Foreigners set to dominate UK property

Foreign institutional investors are on course to become the dominant force in the UK commercial-property market, having pulled level with domestic pension and insurance funds for the first time.

Overseas financial institutions own 23 per cent of the UK’s £717bn property market, having increased their share by 106 per cent during the past eight years, according to research published on Thursday by the Property Industry Alliance.

The position puts foreign ownership of the market on a par with UK institutions, which have had their share gradually eroded during the financial crisis, and underlines the depth of international interest in the country’s commercial real estate.

Liz Peace, chief executive of the British Property Federation, said overseas owners were on course to dominate the property sector in a similar way to the UK equity market.

“The UK remains a highly polarised market but prime property, particularly in London and the south-east, continues to act as a magnet for overseas investors in [a] time of uncertainty,” she said.

Overseas institutions, including the world’s largest pension and sovereign wealth funds, have poured billions of pounds into buying offices, shops and industrial property in the UK.

The majority of the spending spree has been directed at London, where the swing toward overseas buyers has already reshaped property ownership in the City of London. In 2011, foreign investors owned more than half of all office buildings in the Square Mile – the first time domestic ownership was in the minority, according to Development Securities, the property company.

Foreign investors have accounted for the bulk of large property transactions this year, spearheaded by a string of high-profile deals, such as the £400m sale of Battersea Power Station to a consortium of Malaysian buyers. Even with those deals that have involved domestic buyers, finance has often been provided by an overseas partner.

“At the moment, we are seeing as broad a range of nationalities buying into the market as we have ever seen,” said Hans Vrensen, head of research at DTZ, the property services group.

“It means there is going to be much more stability in the market long term, as the likelihood of a wide range of international investors being forced to sell at the same time is fairly low,” he added.

The growing investment in the UK comes despite sharp falls in overseas spending in other European property markets, which have been rattled by concerns over the future of the single currency.

Directly owned commercial property returns were 7.7 per cent in 2011, far better than that of UK equities but well below gilts, which have outperformed other asset classes through much of the financial crisis.