Who owns the city

WhooWnstheCityAn analysis of OfficeOwnership and Global Investmentin the City of London A report commissioned by

Who Owns the City, commissioned by Development Securities PLC 2011Research conducted by Professor Colin Lizieri, University of CambridgeReport produced by The Communication Group plc

Michael Marx Chief Executive Development Securities PLCForewordThe last three years have put many of us, not least the property industry, through a mosttesting period. The City’s office stock has experienced its fair share of pain as capitalvalues plummeted by 50% between 2007 and 2009 and, in spite of a subsequent recovery,remain some 37% below their pre-crisis values. Nonetheless, throughout the 2008 globaleconomic downturn and the ongoing Eurozone debt crisis, the Square Mile’sability to attract occupiers and investors has proved to be a litmus test of London’spre-eminence as a global financial centre.It is against this background that One of the most important findings of This underlines the remarkableDevelopment Securities PLC publishes this new report is that, for the first time resilience of the City of London’s officethe latest Who Owns the City report, ever, the level of overseas ownership market and its continuing success as thethe fourth in a series of studies that of the City’s office stock has overtaken world’s office investment destination ofwe have commissioned since 1998 to UK ownership. From a mere 8% in choice. Foreign investors have helped toexamine the dynamics of office 1980, foreign ownership passed 25% in maintain liquidity in the market, therebyownership in the City of London. the mid 1990s and now stands at 52%. improving its attractiveness to increasingWhilst our investment and development London as a whole attracts more inward numbers of real estate investors,portfolio extends across UK commercial office investment than any other city in financial firms and, interestingly,property, London remains an important the world, including New York. a growing number of private owners.area of strategic focus for us. Interestingly, the reversal in capital Fundamental to its continuing appealOver many years, Development values that followed the crash of 2008 is the City of London’s intrinsic abilitySecurities has aimed to contribute to did nothing to discourage foreign to attract occupiers – financialdebate affecting the property industry, investors. Far from inducing capital businesses that sustain the value ofthe wider business community and flight, as was the experience of the US the Square Mile’s office stock.policy makers. Amongst the most real estate market in 2008, the market As we manoeuvre our way throughsignificant of these contributions, correction here has led to an increase the dark economic clouds of our times,we believe, is Who Owns the City. in overseas interest. the challenge for policy makers and opinion leaders alike is now to ensure that businesses, and financial businesses in particular, can continue to flourish in London. 1

Contents Executive Summary1. Introduction2. City office ownership - a detailed analysis3. The impact of the global financial crisis4. Conclusions and implications 2

Who Owns the City? Executive summary 1. Foreign ownership of 2. London is the office 3. Overseas buyers remain City of London offices now investment target of choice focused on prime City assets stands at 52% London attracts more office inward Between 2008-2011 UK buyers One of the most important trends investment than any other city, accounted for 43% of purchases by since our last report in 2006 has including New York. With €72 billion floorspace but only 34% by value. been the continued growth in foreign of sales activity between 2007-2011, The average value of buildings acquired ownership, which now accounts for London dwarfs Paris (€43 billion) and by foreign investors was £91 million as a 52% share of the City of London’s Frankfurt (€11 billion) as the most against an average purchase price of office space. In 1980 less than 10% of attractive market for office investment £27 million for UK buyers. the City’s office stock was owned by in Europe. overseas interests. Foreign ownership passed 25% in the mid 1990s and 40% 4. Germany spearheads City office investment with strong in the mid 2000s. increases recorded by the US and Middle East Germany remains the largest overseas City office investor with a 16% share, while Japanese holdings have declined to 2% compared with a peak of around 11% in the early 1990s. The US presence has increased and there has been an expansion of Middle Eastern ownership, which currently accounts for a 6% share. Foreign ownership of the City of London now stands at 52% 3

