LONDON (Reuters Breakingviews) - Chinese investors are buying into a London skyline that is past its peak. Two landmark skyscrapers in the city’s financial district have recently been sold to Hong Kong-based bidders. The sky-high prices put pressure on yields at a time when Britain’s departure from the European Union is threatening rents. Still, it is a safer bet than investing at home.
London’s 20 Fenchurch Street, known to locals as the Walkie Talkie, was sold to LKK Health Products, an arm of Hong Kong tycoon Lee Kum Kee’s oyster sauce empire, for 1.3 billion pounds in late July. Four months earlier the Leadenhall Building, commonly known as the Cheesegrater, was bought by a Hong Kong-listed group controlled by Cheung Chung-kiu for 1.2 billion pounds. The Chinese real estate tycoon, who has been selling assets in west China, has bought other properties in London. Both buyers paid hefty prices: rental yields on the landmark buildings, after costs, will be 3.4 percent in a district where the going rate is above 4 percent.
The deals suggest that Brexit hasn’t tarnished London’s credentials as a safe haven for global investors. In fact, the British capital overtook New York as the world’s top city for foreign property investment in the first half of 2017, according to JLL research. However, these figures mark a striking shift in who is buying and who is selling. Global funds, British property groups and American and Canadian investors are pulling back.
Asian buyers are paying top dollar to take their place. The Walkie Talkie and Cheesegrater were both sold for close to three times their construction cost. Hong Kong and Chinese investors appear to have been attracted by the weaker pound, which has lowered the headline purchase cost in foreign currency terms. Lower rental yields are still well above Hong Kong levels. And as China tightens restrictions on outbound investments, tycoons are keen to park cash overseas.
But Brexit undoubtedly makes London property riskier. Vacancy rates in the City of London are creeping up, while prime rents for the second quarter were down 1.7 percent year on year, according to estate agent Savills. Most analysts expect rents to fall between now and 2020. Sky-high returns on London’s landmark properties are in the past.
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