BNPPRE - Investing in London

INVESTING IN LONDON
THE BNP PARIBAS REAL ESTATE GUIDE TO
IN ASSOCIATION WITH
PRODUCED BY
ABOUT BNP PARIBAS REAL ESTATE

BNP Paribas Real Estate is the market leader in commercial real estate services across Europe with 618 million of gross turnover, 141 million of gross operating and 3300 employees.
We manage more than
30.5 million sq m in commercial real estate

across Europe
11 billion
of assets under management across Europe
84,000 valuations
completed across Europe in 2010
Market leader in Europe

in Commercial Property Development
47m gross turnover

Real Estate Strategy: 57%, Project Management: 35% Occupier Services: 8% One transaction every
14 minutes
4,300 commercial real estate
transactions completed in 2010
CONTACTS
International Investment Andrew Cruickshank +44 (0) 20 7388 4434 andrew.cruickshank@bnpparibas.com Head of Central London Dan Bayley +44 (0) 20 7388 4444 daniel.bayley@bnpparibas.com Central London Chairman Fred Hargreaves +44 (0) 20 7338 4430 fred.hargreaves@bnpparibas.com C Investment Shaun Gorvin +44 (0) 20 7388 4851 shaun.gorvin@bnpparibas.com Head of West End Investment Justin James +44 (0) 20 7338 4228 justin.james@bnpparibas.com Property Management Steve Harber +44 (0) 20 7484 8170 steve.harber@bnpparibas.com
www.realestate.bnpparibas.co.uk
INTRODUCTION
CONTENTS
CONTENTS
4 5 6 10 12 18 20 24 26 29 30 31 INTRODUCTION LONDON BY NUMBERS FOREWORD LONDON OVERVIEW TOP 10 REASONS TO INVEST INVESTOR CASE STUDIES GUIDE TO LONDONS SUBMARKETS INVESTOR TOOLKIT LONDON: INVESTORS QUESTIONS ANSWERED NEED TO KNOW: KEY LEGAL AND TECHNICAL TERMS TAX CLINIC LONDONS DEBT MARKETS: A LENDERS VIEW JOINT VENTURE PARTNERSHIPS FUTURE LONDON KEY TRANSPORT CHANGES HOT SPOTS
Editor: Lucy Scott Sub-editors: Lucien Howlett, Phil Petty Art director: Nick Watts Designer: Heather Reeves Illustrations: Infomen Project manager: Francois Morrow
Business development managers: Niki Kyriacou: Niki.Kyriacou@ubm.com James Orpin: James.Orpin@ubm.com This guide was published in association with BNP Paribas Real Estate and Freshelds Bruckhaus Deringer October 2011
INTRODUCTION
LONDON BY NUMBERS
LONDON BY NUMBERS
Three quarters of Fortune 500 companies have a London ofce.
75%
The total of Londons annual economic output or gross value added in 2010. This represented an increase of 2.7% compared to 1.5% across the UK.
249.1bn
Northern Fringe
Kings Cross
Midtown
Holborn
City
Bank Canary Wharf
Bond Street
West End
South Bank
London Bridge
Docklands
London continues to be a vibrant tourist destination, attracting 14.7 million international visitors in 2010, 3.5% more than in 2009.
14.7m
London is home to more than 480 overseas banks, more than any other city in the world. There are more Japanese banks than in Tokyo and more US banks than in New York. More than half of the businesses in the FTSE 100 and over a fth of Europes largest 500 companies have their headquarters here.
480
Londons population has grown every year since 1998 and stood at 7.83 million at the end of 2010. The upward trend is expected to continue until 2031.
7 .83m
GUIDE TO INVESTING IN LONDON
INTRODUCTION
FOREWORD
A capital place for investors

ondon is on the cusp of one of the most exciting periods in its recent history. As the Olympic Games is set to focus the worlds attention on the capital, a number of infrastructure and urban regeneration initiatives promise to transform the real estate market. The UK capital has opportunities for all investors: from those seeking core returns to those with an appetite for risk. Their enthusiasm is strengthened by Londons simplicity, transparency and efciency. International investment is a solid feature of Londons property market, maintaining its presence even in the depth of the nancial crisis overseas investors spent almost 10bn on commercial property in 2008 and 2009. Overseas buyers accounted for half of all investment into central London in the rst half of 2011. We are condent that this trend will continue. Across the capital, schemes are under way that will present fresh opportunities in the coming years. Two of the most signicant are Argents Kings Cross Central (where we are also developing our rst UK scheme) and the International Quarter at Stratford, being developed by Lend Lease and London & Continental Railways. This guide outlines the opportunities available now. We will show you where the property investment hot spots will be and provide information on each area of the city, with examples of recent activity and key property statistics. We have also collated practical information on navigating the technical aspects of investing in London. We, together with Freshelds, address the legal and regulatory issues in the Investor Toolkit section, while on page 26, the BNP Paribas Finance Team analyses the state of the debt market and outlines the opportunities this offers. We hope you nd the guide useful and are as excited by London and the opportunities it offers as we are. Andrew Cruickshank is senior director of international investment at BNP Paribas Real Estate
london overview
top 10 reasons
the top 10 reasons to invest in london

londons financial sector will need space equivalent to four shards or five heron towers by 2014
one
6
nP Paribas Real estate estimates there will be demand for at least 1.6m sq ft of extra space in london over the next three years, based on responses to its london Financial sector survey 2011, which asked rms about their outlook for job growth. More than half (55%) said they planned to increase headcount over the next three years, leading BnP Paribas Real estate to conclude that 11,500 extra jobs could be created in the nancial sector by 2014. An average of 3.1m sq ft of space has been transacted each year by the nancial sector over the past ve years, says BnP Paribas Real estate. this has been driven primarily by lease expiries and M&A activity. it is a trend we expect to continue, says Claire Higgins, head of research for the company.
sPACe needed BY londons FinAnCiAl seCtoR BY 2014
guide to investing in london
lonDon overview
top 10 reasons
DemanD for space matches supply

he strongest demand for new space is likely to come from small-scale nancial companies currently occupying space of less than 10,000 sq ft. Recent lettings over the summer conrm BNP Paribas Real Estates projections. Investment management rm ISI International Strategy leased 4,000 sq ft in the City of London at 50 St Mary Axe, EC3, while in Mayfair, US hedge fund York Capital Management signed a 7,600 sq ft letting at 23 Savile Row, W1S, paying 97.50/sq ft. Claire Higgins, head of research at BNP Paribas Real Estate, says: Our research shows that these smaller companies are more positive about growth in jobs. They will drive demand over the next few years, which is good news for the central London ofce market, as these requirements match the supply available.
two
T
overseas investment continues to Dominate lonDons property market

he diversity of Londons investment market has shielded it from the worst effects of the downturn. Non-UK investors accounted for 60% of the 10.3bn transacted in central London in the past 18 months. In the past ve years, overseas buyers invested 38bn into central London commercial property, according to Property Data. Prime West End yields are now 4% for ofces and 3% for retail, and 5% in the City of London for both sectors (see pages 13-17 for more yield data). Overseas investment is a key source of capital for London. In 2010, Norges Bank Investment Management picked the UK capital to invest the rst slice of its global real estate mandate taking a stake in The Crown Estates Regent Street portfolio for 448m. In June, Koreas Public Ofcials Benet Association awarded ING Real Estate Investment Management a mandate to invest 170m in central London ofces.
three
Business confiDence in lonDon is at a high

s London prepares for the 2012 Olympic Games the condence of overseas businesses in the capital is at a high. A survey commissioned by promotional agency London & Partners found that 90% of senior executives from overseas companies believe that London provides a good location for their business. A total of 86% said the Olympics would benet London, while 70% said the proximity to markets and customers was a principal reason for their presence. In addition, a survey by Think London reveals that 82% of senior executives from foreign direct investment companies believe that London provides a good environment for strong, innovative companies.
four
GUIDE TO INvESTING IN LONDON
LONDON OVERVIEW
TOP 10 REASONS
CHANGE
ANNUAL HOUSE PRICE INFLATION FORECAST
5% 4% 3% 2% 1%
FIVE
L
0%
2011
2012
2013
2014
2015
UK
London
Source: BNP Paribas Real Estate
LONDONS HOUSING MARKET HAS HELD UP WELL

ondons residential market is outperforming the rest of the UK, with average rents increasing by almost 7% in the last 12 months. The average rent in Greater London has been reported to have broken through the 1,000 per month barrier for the rst time reaching 1,006 per month. In central London, the average is closer to 2,500 per month. House prices have also remained strong. In 2011, Londons prime residential market recorded prices 30% above the 2007 peak, as overseas investors chose luxury property. United House Developments sold 51 of the 56 ats at its new Central Saint Giles scheme in WC2 to buyers in Hong Kong, Singapore and Kuala Lumpur, at an average of 1,400.00/sq ft, a record for the area. In Londons West End, 900m of sales were completed on 60% of the One Hyde Park scheme, SW1, within ve months of its ofcial launch. Debbie Taylor, director, head of land and new homes at BNP Paribas Real Estate, says: Despite the fact that the UK has austerity measures in place, it is seen as a strong market and a safe place for investors to put their cash.
LONDON RETAIL CONTINUES TO BE ROBUST