Executive summary5. There is a growing trend 7. The City of London 8. Lower capital values havetowards private individual office market has displayed not deterred foreign investorsownership of City offices remarkable resilience to The traumas in financial markets andThe individual, high net worth, private global economic turmoil the accompanying reversal in propertyinvestor is playing an increasingly prices have not brought about any Foreign investors helped maintainsignificant role within the ‘Square Mile’ significant shift in the pattern of liquidity against a backdrop of fallingand currently accounts for some 6% ownership within the City’s office values and, far from inducing capitalof total floorspace. This may be an market. In the 2008-2011 period, flight, the market correction led to anunderestimate, given private investors’ 42% of sales were from UK owners to increase in overseas involvement.shyness of the public eye and the foreign investors, with just 6% sold by The US real estate market experienceddifficulty of tracing ownership through foreign owners to UK players. considerable capital flight in 2008, astandard searches. 9. The long-term health of phenomenon that was not apparent in the City of London market.6. Traditional owners of the financial sector is integralCity office space are in decline to the City of London officeSpecialist real estate investors (45%) marketand financial firms (24%) have Due to the fact that 41% of the City officecontinued to increase their ownership space is owned and occupied by firms inof City office space at the expense of the Finance, Insurance and Real Estatetraditional owners such as the public (“FIRE”) sector, and 57% by financialsector, charities and livery companies. and business services firms, there isDirect institutional ownership has considerable ‘functional specialisation’experienced a sharp decline from in the City. The long-term fortunes of29% to 17% during the period 2005 occupiers and the investment marketto 2011. This compares with a 37% are therefore locked together.interest in 1995. 4

1Who Owns the City? By way of record, the colloquial ‘Square Mile’ provides centre stage to: • A daily foreign exchange turnover Introduction of $1.9 trillion, representing 37% of the global market; • A 19% share of global foreign equity market trading; At a time when the global economy faces, to quote • A 70% share of global eurobond Sir Mervyn King, Governor of the Bank of England, turnover; “the most serious financial crisis... since the 1930s, • An average daily London Metal if not ever”, the role and ongoing vibrancy of the City of Exchange turnover of $46 billion; London, positioned at the heart of the world’s financial • Annual trading of close on 1.23 billion contracts on London’s International markets, is of paramount importance. Financial Futures Exchange; and • A 46% share of the ‘over the counter’ derivatives market. The City also plays a dominant role in relation to the UK’s: • £4.1 trillion of funds under management - exceeded only by the US; • £200 billion net premium insurance income; • World-leading 18% share of cross- border lending arrangements; and • Largest hedge fund (19% share of global assets) and private equity markets in Europe. Source: The City of London Corporation 5

IntroductionIn the wake of the 2008 global financialcrisis and the ongoing Eurozone debt The market environment in 2011 is very different from 2006. What is the legacy What is the legacy ofmalaise, the City’s capacity to generate of the global meltdown in relation the global meltdown insignificant trade surpluses (estimated to the City property market? Has theat £36 billion in 2010) through the trend towards foreign ownership of City relation to the Citypredominance of its financial services offices been reversed? Is there evidencewill prove integral to the UK’s short of capital flight? Has the nature of property market?and long-term economic health. City office owners changed? Are there new players in the market, either byAgainst this background the nationality or by type of investor?publication of the fourth Who Owns Did the particular structure of the Citythe City report, commissioned by market make it more vulnerable to theDevelopment Securities PLC, would financial traumas of the late 2000s?appear opportune. Such are the questions that WhoIn terms of the overall ownership of Owns the City, drawing on a primaryCity offices, our previous report in database that incorporates 174 offices2006 highlighted the fact that the occupying some 20 million square feet,fragmentation of ownership and has sought to address.increasingly highly geared structuresbrought real risks to the City.The report concluded:“There are, thus, real potential risksin the current market, risks that arelinked to the changing nature ofownership in the City. Most of all, theCity office market is vulnerable to amajor negative shock – in the propertymarket, in the City’s financialactivity, in the regulatory and fiscalenvironment.” 6

2Who Owns the City? The extent of foreign ownership has City office shown a significant rise since the publication of our previous findings in ownership - a 2006 when overseas ownership of the City’s office stock was estimated at 45%. The further increase to 52% represents detailed analysis the culmination of a consistently rising trend which has seen foreign ownership track 60% for the past eight years. In 1980 overseas ownership of the City’s Foreign investors property assets stood at a mere 8% (including owner-occupiers). Foreign acquire 52% share of the ownership passed 25% in the mid 1990s and, fuelled by the growth of global real City’s office assets asset investment and the expansion of private real estate fund vehicles, exceeded 40% in the mid 2000s. Foreign owners of City office properties now account The transformation of the ownership of for the majority of space in the ‘Square Mile’ with an the City’s office stock (Figure 1) is rooted in the ‘internationalisation’ of the City, approximate 52% share, thereby reducing UK ownership flagged by the ‘Big Bang’, which, in the to some 48%. autumn of 1986, heralded an unprecedented revision of the London Stock Exchange’s trading practices. This duly opened the City’s doors to an array of international investment banks and financial practitioners which, in turn, served to underwrite the City’s status as a pre-eminent global financial centre. The US, Germany and Japan subsequently emerged as significant purchasers of prime City office stock. In 1980 overseas ownership of the City’s property asset stood at a mere 8% 7

