London Calling: SWFs Snap Up City Real Estate

June 20, 2013 by Loch Adamson

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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 adviser CBRE.

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 investment trust.

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.

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