ondons retail property market has experienced a period of strong growth, driven by a favourable exchange rate for tourists and international retailers competing for space. Retailers from the US are leading the international expansion. US fashion retailer Forever 21, for example, is to use its agship store on Oxford Street as a launchpad for a full-scale entry into the UK. Investment from China has appeared too, retailer Bosideng MAN said it would open a store in London after buying a prime development site near Oxford Street. It is set to open before the Olympics.
SIX
london overview
top 10 reasons
demand for hotels from overseas remains solid
seven
t
ear-on-year protability levels at london hotels increased by nearly 17% as the capital hosted an assortment of sporting, cultural and political events. We have seen a year-on-year increase in average room rates of more than 14% to 112.90 from 99.00 in 2010, says BnP Paribas Real estates Claire Higgins. overseas buyers have dominated the london hotel market over the past 18 months, accounting for 70% of investment by value. Far eastern and european investors were the most active purchasers, she adds.
london offers overseas investors an attractive tax regime

here is generally no uK tax on capital gains for nonuK resident investors buying property in london, even on deals negotiated or signed in the uK. When calculating taxable rental income, interest on a loan to a non-resident landlord secured against the property is generally deductible (for advice on capital gains tax, see page 24).
nine
eight
longer leases make asset management easier
transparency, whatever the cycle

he simplicity and efciency of the uK legal system and market practices means investors are able to access accurate market information about particular assets, as well as about the market in general. the liquidity of the london market means that entry and exit are always possible.
verage lease lengths in london are 6.7 years for ofces and 7.7 years for retail. in Asia, however, buildings tend to have shorter leases and are multi-let. overseas investors appreciate the fact that buildings are often occupied by a sole tenant that is there for the long term, making it simpler to asset manage a property from afar, says Andrew Cruickshank, senior director of international investment for BnP Paribas Real estate.
ten
guide to investing in london 9
LONdON OVERVIEW
INVESTOR caSE STudIES
hOW WE dId IT
JOINT TREaSuRE INTERNaTIONaL
STRaIghT-TaLkINg appROach
Thomas Yiu, adviser at hong kong-based Joint Treasure International, says successful investment in London is about contacts, research and having a straight-talking approach. The private equity rm made its rst investments in London this year. We have been looking in london for three years, but we have only bought two properties. during that time we were learning about the city too. We spent time with agents, law rms and our contacts cross-checking what people told us. We tested the market with an investment
London may be one of the easiest markets to invest in globally, but new buyers need to do their homework. We spoke to three overseas investors about their top tips for success
in an apartment in south Kensington. then we bought 10 stratton street in Mayfair. At 4.5% the yield was low, but we will upgrade the building to a prime ofce property, enabling it to command a higher rent. london has an attractive tax regime that is more favourable to overseas investors than other places. As a Hong Kong investor, it is an easy market to understand our colonial connection means we are familiar with the culture. if you are new to the market, we have found people can question whether you have the ability to close a deal. But now we have undertaken two deals in london, it is easier. People are taking us more seriously and trying harder to bring us deals. to gain respect, it is important to be a straight shooter and not mislead people. To gain respect, it is important to be a straight shooter and not mislead people
New investors should ensure they establish a strong network of contacts
hONg kONg pRIVaTE INVESTOR

buILd a cREdIbLE REpuTaTION
Overseas buyers need to react fast in Londons competitive market, says a hong kong private investor that has been investing in London since 1982. As a private family ofce, we are mostly looking for stable returns. londons real estate market gives us that and offers that incremental upward recurrent income and potential for capital appreciation. But london also offers what other cities dont: long institutional leases (see p20), a friendly tax regime for foreign investors, a
clear and established legal framework and an abundance of property professionals. today, and over the next few years, attractive opportunities will be less easy to nd so new investors should consider looking where there is less appetite, such as at assets that are capital and management intensive. this increased competition among overseas buyers, combined with shorter market cycles, also means you need to react fast and sometimes aggressively to capture an opportunity. new investors to london should ensure they establish a strong network of contacts. But they also need to build their credibility and reputation in the market having funding ready as well as a quick decision-making process really helps.
10
LONDON OVERVIEW
INVESTOR CASE STUDIES
MGPA
TIMING IS KEY
Investors should look to Londons emerging locations for opportunities, says Julian Neave, analyst, asset and development management at MGPA. The private equity real estate rm has been investing in central London ofces since 2008 and has recently focused on developing prime ofces in the City. London is a competitive market but it means that when you come to exit your investment, there is a wide pool of potential buyers. It is also one of the most transparent markets in the world and the availability of information means that agents and investors tend to know when deals are coming to the market. Investors trust the English legal system, while the language and Londons international culture means it is an easy city to navigate. The Citys standing as one of the worlds leading nancial centres has helped it to attract foreign investment during uncertain economic times. The City tends to have larger assets with large oor plates, while the West End has smaller lot sizes and oor plates, with ofces in Mayfair often being in old residential buildings that have been renovated. Timing is key when looking at this market. The central London ofce market is liquid, but it is also one of the most cyclical in the world. Investors should time entry around lease events, but also focus on buildings that are occupier friendly. In the past year, a lot of people have been targeting development in central London, but that window of opportunity is now closing. If a project is not ready to start imminently it will be difcult to beat the rush of development coming in 2014. Investment strategies should focus on Londons new hot spots such as Farringdon or Kings Cross.
LONDON OVERVIEW
SUBMARKETS: WEST END
GUIDE TO LONDONS SUBMARKETS

Whatever your investment strategy, London has something to offer, as our overview over the following six pages shows
the west end

West End post codes: W1, SW1, W2, SW3, SW7 and W8 Most famous for: Retail. The West End is a shoppers paradise, offering everything from cheap and chic fashion to luxury designer goods on its famous streets such as Bond Street, Oxford Street, Regent Street and Piccadilly. Also known for its theatres and Georgian architecture. Landmark buildings: Houses of Parliament, Buckingham Palace, The Ritz Hotel PRIME RENTS (/SQ FT) AND YIELDS
Ofces Prime yields (%) Secondary yields (%) Capital value (/sq ft) Prime rents (/sq ft) Overseas investment (m)* Overseas market share (%) 4.00 5.50 100.00 2,655 60 Retail 3.00 5.00 650-900 1,284 85 Residential 3.50 1,750 62.00
OCCUPIER BREAKDOWN
1.8BN 120.00 4.3% 3%

PRIME RETAIL YIELDS
TRANSACTED IN H1 2011
10% 10%
10%
30% 25%
nancial professional other
PER SQ FT PRIME OFFICE RENT FORECAST IN 2014
15%
corporate government media
VACANCY RATE IS AT ITS LOWEST SINCE 2008
*Covers last 18 months
PRIME RENT FORECAST (/SQ FT)

Prime rents St Jamess/Mayfair Victoria Soho North Oxford Street East North Oxford Street West Q4 2011 105.00 68.50 70.00 62.50 71.50 Q4 2012 110.00 73.50 72.50 65.00 77.00 Q4 2013 115.00 77.00 75.00 67.50 80.50 Q4 2014 120.00 80.50 77.50 70.00 84.00
W2
THE WEST END: A SAFE BET

Londons West End property market offers investors luxury hotels and residential, good quality ofces as well as high street and high-end retail. Property here is smaller in scale relative to other areas if you want to spend 200m, the City may be your best bet, but if its 20m, there are a lot of opportunities here. Safe and robust, it has fewer peaks and troughs than other London markets.
OCCUPIERS
The West Ends occupiers are diverse. As Londons largest retail area by oor space, the district is home to a wide range of retailers from Primark to Cartier. But its also the base for a mix of hedge funds, tech and media companies, and home to many property companies.
W8
12
LONDON OVERVIEW
SUBMARKETS: WEST END
BEST LOCATIONS TO BUY IN

Property here is smaller scale relative to other areas if you want to spend 200m, the City market may be your best bet, but if its 20m, there are a lot of opportunities for you here.
Established prime locations are St Jamess, Mayfair and Berkeley Square, where prime yields are 4% for ofces and 3% for retail (see table). For those with an appetite for higher returns and interesting opportunities, areas such as Victoria, Paddington, north of Oxford Street, and Soho are worth a look.
HEALTH OF THE OCCUPIER MARKET

