11 August 2008
As any firm with a sizeable commercial property department will know, the credit crunch has resulted in a reduced volume of investment transactions involving real estate – some surveys have noted a 50 per cent drop in Central London transactions from the high point of early 2007. There is a huge weight of equity looking to get back in the market, but every indication is that the bottom of the market has not yet been reached.
The state of the market has alerted one group of investors – the sovereign wealth fund (SWF) – as well as investors who have not traditionally been big players in the UK property market. Qatari-based funds are now behind the development of the Shard of Glass and Chelsea Barracks, while a Kuwaiti fund acquired the Willis Building from British Land. The activity has not been limited to direct investments, but includes the acquisition of listed property companies, with Gazeley and Minerva gaining the attention of Dubai-based funds over the past few months.
The headlines about money coming from Russia and the former Commonwealth of Independent States (CIS) has been principally focused on high-value residential properties in London, but Russian investors are also starting to pick up commercial assets, such as the 50 per cent stake in Beetham’s development at Blackfriars by the Moscow-based Mirax Group.
For many SWFs, their main source of income comes from oil production. Over the past year the price of City of London properties may have dropped by between 20 and 25 per cent, but the price of oil has virtually doubled in the same period, which makes investments look comparatively cheap in terms of numbers of barrels of oil. Money from Russia and other investors from the former CIS originates principally from the natural resources of these countries.
A number of concerns have been raised over the arrival of foreign capital in the UK property market. Unfounded as most of these are, they read something like this:
• “The UK is experiencing an unprecedented influx of foreign money.” In fact, investment from foreign investors is nothing new. Over the past few decades lawyers have been acting for buyers from the US, Germany and Japan, and more recently from Ireland and Israel, who all looking to invest in an asset class and jurisdiction that has been stable for many years. Some SWFs, such as GIC from Singapore and the Abu Dhabi Investment Authority, have also been active in the UK for some time.
• “They are opaque.” The concerns that are sometimes directed at SWFs in the context of private equity or corporate transactions do not apply to property in the same way. These concerns usually focus on the lack of transparency of SWFs and protectionist concerns about whether we are happy for funds, the identity and objectives of which are unknown, to take large stakes in our listed companies. But rights for occupiers are enshrined in leases, and it does not really make a difference who the owner of the building is.
• “They will outbid traditional investors in real estate.” SWFs do have serious amounts of money to spend, are not dependant on high levels of debt and have strong sentiments for the UK market and the opportunities that falls in value have to offer. The notion that SWFs have so much money to spend that they will bid almost any price to secure a building is, however, a gross misunderstanding of their organisational structure and market intelligence. They have talented individuals guiding their investment strategies and they look to achieve genuine value and significant returns over the long term. Investments in listed property companies are not just trophy hunting – they show a long-term commitment to the UK property market.
The potential for UK lawyers is massive, but some will be much better placed than others to take advantage of the opportunities. Some real estate practices will see changes in the make-up of their clients. The practices benefiting the most may be from those firms that have presences in the Middle East and Russia, providing they understand the commercial drivers of these clients. It may not be restricted to the larger practices, as the focus of attention for these investors is likely to broaden out from just trophy office and hotel assets in London at the top end of the investment market.
There will also be an increase in the number of sharia-compliant funds. This will benefit funds lawyers in the Middle East region, but already UK property finance lawyers are finding an influx of Middle East banks in the London market and other banks seeking to set up sharia-compliant structures in anticipation of an increased number of Middle East investors looking for such products.
These funds will help to add a degree of liquidity to the market at a time when it is really needed. The enthusiasm for these investors to acquire UK property for the long term may assist in kick-starting a phase of increased activity over the next year. Traditional investors in UK property may be back in action by mid-2009, but the impact felt by SWFs is likely to be a significant driving force in the market for some time
Simon Price is a partner at Herbert Smith
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