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RealEstateandGlobalCapitalNetworks:DrillingintotheCityofLondon

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ColinLizieriandDanielMekic

CambridgeRealEstateResearchCentre,

DepartmentofLandEconomy

UniversityofCambridge

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PreliminaryVersion:PleaseContactAuthorsForLatestVersion

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Contactauthor: ColinLizieri

GrosvenorProfessorofRealEstateFinance

CambridgeRealEstateResearchCentre

19,SilverStreet,CambridgeCB39EP,UK

[email protected]



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RealEstateandGlobalCapitalNetworks:DrillingintotheCityofLondon

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1. Introduction

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The spatial clustering of global financial business in a small number of major cities, acting as

coordinating centres for an interlinked system of international financial flows, attracted academic

attention in the last part of the 20

 Century (Sassen 1991, Castells 1996, Sassen 1999). This was

particularly driven by globalisation and seeking to understand the place for the nation state (Ōmae

1995). There is a growing awareness in urban social science of the importance of commercial real

estate as a medium by which major cities are

embedded within global capital networks (Halbert and

Rouanet 2013, Halbert et al. 2014a, 2014b, Lizieri & Pain, 2014, Theurrillat & Crevosier, 2014) and a

“rediscovery” of real estate as a topic for critical urban analysis (see e.g. Fox Gotham, 2006;

Christophers, 2010; Dörry & Handke, 2012; Guironnet & Halbert, 2014). In

 particular, city centre

transformations emphasising office development focussed on financial and business services firms

servetotiecitiesintointernationalemploymentcycleswhilethecapitalsunkintotherealestatelocks

thosecitiesintoglobalcapitalmarketsthroughinvestmentownershipandthefinanceandfundingof

the built environment (Lizieri

2009). This trend is most pronounced in developed world cities whose

focus is on financial services – international financial centres – or who aspire to creat e a financial

sector.Inthispaper,weexaminethechangingpatternsofofficeownershipintheCityofLondon:the

financialheartofanarchetypical

globalcity.



Cityofficerealestatewithinglobalcitiesprovidesthephysicalinfrastructurethat allowsfinancialand

businessservicesactorstooperateinternationalservicenetworksworldwide,whileat thesametime

beingimportantinvestmentvehicles.Globalcitieswiththehighestconcentrationofofficeinvestment

are found to be most exposed

to risk associated with international financial market (Lizieri and Pain

2014).Withsuchanevidentlink,theglobalfinancialinstabilitythatbeganin2007ledtoaresurgence

ofinterestinfinancialcrises,systemicriskandcontagioneffectsfromrealestate;commercialproperty

wasattheheartofexplainingtheorigins

ofthecrisis:

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“TheUKfinancialcrisisbeginningin2007wasexacerbatedbyarapidbuild‐upininvestmentsin 

commercialproperty,alargeswinginpropertyvaluationsand,intheaftermath,asharprisein

non‐performingloans”(BoE2013)

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AsshowninFigure1,systemicriskarises throughtheprocessofrealestateinvestmentin suchcities

due to the locking together of occupational markets (functionally specialized in financial services

activities),investmentmarkets (throughacquisitionofoffices),supplymarkets(boththroughdemand

drivers and the supply of  finance for development),

 and real estate finance (through property as

collateralforlending).

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Figure1CommercialpropertyownershipinCity:Intertwiningofoccupiers,creditorsandinvestors

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Investor

CreditorOccupier

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London’s role as the pre‐eminent international financial centre in Europe has created a depth and

breadthofmarketsthatunderpinsdemandforofficespaceintheCityanditssurroundingsub‐markets.

WithinLondon,theCity’smaincompetitioncomesfromlowcostbusinesscentresinCanaryWharfand

Southbank, as

well as the West End.The City of London forms the largest complex of office space in

Europe,withtheCorporationofLondonestimatingthetotalfloorspaceintheCityatsome8.6million

squaremetresasatMarch2014(City2014).TheCityemploys392,400peopleacrossthesquare

mile

(ONS2013).

