Where Are Arab Investors Buying Property In London?

Standing on the 30th floor of the under construction South Bank Tower, the views across London’s cityscape emphasise the appeal of high-rise living.

The building, originally named King’s Reach Tower, was once the headquarters of one of Europe’s biggest publishers IPC, but harder times followed.

In 2010, the site was plucked from receivership by private equity real estate firm CIT and Saudi Arabian investment bank Jadwa Investment for £60 million, with the two seeking to transform the building from 30 floors of office space to an even taller mixed-use development.

For Jadwa, the motivations for the partnership were clear. Most if not all of its investors were “very familiar with London,” some deemed the British pound “cheap at that time,” while the tower was also considered a lower price entry point into the London property market, according to Raed Al Ammari, director of business development, asset management at the investment bank.

King’s Reach was in a location that had not traditionally appealed to Middle Eastern buyers, who were allured by the extravagance of the mansions and townhouses of Knightsbridge, Mayfair, Belgravia, Kensington and Chelsea rather than apartments along the river Thames.

However, the city’s property agents suggest London’s real estate market is shifting, in more ways than one.

Changing PostCodes

London’s South Bank, a huge area of riverfront stretching from the iconic Tower Bridge in the east to Battersea Power Station in the west, is set to be one of the main beneficiaries of a marked shift in the capital’s prime market (the top five to 10 per cent of property).

Over the last decade, the area has been transformed with the average new build price rising from £500 per square foot (PSF) five years ago to £1,300 today, according to real estate advisor CBRE.

In areas considered the heart of the South Bank, between London Bridge and Waterloo, new schemes are consistently achieving over £1,800 PSF.

“Middle Eastern investors are now moving away from core markets,” says Charles Walsh, director of London residential development at rival agency Savills. “If you asked me 10 years ago if they are buying South Bank, I would say absolutely not. It’s Knightsbridge, Belgravia or nothing. Now we are seeing a huge amount of change happening.

“That’s the spread of prime and realising that prime London is not actually the established addresses. It’s to do with communication, walkability and proximity to the heart of London.”

This changing prime mind-set is being led by a new generation of well-travelled buyers who would much rather own a central high-rise apartment with city views than a traditional townhouse.

“A lot of the Middle Eastern buyers are next generation. They went to university in the US and the UK. They are very well travelled compared to their parent’s generation. They don’t want to stay in dad’s house in Knightsbridge. They want their own apartment with amazing views,” says Walsh.

The Qatari Diar-owned Shard, London’s and Western Europe’s tallest building, arguably served as the flipping point, in South Bank’s rise, according to CBRE, establishing the area on the global map as a place to invest.

The fund’s London projects now attract global attention, with one of its largest also on the South Bank at the Shell Centre, where it is engaging in a redevelopment project in partnership with Canary Wharf Group.

The £1.2 billion scheme will see the Shell Centre tower complemented by eight new buildings, providing 800,000 square foot of residential space in total and up to 877 new homes, a significant percentage of which are expected to be sold to Middle Eastern buyers. Diar and Canary Wharf Group plan to buy two office buildings at the 1.45 million square foot scheme for more than £500 million.

“Sovereign wealth funds are really putting London on the map for foreigners. A lot of them are now seeing their governments piling into investments and as a result seeing London as an investment place themselves. It’s a stamp of approval,” says Walsh.

But it is not just large funds driving the market. In the last two years, real estate experts have also seen examples of mid-sized Middle Eastern investment in multiple units or smaller scale schemes.

“It’s not a single unit purchase and its not Qatari Diar funding a whole scheme. It’s in that middle ground of a £10 to £30 million investment. Often it’s a family trust or family office investment,” says Rory Cramer, senior director, central London residential, at CBRE.

Given the quality of stock coming online CBRE estimates South Bank property could break a £2,000 PSF average price point in the not too distant future and there is a significant pipeline of projects.

The firm estimates that 27 schemes are planned, totalling an addition of around 16,300 new homes in the area over the next 10 years. At least 10 per cent of these are forecast to go to Middle Eastern investors.

“The strength of local market conditions, in addition to the quality of product being delivered, affirms the notion that South Bank is now comfortably into its prime stride,” the firm states in its South Bank report.

But while these figures, and those from Nationwide Building Society in July, which said London property prices rose at a record 25.8 per cent between the second quarters of 2013 and 2014, do paint a rosy picture, other indicators suggest it may not all be plain sailing ahead.

