London is booming as the real estate capital of the world. But with concerns around overpricing, are there clouds on the horizon? Damian Wild reports on the London Real Estate Forum debate
London added another trophy to an already bulging cabinet last week after it was named the world’s most visited city once again. Meanwhile, it continues to compete with New York as the top destination for real estate investment from overseas. At the same time, the city is the undisputed world capital for sovereign wealth, with the UK attracting five times more capital relative to the size of its economy than the US.
It was logical that Estates Gazette followed up its debut Global Real Estate Debate, in Dubai last year, with another forum at last week’s London Real Estate Forum. By the end of the year we will have taken the debate to North America, continental Europe and Asia.
For all world cities, countries and emirates, the question is simple: how can they become the new London, the real estate capital of the world? Last week the question was simpler still: how can London ensure it retains its crown?
For the London debate, EG brought together a panel with serious global credentials: an architect whose work is visible in most major cities across the world; one of the world’s biggest investors; an agent who has acted on some of the most exciting cross-border investment deals of recent times; a North American investor with an established foothold in one of London’s fastest-emerging investment classes; and a partner at one of the world’s biggest law firms.
Panel members were confident that London could retain its hold on the real estate capital of the world title but acknowledged that without certainty on macro-economic policy, on planning and without an uplift in supply, its continued supremacy is by no means certain.
“The investment market in London has been fantastic for the past three to four years,” said Savills’ Stephen Down. “London is on the shopping list for a lot of sovereign wealth and pension funds.”
But Down acknowledged clouds on the horizon too. “There are beginnings of concerns about parts of London looking overpriced. If you take, for example, the Malaysians, who were in this market back about three years ago, with a few exceptions, most of them have moved on. They are looking at Germany and France and parts of North America.
“Some of the Chinese investors we thought would be coming here have looked at the yields, the very highest yields, and said this is not something we can participate in. That said, there are others who are there to replace them so, so far, so good.”
TH Real Estate’s Mike Sales said that with emerging investors’ gaze turned towards London, life was harder for an established investor such as himself. “It makes life difficult,” he said. “Five years ago, as we came out of the last cycle, it was all about capital. The capital was slightly frightened of going in at a time when
the economy was still fragile and in the balance. Now the abundance of capital and debt means it is all about product. And there are only a certain amount of deals that the sovereigns can do over a certain limit. My concern is that will drive pricing to below rational fair value.”
Ryan Prince of Realstar, which has been invested in London for 12 years, agreed that the current mismatch between available capital and supply was a growing problem. But as a residential-orientated investor he had a different concern. “For me, the big challenge in London today is the new key worker class. If you look at who the workers are in London, they are from the service economy. It is retail, travel and tourism and administration. If you make £30,000 to £40,000 a year and you want to live within half an hour of work, I challenge you to find a place where you can affordably do that, even if you are renting, let alone buying.
“It is becoming increasingly uneconomic to build because the weight of capital is making the value higher but rents have not moved, which just means yields are lower, which makes it uneconomic to build and hold and finance. I think there needs to be some alternative ways of looking at it because it is creating some mismatches that are going to be a problem, certainly in the medium term.”
But none of this would disrupt the flow of equity into the capital, said Linklaters’ Simon Price. Like his fellow panellists, Price was not overly concerned by talk of a Brexit. “One of the trends we see is that there is quite a lot of deregulation in a number of the overseas markets – Canada, Australia – where you have got big state pension funds and superannuation funds coming into the market,” said Price. “In China, there are huge changes in terms of the ability to deploy capital overseas, and that means that there is a stock of dry powder that we see increasing, not decreasing.”
A MANIFESTO FOR LONDON?
“We can mess things up by doing nothing and not going ahead with Crossrail 2 and maybe Crossrail 3 as well,” said Savills’ Stephen Down.
“There has been a lot of discussion about air pollution in London and, speaking as someone who lives reasonably close to where I work, I would increase the congestion charge to about £50 a day and extend it to Hammersmith and Canary Wharf.
“At the same time, we should allow people to travel on public transport for £1.50 an hour, to allow people to travel into the centre from wherever they live. Make transportation cheaper to use and bring in a bit more life and vitality. Pedestrianise the centre of the City of London and Mayfair and St James’s and create a bit more life.
“And start talking to investors. Get these investors to commit to the Silvertowns, the Stratfords and Croydons. These are the areas where we are going to expand. That is London.
“We have just got to be a little bit more broad-minded as to where it is good to invest and where we should invest and where people can work from.”
BEYOND YIELDS
“We spend most of our time educating the capital investor market on where the next trends are going to be,” said architect Eric Kuhne, who is currently masterplanning Silvertown Quays. “And, no matter where we build in the world, London, whether people admit it or not, is used as the benchmark of excellence.
“And it is not just excellence on yields or return; it is excellence on long-term sustainability, and it is always based on appealing to a quality of experience that we have never encountered in the past 30 years.
“And those elements of quality of civic life include, for example, the ground plane that is flush with robust activity and acts as a place where people can meet and exchange ideas. The new chambers of commerce are actually on the ground floors of all these buildings. But their offices are not fortresses with security guards and howitzers protecting empty lobbies – instead they are ground-floor planes that actually engage in the life of the city and the reservoir of people that work and live in these buildings. If these sorts of spaces do not enrich these people’s conversations with their family, their friends and their colleagues, the city goes numb.”
RESI REVOLUTION
“There’s London, there’s New York, and there’s everywhere else”. That was Realstar Group vice-chairman Ryan Prince’s view of choosing a place to live. Prince said that the change in London over the past 20 years had been like night and day, particularly in terms of restaurants, retailing and hotels. “But where to invest is a much harder question. There is way more capital than supply and available return.”
Sales echoed this sentiment: “We have to find a solution to keep as many people in the city as possible.”
On Twitter, reaction to the debate centred on residential and work-life balance.
“Struck by focus on housing at #LREF2015 – seems that industry realises that this could derail London,” said
@estatesgazette digital columnist @anthonyslumbers. “Poor quality of life for young is bad.”
@estatesgazette regional editor @EGStaceyM tweeted: “#LREF2015 Lots of talk about making offices nicer because people are at work longer, but isn’t the issue why people are working long hours?”
TRANSPORT EVOLUTION
“When was Crossrail first devised?” asked Linklaters’ Simon Price. “When did people first think about it? The answer is the 1940s. Transport complacency is a concern.”
But Realstar’s Ryan Prince was positive. His perspective on the oft-criticised transport system in London was that it compared favourably with the best in the world. He compared it to Los Angeles, where he said you would never consider crossing the conurbation to go to work.
EAST VS WEST
For architect Eric Kuhne, asking whether Shanghai and Singapore will begin battling with London or New York to be known as the centre of the commercial world is to miss the real cultural shift that is under way.
“We have gone from a world that has a single centre of commerce leadership to a world where there are multiple centres and it is the biggest single shift in the history of the world,” he said. “Not only will there be multiple centres that compete, but multiple centres that rely on each other in ways that have never happened before.
“And so, as we work and we design city centres around the world, the constant thing we emphasise is that we must not Xerox what is happening in London or New York, because that way you mistake the wrapping for the content.”
THE OBLIGATORY BUFFETISM
Stressing that the most important thing a real estate investor can do is stay alive, Realstar’s Ryan Prince said: “I think when Warren Buffet does his analysis on why his returns are so good, he will find that his returns are not so good because his returns are so high every year; his returns are so good because he has good years consistently. One down year wipes out 15 years of great years. And so if you can mitigate getting wiped out, that helps a lot.”
