Foreign direct investment – the effect on supply and demand of commercial realty in London11th November 2014

Foreign direct investment – the effect on supply and demand of commercial realty in London

In as little as a decade, the commercial property landscape has experienced a significant shift in ownership, with growth in foreign investment doubling to result in almost a quarter of real estate being held by overseas investors. This move towards foreign-held commercial property not only indicates the resolve of the capital’s property market throughout turbulent economic times, but highlights its value in the eyes of international commerce.

What this means for those investors looking to enter or expand their presence in the marketplace, however, is that 2015 will be a year of high competition coupled with high levels of investment.

Like all markets, supply and demand are inextricably linked in the commercial property sector, each fuelling the other in a relationship that drives prices higher and ensures competition becomes more intense. But why has the London commercial property market become the focus of such significant growth among foreign entities? And how is this growth impacting the interests of domestic organisations?

East pushing west

In research published by Bloomberg, the major investors in London’s commercial property have come from China and the Middle East, while the US continues to invest heavily in the marketplace. Such is the level of investment over the past 12 months, London has quickly become the world’s most expensive city for real estate, triggering rises in rental costs while availability of prime real estate becomes scarcer by the day. With fluctuations in the value of the pound further impacting the value on offer, the potential growth in foreign investments seems unlikely to abate, with approximately £14 billion already invested in 2014.

Of course, the influx of foreign investment has brought with it contrasting fortunes for the city of London. The undoubted economic boon triggered by the investment of major players from around the globe has been tempered by the inevitable spike in cost of living and continued rises in property prices. What’s more, since London continues to be a stable environment where investor confidence remains high, and the political instability of neighbouring countries drives interest to ‘safer havens’ such as the capital, the knock-on effect for smaller enterprises is that affordability is gradually slipping from their reach.   

Regeneration opportunities

This foreign growth means availability for domestic investors may well start to become few and far between, and the broadening of property searches means looking at less popular regions of the capital. Areas undergoing regeneration in residential and commercial property – such as Southwark and Farringdon – are subsequently attracting interest from developers and investors with a keen eye on high-yield rentals, while the conversion of former office space into residential developments following government action is presenting further opportunities for those seeking to capitalise.

Despite this, there remain only a finite number of residences – commercial or domestic – available for investment, and the viability of securing a stake in prime commercial real estate is dictated by the economic outlook for the capital – and the nation – as a whole. With leading economists anticipating shifts in interest rates sooner rather than later, those with an interest in commercial properties in the city may suddenly find themselves stretched beyond their means, and find that the very benefits of investing in London real estate are no longer present.

Where is the market headed?

Like the world’s other foremost capitals, the cosmopolitan nature of London is among its foremost attractions. This means that the overseas investment that has so influenced the economic stability of the nation will undoubtedly be encouraged to continue. Quite how the city accommodates this investment while supporting the successes of British investors, however, is another story.

Recent initiatives have been mooted to ameliorate the difficulties experienced by domestic investors. Across the capital, plans for 50,000 new homes to be built have been issued by George Osborne, yet it is the high returns on commercial property that appeal most. With the advent of the Crossrail development, Europe’s largest infrastructure project, the reach of commercial interests across the city is undoubtedly going to expand exponentially, presenting organisations of all sizes with the chance to invest in property.

Naturally, growth in the construction industry will also be experienced with the development and regeneration of London commercial districts, and the migration of foreign businesses into the city will continue to benefit the economy as a whole. Demand may well be outweighing supply for domestic investors at the moment, but there’s no need for those with commercial interests to despair, with future developments likely to increase investment opportunities.

Accommodating all markets

Time will tell how the supply and demand of commercial real estate in the capital evolves to accommodate domestic and international investors but, in the face of economic uncertainties on a global scale, the fact that London’s real estate market is held as a safe option is a boon for the capital. Greater investment leads to greater competition which, in the end, ensures the marketplace maintains a liquidity that underpins economic stability for the city and the country.

It speaks volumes that some of the world’s biggest economies remain attracted to the UK market, and the competition it adds can be a catalyst for domestic investors to review their approach to developing an effective property portfolio.