Take-up during the rst half of 2011 was below ve-year average for ofces. Nevertheless, there has been signicant activity in the West End lately. In 2010, it overtook Hong Kong as the worlds most expensive ofce location when rents nudged up to 85.00/sq ft. They now stand at 100.00/sq ft. There has also been healthy activity from TMT (technology, media and telecommunications) companies with 24 leasing deals generated by the sector in the rst half of 2011. Film effects business Double Negative prelet the
entire ofce element of 160 Great Portland Street, W1, the 86,500 sq ft scheme near Regents Park, paying 59.60/sq ft for a 20-year lease. Google has signed up for an additional 37,400 sq ft at 123 Buckingham Palace Road, SW1, near Victoria Station, while Apple has agreed to pay 72.50/sq ft for 26,000 sq ft at 1 Hanover Street, W1. The banking and nance sector has also been active. Investment rm Rathbone Brothers signed for 40,800 sq ft at 1 Curzon Street, W1, paying 75.00/sq ft for its new headquarters during the second quarter. Lucidus snapped up 5,700 sq ft at 55 New Bond Street, W1, for 70.00/sq ft, while Californias Platinum Equity took the last 3,200 sq ft at 40 Bruton Street, W1, in Mayfair, paying 98.50/sq ft for a 10-year lease.
DEVELOPMENT
Lack of West End supply also explains the upward pressure on rents and signicant developments are few and far between. But a handful of schemes are being developed that will bring more space to the market, such as Avivas 575,000 sq ft mixed-use scheme at Mortimer Street, Fitzrovia, W1.
ORIENTATION
W1 Soho
Marylebone
Bond Street
EXAMPLE DEALS
Retail 16 Old Bond Street, W1

A 13,100 sq ft building let to Prada sold for 32m, reecting a yield of 3.15%.
Ofce 17 Duke of York Street, SW1

The 17,800 sq ft building was sold to CREMS for a reported 32m, reecting a yield of 4.25%.
Residential 30 Old Burlington St, W1
Mayfair
A residential developer is understood to be close to buying 30 Old Burlington Street for 96m.
SW7
Westminster
A FAVOURITE WITH
Aside from the UK institutions and European buyers, the market is popular with Far Eastern investors, who in the past 18 months accounted for 25% of the overseas investment market, followed by investors from the Middle East (22%) and North American buyers (7%).
SW1 SW3
Victoria
13
LONDON OVERVIEW
SUBMARKETS: DOCKLANDS
E16 E14
Limehouse
ORIENTATION
10.5m 8.6%
VACANCY RATE
TRANSACTED IN H1 2011
Canary Wharf
City Airport The O2
Canary Wharf
docklands
Occupier breakdown: 60% nancial, 10% telecoms/IT, 10% professional, 10% government, 10% other Post codes: E14 and E16 Most famous for: The Canary Wharf business district, home to some of the tallest skyscrapers in Europe. Landmark buildings: One Canada Square, ExCel centre and London City airport. PRIME RENTS (/SQ FT) AND YIELDS
Ofces Prime yields (%) Secondary yields (%) Capital Value (/sq ft) Prime rents (/sq ft) Overseas investment (m)* Overseas market share (%) 5.25 6.00+ 37.50 343 40 Retail 5.25 375.00 Residential 6.00 650 40.00 *Covers last 18 months
DOCKLANDS: OPPORTUNITY KNOCKS

There are two main property markets in Docklands: Canary Wharf and the area to the south. On the Canary Wharf estate it is not often that properties come to market. When they do, they are large lot sizes usually bought by major overseas companies or consortia. It has only been a recognisable ofce market since the early 90s, and has prime ofce rents of 37.50 to 40.00/sq ft in Canary Wharf and 25.00/sq ft in the wider Docklands area. Residential is an emerging sector. Ballymore recently sold 110 ats at its luxury Pan Peninsular, E14 scheme for between 250,000 and 4m to investors primarily from the Far East.

Q4 2011 Q4 2012 Q4 2013 Q4 2014 42.50 42.50 45.00 46.00

Canary Wharf is the prime area, but residential properties in the Limehouse area, E14, could provide interesting returns.
OCCUPIERS
Canary Wharf is dominated by the banking and nancial industry and with rms such as JP Morgan planning to move there, it is a trend which look set to continue. Despite that, levels of ofce letting are low, with just 35,000 sq ft transacted during Q2 2011, largely because the banking sector remains subdued. Canary Wharf is a retail destination too: malls such as Cabot Place are occupied by high-end retailers including Tiffany and Waitrose.
DEVELOPMENT
The Landmark is a 500,000 sq ft luxury residential scheme near Canary Wharf, E14 and Bellway Homes is building the New Festival Quarter at Poplar, E14.
A FAVOURITE WITH
Middle Eastern buyers accounted for 61% of all deals undertaken during the past 18 months.
When properties do come to market, they are large lot sizes usually bought by major overseas companies or consortia.
14
LONDON OVERVIEW
SUBMARKETS: MIDTOWN
MIDTOWN: A GOOD MIX

With a vacancy rate of 5.2%, Midtowns ofce occupier market is at its healthiest for three years.
Midtown is a mix of the West Ends historical buildings and new, modern space investors might nd in the City. Deals tend to be between 20m and 50m. Multi-tenanted buildings provide good asset management opportunities for investors. Rental growth and income in its ofce market outperformed both the City and the West End in 2010, reports the Investment Property Databank.
DEVELOPMENT
The lack of quality space has encouraged more speculative schemes to be brought forward, such as Hines 70,000 sq ft 280 High Holborn, WC1 and Legal & Generals 56,000 sq ft scheme at 6 Agar St, WC2.

Prime property can be found in Covent Garden and The Strand. For more value added opportunities, look north of Theobalds Road and around High Holborn. Tottenham Court Road is also set to benet from the large Crossrail development.
OCCUPIERS
With a vacancy rate of 5.2%, Midtowns ofce occupier market is at its healthiest for three years. Take-up reached 356,000 sq ft during the second quarter 2011 well above the ve year average because it picked up overow from the West End. Signicant deals include Google leasing the remaining 160,000 sq ft for 65.00/sq ft at Central St Giles, WC2, near Tottenham Court Road, meaning the scheme is now fully let, and social networking giant Facebook expanding from its 6,000 sq ft ofce at 22 Ganton Street for a building more than six times that size in Seven Dials, Covent Garden, WC2.
A FAVOURITE WITH
North American and Middle Eastern buyers have been very active in the past 18 months. The rst half of 2011, 245m of the 658m transacted was by overseas buyers.
midtown
Post codes: WC1, WC2 PRIME RENTS (/SQ FT) AND YIELDS
Ofces Prime yields (%) Secondary yields (%) Capital Value (/sq ft) Prime rents (/sq ft) Overseas investment (m)* Overseas market share (%) 5.00
5.50
WC1
Occupier breakdown: 50% professional, 15% corporate, 10% nancial, 15% media, 10% other
Retail 5.00 6.00+ 450.00 3
Residential 3.50-5.00 1,100 43.00
Centre Point
50.00 568 49
Holborn
WC2
*Covers last 18 months

Q4 2011 Q4 2012 Q4 2013 Q4 2014 55.00 57.00 58.50 60.00
658m 5.2%
TRANSACTED DURING H1 2011
Covent Garden
LOWEST VACANCY FOR THREE YEARS

ORIENTATION
15
LONDON OVERVIEW
SUBMARKETS: THE CITY
the city
THE CITY: FOR BIG PLAYERS

If you have large amounts of capital to deploy, this area should be top of your list. While the City offers a range of lot sizes, there are many properties of 200,000 sq ft and over. Recent transactions of this scale include the 288m sale of the 315,200 sq ft Aviva Tower, EC3, and the 183m sale of the 454,000 sq ft Leadenhall Triangle, EC3. With average ofce lease lengths of between ve and 15 years, compared to between ve and 10 years for ofces in the West End, the area is ideal for those looking for long-term income. This market can be volatile, however. Good scope for development in the City leads to uctuating rental cycles. In December 2007, prime rents were 65.00/sq ft. Two years later, they were 43.50/sq ft. The good news is rents have been steadily growing since then, standing at 55.00/sq ft today. Current supply is being absorbed, decreasing from 11.71m sq ft in 2009 to 7.86m sq ft in the second quarter of 2011. The provision of retail and leisure amenities has grown substantially in
City post codes: EC1 professional/nancial/media; EC2 nancial district; EC3 insurance district; EC4 professional Most famous for: The City of London is a world leading nancial centre. A total of 300,000 are employed in the nancial services sector and more funds are invested in the submarket than in the next top 10 European cities combined according to the London Development Agency. In its latest London Financial Sector Survey, BNP Paribas Real Estate reported that the City remains the world leading nancial centre, with 82% of respondents citing the capital as the global leader, compared with just 16% who specied New York. Landmark buildings: The Gherkin, Tower 42, Lloyds of London, the Heron Tower and St Pauls Cathedral.
PRIME RENTS (/SQ FT) AND YIELDS

Ofces Prime yields (%) Secondary yields (%) Capital Value (/sq ft) Prime rents (/sq ft) Overseas investment (m)* Overseas market share (%) 5.00 5.50-6.50 57.50 4,530 62 Retail 5.00 5.50 200.00 23 77 Residential 4.50 1,100 47.00 *Covers last 18 months
OCCUPIER BREAKDOWN
10% 10%

Q4 2011 57.50 60.00 65.00 67.50
30%
50%
Q4 2012 Q4 2013 Q4 2014

nancial professional insurance other
EC1
EC2
3.3bn 67 .50
TRANSACTED DURING H1 2011
5% 8.7%
PRIME OFFICE YIELDS
EC4
Tower 42
Bank
PER SQ FT PRIME OFFICE RENT FORECAST IN 2014
VACANCY RATE
St Pauls
EC3 The
16
LONDON OVERVIEW
SUBMARKETS: THE CITY
the past few years and this is principally for the Citys employees rather than tourists. There is also growing interest in mixed-use developments, of which Land Securities 300,000 sq ft One New Change, EC4, is a prime example. There has been 3.3bn of transactions in the City during the rst half of 2011, compared with 4.42bn for the whole of 2010, meaning transactions for 2011 will be signicantly up on the year before.
the area is ideal for those looking for long-term income
BNP Paribas Real Estates London Financial Sector Survey 2011 showed that the strongest growth in demand over the next three years will come from those occupying space of 10,000 sq ft who are optimistic about headcount rising.

