Two things have really dominated property news in Hong Kong lately: the flood of beloved London property launching sales here and the flight from residential investment into the commercial sector in the wake of added stamp and buyer’s duties. With the government’s introduction of yet another stamp duty in late February — an across the board 1.5 percent — Hong Kong investors may once again find themselves seeking alternatives. It could be time for creative investors to combine the two: London and commercial real estate.
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Most major agencies agree that the best growth (yields and capital values) will come from commercial property this year. And while some commercial activity is so massive it remains the purview of institutional investors and hedge funds, there’s plenty to go around at a more modest level.
For those seriously considering commercial alternatives, London is just about ideal, even more so if you’ve got the stomach for rolling the dice. In the way Hong Kong has Central and a secondary business district in TST (and then the rest of the city), so too London is split mostly into two districts — the West End and the City. Yields sit around 5 percent in the City because demand is pushing yields down but “Despite this central London is comparatively good value, especially compared to Hong Kong where yields are around 3 percent,” explains international investment surveyor John Okell at Knight Frank in London. “You get 5 percent for absolute prime, 4 percent in the West End. The rest of the market for normal stock is closer to 6 percent.”
Yields that rival residential numbers aside, there are other advantages for Asian investors working from a long distance. London’s long leases, generally in the neighbourhood of 10 to 15 years, in themselves are attractive for the low-maintenance required: there’s no fidgeting with new tenants every year to two. Other bonuses are a favourable pound and a familiar legal structure.
As it stands, Okell notes that the large sovereign wealth funds from the Middle East kicked off the commercial trend, and have since been followed by Malaysian funds along the same lines. Most of those are interested in big lots and entire office towers. Next in line have traditionally been developers and institutions. Finally, commercial property has filtered out to the HNWIs. “They’re looking at London more and more because they want to diversify out of residential to a certain extent,” says Okell. Some of that stems from the UK’s own residential stamp duty bump in the 2012 budget, which had a similar influence to what Hong Kong is experiencing now in the flight from one property sector to another.
Smart to be Hip
Canary Wharf office towers may be out of reach for some, but smaller, “cooler” buildings may not be. The technology, media and telecommunications industries (TMT) now constitute London’s largest industrial sector — ahead of banking. The likes of Google and Apple have very carefully constructed personae, and they traditionally want office space in line with those. So do their staff. The rise of TMT industries in London isn’t going to take the sheen off The City and West End, but it is going to reshape the industrial map. So will the city-bisecting Crossrail line. Are the “cool” buildings the way to go for non-riskaverse investors? “Absolutely. I’d look around the Farringdon area in particular,” theorises Okell.
The fringes of the traditional commercial districts are rich in secondary office stock without being too far from the core. The prime districts, “Adjoin to this market where the TMT occupiers are looking, full of old factory buildings that can be converted very easily without a lot of money; really trendy space that’s becoming increasingly attractive.” Farringdon is set for its own station and, “Once the Crossrail is complete in 2018 that area is going to look more and more attractive,” says Okell. “And it’s got great amenity. I would say that’s an upcoming area, certainly.”
Is there anything in the near future that could put a damper on commercial activity? Not surprisingly its taxes — or one tax. The EU has been toying with the idea of a financial transactions tax (which the UK opposes) that some think could drive banks out of the City. That would wreak havoc with demand, but Okell estimates it’s unlikely the proposed FTT will become official; UK taxes vis-àvis commercial property haven’t changed in years. “But the West End is a bit more isolated from anything going wrong because it’s occupied by boutique financial firms and hedge funds. And the stock is increasingly being converted to residential use,” Okell finishes. “It’s looking pretty safe at the moment.”