City office ownership - a detailed analysis Figure 1: Ownership share 1980 - 2011 2011 2010 2005 2000 1995 1990 1985 1980 UK 48% 50% 56% 65% 71% 79% 89% 92% Germany 16% 16% 18% 9% 3% 1% 1% 1% USA 10% 8% 7% 4% 1% 0% 0% 0% Middle East 6% 6% 2% 4% 3% 3% 2% 3% Europe ex Germany 5% 4% 6% 4% 8% 5% 4% 2% International 3% 3% 2% 3% 0% 0% 0% 0% Ireland 4% 4% 3% 0% 0% 0% 0% 0% Japan 2% 2% 2% 9% 11% 11% 3% 2% Other / Unknown 6% 7% 4% 2% 3% 1% 1% 0% Source: Who Owns the City database The dominance of foreign ownership The steady increase in overseas Records provided by CoStar of 243 is particularly applicable to prime ownership manifests itself between office transactions in the City of London office space, albeit less so in relation to 2003 and the second half of 2011 between 2008 and Q2 2011 (involving smaller, older, secondary and tertiary (Figure 2) when almost 60% of all City a total floor area of 25 million square assets where the overseas share may office acquisitions, with a value of some feet and sales proceeds of circa £12.2 be somewhat lower. The result, based £26 billion, were acquired by foreign billion) show that UK purchasers on the assumption that the proportion investors. accounted for 43% by floor area and is common across the totality of stock, 34% by capital value. This clearly implies that foreign investors now own indicates that overseas investors are in excess of 44 million square feet of City targeting higher value properties – office space. the average purchase price expended by overseas buyers being £91 million compared with £27 million on the part of UK investors. Figure 2: Office investment, City of London Value of Investment (£ billion) 3.5 Non UK UK 3.0 2.5 2.0 1.5 1.0 0.5 0.0Year and Q1 Q3 Q1 3 Q1 Q3 1 Q3 Q1 3 Q1 Q3 Q1 Q3 1 3 Q1 Q Q Q Q Q Quarter 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: CBRE / authors 8

Who Owns the City? London attracts more inward office investment than any other city, including New York London attracts more inward office investment than any other City, including New York, as illustrated by Figure 3, and remains the principal European target destination for international investors. Approximately 41% of City office space is London’s share of the value of overall sales recorded by Real Capital Analytics (Figure 4) between 2007-2011 was 23%, with, again, Paris (13%) emerging as the only other city to achieve double figures. It is estimated that 39% of the representing €72 billion out of €315 London acquisitions were global, while simultaneously owned and billion. Paris was second (13%: €43 22% represented overseas funds based occupied by firms in the billion), with no other city capturing a in Europe. share in excess of 4%. Some 40% of Finance, Insurance and all global (defined as non-European) Real Estate sector acquisitions were transacted in London Figure 3: Office capital inflows by city 2007 - 2010 $ million 60,000 50,000 40,000 30,000 20,000 10,000 City o ris n ork l re ai g DC d co w rt ng go ey a rlin i ou ipe nn ijin ky dri do sco kfu gh po dn cis ica Ko Pa Se wY To Be ton Ta Vie n Ma an Be ga Sy Mo ran an Lo Ch ng Sh Sin Ne ing Fr Ho nF sh Sa Wa Source: RCA/Authors 9