Prime areas include EC2, EC3 and EC4, while property in emerging areas at the fringes, such as Farringdon and Spitalelds, can provide investors with more interesting returns.
OCCUPIERS
Finance is by far the most important sector to the City, accounting for 50% of the occupier base. But it is also dominated by professional services rms such as lawyers and accountants (30%) and insurers (10%). Lettings by the banking and nance sectors have risen over the year. But overall take-up activity is below the ve-year average in quarter two just 0.87m sq ft was transacted, a fall of 18% on the rst quarter, as banks remain nervous. Demand for space in the City is currently being driven by lease events such as expiry or M&A activity rather than expansion, explains Fred Hargreaves, chairman of central London at BNP Paribas Real Estate.
DEVELOPMENT
There are only a small number of available buildings capable of providing space of more than 200,000 sq ft. So investors have targeted development sites recently as a lack of supply over the next three years gives them an opportunity to create prime ofce space and capture rental uplifts. Near St Pauls, 100 Cheapside, EC2, which has planning consent for 87,000 sq ft of ofces and 13,000 sq ft of retail, has attracted strong interest from the development market, while fund manager MGPA and CarVal Investors are about to begin work on 225,000 sq ft of ofces near Moorgate, EC2.
A FAVOURITE WITH
ORIENTATION
Heron Tower
The City has a very international mix of investors who consider the district a safe haven for their capital. Transaction data over the past 18 months shows the market was popular with North American buyers, who accounted for 46% of overseas investment, Far Eastern buyers (22%) as well as investors from Germany (13%).
E1
EXAMPLE DEALS
Ofce deal Bow Bells House, EC2

Bow Bells House was bought for more than 140m by an overseas client of Constanti, reecting a yield of 5.45%.
e Gherkin
Hotel deal 10 Trinity Square, EC3
The former Port of London Authority headquarters is to be reborn as the Square Miles rst super luxury hotel.
Residential development The Heron, EC2
More than 150 of 284 apartments have sold off-plan in less than 12 months at Heron Internationals 36-storey tower.
17
iNvEstoR toolkit
q&A
loNdoN: iNvEstoRs quEstioNs ANswEREd

From buying a property to owning it, a new market can be daunting. Andrew Cruickshank, BNP Paribas Real Estate senior director of international investment, answers some common questions
Q1: im thinking of buying in london. Am i too late to nd good buying opportunities? A: there are different types and quality of buildings within each asset class and submarket of the city, matching a variety of risk appetites. this diversity can be daunting for new investors, so consult an adviser who can work with you to formulate a strategy. Q4: Core areas seem to be trading at very low yields. Are there safe investments outside of these areas? A: the price of core assets is a reection of security and prospects for strong rental and capital growth. But there are secure and long-term income deals on buildings outside the traditional core areas that offer marginally higher returns.
Q2: Now im here, how do i access the market? A: london is one of the most accessible markets globally for overseas investors, market information is plentiful and there is a good selection of advisers to help you. A purchaser will usually have an adviser such as BnP Paribas Real estate to introduce on and off market transactions and provide support throughout the purchase process. Q3: How do i go about deciding the best asset class and location to invest in? A: the prime market has recovered from the downturn and there is strong competition for core assets. But with good rental growth prospects for ofces and selected retail, strong investment performance over the short to medium term is expected. Riskier assets with higher initial yields provide interesting opportunities.
18
Q5: What about if i want to invest a small amount of capital?
investor toolkit
Q&A
i have a portfolio of investments already, but id like to invest in london real estate for the rst time. Can you help? Mignonne Cheng, chairman of BnP Paribas Wealth Management for Asia Pacic (left), responds: Yes. We are one of the largest real estate service providers in europe, and the only adviser to offer advice at every stage of the property life-cycle through six business lines: property development, consulting, valuation, transaction, property management and investment management. Real estate is one service alongside other investment classes offered by relationship managers and BnP Paribas Wealth Management has many clients with differing levels of experience in european markets. our wealth management and real estate teams sit within the same division of the bank and have an increasingly close working relationship, providing a ow of deal opportunities to clients. With the relationship managers from corporate coverage and wealth management, we have created a strong track record of working with Far and Middle eastern clients of the bank in the uK.
A: BnP Paribas Real estate regularly advises overseas investors on transactions between 2m and 5m. the West end and its surrounding areas offer numerous opportunities as compared to the City, where lot sizes are larger.
Q6: id like to make a long-term investment in london - is the market suitable? A: one of the attractions of london is the long occupational leases available. today it is common for landlords to secure 10 to 20 year leases on new ofce buildings and these represent ideal secure investments.
Q7: now ive bought a building, how do i ensure it is properly looked after? A: steve Harber from BnP Paribas Real estates property management team answers: For single let investments, the onus is on the tenant for the majority of costs and repairing obligations. For multi-tenanted properties, a property manager should be appointed. Advisers such as BnP Paribas Real estate can also help with rent reviews, lease renewals, refurbishment and leasing as part of a full ownership lifecycle process. (For more on leases, see p23).
Q8: How will income and capital gains tax impact my returns?
A: efcient tax planning is essential to protect an investment. uK tax laws are relatively friendly towards overseas investors (for advice on this, turn to pages 24 and 25).
Q9: How do i crystallise increases in rental growth? A: Rents are adjusted to market value every ve years. uplifts in rental value during the lease are possible, although there is a risk a review wont coincide with the best point of a rental cycle. some leases will specify a minimum or maximum uplift or a rise in line with a cost of living index.
guide to investing in london 19
iNvestor toolkit
Need to kNow
getting to grips with the intricacies of Uk property can be daunting. Freshelds real estate partner, david lewis and real estate associate Joanna davies outline the key information and terminology you need to know
Need to kNow: key legal aNd techNical terms
registeriNg property iNterests restrictioNs oN bUyiNg property
there are no restrictions on non-resident parties investing in land in england and Wales just one of the many features of the property market which make it attractive to overseas investors.
holdiNg a property
the land Registry records title to freehold and some leasehold interests. Registration provides a guarantee of the owners title to the land, which is backed by the state. All land in england and Wales is required to be registered. some land remains unregistered, but registration is required when statutory requirements kick in, such as a sale of the property or the grant of a lease for more than seven years.
generally land is held freehold or leasehold. owning the freehold title means an investor has a right to the land forever and will own all the buildings on the land. A leasehold interest is limited to a certain number of years (the term of the lease).
types oF lease
leasehold interests are generally either long or occupational leases. long leases are typically of 999, 125 or 99 years with low or nominal rents. long leaseholds are similar in practical terms to freehold, but the tenant owes some obligations to the landlord, for example to keep the property in good repair or to insure it. occupational leases commonly have ve to 15 year terms, with tenant options to break.
20
iNvestor toolkit
Need to kNow
the laNdlord aNd teNaNt act
lease terms
under the landlord and tenant Act 1954, a tenant who occupies premises to carry on a business has a right to remain in occupation when the lease expires and to be granted a new lease of up to 15 years, unless specic steps are taken by landlord and tenant at the outset to exclude these rights. the landlord may however be able to oppose the renewal of the lease in certain circumstances. Where the landlord has successfully opposed the grant of a new tenancy on grounds that do not involve tenant default, the tenant is entitled to compensation.
there is no code of lease terms implied by law, however certain landlords subscribe to a voluntary lease Code which aims to promote fairness in commercial leases. occupational leases are typically at full open market rent with review cycles and rent is usually payable quarterly in advance. detailed provisions regarding use, repair and occupation will be included.
iNstitutioNal leases
institutional leases have standard terms that are acceptable to an institutional investor. they are typically 10-15 years in length and the tenant bears the full cost of repair, reinstatement, maintenance and insurance of the premises.
reNt escalatioN
leases of business premises are usually subject to upwards-only rent reviews every ve years. Rent is generally reviewed to the open market rent payable at that date, although xed rent increases and indexlinked rents are becoming more common.
coNditioN of the property at the eNd of the lease term
repairs
the tenant is usually obliged to keep the premises in a good state of repair throughout the term of the lease. Where a property has multiple tenants, the landlord is responsible for repairing and maintaining the structure, exterior and common parts and the tenants usually pay a proportion of the landlords costs through a service charge.
When the lease expires, the tenant has to hand the premises back in good repair. Failure to do so generally entitles the landlord to a right to claim damages, subject to a statutory cap equivalent to the diminution of the value of the landlords reversion. Where alterations have been carried out, a landlord can usually ask for the property to be reinstated at the end of the lease.
21
iNvestor toolkit
Need to kNow
assigNmeNt of a lease aNd sublettiNg iNsuraNce
usually the landlord insures the property in their name to the reinstatement value together with loss of rent for a specied period (typically three years) and recovers the cost from the tenant. the tenant is liable for all repairs, except where damage is caused by an insured risk, where the landlord will be liable for reinstatement. if the tenant cannot occupy the property, rent will be suspended and if the property cannot be reinstated, the lease will usually be terminated.
typically a business lease will permit assignment or subletting of the whole, subject to landlords consent, which may not be unreasonably withheld. the lease will specify the conditions subject to which consent may be granted and/or circumstances in which it may be refused. there may be conditions in respect of the credit worthiness of an assignee, for example requiring evidence of net assets, a guarantee or rent deposit.
liabilities post-assigNmeNt
For leases granted on or after 1 January 1996 an assigning tenant is automatically released from the tenant covenants in the lease. However, the tenant is normally required to enter into an authorised guarantee agreement (AgA), which guarantees the performance of the new tenant under the lease.
additioNal coNsideratioNs for developers
For investors looking to develop property, there are further matters to consider such as rights to light, planning consents and environmental controls.
eNergy performaNce certificates
An energy Performance Certicate is required on the construction, modication, sale and rental of a commercial building, recording the energy efciency of a building.
22
Compare the market

