based currencies in the region and the possibility of some negotiation on price which can be much harder usually.”
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%.