The rising tide of foreign, often anonymous property owners, in the City of London highlights its continuing unique appeal, but could threaten its long-term future. This is the main conclusion of Who Owns the City 2006?, the third major report published today by Development Securities PLC on ownership and occupation in the City of London.
Highlights
- Proportion of foreign ownership has more than doubled in less than ten years from 20% to over 45%
- Properties with multiple, often anonymous, owners now account for 54% of total office space
- Private equity vehicles have increased their share of the City office market from 1% to 14% in ten years
- 28% of the City is owned by German, US, Japanese and Irish investors
- £138 billion debt on UK commercial buildings, three times greater than at the last property crash, suggests new City owners are very leveraged
Fragmented, more highly geared, ownership structure increases City’s vulnerability to shocks and boosts volatility
The report, written by Colin Lizieri, Professor of Real Estate and Finance at The University of Reading, for Development Securities, reveals that over 45% of City office space is now owned by foreign investors. That compares with 20%, according to the first Who Owns the City? report published in 1998 and 38% in the second such report published in 2001.
German investors’ share of commercial City space doubled between 2000 and 2005, from 8% to 18%. The next three most dominant overseas investors are the US with 6.8% and both the Japanese and Irish with up to 3.0% of commercial City space each.
Whilst this significant rise in inward investment indicates the current confidence in the City and enhances property market liquidity, the increasingly fragmented character of the ownership of City properties does raise some serious long-term concerns says the report.
Traditional owners of City properties, such as charitable institutions and livery companies, have been replaced, to a large extent, by a range of often anonymous offshore nominee companies, private equity firms, and other hybrid corporate vehicles, many of which have short-term property interests.
The report highlights that the higher leverage among many of these new property owners makes the City more vulnerable to shocks and increases volatility. Also the shorter holding periods and emphasis on returns and maximising cash flow, particularly among private equity firms, could weaken their commitment to the maintenance and stewardship of the City’s buildings.
Another concern raised by the report is that development continues apace in the Square Mile. A total of 3.4 million square feet of office space is currently under construction, of which 75% is speculatively built, despite 10% of office space in the City remaining unoccupied.
Other broader factors that could further dampen the City of London’s appeal says the report are the still high rental costs - the City of London is currently the world’s fourth most expensive office location - public transport problems and unfavourable tax regulations.
CB Richard Ellis estimate that there has been over £14 billion invested in the City of London office market in the past 3 years with 46% of that total - £6.5 billion - attributed to non-UK investors. Investment peaked in the fourth quarter of 2004 with over £2.3 billion invested and has continued at a very high level. In the Central London market as a whole, £29 billion has been invested with foreigners taking a 45% share. Acquisitions are also sales; Knight Frank note that a "gaggle of private investors put a swathe of new stock onto the market" and comment that "even Irish investors have been selling this year."
Roy Danzic, Chairman, Development Securities, PLC, commented:
“When we undertook our initial research back in 1998 into the ownership of the Square Mile, we never anticipated that ownership trends would change so markedly in such a short space of time. The current research has identified new players, many of whom are off-shore, and whose investment horizons are likely to be considerably shorter than their recent predecessors. It is not unreasonable to suppose that this could lead to increased volatility.
“The City of London has indeed become a more international location, both as to a global financial centre and as an investment location.”
Download report.
