Lenders must not waste the Asia opportunity

Cosying up to Eastern money is a strategic must for European debt providers as strong demand from the continent for London offices mitigates Brexit outflows closer to home.

Lenders operating in the UK are strengthening ties with Asian investors hungry for office properties in London, which they see as a safe haven for long-term investment.

Asian capital flows have driven office investment volumes in central London to a record high, with £3.6 billion (€4 billion) of stock traded during Q2 2018 – an 85 percent increase quarter-to-quarter and a 67 percent increase year-on-year, according to consultancy firm CBRE.

Indeed, Eastern money has gone some way to assuage the reduced European flows to London offices, largely brought about by Brexit – which were down in the second quarter by 44.7 percent to €611 million, year-on-year. Paradoxically, an indirect consequence of Britain’s vote to leave the EU – a weak pound – has been crucial to attracting overseas investment. In Q2, Asian investors spent a total of £2.8 billion in the capital’s offices space, accounting for 77.7 percent of the total volumes traded in London.

While a massive deal – the sale of UBS’s headquarters at 5 Broadgate to Hong Kong-based investor CK Asset Holdings in June – accounted for £1 billion of the traded volumes, deals ranging in value from €100 million to €300 million continue to be the bread and butter of international property investors.

Opportunities in the sector are not lost on lenders, which are seizing the chance to grow their loan books.

Some debt providers, such as Germany’s Dekabank and investment manager Barings Real Estate, have capitalised on the strong Asian demand for London offices – Deka wrote a £204.6 million loan to finance the purchase of the 20 Old Bailey building for South Korean buyer Mirae Asset Global Investment, while Barings recently provided a £43.2 million (€48.5 million) loan to support the freehold acquisition of 165 Fleet Street in the City of London.

While Barings did not reveal the identity of the borrower, it was known to be part of a large financial services group based in China. In June, it provided an £83 million loan to back the acquisition of London’s Corn Exchange by Hong Kong’s Hao Tian Asia Investment Company.

Asian buyers are likely to continue teaming up with local banking partners from their home markets, but the deals seen so far this year suggest there are an increasing number that will do business with European lenders. There is also potential business from Asian investors which have initially invested equity to speed up execution but could refinance at a later stage.

South Korean investors have become a beacon for lenders after the country poured €542 million into the London office market during Q2 this year, according to CBRE. This is in stark contrast to the corresponding period in 2017 when they invested nothing in the sector.

The banks that have cultivated relationships with Asia early have secured some large deals. ING’s £644 million financing of the Cheesegrater building in London in June last year, in a club deal with HSBC and Bank of China, is arguably one of the standout examples of such an effort paying off. And with evidence pointing to significant Asia investor representation proportionate to other types of buyers, cosying up to Eastern money is a strategic must.

Email the author: alicia.v@peimedia.com