City office ownership - a detailed analysisFigure 4: Office acquisition by city, 2007 - 2011Value of Acquisition (€ million)80,000 Domestic Continental Global70,00060,00050,00040,00030,00020,00010,000 0 City rt rlin on ris h w olm d rg s sel dri nic sco kfu bu nd Pa Be us ckh Ma Mu m Mo an Lo Br Ha Sto FrSource: RCALondon’s role as the pre-eminent Approximately 41% of City office space Across central London as a whole, it isfinancial centre in Europe has served to is simultaneously owned and occupied estimated that more than half of all salescreate a depth and breadth of markets by firms in the FIRE sector, while some have been to overseas buyers. Althoughthat underpins demand for office space 57% is accounted for by financial and UK investors enjoy a modest majorityin both the City and its surrounding business services firms. Many of the share of London’s Midtown marketsub-markets in Docklands and latter, including legal and accountancy in terms of capital value and a similarMidtown. Finance, insurance and real practices, are also strongly associated share of the West End market in termsestate (“FIRE”) employment in London with the financial markets, thereby of area (largely through the ownership(Figure 5) has shown a 1.1% per annum heightening ‘functional specialisation’. of a considerable number of relativelyincrease since the early 1980s, mirroring The future success of occupiers and small properties) their presence in thethe increase in stock. investment markets are therefore thinly-transacted Canary Wharf/ locked together. Docklands market is almost invisible.Figure 5: London FIRE employmentNumber of Employees450,000400,000350,000300,000250,000200,000 Year 01 02 03 04 05 06 07 08 09 10 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 00 198 199 198 199 198 199 198 199 198 199 198 198 198 199 199 199 198 199 199 20 20 20 20 20 20 20 20 20 20 20Source: Adapted from NOMIS 10

Who Owns the City? Germany spearheads overseas ownership as Japan retrenches Two of the key trends in the pattern of regional ownership of City offices over several decades (Figure 6) are the rise in German ownership and the fall in Japanese holdings, which now amount to 2% compared to a peak of around 11% in the early 1990s. Germany remains the largest overseas City property has not proved a target Germany remains the investor with a 16% share following for Chinese or other Asian investors an acceleration of investment, led by but there has been an expansion of largest overseas investor with a 16% open-ended funds, in the late 1990s. Middle Eastern ownership, which There has also been modest but currently accounts for a 6% share of significant growth over a similar the City’s real asset base. period in the share of “international” investment funds which pool capital from multiple national sources. share following an acceleration of investment Figure 6: Non-UK ownership of City offices Percentage 60 Other / unknown 50 International 40 Middle East Europe 30 Japan USA 20 Germany 10 0 Year 1973 1980 1987 1994 2001 2008 Source: Who Owns the City database 11

City 0ffice 0wnership - a detailed analysisForeign owners account for60% of new space The process of office development and redevelopment serves to increase foreign ownership of City space. As Figure 7 shows, foreign ownership of all new space proved relatively stable at around 60% for the latter half of the 2001-2011 period.Figure 7: Non-UK ownership -New build and major refurbishmentPercentage70 Other60 Europe50 Australia40 Singapore International30 Germany20 Canada 10 Middle East 0Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Who Owns the City database 12

Who Owns the City? Exit the institutions... One of the most notable findings is the sharp decline in direct institutional ownership of City offices from a 29% share in 2005 to 17% - a far cry from the 1995 peak of 37%. This serves to illustrate (Figures 8, 9 This trend towards a more financially Although pension funds and insurance and 10) the consistent erosion of the oriented and fragmented ownership companies maintain a significant traditional ownership of City property continued during the 2005-2011 period, presence in new and redeveloped City assets by livery companies, institutions with no sign of any reversal. Specialist office space, some 65% of such space and established property companies, real estate investors have increased owned by institutional funds is held by a scenario characterised by a single their share of acquisitions and now overseas pension funds or insurance freehold owner, low turnover rates and account for a 45% share of City space, companies. Domestic and foreign buy-and-hold investment strategies. as against 35% in 2005, while a further institutions will share similar This has given way to a predominance 24% is attributable to financial firms. characteristics in relation to risk aversion of ownership by financial service firms, but domestic assets are more likely to specialist real estate funds, overseas represent buy and hold investments investors and private vehicles, often than foreign ones. with ownership split between different funds and entities. 65% of space owned by institutional funds is held by overseas pension funds or insurance companies Figure 8: Ownership by type of owner - new build and major refurbishment Percentage 100 90 Other 80 Individual 70 Traditional 60 Specialist real estate 50 Finance 40 Institutions 30 20 10 0 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Who Owns the City database 13

