IN THEIR HUNT for inflation-proof assets and steady
long-term returns, major sovereign wealth funds, led by the Abu
Dhabi Investment Authority (ADIA), the Government of Singapore
Investment Corp. (GIC) and the Qatar Investment Authority
(QIA), are investing heavily in London real estate. So far in
2013, four sovereign wealth funds have taken significant stakes
in high-end commercial properties or bought them outright, for
a combined total of $1.6 billion.
Deal flow in 2013 is on track to match -- or even exceed --
the pace of acquisitions in 2012, when eight funds, including
new entrants Abu Dhabi Investment Council, China's State
Administration of Foreign Exchange and the State Oil Fund of
the Republic of Azerbaijan, invested approximately $2.6 billion
in London property. But 2013's investments so far have not yet
matched the astonishing pace set in 2008, when sovereign wealth
funds spent a record $4.7 billion on London property. Since
2005, when sovereign wealth funds discovered London's prime
commercial real estate market en masse, they have spent a
combined total of $15 billion.
Location is everything, and London is an undisputed global
financial center. Most of the sovereign wealth funds
investing in London have focused their attention on its two
financial hubs: the City of London, the traditional financial
district in the heart of the capital; and Canary Wharf, which
was specially built to serve as a banking center about
three miles to the east of the City, on the River Thames.
As the interactive map shows, the largest concentration of
investment is in the City, or the so-called Square Mile, where
ten funds have made 16 investments since 2005. The deals range
from matching $91 million stakes by China Investment Corp.
(CIC) and QIA in a new commercial building under development at
20 Fenchurch Street (aptly nicknamed "the walkie-talkie
building" for its distinctive curved shape) to GIC's $951
million outight purchase of Bank of America Merrill Lynch's
European headquarters at 2 King Edward Street.
In Canary Wharf, CIC and QIA own minority stakes (of 15.8
percent and 28.6 percent, respectively) in publicly listed,
London-based developer Songbird Estates, whose main operating
subsidiary, Canary Wharf Group, developed the land. The Kuwait
Investment Authority, through its London-based property
investment arm, St. Martins Property Corp., and QIA also own
buildings in Canary Wharf.
Outside of these financial districts, sovereign wealth funds
have also targeted the West End and its adjacent neighborhoods,
which cover an area roughly three miles west of the City and
encompass Piccadilly Circus and retail mecca Oxford Street.
Seven funds have bought 16 buildings in this wider area,
including two of the largest recorded real estate investments
in London: QIA's $1.9 billion acquisition in 2008 of Chelsea
Barracks and its $1.5 billion purchase of the Shard, Europe's
tallest building, which lies just south of the Thames near
London Bridge. A mixed-use building with a hotel, commercial
office space and high-end residences, the Shard has attracted
thousands of tourists to its viewing platform and is slated to
have three restaurants open by July. However, as of June 2013
the Shard had no office tenants.
Sovereign wealth funds have also demonstrated an affinity
for London's hospitality industry. Most of the funds that
invest in the sector are drawn to prestigious, five-star hotels
(and their management companies), which they perceive to be
promising long-term investments. These holdings include famous
brand names such as the Dorchester, which is owned by the
Brunei Investment Agency; London Park Lane, an InterContinental
hotel owned by QIA, and the Lanesborough, which ADIA bought and
developed in 1990. The Abu Dhabi fund also owns a portfolio of
six Marriott International hotels in London, including the
spectacular County Hall on the South Bank, which it bought as
part of a $1 billion acquisition of 42 Marriott hotels in in
the U.K. February 2013.
Sovereign wealth funds are not the only institutional
investors drawn to London's high-end real estate market. Since
2008 they've been vying with pension funds and investment
trusts for prime opportunities to build out their London
property portfolios. The competition has contributed to rising
prices and reduced yields, according to a recent report by the
London subsidiary of Los Angele's based commercial real estate
In response, sovereign wealth funds have started to venture
outside London and into slightly less conventional investment
opportunities. In such cases some of the more risk-averse funds
tend to prefer joint ventures, often teaming up with partners
involved in an industry related to the property's use. GIC, for
example, has stakes in two joint ventures alongside
Bristol-based student housing developer Unite Group. In June
2013, Norway's Government Pension Fund Global, the world's
largest sovereign wealth fund, with $715 billion in assets
under management -- a recent entrant in the global real estate
market -- purchased 11 retail distribution warehouses in
central and northern England for £247 million ($379
million) from LondonMetric Property, a U.K. real estate
QIA remains the biggest investor in London real estate,
accounting for about 40 percent of all sovereign wealth funds'
direct investments -- and its interest shows no sign of waning.
QIA's whopping $610 million deal in March 2013 for the freehold
and leasehold (the ownership of the land and right to occupy
the building on it) of the prestigious Park Lane was its
largest real estate play in the past three years.
Other funds that have previously invested heavily in London
have yet to strike deals this year, but the overall deal-making
pace is still running high. Although ADIA, GIC and QIA had not
announced any new London acquisitions as of mid-June, KIA's St.
Martins Property bought outright Canary Wharf's 5 Canada Square
in January for £385 million. Clearly, the allure of
London's real estate market is still powerful despite its
increasingly competitive challenges.