England & WalEs are there any restrictions or notication requirements on non-resident parties holding property? Is there a system of registration of land? No gErmany
INvestor toolkIt
Need to kNoW
Want to know how our continental neighbours do it? Our concise table below answers some key questions relating to property ownership and tenancy in the major European countries
FrancE Some investments subject to notication to the central bank and/ or the public revenue department Yes, and Notary guarantees title validity spain Some investments are subject to notication to the Bank of Spain italy Generally no restrictions apply
Some restrictions for foreign investors regarding share deals
Yes and registration provides state guarantee of title Freehold or leasehold No. However, certain landlords subscribe to a voluntary Lease Code Long leases typically 999, 125 or 99 years with low or nominal rents and occupational leases commonly 5-15 years (with tenant options to break) Tenant of business premises has right to remain for new term up to 15 years, unless excluded by landlord and tenant at outset Landlord can oppose renewal in certain circumstances; tenant may be entitled to compensation
Yes
Land registration voluntary but standard in practice and state guarantee of title Freehold or leasehold Parties largely free to agree lease terms
Yes, but no state guarantee of title
how is property held? are lease terms implied by law?
Typically held freehold Commercial leases regulated by Civil Code but parties can modify in specic circumstances Freely negotiable lease terms commonly 5-10 years
Freehold or leasehold Commercial leases subject to Commercial Code and civil/long-term leases subject to Civil Code Commercial leases provide for a minimum term of 9 years with tenant right (and limited landlord rights) to terminate at end of each 3-year period Tenant is entitled to renew lease for term of at least 9 years if certain conditions are met and if landlord refuses, tenant is entitled to compensation
Freehold or leasehold Commercial leases governed by Civil Code but parties can modify in specic circumstances Minimum term is 6 years (9 for hotels)
how long are leases granted for?
Initial term of 3-5 years common for individual ofce premises and 10-15 years for complete building
What rights are there for the tenant at the end of the lease?
No right to renew unless contractually agreed but tenant often has contractual right to extend lease once or twice for another period of 5 years
No statutory right to renew
Commercial leases are automatically renewed for an additional 6 years unless 12 months notice is given by either landlord (on very limited grounds) or tenant On expiry of any further period, landlord can terminate without restriction on giving 12 months written notice
What are typical provisions for rent and rent review?
Open market rent common for occupational leases or peppercorn rent for long leases (granted at a premium) Business leases usually subject to upwards-only rent review (to open market rent) every ve years
If term is 10 years or more, rent usually linked to consumer price index but some leases include pre-xed annual increases Review cannot be upwards-only. Open market rent review increasingly common Written consent of landlord for subletting and transferring usually required After assignment, tenant usually remains liable for claims relating to time in which it used the building
Commonly xed rent, sometimes combined with variable rent Annual indexation. 3-year review subject to specic conditions
Commonly xed rent, sometimes combined with turnover Annual indexation, based on consumer price index, common plus market review every 3, 5 or 7 years in long-term leases Unless otherwise agreed, tenant can sublet or assign without landlord approval on giving notice, however Landlord can increase rent by 1020% Original tenant liability survives subletting but only survives assignment where agreed in original lease
Rent and increases may be agreed at outset and no revision allowed before termination of lease, which for leases of 6 years may be may be up to 75% of variation of consumer price index and for leases of more than 6 years, up to 100% Consent of landlord generally required, unless business carried out in property is also transferred Tenant remains liable on assignment unless liability expressly transferred to assignee with landlords consent
are there restrictions on subletting and assigning?
Assigning and subletting usually permitted subject to landlord consent (not to be unreasonably withheld) Tenant may be required to enter into an authorised guarantee agreement guaranteeing performance of new tenant after assignment
Subletting and assignment generally prohibited but landlord cannot prohibit transfer of lease to a successor of tenants ongoing business Original tenant usually remains liable for remainder of term
GUIdE TO INvESTING IN LONdON
23
INVESTOR TOOLKIT
TAX CLINIC
TAX CLINIC
The UK tax regime offers many attractive exemptions to non-resident investors, making it an efcient country in which to place capital. But it is important to fully understand the rules and regulations. In this tax clinic, Freshelds tax partner Colin Hargreaves and tax associate Alan Rafferty outline the key issues
TAX ON RENTAL INCOME

Rent from UK land is subject to UK tax. UK companies pay corporation tax on income, but non-resident investors (whether companies or individuals) normally pay income tax instead. In calculating the amount of rental income for tax, interest is deductible if the borrowing is incurred direct at the property owner level, subject to thin capitalisation and transfer pricing tests and to anti-avoidance rules. Any other regular outgoings directly related to the building will also generally be deductible. Depreciation of capital assets in a taxpayers accounts is not allowable for tax. Instead, a kind of tax substitute for depreciation, called capital allowances, is given at prescribed rates (regardless
of actual accounting treatment) for expenditure on plant and machinery. When buying a building it is important to agree with the seller how much of the purchase price should be allocated to the plant and machinery in the building, especially as the tax rules mean that the buyer and seller will usually have diametrically opposed objectives in the allocation. Partnerships and non-UK unit trust schemes are usually transparent for UK income tax purposes, meaning that no tax is payable by those entities themselves, but rather their income is treated for tax as income of their owners, ie the partners or unit holders as the case may be. Payments of rent from UK land to nonresident landowners are subject to UK withholding tax unless HM Revenue & Customs
Provided land is owned as an investment and not trading as stock, a non-resident investor will enjoy tax-free treatment of exit prot.
Colin Hargreaves, partner Tel: 020 7832 7352
24
INVESTOR TOOLKIT
TAX CLINIC
(HMRC) has approved gross payment in any particular case. HMRC normally approves gross payment unless it has reason to think the non-resident investor will not submit UK tax returns and pay UK income tax on the net rental income in accordance with UK tax law. prots made from trading in the UK, which would include sale prots from land deals of a trading nature. Tax litigation over the trading/investment borderline is almost as old and as endless as UK income tax itself, but often the position is relatively clear. Buying an asset such as a fully let ofce building which generates a rental income stream which exceeds the investors cost of funds, to hold for several years, would be an investment transaction. By contrast, buying a plot of vacant building land which is not currently generating any income, with the aim of selling it within a few years at a prot due to market movements and/or to the addition of value through planning permission or development work, would be a trading venture. The popularity in the UK real estate market of offshore property unit trusts is due to their SDLT efciency.
TRANSFER TAXES
Transactions in UK commercial property are subject to stamp duty land tax (SDLT) at rates of up to 4%, charged by reference to the purchase price. The 4% rate applies to transactions above 500,000. Residential property purchases over 1m are subject to 5%. SDLT is a liability of the buyer, not the seller. UK property is often offered for sale in an offshore unit trust wrapper. The popularity in the UK real estate market of offshore property unit trusts (typically Jersey JPUTs or Guernsey GPUTs) is due to their SDLT efciency: the units can be bought and sold free of the duty. Also, JPUTs and GPUTs are typically transparent for UK income tax purposes, which makes them attractive to UK exempt institutional investors (eg pension funds). Partnerships, by contrast, are unattractive in SDLT terms, because the purchase of a partnership share attracts SDLT by reference to any UK land the partnership owns.
VALUE ADDED TAX (VAT)