City office ownership - a detailed analysis...Enter the high net worthprivate investorWe have detected the ongoing growth of a relatively new type of owner: the individual,high net worth, private investor. Although there is nothing new about private ownershipof commercial real estate by wealthy private investors, this phenomenon has been lessevident in the prime segment of the City office market.Private investors now account for a include other private investors whose the domicile of many high net worthsignificant 6% of total floorspace. shyness of the public eye is reflected in individuals is not always easy to define.Even this, in all probability, is an the difficulty of ascertaining ownership There are also indications of a growingunderestimate, given that the “unknown” through standard searches. Indications role on the part of sovereign wealthcategory of owners, accounting for are that the majority of these private funds.a further 4% of floorspace, may well owners are not UK domiciled, althoughFigure 9: Type of owner, City of London, 1975-2011 2011 2010 2005 2000 1995 1990 1985 1980 1975Institutions 17% 17% 29% 32% 37% 36% 34% 28% 24%Financial Firms 24% 26% 24% 28% 19% 22% 22% 17% 17%Specialist Real Estate 45% 44% 35% 30% 27% 21% 15% 17% 17%Traditional Owners 4% 5% 4% 7% 15% 19% 29% 35% 39%Individuals 6% 5% 4% 1% 0% 0% 0% 0% 0%Other/Unknown 4% 3% 4% 2% 3% 2% 1% 2% 2%Source: Who Owns the City databaseFigure 10: Ownership by type of owner, City of London officesPercentage100 90 Other / unknown 80 Individual 70 Traditional 60 Specialist real estate 50 Finance 40 Institutions 30 20 10 0Year 1973 1980 1987 1994 2001 2008 Source: Who Owns the City database 14

Who Owns the City? Investment in City office stock versus equities, bonds and US real estate The growth of foreign investment in the City of London office market is part of an overall trend towards a more global real estate market, which, in turn, has been driven by the development of a more open and interlinked international financial system. The 52% foreign ownership of space in Whereas individual ownership of City When compared with the US, a different the City of London represents a greater offices is mounting, share ownership on picture emerges. Estimates of foreign share and more international profile behalf of private investors is in decline. direct investment in US real estate from than non-domestic ownership of UK Individual share ownership in the UK, the US Bureau of Economic Analysis equities, estimated at around 40% at according to the Office for National (Figure 11) show sharp fluctuations in the end of 2008, and UK Government Statistics, declined from around 45% to investment flows. Net foreign investment securities where overseas ownership nearer 10% between 1969 and 2008, of $9.5 billion in 2007 – of which 71% peaked at 34% in 2009. despite the advent of privatisation and related to the first half of the year – the introduction of tax-efficient gave way to net outflows of some wrappers such as ISAs. $3.1billion, with reversals of around $6billion in Q4 2008 and Q1 2009 offset by some positive, albeit modest, investment flows thereafter. This suggests that the US real estate market experienced considerable capital flight, a phenomenon that was not apparent in the City of London market. Figure 11: US net FDI in real estate $ million 10,000 8.000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: US Bureau of Economic Analysis 15

City office ownership - a detailed analysis 16

3Who Owns the City? The impact of the global financial crisis Turnover: The retreat from the 2006 peak City office turnover peaked in 2006 (Figure 12) as investors anxious to join the party were matched by those prepared to take profits at what proved to be close to the top of the market. By the end of the year almost a fifth of the total floorspace on Who Owns the City’s database had changed hands. In response to the global events of 2008 and the reversal in capital values, turnover fell away sharply with less than 4% of our database space, including the newly built and redeveloped additions, being sold in 2009. Figure 12: Turnover rate 1991 - 2011, City offices Turnover (%) 25.00 20.00 15.00 10.00 5.00 0.00 Year 05 06 10 11 07 08 09 6 01 02 03 04 2 3 4 5 7 8 9 00 1 199 199 199 199 199 199 199 199 199 20 20 20 20 20 20 20 20 20 20 20 20 Source: Who Owns the City database: Dotted line indicates average 1991-2011 17

