A recent report entitled "Who Owns the City", researched by Professor Colin Lizieri, of Cambridge University, highlights some interesting aspects concerning City of London's commercial office market; which is very buoyant but often neglected by mainstream press coverage.

1. Who
oWns
the
City
An analysis of Office
Ownership and Global Investment
in the City of London
A report commissioned by

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

3. Michael Marx
Chief Executive
Development Securities PLC
Foreword
The last three years have put many of us, not least the property industry, through a most
testing period. The City’s office stock has experienced its fair share of pain as capital
values 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 global
economic downturn and the ongoing Eurozone debt crisis, the Square Mile’s
ability to attract occupiers and investors has proved to be a litmus test of London’s
pre-eminence as a global financial centre.
It is against this background that One of the most important findings of This underlines the remarkable
Development Securities PLC publishes this new report is that, for the first time resilience of the City of London’s office
the latest Who Owns the City report, ever, the level of overseas ownership market and its continuing success as the
the fourth in a series of studies that of the City’s office stock has overtaken world’s office investment destination of
we have commissioned since 1998 to UK ownership. From a mere 8% in choice. Foreign investors have helped to
examine the dynamics of office 1980, foreign ownership passed 25% in maintain liquidity in the market, thereby
ownership in the City of London. the mid 1990s and now stands at 52%. improving its attractiveness to increasing
Whilst 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 appeal
Over many years, Development values that followed the crash of 2008 is the City of London’s intrinsic ability
Securities has aimed to contribute to did nothing to discourage foreign to attract occupiers – financial
debate affecting the property industry, investors. Far from inducing capital businesses that sustain the value of
the 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 through
significant 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

4. Contents
Executive Summary
1. Introduction
2. City office ownership - a detailed analysis
3. The impact of the global financial crisis
4. Conclusions and implications
2

5. 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

6. Executive summary
5. There is a growing trend 7. The City of London 8. Lower capital values have
towards private individual office market has displayed not deterred foreign investors
ownership of City offices remarkable resilience to The traumas in financial markets and
The individual, high net worth, private global economic turmoil the accompanying reversal in property
investor is playing an increasingly prices have not brought about any
Foreign investors helped maintain
significant role within the ‘Square Mile’ significant shift in the pattern of
liquidity against a backdrop of falling
and currently accounts for some 6% ownership within the City’s office
values and, far from inducing capital
of total floorspace. This may be an market. In the 2008-2011 period,
flight, the market correction led to an
underestimate, 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 experienced
difficulty of tracing ownership through foreign owners to UK players.
considerable capital flight in 2008, a
standard 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 integral
City office space are in decline to the City of London office
Specialist real estate investors (45%) market
and financial firms (24%) have Due to the fact that 41% of the City office
continued to increase their ownership space is owned and occupied by firms in
of City office space at the expense of the Finance, Insurance and Real Estate
traditional owners such as the public (“FIRE”) sector, and 57% by financial
sector, charities and livery companies. and business services firms, there is
Direct institutional ownership has considerable ‘functional specialisation’
experienced a sharp decline from in the City. The long-term fortunes of
29% to 17% during the period 2005 occupiers and the investment market
to 2011. This compares with a 37% are therefore locked together.
interest in 1995.
4

7. 1
Who 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

8. Introduction
In the wake of the 2008 global financial
crisis and the ongoing Eurozone debt
The market environment in 2011 is very
different from 2006. What is the legacy
What is the legacy of
malaise, the City’s capacity to generate of the global meltdown in relation the global meltdown in
significant trade surpluses (estimated to the City property market? Has the
at £36 billion in 2010) through the trend towards foreign ownership of City relation to the City
predominance of its financial services offices been reversed? Is there evidence
will 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 by
Against this background the nationality or by type of investor?
publication of the fourth Who Owns Did the particular structure of the City
the City report, commissioned by market make it more vulnerable to the
Development Securities PLC, would financial traumas of the late 2000s?
appear opportune.
Such are the questions that Who
In terms of the overall ownership of Owns the City, drawing on a primary
City offices, our previous report in database that incorporates 174 offices
2006 highlighted the fact that the occupying some 20 million square feet,
fragmentation of ownership and has sought to address.
increasingly highly geared structures
brought real risks to the City.
The report concluded:
“There are, thus, real potential risks
in the current market, risks that are
linked to the changing nature of
ownership in the City. Most of all, the
City office market is vulnerable to a
major negative shock – in the property
market, in the City’s financial
activity, in the regulatory and fiscal
environment.”
6

9. 2
Who 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

10. 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
0.0
Year 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

11. 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

12. City office ownership - a detailed analysis
Figure 4: Office acquisition by city, 2007 - 2011
Value of Acquisition (€ million)
80,000
Domestic Continental Global
70,000
60,000
50,000
40,000
30,000
20,000
10,000
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
Fr
Source: RCA
London’s role as the pre-eminent Approximately 41% of City office space Across central London as a whole, it is
financial centre in Europe has served to is simultaneously owned and occupied estimated that more than half of all sales
create a depth and breadth of markets by firms in the FIRE sector, while some have been to overseas buyers. Although
that underpins demand for office space 57% is accounted for by financial and UK investors enjoy a modest majority
in both the City and its surrounding business services firms. Many of the share of London’s Midtown market
sub-markets in Docklands and latter, including legal and accountancy in terms of capital value and a similar
Midtown. Finance, insurance and real practices, are also strongly associated share of the West End market in terms
estate (“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 relatively
increase since the early 1980s, mirroring The future success of occupiers and small properties) their presence in the
the increase in stock. investment markets are therefore thinly-transacted Canary Wharf/
locked together. Docklands market is almost invisible.
Figure 5: London FIRE employment
Number of Employees
450,000
400,000
350,000
300,000
250,000
200,000
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
20
Source: Adapted from NOMIS
10

13. 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

14. City 0ffice 0wnership - a detailed analysis
Foreign owners account for
60% 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 refurbishment
Percentage
70
Other
60
Europe
50 Australia
40 Singapore
International
30
Germany
20 Canada
10 Middle East
0
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Who Owns the City database
12

15. 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

16. City office ownership - a detailed analysis
...Enter the high net worth
private investor
We 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 ownership
of commercial real estate by wealthy private investors, this phenomenon has been less
evident 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 worth
significant 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 growing
underestimate, given that the “unknown” through standard searches. Indications role on the part of sovereign wealth
category of owners, accounting for are that the majority of these private funds.
a further 4% of floorspace, may well owners are not UK domiciled, although
Figure 9: Type of owner, City of London, 1975-2011
2011 2010 2005 2000 1995 1990 1985 1980 1975
Institutions 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 database
Figure 10: Ownership by type of owner, City of London offices
Percentage
100
90
Other / unknown
80
Individual
70
Traditional
60
Specialist real estate
50
Finance
40
Institutions
30
20
10
0
Year 1973 1980 1987 1994 2001 2008 Source: Who Owns the City database
14

17. 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

18. City office ownership - a detailed analysis
16

19. 3
Who 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

20. 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
-50.00
Month 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

21. 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

22. The impact of the global financial crisis
20

23. 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

24. 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
60.0
Month 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

25. 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

26. 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

27. 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