In the UK, the letting of commercial property is normally with many exceptions exempt from VAT, unless the landowner has opted to tax its interest in the building. In practice, a landlord nearly always opts to tax, meaning that VAT is charged on the rent, because that way the landlord is entitled to credit for VAT borne on its costs. The main reason why a purchaser usually opts to tax is the VAT treatment of the purchase. The sale of an income-producing building may qualify as a transfer of a going concern (TOGC), which means no VAT is charged on it. But the law provides that, where the seller has opted to tax, TOGC treatment cannot apply unless the purchaser has also opted to tax. Different VAT rules apply where the property is in a wrapper such as a unit trust, and the investor buys the wrapper.
TAX ON EXIT PROFIT

The UK does not generally tax non-UK resident investors on capital gains, even where the gains arise on the sale of UK assets and/or as a result of deals negotiated or signed in the UK. So, provided land is owned as an investment and not as trading stock, a non-resident investor will enjoy tax-free treatment of its exit prot. This highlights the need for non-UK investors to avoid using UK resident companies as vehicles through which to invest in UK land, as such companies will result in an unnecessary layer of tax on capital gains. It is also important to distinguish between trading and investment in land. Non-UK residents are generally liable for UK tax on
BUSINESS RATES
UK local authorities collect a local tax known as business rates. This is generally charged to the occupier, and the cost will be placed on the tenant under standard lease terms. It is not, therefore, a problem for landlords except in cases where premises become empty.
25
investor toolkit
debt markets
london's debt markets: a lender's view

High-prole european banker Peter denton recently moved to bnP Paribas, signalling the start of a major push into Uk property lending by the French bank. over the next three pages, he talks about his plans and outlines his projections for londons nancing market
Peter denton: a fresh loan book and mandate for lending to real estate in the Uk
disagree with the mantra that there is no debt out there. If you are doing business in London and it is sensible, it is possible to get nance, says Peter Denton, UK head of real estate nance at BNP Paribas. This sounds like an implausible statement, given the statistics surrounding the availability of nancing in the UK at present. However, in his new role, Denton who has held senior roles at Barclays Capital, Eurohypo and Deutsche Bank and built a reputation as one of Europes leading real estate structured nanciers is approaching the UK with a fresh book and mandate. BNP Paribas, which has a sizeable European property loan book, is keen to exploit the inability of other lenders to undertake new business. De Montfort Universitys latest UK Commercial Property Lending Report reveals that the number of large lenders to property halved during 2010, with 80% of new lending undertaken by just 12 organisations. This unique moment in the market, combined with BNP Paribass size and record in European property lending and the expertise of the real estate business itself, has led some to predict that it will build a multi-billion pound loan book in the UK. Aside from sensing an opening in the market, its growth strategy is based on building on its
banks are looking to invest in reasonably safe investments and assets that provide the best returns
bnP Paribas at a glance:

BNP PARIBAs HAs HAD A PREsENCE IN THE UK foR 140 yEARs LoNDoN Is THE BANKs sECoND gLoBAL HEADqUARTERs THE gRoUP HAs A ToTAL woRKfoRCE of 8,500 IN THE UK, INCLUDINg ITs sUBsIDIARIEs IT Is oNE of THE woRLDs sIx sTRoNgEsT BANKs, ACCoRDINg To sTANDARD & PooRs IT Is THE woRLDs 11TH BIggEsT CoMPANy (foRBEs 2011) THE BANK HAD REvENUEs of 43.9BN IN 2010
26
gUIDE To INvEsTINg IN LoNDoN
investor tooLkit
Debt markets
Denton on the LonDon Debt market
capabilities as a leading European lender. BNP Paribas is already mandated on arranging a number of larger-scale club transactions in the UK, an approach that Denton sees as sensible while the market remains uncertain, and plans to take the leadership role in other club deals. When the markets become clearer, Denton sees BNP Paribas also taking on the role of underwriter in its property lending. As well as balance-sheet debt, Denton will work with UK companies seeking to invest abroad and bring together other services the bank provides, such as derivatives, debt/equity capital markets advice and BNP Paribas Real Estates platform, giving borrowers access to a diversity of products. To that end, Denton hopes to be able to work closely with the banks Asia Pacic business, including its wealth management teams, to enable clients from the region to access
We want a varied exposure, a large proportion lent against good investment property
roadly speaking, it is not as easy to get nance as it was a few years ago, but it shouldnt be easy; getting a multimillion pound loan should be difcult. Lenders in the UK are very focused on London today, so there isnt a great imbalance of supply and demand there. With limited amounts of capital, banks are looking to invest in reasonably safe investments and assets that provide the best returns. There are more of those types of opportunities in London. Recent investment activity has been almost totally focused on London, so banks have followed suit. There are concerns over the strength of some regional cities, in particular the impact government cuts will have on occupier markets. Assets in regional markets are also struggling to attract renancing capital as banks are unwilling to get involved in situations where the property was overvalued at the height of the boom. Europes new banking crisis could have an impact on the increasing levels of liquidity we have seen appearing over the past 12 months, but currently, for deals of a reasonable size, there is good liquidity for loans up to 60m and club loans up to 500m. Ofce and retail are the easiest assets to nance, while student accommodation and high-end residential are becoming tighter. It is difcult for borrowers to negotiate specic commercial terms on loans, but those that have good relationships with banks can still get decent terms, because relationships do still matter to banks. I do think costs of nance are more likely to go up but the costs of funding for banks are also high.
gUIDE TO INvEsTINg IN LONDON
27
Investor toolkIt
debt markets
Project Isobel
he latest De Montfort survey of the UK real estate debt market showed that 77% of the organisations it surveyed in 2010 had reduced their loan book during the year a gure that wont have surprised anyone with a passing interest in the lending market today. A number of institutions have publicly stated their intention to reduce their loan books, of which Lloyds Banking Group and The Royal Bank of Scotland (RBS) are the most high prole, with a combined loan reduction target of at least 50bn over the next three to ve years. Undoubtedly it could be a slow process. But there is one potential solution on the horizon that could allow banks to deleverage unwanted loans more quickly. all of those banks with loan reduction targets will watch Project Isobel closely Project Isobel is an innovative structure created by RBS to enable a 1.6bn property loan sale and as this guide went to press, it was in the nal stages of signing off a deal with Blackstone. The idea is that RBS will transfer the loans into a fund, which will be managed by the nal buyer, and structured to allow the bank to take less of a writedown on loans and spread those writedowns over a longer period. If successful, Project Isobel could provide a template for other banks seeking to reduce their property exposure, allowing them to sell multiple loans at once, rather than tackling positions individually. All of those banks with loan reduction targets will be watching Project Isobel closely to see if it is a model they are able to follow, says Denton.
opportunities in the UK, particularly London. BNP Paribas hasnt allocated a specic amount of capital to the UK market: It isnt that our balance sheet is unlimited, he says. But as long as we are doing good business, it is unlikely we will have material issues with exposure levels for the foreseeable future. However, the basic parameters of what BNP Paribas offers in its non-recourse business are loans of 50m or above on core ofces, retail, logistics and distribution and mostly at maximum loan-to-value ratios around 60-65%, though the bank can go up to 70%, he adds. While Denton is keen to build a strong loan book in London, he says the bank is not wholly focused on lending on bond-like prime property. Prime lending can be expensive and volatile. We are seeking to build a balanced book. I dont think we will do extreme secondary property, but we want a varied exposure a large proportion lent against good investment property, a bit of speculative development, a bit of prelet, and some assets with real leasing or refurbishment risks in different sectors, he says.
Prime lending can be expensive and volatile. We are seeking to build a balanced book
28
GUIDe To INveSTING IN LoNDoN
investor toolkit
joint venture partnerships
joint venture partnerships

