US and Australian investors have taken advantage of the slumping value of the pound against their respective dollars to splurge more than $2 billion on London commercial property in recent months, as other international investors have pressed the pause button.
According to figures from Savills, US investors spent £809 million ($929 million) on offices, shops and warehouses in London between July and September, double the £418 million ($479 million) invested by US businesses in the second quarter.
Australians were nevertheless the top foreign investors in the third quarter, with figures skewed by one acquisition, TCorp and Lendlease's £809 million acquisition of 21 Moorfields in the City.
Australian companies spent US1.178 billion (£1.02 billion) in total, Savills reported. Elsewhere Australian listed developer Goodman splashed £180 million buying Staples Corner Business Park, an industrial estate in Brent Cross in north-west London, from Abrdn.
US and Australian investors had joined other nations in retreating in the second quarter of 2022, but have stepped into the breach in a period that has seen the pound slump sharply against both the US and Australian dollar, particularly post 23 September and short-lived Prime Minister Liz Truss's ill-fated mini Budget.
Increased American and Australian appetite has come in sharp contrast to investment originating from Hong Kong, Singapore, and Germany, which fell during the third quarter, Savills said.
Liz Truss’s now notorious 'mini budget' hastened an ongoing decline in the pound against the dollar. Sterling has fallen 15% against the US currency since the start of the year as the Federal Reserve has continued to raise interest rates quicker than the Bank of England. The Sterling to Australian Dollar exchange rate hit multi-year lows in late September.
Savills' figures look at investment volumes split by the top 10 countries of origin in the third quarter only.
Rasheed Hassan, head of global cross-border investment at Savills, says it is hard to disentangle how much currency fluctuations may have played a role in cross-border investors’ decisions to buy commercial property, as it’s "just one factor" that may drive decision making and is not an influence for every type of investor.
He added that Sterling’s depreciation is also relative as other currencies have also seen turbulence this year. But he said that, anecdotally, Savills believes it has "piqued the interest of a number of foreign investors" who do see the current moment as a buying opportunity.
"Hotspots of activity are likely to come from deep pools of private capital based in Hong Kong, Singapore and the Middle East, as all have currencies that have strengthened considerably against the pound and view UK property as a safe haven in an uncertain world.”
Savills points out that the drop in investment in the second quarter was "not simply isolated to US investors".
"Market uncertainty was already starting to creep in. There wasn’t clear evidence of price moves in transactions, however we were seeing softening in bid levels from some investors, in particular those using debt in their acquisitions.”
Hassan says that as at today, given devaluation of the pound, the UK looks particularly compelling for US Dollar denominated investors, but points out that currency is seldom the sole driver for investment.
"The asset price moves we are seeing in the UK right now are serving to encourage interest from investors across the world. Major US investors on the whole have been biding their time but we are starting to see a notable uptick in their conviction to invest.”
The biggest US deal in the period was the completion of US private equity firm Bain Capital's £197 million ($226 million) long-running talks to purchase office block 60 Sloane Avenue from the Vatican. The office-to-residential development opportunity is at the centre of an ongoing fraud trial that revolves around the previous purchase of the building by the Secretariat of State in stages between 2014 and 2018 from Italian businessman Raffaele Mincione. Savills advised on the sale.
Other notable deals include US industrial giant Prologis buying warehouses in Park Royal, north London for £126.5 million ($145 million) from Schroders Capital and the £84 million ($97 million) purchase of Westlands industrial estate by the now Blackstone-owned St Modwen.
Chicago-headquartered LaSalle Investment Management alongside Trilogy Real Estate bought the former London Metropolitan University buildings, 41-71 Commercial Road and the Met Works Building, in Aldgate for a major education and innovation hub development for around £56 million, in a transaction revealed by CoStar News.
Overall, investment in Greater London commercial property rose from £1.48 billion ($1.7 billion) in the second quarter of 2022 to $2.9 billion (£2.53 billion) in the third, Savills reports. The figure was well below the $4.4 billion (£3.84 billion) invested in the same period last year.
Lambert Smith Hampton's third quarter figures showed £10.6 billion of commercial property sales across the UK, down 36% on the second quarter and the weakest quarterly total since the third quarter of 2020.
The return to robust performance by US investors in recent months compared with other foreign buyers follows a well-trodden path.
In 2021 US and Canadian investors dominated UK real estate, taking advantage of the strong exchange rate and having "boots on the ground" to go where other investors had feared to tread at the height of the pandemic.
So what are US investors really going to be targeting going forward?
Hassan says the greatest interest is being generated in assets with significant price moves and in sectors with the strongest fundamentals and those that have the most compelling rental growth prospects such as life sciences, living, and logistics.
"For the London office market the same logic applies: the strongest rental growth prospects sit within the highest quality and best located assets. This is where we are seeing the smallest price moves.”