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UK properties entice Malaysian companies

KUALA LUMPUR (April 30): The low interest rate, weakening pound and near rock bottom prices have wooed property buyers to the UK, including Malaysian developers and asset managers.

Last week, Eastern & Oriental Bhd (E&O) announced the acquisition of an office and retail development in London for RM100.9 million. The property developer wants to establish an office there, as a base to explore business opportunities in the UK.

Permodalan Nasional Bhd (PNB) and the Employees Provident Fund (EPF) have already spent billions buying commercial properties in the UK over the past few years. Other companies such as TA Global Bhd and S P Setia Bhd have shown interest in UK properties.

S P Setia said it would continue to seek ways to "invest, via strategic partnerships and landbanking, in this exciting market" after its failed bid to win a £5.5 billion (RM27.3 billion) project in London.

The British real estate sector has been a target for many international investors, capitalising on its status as a safe haven built on sound risk-adjusted returns and ample liquidity even in times of economic difficulty, said real estate research and consulting firm Cushman & Wakefield.

"With continued ultra-low interest rates, further geo-political unrest and a relatively weak sterling, there is no reason to believe that there will be any let-up in interest from international investors in the central London market," said the consulting firm's head of central London Investment, Clive Bull, earlier this year in a report.

The UK registered a GDP contraction of 0.2% in the first quarter this year after a decline of 0.3% in 4Q11, putting it in a technical recession. The last time that the country had experienced two consecutive quarters of contraction in GDP was in 2009, when the economy fell 4.4%. However, most economists perceive the UK economy as stronger than its European peers.

Despite the economic slowdown, Cushman & Wakefield said property prices in the UK have began to rebound in the past two years, mainly in the office space segment. The firm said London offices earned an average rent of US$163.80 (RM497.95 per sq  ft (psf), the highest rate among 38 key European cities.

Moreover, London's office rentals grew faster in 1Q12 at an annual rate of 5.1% compared with Europe's 1.3%. However, data from real estate analyst Investment Property Databank (IPD) said yields from UK properties fell to 7.3% in March from 12.1% in the previous year. IPD said offices lead with a yield of 8.6%, while the retail and industrial real estate sector registered 6.2% and 7.1%.

The base rate has remained at 0.5% since 2009, and the pound has remained below RM5 since November last year.

"Throughout much of 2011, investment demand at the prime end has been driven by overseas investors and selected UK institutions who have targeted well-let assets in good locations, with long income streams and good covenants," said Cushman & Wakefield. The firm expects the trend to continue this year.

The EPF spent £693.5 million to acquire five properties in the UK, through its special purpose vehicle Kwasa Global (Jersey) Ptd Ltd. The fund presently owns seven properties in the UK. Properties only made up 0.39% or RM1.82 billion of its total assets last year. However, the figure could rise as the EPF recently received a mandate to increase its overseas investments to 23% from the 13.4% last year.

"We have undertaken these acquisitions at a time when property rates overseas have been on the decline. These investments have also presented us with the opportunity to diversify into new and potentially lucrative assets that offer good returns over the long term with strong tenant covenants," said the EPF in its latest annual report.

PNB has spent some RM4.9 billion in the past two years acquiring overseas properties. This includes three offices in London. The fund may shift its investment focus towards the real estate sector moving forward, based on a recent statement by president and chief executive Tan Sri Hamad Kama Piah Che Othman.

"In the past, our focus has definitely been on equity investments but now we are venturing into the real estate sector as it is expected to provide stable returns," he was quoted as saying earlier this month.

The pilgrim fund Tabung Haji, has allocated between £150 million and £200 million to purchase at least one commercial property in the UK this year.

Director and chief executive Tan Sri Abi Musa Asaari Mohamed Nor said earlier this month that the UK had been on its radar for a long time. He added that expanding the fund's scope to include properties in London would provide it an opportunity to earn favourable returns on a fixed income basis.

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