joint ventures are a good way for investors to get a foothold in the london market
hile the idea of one property company teaming up with another isnt new, it is becoming aidea of onefeature ofcompany While the common property the London teamingtoday. another isnt a new concept, or market up with one that has been broughtdirectly inthe For rms seeking to buy about by London now, downturn, it forone that is becoming a more competition is the best assets is strong, while common already of the London market today. for those feature established, lack of debt means that moving forward requires are provingand Joint ventures partnerships innovation useful tools for navigating the challenges that a and imaginative ways of working with the assets competitive market like London presents to both capital they already have. local and overseas investors.are therefore proving Joint venture partnerships usefulrms seeking to buy directly in the UK For for navigating these challenges. capitaloverseas investors it is for the best to enter For currently, competition a good way assets is rife. While for companies with an established the market the returns are potentially better foothold, scarcity of debtdomestic developer who and they get access to a means innovating and moving forward requires imaginative ways a new has expertise and can guide them through of working with the assets and capital you already market, explains Paul Henwood, head of central have. investment for BNP Paribas Real Estate. London For Norges Bank Investment Management to The the overseas investors it is a good way enter the market;of a 25% stake in The Crown (NBIM) purchase the returns are potentially better and they Street is one example. In its rst Estates Regent get access to a domestic developerin thehas expertise and manages the purchase who UK, NBIM, which can guide them through a new market, says Paul Henwood, Norwegian government pension funds global head of central London investment for BNPthe property mandate, gained access to one of Paribas Real Estate. assets in central London. most established retail The Crown Estate, meanwhile which funds The Norwegian government pension is not purchase of a 25% stake in The Crown Estates allowed to borrow gained a fresh source Regent Street is one such example. In its rst of equity. purchase in the UK, Norgesto doing business This symbiotic approach Bank Investment Management, which manages the funds global can also provide funding for the construction of property mandate, managed to get access to free signicant schemes, allowing landowners to one of the most established retail assets in central up capital for other projects and spread risk London. While The CrownRecent which is not across a range of sectors. Estate examples
investors seeking partners also want more than simply cash on the table
include: Land Securities and Canary Wharf group to develop the 'Walkie-Talkie' tower; British Land and Canadas oxford Properties to develop the 'Cheesegrater' skyscraper; and MgPAs joint venture with Carval Investors and Quadrant to speculatively develop a 225,000 sq ft ofce scheme near Moorgate. However, nding these opportunities is not easy, says Henwood. The partnerships are usually secured because the landowner has gone out to nd a partner. It is slightly different from the normal investment market, he says. Investors seeking partners on their prime projects also want more than simply cash on the table, explains Paul Brundage, executive vice president, senior managing director Europe at oxford Properties: The days of being a passive partner who makes an initial investment and then waits for the proceeds are long gone. Paul Clark, director of investment and asset management at The Crown Estate whose other partners include Healthcare of ontario Pension Plan and Land Securities says a blue-chip investor that has corporate stability and a long-term interest in the project is just as important as equity. We want the best financial deal for The Crown Estate, but of equal importance is finding the right partner and having the right structure, he says. So be prepared to take on risk, roll your sleeves up and dedicate time and resources to fully engage with a project from start to nish. If the asset requires renancing, leasing or capital expenditure, then as a joint venture partner you need to invest early in the project and take on that risk, says Brundage. But as Emma Kendall, real estate partner at Freshelds, explains: Structuring a joint venture around an existing asset is easier, but with development there is a lot more to discuss such as how prots will be shared, and whether you can force the sale which inevitably has become more important since the nancial crisis. once that is all in place, the hard work begins, says Brundage: It is crucial that you put people on the ground to manage and develop the partnership. You need to do that if you want a joint venture to be effective.
gUIdE To INvESTINg IN LoNdoN
29
FUTURE LONDON
KEY TRANSPORT CHANGES
KEY TRANSPORT CHANGES

A number of major infrastructure initiatives are set to overhaul London's increasingly congested and tired transport system
The recently released London Plan sets out far-reaching changes to the citys transport network. The aim is to support developments that generate high footfall at locations with good public transport access, and to improve interchanges to increase connectivity. This vision is imperative as London prepares to host the 2012 Olympic Games, which is being used to drive the pace of regeneration. Stratford will gain hugely from these improvements, as will the city as a whole, says Fred Hargreaves, chairman of central London at BNP Paribas Real Estate. Here are some of the key changes:
Northern Fringe
DOCKLANDS LIGHT RAILWAY (DLR)

An upgrade of the light rail network will enable a 50% rise in capacity. An extension from Stratford to Canning Town will be completed by 2011, while work on other potential extensions and/or capacity increases is likely to continue until 2020.
Ki ng s Cr os s
City
rt R
Li ve rp oo lS
Midtown
Pa dd in gt on Co u
Fa rr
in gd
on
en ha m
te ch
St
St ra tfo
ap el
Docklands
W ha rf
nd
To tt
W hi
Bo
West End
South Bank
CROSSRAIL
This 16bn project is set to create a high frequency, convenient and accessible rail route through London and the South East. When the service fully opens, around 2018, Crossrail trains will travel from Maidenhead and Heathrow in the west to Sheneld and Abbey Wood in the east, through new twin tunnels under central London, stopping at seven central locations. The line will pass through the West End, City and Canary Wharf. New stations will be built at Paddington, Bond Street, Tottenham Court Road, Farringdon, Liverpool Street, Whitechapel and Canary Wharf. Crossrail will also reduce crowding on Londons transport network, helped by trains that can carry more than 1,500 passengers each during peak periods. Crossrail is Londons most important transport initiative and will revolutionise commuting, increasing the capitals rail capacity by 10%, says Hargreaves. Today, people have to alight at mainline stations and get on the congested tube into central London. In future, they will travel to seven central stations, walking from there to work.
HIGH SPEED 1
The UKs rst high-speed domestic train service has slashed journey times from Kent to Londons St Pancras Station. The line includes Stratford, which may be served by international Eurostar services after the 2012 Olympic Games. Completion is expected by 2020.
OVERGROUND AND UNDERGROUND

OVERGROUND: A rail network enhancement programme includes new inner London orbital services and longer trains by 2012. Will put 30% of Londoners within a 15-minute walk of a station. TUBE STATION RELIEF SCHEMES: Congestion relief schemes are planned for Victoria, Tottenham Court Road, Bond Street, Bank and Paddington, with an overall completion date of 2020. JUBILEE LINE: An upgrade will increase the lines capacity by 33%, allowing for an additional 12,500 passengers an hour by 2012. NORTHERN LINE: Transport for London is consulting over plans to extend the line from Kennington to Nine Elms, (see page 32) in south London by 2017, to support regeneration of the area around Battersea Power Station and ease pressure on services at Vauxhall.
30
Ca
na r
rd
FUTURE LONDON
HOT SPOTS
London is alive with regeneration schemes and transport projects. BNP Paribas Real Estate highlights its top 10 emerging trends
KING'S CROSS: OFFICE DESTINATION OF CHOICE
It was once an area that resisted gentrication, offering not much more than an industrial wasteland and crime. But a 2bn regeneration project the largest redevelopment in central London for 150 years will make it such a signicant destination when it is nally completed in 2020 that it will even have its own postcode. Kings Cross Central at 'N1C' is fast becoming a destination for a range of ofce occupiers, from universities, boutique hotel operators, property rms and businesses. Meanwhile, the 2,000 homes being built will provide space for a new residential district. But it isnt just this 67-acre development that will change the face of the Kings Cross area. BNP Paribas Real Estate has chosen the area to develop its rst ever site in the UK a building at the southern end of Kings Cross Central that includes 360,000 sq ft of ofces and 11,000 sq ft of retail. Henderson Global Investors is funding Regent Quarter, a mixed-use scheme next to Kings Cross Station. While to the west, British Lands 13-acre Regent's Place an
Above: BNP Paribas Real Estate has picked King's Cross as the site for its rst UK development
THE FUTURE
8M SQ FT OF MIXED-USE SPACE AT KINGS CROSS CENTRAL 2,000 NEW HOMES HIGH-SPEED LINKS TO PARIS
evolving ofce hub is in the nal stages of completion. What makes this area all the more promising is its excellent transport links, which offer cross-London services on the tube and connection to the national rail network, as well a high-speed train link to Paris. In time for the Olympics, 400m will have been invested in upgrading and improving access to services on the Underground, the new Thameslink station and domestic and international services at the adjoining St Pancras International station.
31
future loNdoN
hot spots
above: the international Quarter at stratford will create a 1.3bn ofce district
above: Nine elms - one of central london's biggest regeneration areas
The fuTure
1.3bn new office district HigH-speed links to international airports
The fuTure
16,000 new Homes to be bUilt by 2026 new diplomatic QUarter
stratford: olympics legacy

the eyes of the world will be on londons stratford as it provides the stage for the 2012 olympic games and paralympic games. but major regeneration projects under way in the area mean stratford will be a destination in its own right long after the athletes have departed. westelds stratford city, a 4m sq ft regeneration project one of the largest urban regeneration projects ever undertaken in the Uk will turn stratford into a new metropolitan centre with shopping and entertainment districts as well as space for large national and international businesses. but signalling the next phase of the areas development is the international Quarter at stratford city (e20), a 1.3bn ofce district being developed in partnership with lend lease and london & continental railways. the scheme, which will start on site in 2013, will provide 4m sq ft of prime ofce space, which could provide workspace for 15,000 workers. Joining the dots will be new transport infrastructure connecting stratford regional station and stratford international across the city and to international airports at Heathrow and gatwick.
regeNeratioN south of the river

the many developments in and around the 350-acre nine elms area, south of the river near Vauxhall, have the potential to create 16,000 homes and space for 25,000 workers. irish developer ballymore has put in an application for a 15-acre redevelopment around the site where the new Us embassy building is being developed in sw5. and the covent garden market authority is selling a 57-acre covent garden market site for a mixed-use redevelopment. two parties are bidding to buy the site.
The fuTure
new west end office destination crossrail station by 2018
paddiNgtoN: rival to traditioNal west eNd

