Despite continuing economic uncertainty the London commercial property market continues to attract growing numbers of foreign investors. Overseas institutions, including pension and sovereign wealth funds, have been pouring billions into UK property over recent years with London offices seen as particularly desirable investments.
This has led to the gradual decline in office space owned by UK institutions with foreign ownership in the City surpassing the domestic share for the first time in 2011. This trend has continued throughout 2012 with the bulk of the largest property transactions in the capital involving overseas investors.
The latest country to join the scramble for London property is the oil rich state of Azerbaijan. This week the State Oil Fund of Azerbaijan (Sofaz) revealed it has completed the purchase of a £180 million office block on St James’s Street. The acquisition is the first step in a £1 billion spending spree to assemble a significant European real estate portfolio.
Sofaz was established in 1999 to invest the country’s oil revenues and has £42 billion of assets under its management, mainly in bonds and equities. The fact that the institution has opened its property portfolio with an acquisition in London reflects the international standing of the city and the strength of the market which has largely bucked the national trend during the years of financial crisis.
The initial purchase is a 119,000 sq ft Grade 11 listed building currently let to HSBC until 2023. It is these types of investments, with long term rental incomes and financially stable tenants, which attract the most interest from overseas institutions.
Azerbaijan joins a broad range of nationalities keen to invest in the London market. This has recently included wealth funds from Norway, Malaysia and China. While this overseas investment boom has further eroded domestic ownership, it is good news for the long-term stability of the London market. This is because having such a diverse mix of ownership reduces the likelihood of unforeseen economic difficulties resulting in a property fire sale.
Up until now overseas investors have tended to focus their interest on the City and Canary Wharf. But with rents rising steadily in districts like Soho and Mayfair they are now beginning to look elsewhere.
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