The central London skyline is instantly recognisable with its distinctive skyscrapers such as the Shard, the Walkie Talkie and the Gherkin.
It is possible to invest in buildings like this to benefit from a rise in their value and the rental yield they generate.
The many office, retail and industrial buildings across the capital city can offer an alternative to investing in company stocks, if you know how to go about it.
This article covers:
Why do people invest in London property?
Investing in London’s property market can offer the twin benefit of capital appreciation and an income. Property offers an alternative to stocks and bonds and can be used to diversify a portfolio.
London, as a global financial, legal and cultural centre and one of the largest cities in the world, has one of the strongest commercial real estate markets globally. Being a leading city in global terms puts London in a category alongside places such as New York, Tokyo and Sydney, making it distinct from other UK cities. As such, it generates demand from investors around the world and tenants of many types.
London’s property market is closely attuned to the global economy rather than the UK domestic economy. Although there is a significant degree of overlap between these two things, investing in the London property market has a different risk and reward profile to UK property generally.
This all means it can be very lucrative. The consistently strong demand and a fundamental constraint on supply supports valuations.
From office buildings to retail locations and industrial sites, there is a wide range of building types to target. The way most investors do this is by buying units in a property fund or shares in an investment trust via an investment platform.
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What are UK property funds?
Investing in commercial property is very different from being a residential landlord. As a commercial property investor you are unlikely to buy properties outright on an individual basis, unless you have many millions to spend.
Instead, your route is via collective investment vehicles. These largely fall into two categories, open-ended funds and real estate investment trusts (Reits).
The former work in a similar way to equities funds, with the managing firm buying a pool of assets with their investors’ money and issuing units against this pool. The difference is simply that they are buying properties instead of shares in a company.
This difference does fundamentally change their nature as an investment proposition. Stocks are highly liquid, meaning they can be easily sold to a ready pool of many buyers whenever the stock market is open for trading. Buildings, however, are relatively illiquid, which means they cannot be easily or quickly sold.
As anybody who has sold a house will tell you that the sale depends on finding that one particular buyer who is willing to pay a price you will accept. That can take weeks, months or, in some cases, years.
The fund managers are required to keep a significant proportion of the fund in cash to mitigate this factor and allow for quick withdrawals by investors. Under most circumstanced this works smoothly. There have been occasions, though, where withdrawal requests were too high and could not be met. The money owned to investors will ultimately be paid but it could take weeks or months. It is important to be aware of that possibility before investing in a open-ended property fund.
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What are Reits?
Real estate investment trusts are listed companies which have a primary focus on investing in commercial properties such as office buildings and retail centres. They must distribute 90% or more of their income to shareholders.
The key advantage they have over property funds is liquidity. As a listed company on the London Stock Exchange you can buy and sell shares in a Reit virtually instantly, whenever the stock market is open.
Large UK Reits which hold London property include British Land, Land Securities and Segro. Each of these will provide you with broad exposure to the market. Different Reits will have varying pools of assets they own and prioritise, so it is important to do your research before investing to ensure a particular Reit’s strategy aligns with what you are aiming for.
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Are there risks to investing in London property?
The principle risk of investing in London property is a sharp fall in valuations and rental yields due to a sudden, unexpected event. This would reduce the value of your investment and shrink any rental yield you might receive.
Commercial property markets are very sensitive to the economic cycle. We saw the perfect example of this in recent history, namely the Covid pandemic and related lockdowns. An earlier example is the 2008 financial crisis, where credit markets froze due to vast amounts of reckless lending, which resulted in an economic crash. Thankfully, these kind of events are few and far between.
A more conventional economic slowdown or recession can have a negative impact on the London property market but the impact should be manageable.
It is also important to keep in mind the opportunity cost, as with any investment. Any money you invest in one asset type, such as property, could underperform money put into another asset, such as company stocks.
Fund gating
As touched on earlier, another risk to be aware of which applies specifically to open-ended property funds is “gating”. This is where the fund manager will “gate” the fund by temporarily declining all withdrawal requests.
This can occur when a large number of clients seek to exit at a similar time and there is not enough cash on hand to give them their money back. Properties are not liquid assets like stocks, as an extensive sale process is involved, requiring a willing buyer or buyers. This means property fund managers may need time to sell some of the assets before handing over investors’ cash. Once some of the assets have been sold or there is more cash available, the gate will be removed.
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