Just 15 minutes from Heathrow airport, paddington could provide an alternative to the traditional west end market. the district is reported to be on retail group arcadias list for its new 130,000 sq ft west end headquarters and, if it chooses the area, it will join marks & spencer, which leased a 170,000 sq ft building at merchant square, w2, in 2008. mining group rio tinto has also signed up for 26,000 sq ft at two kingdom street, paddington central, w2. also in w2, Zog group bought north wharf gardens, the nal paddington basin masterplan site to be sold for redevelopment. it has consent for 434 new homes and 140,000 sq ft of ofce space. royal mail is also vying to create a 270,000 sq ft mixed-used scheme next to paddington station, while the reuben brothers have consent to build a 460ft residential tower, dubbed 'the cucumber'.
32
gUide to inVesting in london
The fuTure
InCREASE In PRIME RESIdEnTIAL dEvELoPMEnT MAjoR dEvELoPMEnT oF nEW GRAdE A oFFICE SPACE
future London
hot spots
strategic Location
There is likely to be an increase in the creation of prime residential schemes in areas on the fringe of the City and just outside the border in boroughs such as Tower Hamlets. At the Barbican, Heron International has built the 284-apartment Heron scheme, for which prices have reached 4,500/sq ft. But it isnt just about residential. Prime Minister david Cameron has already stated his wish for Shoreditch to become a tech city and the area is a strategic priority for the London Mayor. If all consented development and pre-application development proceeded in the City fringe as planned, it would create 68,000 jobs and between 870,000 and 1m sq ft of ofce oorspace. The area is also gaining interest from an increasing number of retailers (see overleaf).
above: 140 trains an hour will be channelled through farringdon
destination farringdon
By 2018, Crossrail will channel 140 trains an hour to the Farringdon interchange and create one of Britains busiest train stations. But Crossrail says the station will be so integral to London that Farringdon will re-emerge as a destination in its own right. Investors seem inclined to agree and have been banking sites in expectation of uplifts in value. Global fund manager LaSalle recently bought a multi-tenanted ofce building in Farringdon Road and is refurbishing 2 Pear Tree Court nearby into an ofce building, and US investor Hines bought Stonecutter Court, an ofce complex on Farringdon Street.
The fuTure
140 TRAInS An HoUR BRITAInS BUSIEST RAILWAy STATIon
shard points the way
The fuTure
above: the shard could command rents of 55.00/sq ft
HoME To EURoPES A new London icon is rising from the TALLEST BUILdInG ground in South Bank. The Shard, FIvE-STAR HoTEL which will be the tallest building in Europe oFFICE REnTS AT 55.oo/Sq FT when it is completed in 2012, will transform the London skyline into a vertical city of ofces, world-renowned restaurants and a ve-star Shangri-La hotel. Market experts predict the ofce element will be able to command rents of 55.00/sq ft unprecedented in SE1. However, South Bank is undergoing a wider facelift, as recently completed schemes such as More London, home to global rms and government ofces alike, bring the district greater cach. Transport links will be strengthened by the redevelopment of London Bridge Station a project that includes a new bus station, increased platforms, more trains and destinations and a concourse bigger than the pitch at Wembley Stadium. It is perhaps no surprise that ofce leasing transactions in South Bank grew by 157% in 2010, while vacancy rates have dropped to 4.7%.
GUIdE To InvESTInG In London
33
fuTuRE London
pRospEcTs
The fuTure
LUXURY RETAIL ANd HOTEL BRANdS ON THE mOvE
RETAIL gETs ovER ThE wEsT End
Luxury brands are considering alternative PRImE WEST ENd RESIdENTIAL TO SOAR locations to Bond Street, such as up and coming Shoreditch, with brands like Parisian shoe designer Christian Louboutin having expressed interest recently and Hermes who opened a pop-up store there last year. hoTELs bRAnch ouT One New Change in the City of London (see above) proves that A ve-star hotel at The Shard in retailers don't have to be in the West End to be successful. London Bridge, a W hotel (see above) at The scheme is a 300,000 sq ft development including brands such as Leicester Square and Singapores KOP Hugo Boss and Links of London. It was developed by Land Securities Properties 120-room luxury hotel in Tower as a new shopping destination, open seven days a week, in the heart Hill on the east of the City of London signal of the City. It is playing a lead part in transforming the City into a that high-end hotels appear to be branching retail hub. out into areas not previously considered. We This development offers a fresh perspective on life in the City of forecast a new trend for top quality hotels in London and plays a vital role in restoring Cheapside to its rightful more uncharacteristic locations. place on the retail map, says Colette O'Shea, head of development, London Portfolio for Land Securities. The fuTure
11,500 jOBS CREATEd BY FINANCIAL OCCUPIERS FOUR SHARdS WORTH OF SPACE IN THE NEXT THREE YEARS
Image: jestico + Whiles
pRImE REsIdEnTIAL offERs oppoRTunITIEs

While residential in mayfair and St jamess has always been an attractive investment opportunity, BNP Paribas Real Estate believes there are still opportunities in this area of the West End submarket for overseas investors. Prime London residential values show no signs of slowing down and are showing the highest returns, so there is little reason why this area of the market will not continue to attract investors, says debbie Taylor, head of new homes at BNP Paribas Real Estate.
ExTRA dEmAnd of 1.6m sq fT

Even despite the recent turmoil in the banking and nancial sector and effectively no new job growth, over the past ve years there has still been an average of 3.1m sq ft of Central London ofce space transacted each year by this sector. Results of BNP Paribas Real Estates Financial Sector Survey 2011 also suggest that it is realistic to expect another 11,500 nancial sector jobs to be created over the next three years. We estimate that this could translate into demand for at least 1.6m sq ft of extra space. This means the equivalent of four Shards or ve Heron Towers, BNP Paribas Real Estate reports.
InvEsTIng ThE gREEn pound

Sustainability will become part of the denition of prime property. Green buildings attract the best occupiers, will avoid future tax legislation and will increase in value. Investors will be able to pick buildings that have sustainable certicates over those that do not, says BNP Paribas Real Estate property management director Steve Harber.
The fuTure:
THE BEST OCCUPIERS WILL ONLY WANT GREEN BUILdINGS LEGISLATION WILL PUT FOCUS ON SUSTAINABILITY THE vALUE OF GREENER BUILdINGS WILL INCREASE
34
GUIdE TO INvESTING IN LONdON
Image: Singaporean in London
will the olympics create a sustainable investment opportunity in east london? Join the debate
Follow us at www.twitter.com/bnppre
www.realestate.bnpparibas.co.uk
FOCUS INNOVATE PERSIST DELIVER

Supporting Tim Brabants
The London 2012 Olympic and Paralympic Games represent the largest peacetime logistical operation. Theres no recent precedent to follow, an immoveable deadline, multiple locations and only one chance to get it right. It takes a skilled and focused real estate legal team to mastermind the legal frameworks which will deliver this once in a lifetime event. For further information please contact Nick Wright +44 20 7785 5813 nick.wright@freshfields.com www.freshfields.com/London2012

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INVESTING IN LONDON

THE BNP PARIBAS REAL ESTATE GUIDE TO

ABOUT BNP PARIBAS REAL ESTATE

30.5 million sq m in commercial real estate

of assets under management across Europe

Market leader in Europe

47m gross turnover

4,300 commercial real estate

transactions completed in 2010

GUIDE TO INVESTING IN LONDON

A capital place for investors

GUIDE TO INVESTING IN LONDON

the top 10 reasons to invest in london

sPACe needed BY londons FinAnCiAl seCtoR BY 2014

guide to investing in london

DemanD for space matches supply

overseas investment continues to Dominate lonDons property market

Business confiDence in lonDon is at a high

GUIDE TO INvESTING IN LONDON

ANNUAL HOUSE PRICE INFLATION FORECAST

LONDONS HOUSING MARKET HAS HELD UP WELL

LONDON RETAIL CONTINUES TO BE ROBUST

GUIDE TO INVESTING IN LONDON

demand for hotels from overseas remains solid

london offers overseas investors an attractive tax regime

transparency, whatever the cycle

New investors should ensure they establish a strong network of contacts

hONg kONg pRIVaTE INVESTOR

guide to investing in london

GUIDE TO LONDONS SUBMARKETS

the west end

1.8BN 120.00 4.3% 3%

PER SQ FT PRIME OFFICE RENT FORECAST IN 2014

VACANCY RATE IS AT ITS LOWEST SINCE 2008

*Covers last 18 months

PRIME RENT FORECAST (/SQ FT)

Source: BNP Paribas Real Estate

THE WEST END: A SAFE BET

GUIDE TO INVESTING IN LONDON

BEST LOCATIONS TO BUY IN

HEALTH OF THE OCCUPIER MARKET

Retail 16 Old Bond Street, W1

Ofce 17 Duke of York Street, SW1

Residential 30 Old Burlington St, W1

GUIDE TO INVESTING IN LONDON

City Airport The O2

DOCKLANDS: OPPORTUNITY KNOCKS

PRIME RENT FORECAST (/SQ FT)

Source: BNP Paribas Real Estate

BEST LOCATIONS TO BUY IN

GUIDE TO INVESTING IN LONDON

MIDTOWN: A GOOD MIX

BEST LOCATIONS TO BUY IN

Retail 5.00 6.00+ 450.00 3

Residential 3.50-5.00 1,100 43.00

*Covers last 18 months

PRIME RENT FORECAST (/SQ FT)

Source: BNP Paribas Real Estate

TRANSACTED DURING H1 2011

LOWEST VACANCY FOR THREE YEARS

THE CITY: FOR BIG PLAYERS

PRIME RENTS (/SQ FT) AND YIELDS

PRIME RENT FORECAST (/SQ FT)