London skyscrapers become latest must-have for Gulf investors
By Julia Werdigier
Thursday, June 19, 2008
LONDON: After investing millions of pounds in British banks, the stock exchange and other financial companies, Middle Eastern sovereign wealth funds are now pouring money into London’s City skyline.
A Kuwait fund just spent £400 million, or $783 million, to buy the Willis Building, one of the tallest in the financial district, and said similar investments were planned. Qatar, the sultanate of Oman and Arab Investments, a secretive London-based fund, are all investing in new skyscrapers that are set to transform the City over the next three years.
London welcomes the investments because they come at a time when tighter lending criteria, the result of the credit crunch, threatens the future of such large projects. And just as traditional developers find it hard to raise large sums, Middle Eastern investors find it attractive to invest.
“That money will make a difference to the projects,” said Colin Wilson, a director at the real estate advisory firm DTZ in London. “For a lot of these investors, London has proven to be an attractive investment.”
For years Middle Eastern family funds had invested in property in the city’s glamorous and wealthy West End, including residential buildings and offices in Kensington and Knightsbridge, but the turmoil in the financial services industry shifted their focus to the capital’s financial center.
Prices for commercial real estate there dropped by up to 20 percent over the last eight months, making it a more attractive investment than the West End, where prices barely budged.
Some of the buildings only became available because the credit crunch had dried up financing, meaning that developers, like British Land, the biggest in London, started to lose money.
Qatar’s investment in the £2 billion Shard of Glass skyscraper in January ended months of speculation over whether the project, designed by Renzo Piano and situated a short walk from the City across the river Thames, would go ahead. Sheikh Jassim bin Hamad bin Jabor Al Thani, chairman of Qatar Islamic Bank, cited Britain’s market-oriented policies and its investment-friendly environment among the reasons for the cash injection.
Middle Eastern investors were responsible for about 15 percent of the £2.45 billion invested in central London offices in the first quarter of this year, up from just 4 percent in all of 2007, according to the property advisory firm CB Richard Ellis.
Lindsey Robinson, whose asset management company, St. Martins, invests money on behalf of Kuwait, said that 18 months ago he had to look elsewhere to put his money because Britain was far too expensive. But that has changed over the last few months.
The acquisition of the 29-story Willis Building, designed by the star architect Norman Foster, was not a bargain, but thanks to the credit crisis, fewer buyers competed for it.
“If you are a buyer in this market you are certainly in a good place,” said Mat Oakley, director of research at the real estate agent Savills. “The market has somewhat bottomed out and competition among buyers is small.”
Skyscrapers in the City are attractive to Gulf investors because they represent long-term investments with an almost guaranteed income. The turmoil in the financial market may lead some companies to cut back on office space, and a market downturn may not be the best time to build new offices, but in the long-term these investments will probably pay off, said Nick Axford of CB Richard Ellis.
The bet is that the special appeal of renting space in a landmark skyscraper will cushion any decline in office demand in the short term, and most of the skyscrapers financed by Middle Eastern funds are not due to be completed before 2010. The Pinnacle, for example, a 66-story office building financed by Arab Investments and designed to have the highest restaurant in the city, is set to be completed by 2012.
Pierre Rolin, a real estate investment adviser in London, said he was confident his clients would get a 20 percent return on investments by 2012. His close ties to the Middle East led to a $900 million investment by the sultanate of Oman in the Heron Tower, another skyscraper close to the London headquarters of Deutsche Bank. Rolin, a former manager of the private banking unit of Credit Suisss, said demand from Gulf funds for such investments in London was unlimited.
“They’re on a buying spree and you’ll see many more trophy assets being snapped up in all ways and forms,” he said. “They are looking for prestigious, luxury assets and the demand is higher than I have ever seen in my life.”
A record oil price and skyrocketing land prices in the Gulf states mean Middle Eastern funds have abundant cash they are keen to invest. Property abroad is an attractive asset as they look to diversify their portfolios away from commodities. It also helps funds, many of which are not older than 10 years, to establish themselves as global players.
“There is a perception there that if you are an international investor, you should have an investment in London,” Oakley said.
Funds are becoming so big, and so quickly, that it has become challenging for them to find suitable investments, Robinson said.
St. Martins, which apart from the Willis building is also investing in three other developments in the City, seeks to spend about £300 million each on up to four projects every year. Kuwait plans to increase the asset value of the fund to £9 billion from £3 billion over the next five years.
London is attractive because the city had long welcomed Middle Eastern investors. British lawmakers and business leaders repeatedly speak out in favor of foreign investment, including from the Middle East – eager to differentiate themselves from their often more critical American and continental European counterparts.
“The U.K. has consistently maintained a policy of openness to all foreign investors, including to sovereign wealth funds, and we continue to welcome their investment,” said Kitty Ussher, economic secretary to the British Treasury. “Investments from sovereign wealth funds can also bring benefits by relaxing borrowing constraints, reducing the cost of capital for businesses and by improving capital allocation.”
But some analysts cautioned that the cozy relationship could come under some strain once financial markets recovered. The sheer size and scope of the funds might raise concerns about their potential effect on asset prices, according to analysts at Lehman Brothers.
But the ties are more than just financial. As the summer approaches, families from the Gulf are expected to arrive in London, seeking refuge from the heat in their home countries until temperatures there start to cool down again in September. Many have come so often that they have bought their own summer houses here.
“It’s a place where many of them feel at ease and which they discovered as a safe haven for their capital,” Rolin said.
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