The impact of the global financial crisis Owners and occupiers: The simultaneous risk As highlighted in previous Who vulnerable to simultaneous shock waves shows, volatility in the equity market Owns the City reports, the respective from the capital markets. Figure 13 has proved much greater than the characteristics of the occupiers illustrates the volatility in City office fluctuations in office returns. It should (primarily involved in financial services) returns between 1986 and 2011, with be noted, however, that post the mid of City property and the owners periods of relative stability interspersed 2000s, equity and office returns have (effectively operating in a global real with high return spikes and sharp tracked each other more closely. estate market) leaves both sectors corrections. However, as Figure 14 Figure 13: City offices total return Total Return (%) 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00 -8.00 Source: estimated from IPD -10.00 Date 0 92 93 00 02 4 06 07 09 86 95 97 99 8 -0 -8 -9 y- g- v- v- r- b- c- g- b- g- v- 04 ne pt Ma Ma Au No No De Au Au Fe No Fe Se Ju y Ma Figure 14: City offices and the equity market rolling twelve month returns 62.50% Return (%) 50.00 37.50 25.00 12.50 0.00 -12.50 -25.00 -37.50 Source: Estimated from IPD and FTSE data -50.00Month and Year 02 04 06 07 09 91 92 94 6 97 99 1 87 89 -0 -9 - v- c- v- v- l- l- g- v- l- r- l- ril r r Ju Ju Ma Ju Ju Ma De No Ma No No No Au 18 Ap

Who Owns the City? Sales volume halved in wake of financial crisis The scale of the reversal in the London As illustrated in Figure 15, US-based There is no evidence that UK investors market, according to RCA data, is investors remain the largest group of took the opportunity to acquire assets reflected in a halving of sales volume foreign purchasers (37%) in London, sold by retreating foreign funds. from $44 billion in respect of 2007- while activity on the part of western Although UK-based purchasers 2008 to $22 billion in 2009-2010. European investors has fallen away. accounted for 34% of the deals by value in the 2009-2010 period, 70% of all US based investors sales during that period were made by UK owners. remain the largest group of foreign purchasers at 37% Figure 15: London offices: Non-UK purchases 7% 11% US Germany Spain Ireland 11% 37% Western Europe Middle East Asia 4% Other 8% 12% 10% Source: RCA, Authors 19

The impact of the global financial crisis 20

Who Owns the City? Foreign trading activity hones the City’s liquidity edge Foreign investment in City office space plays a vital role in sustaining a high level of liquidity: the lifeblood of any market. The depth of liquidity in the City office market, which enables players to enter and exit real estate investments with relative ease, represents an important advantage to London as compared with European competitors such as Frankfurt and Paris. Liquidity is synonymous with trading The crucial role played by foreign It is this activity on the part of overseas activity which, in turn, benefits from investors in maintaining trading activity investors that has proved the keystone a flow of market information which is illustrated in Figure 16. During the to the remarkable resilience of the City serves to reduce pricing uncertainty and past decade less than a third of of London’s office market to the global engender confidence among investors. transactions took place between financial crisis. Far from inducing UK buyers and sellers, while 16% of capital flight, as was the experience in transactions were between foreign the US real estate market in 2008, the owners and purchasers. During the market correction led to an increase in period encompassing the eye of the overseas involvement. financial storm and the subsequent lull (2008-2011), some 37% of sales were UK to UK, whereas 42% were UK to foreign, with less than 6% foreign to UK. Figure 16: Transaction activity, City offices 1982 - 2011 Square feet (million) 3 2.5 Foreign to foreign Foreign to UK 2 UK to foreign 1.5 UK to UK 1 0.5 Year 10 00 02 04 06 08 0 2 4 6 8 2 4 6 8 199 198 199 198 199 198 199 198 199 20 20 20 20 20 20 Source: Who Owns the City database 21