MaRkEt UnCERtainty

In August, London home sellers cut asking prices by the most in more than six years, adding to signs that the UK property market could be cooling down. London values fell 5.9 per cent from the previous month to an average of £552,783, the biggest drop since December 2007, according to property website Rightmove, with prices declining 2.9 per cent nationally.

Property demand normally weakens during the summer months but Rightmove said the slump was larger than expected, with tougher mortgage rules and anticipation of higher interest rates putting pressure on the market.

Some of the largest London price declines were seen in affluent, Chelsea and Kensington, with asking prices dropping seven per cent in the latter to an average of £2.2 million, down 1.4 per cent year-on-year.

Prior to this report, Savills predicted that London’s prime market would drop by one per cent in 2015, its first decline since March 2009, following slowing price growth in the last three months of 2013 from 3.1 per cent to two per cent.

“The market does face some short term challenges, which mean that growth is expected to slow across the prime London market over the next 18 months,” says Lucian Cook, head of residential research at Savills.

“Firstly, the market has to contend with political rhetoric regarding the taxation of high value property and ongoing background noise regarding a possible mansion tax. Secondly, the levels of prime new-build stock coming to the market are rising and high relative to occupational demand.”

Cook told The Telegraph newspaper that the UK’s exchange rate advantage had been the catalyst for the rapid recovery of the prime central London housing market, but this advantage had eroded with the pound growing stronger.

Despite these factors, those in the real estate business are hoping London’s safe haven status, particularly given the escalation of tensions in Eastern Europe and the Middle East, will be enough
to continue drawing investment to the capital’s property market.

“Currency is a major factor, but there are numerous reasons leading the acquisition of London property,” says CBRE’s Cramer. “The key ones are the fact that it is a safe haven politically and legally it’s very stable. It’s in a central time zone, is a finance centre, and a education hub, which are also right up there with the reasons to buy.”

He does contend, however, that there is some degree of uncertainty in the market, particularly regarding property taxation, with parliamentary elections approaching next year. “There is going to be a level of uncertainty in terms of if the Labour party comes to power what will change, but we think it is very unlikely.”

TaRGEtinG thE aRaB MaRkEt

As with the London market, much has changed at the South Bank Tower site since its acquisition in 2010, with planning permission achieved to extend the building to 41 floors in total and a £250 million round of development financing through a senior debt package led by ABC Bank and mezzanine financing from Saudi Arabia-based Mohammed Alsubeaei & Sons Investment Company.

By mid August, CIT and majority partner Jadwa had sold 137 of the tower’s 191 planned apartments, 50 to Middle Easterners, and they are now looking to heavily target rich Arabian Gulf investors for the remaining larger units, which include duplex/laterals valued between £5,935,000 and £9,135,000 and penthouses valued between £14.25 and £16.75 million.

The firms are hoping the site’s extensive private roof terrace, nearby cultural destinations like the Tate Modern, transport links from the newly redeveloped Blackfriars station across the river, and the opening of the Mondrian London hotel opposite will cement the development’s appeal in the build-up to its completion from Q4 2015 to Q2 2016.

CIT’s exit strategy for the tower has focused on de-risking the scheme, which has meant selling at lower rates, but because the acquisition was bought from receivership four years ago, as opposed to current market levels, the firm argues it can be more flexible with pricing.

“That comes down to our business model. There are other business models out there. There is an Abu Dhabi owner of a site in Kensington and they are not doing pre-sales. They are taking a view that when buyers meet their price, they’ll sell the apartments,” adds Edward Barroll Brown, COO of CIT.

The development cost for the project is around £350 million with CIT revealing that South Bank Tower’s gross development value upon completion is expected to be approximately £620 million.

This will provide an estimated return of around £200 million for the scheme’s original investors, with Brown revealing he’s set to double their money.

“We expect to make optimum returns, now that London has one of the most established development pipelines,” he says. The COO admits that the market is “certainly more expensive than it was” when CIT and Jadwa acquired the tower, which has limited the company’s scope for other projects, but his overall outlook for London property remains a positive one.

“There are a huge number of macro trends which have driven London, from the Arab Spring, through to exchange rates, through to Argentina defaulting and Ukrainian money coming in,” he says. “While a few of these may get disrupted, the majority of these trends will continue. So the long term forecast would be an upward one.

“Would I be happy to have my own capital tied up in London long term? Absolutely. Would I want to trade real estate markets month by month? Definitely not.”