By Art Patnaude
LONDON--Buying trophy commercial properties in London has been
getting more competitive because of a new group of investors: the
global superrich.
Wealthy individuals have long sought their own slices of London
real estate, from glitzy mansions to broad office blocks. But
recently, their appetite for paying hundreds of millions for a
single office building has been growing.
Before the financial crisis, paying that much for a single
building "was normally the preserve of institutional capital," said
Damian Corbett, head of central London capital markets at broker
Jones Lang LaSalle Inc. "Now, individuals are playing with the big
boys at the global funds."
For example, in December, Spanish billionaire Amancio Ortega
bought 6 St. James Square, headquarters to global mining giant Rio
Tinto PLC, for GBP265 million (about $400 million).
Brazilian billionaire Joseph Safra in November bought 30 St.
Mary Axe, nicknamed the Gherkin, for around GBP725 million. The
final bid far outstripped the GBP650 million asking price. Of the
four final bidders, Mr. Safra was one of two high-net worth
individuals, people familiar with the deal said.
The pursuit of London commercial property by the global rich is
a sign of the growing number of billionaires whose personal
fortunes are equivalent to the size of institutional investment
funds. It also shows that these investors, as well as traditional
players in the investment world, are being pushed to "look for
long-term stores of wealth," said Bill Hughes, head of real assets
at Legal & General Investment Management, one of the largest
institutional property fund managers in the U.K.
London real estate offers swaths of what these investors look
for: laws that tend to side with property owners, an expanding
economy, and a market where it is easier to trade in huge,
expensive assets than almost anywhere else in the world. London
property also has tended to rebound relatively quickly from
recessions, and some experts believe that it will hold its value
better in future downturns because of the growing number of players
in the market.
However, the superrich still face the same risks as other global
property investors. London is in the midst of a property boom.
While analysts remain generally positive on the near-term outlook,
there is uncertainty about how long the upswing will last.
The central London market saw a record GBP21 billion worth of
commercial property sold in 2014, up from GBP20 billion in 2013,
according to data from Savills, a leading real estate services
firm. Of this, private buyers accounted for nearly $4 billion,
similar to 2013, it said.
Private investors, often through family offices or companies,
spent on average GBP40 million per asset in 2013 and 2014,
according to broker JLL. The average from 2008 to 2012 was GBP29
million. Analysts note that tracking such deals is difficult, with
many done privately or through obscure companies and funds.
Private investors aren't just targeting London. The exclusive
group accounted for about a quarter of all 2014 property deals
globally, including residential investments, according to broker
Knight Frank. They're also fueling demand in cities like Paris, New
York, Dubai and Hong Kong.
Away from London, Mr. Safra also nabbed the WINX office tower in
Frankfurt last year for $436 million. Mr. Ortega bought the
Renaissance Plaza in Toronto for $226 million.
Increased competition from wealthy investors and others in
London has helped push average office yields to 4.8% in the fourth
quarter, lower than before the financial crisis, according to data
from MSCI's IPD U.K. index. At the height of the last property boom
in late 2006 and early 2007, yields touched as low as 4.9%, the
data show. Yields decline when prices rise.
Private buyers, usually without need of debt financing, are
regularly willing to pay more than institutions like pension funds
or insurers, said Robert Buchele, a director in central London at
broker Savills. Institutions often have to measure up their returns
against benchmarks. Wealthy individuals don't, making them "more
comfortable with low yields, " Mr. Buchele said.
Last summer in London, Legal & General sold 97 New Bond
Street for nearly GBP19 million to Wittington Investments, an
investment company for a private U.K. family. The net initial yield
was 2.3%.
London-based Legal & General prefers to buy buildings where
value can be added through refurbishments, leasing, and other
strategies before selling them to high-net-worth individuals or
other large global investors, Mr. Hughes said.
But lately it hasn't always had time to do that. For example,
the firm had planned to redevelop 7-10 Hanover Square, but sold it
last year after receiving a GBP85.5 million offer from a wealthy
European investor through Morgan Capital Partners.
To the superrich, the draw of real estate goes beyond the
financial returns. Trophy assets bring bragging rights.
Wealthy individuals "think, 'I can put a picture of this asset
in my office,'" Mr. Buchele at Savills said. "Sometimes that can be
good enough."
Pricing for the most expensive assets inevitably trickles down
throughout the market. "The smaller players are priced out of the
market by the bidding frenzy" for the bigger assets, said Michael
Marx, who in July will step down as chief executive at U.K.
developer Development Securities PLC. Finding sites to develop in
London has become "extraordinarily difficult unless you're prepared
to write some pretty big checks," he said.
The appetite of the wealthy also appears to be spreading. Some
of the superrich "are now looking beyond prime or trophy offices
and retail space as a safe haven for their funds," Knight Frank's
annual Wealth Report said.
Write to Art Patnaude at art.patnaude@wsj.com
Access Investor Kit for Rio Tinto Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000RIO1
Access Investor Kit for Legal & General Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0005603997
Access Investor Kit for Savills Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B135BJ46
Access Investor Kit for Jones Lang LaSalle, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US48020Q1076
Access Investor Kit for Legal & General Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US52463H1032
Subscribe to WSJ: http://online.wsj.com?mod=djnwires