The impact of the global financial crisis ‘Boom bust’ cycle leaves capital values 37% below ‘highs’ of 2007 Since the publication of the last Who Owns the City report By the end of 2010, property in 2006, the ‘Square Mile’ has experienced an extreme values had staged a 25% property cycle as the rapid growth in asset prices, fuelled, in part at least by the use of leverage, rapidly reversed in the aftermath of the liquidity crunch and the global financial crisis. As measured by the IPD (Investment Although the traumas in financial recovery from their 2009 low Property Databank) monthly index, markets and the accompanying reversal capital values in the City peaked in July in property prices has not brought Numerous borrowers, with loans 2007. IPD (Figure 17) subsequently about any significant shift in the pattern maturing post the global financial crisis, registered consecutive monthly declines of ownership within the City’s office discovered that lower capital values and in capital values until August 2009: a market, this is not to imply that tighter lending terms had left a nadir that marked a 50% retreat from individual owners and funds did not refinancing gap with available debt the 2007 ‘high’. By the end of 2010, experience distress. Highly leveraged capital well below outstanding loan property values had staged a 25% investors were inevitably impacted by commitments – subject to borrowing recovery from their August 2009 low but the collapse in capital values which, facilities actually being on offer. It would remained some 37% below their peak. in turn, led to the breaching of loan- appear that prime, tenanted City office to-value covenants, defaults, enforced properties displayed some robustness capital injections by equity holders and to the borrowing constraints. the renegotiation of loan terms. Figure 17: The office cycle in the UK and the City of London Capital Value Index 140.0 All offices capital growth 130.0 City offices capital growth 120.0 110.0 Source: Adapted from IPD data 100.0 90.0 80.0 70.0 60.0Month and Year 02 03 03 04 04 05 06 05 06 07 08 09 10 07 08 09 10 n- c- n- c- n- c- n- c- c - n- c- n- c- n- c- n- c- De De De De De De De Ju De Ju Ju Ju Ju Ju Ju Ju De 22

Who Owns the City? Although it has been argued that the evident from Figure 18 that a sharp accompanied the credit crunch and recent property reversal was not the surge in office completions coincided subsequent global financial crisis. product of a property boom, it is with the fall in capital values that Figure 18: City of London office completion and stock Completions (Square Metres) Total Stock (Square Metres) 600000 8,500,00 8,000,00 500000 7,500,00 400000 7,000,00 6,500,00 300000 6,000,00 200000 5,500,00 5,000,00 100000 4,500,00 0 4,000,00 Year 7 9 1 3 5 7 9 1 3 5 7 9 01 03 05 07 09 198 199 197 198 199 198 199 198 199 197 198 199 20 20 20 20 20 Source: Authors, from Corporation of London data The increased use of leverage in real This represents a compound growth It is interesting to note that the 1989 estate investment during the run up to rate of more than 20% per annum, far collapse in property values was of a the market correction is illustrated in in excess of the growth in capital values similar scale (55%) although the Figure 19. Bank of England statistics and new construction. UK commercial descent lasted significantly longer: show an increase in loans outstanding real estate had ratcheted up its gearing from October 1989 to February 1993. to UK commercial real estate from ratios and, by implication, had become £39 billion at the end of 1998 to £250 more risky and more vulnerable to billion by late 2008. external shocks. Figure 19: Bank lending to UK commercial real estate £ million 300,000 250.000 200,000 150,000 100,000 50,000 0 Month and Year 8 99 00 02 03 97 1 05 4 06 05 07 8 09 10 11 y0 -0 -9 -0 n- l- t- l- n- c- r- r - v- g- n- - Ma g pt pt Ju Ju b Ju Oc Ma De Au No Au Ja Ju Ap Fe Se Se Source: Bank of England/authors 23

The impact of the global financial crisis Recovery in prime rents tails off The 2003-2010 cycle was primarily followed by a reversal in line with the Indications are that, with effect from driven by capital values and yield shifts. volte-face in financial markets and the Q1 2010, prime City office rents There is also evidence of a rental cycle fallout from the banking crisis. enjoyed some recovery; a trend that (Figure 20) during this period, appears to have tailed off in 2011, characterised by falling vacancy rates possibly influenced by the Eurozone and rising rents until 2007-2008 debt turmoil. Figure 20: Rents and vacancy rates in the City of London Prime Rent Vacancy Rate (%) 75.00 20.00% 62.50 15.00% 50.00 10.00% 37.50 5.00% 25.00 0.00%Year and Quarter Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 06 03 04 05 07 08 09 10 02 03 04 05 06 07 08 09 10 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Adapted from CBRE data Vacancy rate Prime rent 24

