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Asian investors flock to London properties

Battersea Power Station's iconic chimneys will be rebuilt as part of the 8 billion pound redevelopment.

LONDON -- Across London, long-abandoned industrial sites are being transformed by investment from Asia. On the south bank of the river Thames, Battersea Power Station -- its iconic chimneys immortalized on the cover of prog rockers Pink Floyd's 1977 album "Animals" -- is being redeveloped by a Malaysian consortium comprising of property developer SP Setia, industrial conglomerate Sime Darby and the Employees Provident Fund, Malaysia's largest pension fund.

     In a temporary structure beside the hulking shell of the power station, which once produced a fifth of London's power, Malaysian Housing Minister Rahman Dahlan said the 8 billion pound ($12.6) project "has become one of national interest to the Malaysian government."

A sea of changes

The Battersea project is just one example of the trend toward increasing investment by state-backed investors, with global volumes having increased from 3% in 2007 to 13% in 2013, according to research firm Real Capital Analytics, with the Asia-Pacific region having replaced the Middle East as the largest source of funds. London received the lion's share of European investment, with 76% of European inflows in the 12 months ending September 2014, with Paris in second place, at 9%.

     A large working-age population is swelling the coffers of Malaysian pension funds, leading them to look abroad for income-producing assets that can provide long-term cash flow. After the apartments that make up much of the Battersea site have been sold, rents from the commercial and retail spaces will continue to provide income to the consortium's shareholders. "We're here to stay," said Liew Kee Sin, chairman of the Battersea Project Holding Company, at the sales launch for the most recent phase of the project.

     The most recent round of financing for Battersea Power Station is also notable for including a 467 million pounds in Islamic syndicated loans, which will "show the world that Islamic financing can be part and parcel of a global market," Liew Kee Sin said. Islamic financing is rapidly growing, and London is keen to attract business, becoming the first non-Muslim country to host the World Islamic Economic Forum last year, and in June issuing a 200 million pound sovereign Sukuk bond, another first for a Western nation, receiving orders of over 2 billion pounds.

Strong and steady

In an era of low yields, the property market in central London provides a welcome diversification from the dollar, says Patrick Scanlon, a partner at estate agents Knight Frank. Central London property is competitive when compared to other asset classes, with prime yields for West End offices stable at 3.75% and good rental growth expected over the next five years. Constrained lending since the global financial crisis has meant that equity-backed foreign investors are essential to funding new projects, with foreign investors particularly dominant in lots priced over 100 million pounds. For investors, this provides security, as they can be confident that a spike in new supply is unlikely to suddenly come onto the market.

     London "is the most secure, transparent and sophisticated investment market and, above all, liquid," says Simon Barrowcliff, Head of International Capital Markets Central London at property consultancy CBRE, with the sheer size of London's market ensuring ease of entry and exit. While London attracted money after the 2007 financial crisis due to its reputation as a safe haven, growth in the market has been particularly appealing in the last 18 to 24 months.

     Increasingly, new types of investors are willing to take on riskier projects to achieve higher returns, with the profile of investors changing from owner-occupiers to entrepreneurs, property companies and state-owned enterprises. Improvements in infrastructure have been key to opening up new areas for development. The Battersea development will see an extension to the Northern underground line, partly funded by the developers and partly by business rates, with 1 billion pounds of funds guaranteed by the U.K. Treasury.

     The coming of Crossrail, London's first new underground line for more than 30 years, is opening up new opportunities to the east. The Royal Albert Dock, at the time of construction part of the largest enclosed docks in the world, is to be the site of the Asian Business Port, which the developers hope will become London's third financial center.

     At the helm of the 1 billion pound project is Chinese entrepreneur Xu Weiping, who has been building business parks across mainland China, with sites in Beijing, Qingdao and the largest, a plot in Shenyang that the company says will eventually have more than 2,000 buildings.

     The London site, composed of low-rise buildings due to its position across the water from London City Airport, was designed by British architect Terry Farrell, known for the cavernous Beijing South train station. It aims to provide space for midsize Chinese companies that do not currently have a base in Europe.

     In a glitzy central London ballroom in September, the company also launched the ABP International Alliance, which plans to help Chinese businesses expand abroad; the company says it is registering 1,000 Chinese companies that hope to do business in Britain.

Patient money

Many of the sites now receiving investment from Asia spent years in limbo. The Battersea site had a string of projects that failed to come to fruition, with proposals including a permanent home for Cirque du Soleil and a new stadium for Chelsea FC.

     The Greenwich peninsula, which lay largely abandoned after the decline of shipbuilding and industry in the area, received huge investment with the construction of the Millennium Dome, at the time thought to be a white elephant but now, renamed the O2, the world's busiest music venue. It gained an underground station when the Jubilee line was extended eastwards, and a master plan for the area was drawn up by Terry Farrell.

     Progress on development of the surrounding area, however, remained slow. In 2012, Knight Dragon, an investment vehicle owned by Hong Kong billionaire Henry Cheng Kar-Shun, bought a 60% stake in a project to develop 10,000 homes from local developers Quintain and Australia's Lend Lease, going on to buy the remaining 40% from Quintain for 186 million pounds the following year. With the first apartments having gone on sale in September, and with exclusive developing rights into the 2020s, these type of projects "take a lot of patient capital," said Richard Margree, CEO of Knight Dragon Developments.

     Investment from Asia has been boosted by the ongoing weakness of the sterling since the financial crisis. Although commercial property prices in the city have almost returned to 2007 levels, an investor paying in Singapore dollars will receive a 34% discount on 2007 prices, according to Knight Frank, while an investment in the West End, where prices have exceeded 2007 levels, would garner a 30% discount.

     Where once Londoners dreamed of a house in the suburbs, now domestic buyers increasingly want to live in areas closer to the center, with good transport links. An industrial or cultural history, such as Battersea's chimneys or Greenwich's maritime past, adds further appeal. Foreign buyers, who favor modern apartments over traditional terraces and have fewer preconceptions about an area's desirability, are also happy to buy. London has a severe housing shortage and the population is growing rapidly, with the mayor's office expecting a population increase from 8.5 million today to over 10 million by 2030. Office space, too, is being squeezed, with a recent relaxation in planning laws allowing easier conversion from office to residential space expected to further reduce availability.

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