Who Owns the City? 4 Conclusions and implications The period that has elapsed since the publication of the previous edition of Who Owns the City in 2006 has proved momentous. Few could have foreseen the magnitude of the credit crunch and global financial crisis that was to follow although, in the The lock, alas, does not end here. The growth of international ownership and the proliferation of specialist global Against this background, one might reasonably have expected to witness considerable capital flight on the part wake of the events surrounding the financial and real estate investment of overseas investors, as was evidenced turmoil born of 2008, our warning in vehicles also bonds the investment and in the US real estate market. Not so. relation to the City office market’s occupier markets together in a way that On the contrary, foreign ownership vulnerability to a ‘major negative shock’ increases both upside and downside risk. actually expanded in the eye of the would appear to have stood the test In this context, there is little evidence of storm rather than contracting. of time. any risk diversification. Such resilience would appear all the As we have consistently emphasised, a In the event, the financial storm, which more remarkable in the light of the primary risk for the City of London and encompassed the credit crunch, the City’s associations with the failures other global financial office markets liquidity and banking crises, the “great of the international financial system. lies in ‘functional specialisation’, not recession” and the rolling sovereign debt What offsets the systemic risk in relation merely in financial services but in drama, erased half the capital value of to the City’s lack of diversification is the internationally-oriented financial City property portfolios as against the exceptional liquidity that characterises services: a factor which serves to lock leverage driven ‘highs’ of 2007. its office market. the fortunes of the occupier market to Suffice to say that the capital values of the state of the global capital markets. City offices experienced steeper falls and greater volatility than other UK commercial real estate segments. 25

Conclusions and implicationsIn essence, the resilience of the City’s Although credit conditions have The City of London’s status as Europe’sproperty market walks hand in hand tightened considerably, bank lending pre-eminent financial centre has servedwith our headline finding, namely that to the property sector rests uneasily on to underwrite a stream of internationaloverseas investors, extending a trend the books and many of the investment investment in the ‘Square Mile’s’ officeline that dates back to the 1980s, now vehicles and funds that make up the stock. Long may this pre-eminencecommand a majority share of the City of increasingly fragmented ownership continue. Meanwhile, the changingLondon’s property base. The importance of the City’s office bank remain dynamics of globalisation andof the role played by foreign investors in significantly geared. It is a salutary international investment will continue toterms of underpinning liquidity should thought that, in response to the property be reflected in the changing make up ofnot be underestimated. ills of the early 1990s, it took the banks office ownership in the City of London. seven years to readjust their property toThe trading activity that emanated from total loan book ratios: higher now thanoverseas investors in the midst of the they were prior to the former correction.global malaise suggests that, irrespective How long the winding down exerciseof the sharp fall in capital values, the City will take this time around is an openis perceived as a relatively safe haven: question.conceivably as an inflation hedge. In terms of ownership trends, the growth of specialist real estate funds and property companies has been at the expense of financial institutions. High net worth private investors now account for a conservatively estimated 6% share of the City’s square footage and, with an eye to capital preservation, may choose to adopt longer term strategies than many of the specialist funds. Likewise, the appearance on the radar of sovereign wealth funds might also herald longer term investment horizons. 26

Who owns the City? Authorship and data The fourth Who Owns the City report is In addition to the Who Owns the City As noted in the previous Who Owns the City based on research commissioned by database, the research team has gathered report, it has become increasingly Development Securities PLC and conducted information from a variety of sources and challenging to establish the beneficial by Professor Colin Lizieri, author of the has commissioned London Office Database, ownership of City offices. Private equity study, together with Jan Reinert and Andrew managed by Estates Gazette interactive (EGi), vehicles, offshore funds domiciled in tax Baum of the University of Cambridge, Real to provide a broader picture of ownership havens and reticent individuals can all prove Estate Finance Group. and occupation of the London office market. difficult to trace. A further problem relates In addition, analysis of acquisition and sales to the fact that the ownership of offices is The report is designed to provide an insight data was commissioned from Real Capital increasingly fragmented with equity stakes into the City of London office market in 2011 Analytics. Numerous other sources of data in buildings split between multiple and review changes in ownership trends include CBRE, CoStar, Investment Property investors, many of which are feeder funds or since the publication of the previous report Databank, the Bank of England and the pooled vehicles. While acknowledging the in 2006. It draws on the Who Owns the City Corporation of London. many and varied problems associated with database which has been updated to include establishing the beneficial ownership of City records of 174 offices occupying some 20 offices, the contributors to this report believe million square feet. This represents the findings are as accurate as possible. approximately 22% of the City of London’s office stock. The first Who Owns the City Further information: report was commissioned by To download a copy of the Development Securities PLC in 1998 Who Owns the City report please visit and again in 2001 and 2006. www.developmentsecurities.co.uk 27

Who owns the city

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Who owns the city — Document Transcript