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InvestmentintheLondonofficemarketsisincreasinglyinternatio nalinnature.CBREestimatessuggest

that in the ten years from 2005‐2014, 63% of office acquisitions in central London and 68% of

acquisitions in the City of London were by non‐UK investors. This is part of a

 wider globalisation  of

office investment. from the late 1980s, but in particular in the first decade of the 21st century. Real

Capital Analytics  data for top 1000 office deals in each year from 2007 to 2014 show that 30% of

transactionsand35%ofthevalueofthosetransactionswere

cross‐border.Thatinvestmentisstrongly

concentrated with just twenty cities accounting for over 67% of those deals by value. London, with

$107billion of officetransactions,  was clearly the major target market over that period. Major global

investors play a key role in this process (the top ten ranked individual investors

 were involved in

$151billionoftransactions,12%ofthetotal)asdointernationalchainsofbrokersandagents(thetop

ten brokerage firms were involved in some 57% of sales; the headquar ters of those firms are

predominantlyinmajorglobalcities).

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Whileurbanresearchhasidentifiedthesetendencies,thenuances

ofmarketprocessesareoftenlostin

over‐simplistic categorisations such as  “international financial capital”, “finance capital  investors”

(Attuyeretal.,2012)or“propertydevelopers”.Asanexample,Guironnet&Halbert(2014)identify

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“(t)hree paths through which [urban development projects] are shaped for finance capital

investors ... First, the

 production  of market representations, by internationalized property

consultants, skewed towards investors’ standards. Second, the tailoring of buildings as ‘quasi‐

financial’ assets in the course of real estate development, through which developers seek to

address this now dominant financial clientele. Third, the evolution of strategic planning and

landdevelopment,whetheras

aby‐productofgreaterroomgainedbydevelopers,orasaresult

of a direct targeting of the investment industry by local public authorities and their

developmentagencies.”

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Inpractice,thereisconsiderablediversityinthenatureofofficeinvestorsandthatdiversitycanleadto

substantialdifferencesboth

intheirmotivationsforbuildinginternationalrealestateportfoliosandin

thepotentialimpactsofthatinvestmentforthecitiesconcerned.Weexaminethisinthecontextofthe

City of London’s office market. Thee empiricalcontentof the paper isbased onthe fifth update ofa

proprietarydatabasethat

trackstheofficeownershipintheCityofLondon.Thefirsttworeports(Baum

andLizieri1998,Lizierietal.2001)mappedoutthechangeinownershipintheCityofficemarketover

the 1980s and 1990s in response to financial deregulation, propelled by” Big Bang”  – the financial

deregulation

that was part of the macro‐economic policy shifts in the Atlantic neo‐liberal  era. They

demonstrated that foreign owners were increasingl y playing an important role in the City. The third

report(LizieriandKutsch2 006)waswritteninthecontextoffurtherinnovationinthestructureofthe

UKand

Europeanrealestatemarkets.Theriseofprivateequityvehicleshasbeenaccompaniedbythe

increasing use of offshore structures in response to taxation ch anges,  with a consequent growth in

complexcollectiveandpooledinvestmentfunds.

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TheCityofficemarketexperiencedaveryseveremarketcorrectionoverthe2005‐2011

analysisperiod,

linkedtothemajorshocksinglobalfinancialmarketswiththecapitalcrunch,theliquidityandbanking

crises,the“greatrecession”andthesovereign debtcrises.Inthisbleakeconomiccontext,  onemight

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haveexpectedtoseeevidenceofcapitalflight,aretreattohomemarkets.Throughthecrisis,however,

the City remained resolutely international in character. The current survey confirms  the preliminary

findingsofthe2011report(Lizierietal.,2011):foreignownershipseemstohaveincreasedinthemidst

oftheglobal

financialcrisis;thissugges tsthattheCityisseenasasafehavenforinvestors.

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We proceed as follows, the next section shall discuss the influx of investment to the City of London,

touching upon the many hypothesis that explain the disproportionate  interest given the poor

investmentperformance.Nextwe

outlineabriefhistoryoftheCityofLondonofficemarketthatshows

theevolutionofspecialisationandthedevelopmentofcommercialofficesasaninvestment,aswellas

theinitialli mited foreignownership.Thehistoricalperspectiveisintendedtoprovidecontext,butalso

highlightsomeofthepasttrendsand

eventsthathaveledtoanofficemarketdominatedbyinvestor

ownership. This is followed by two sections reviewing the methodology and results from the

proprietaryWhoOwnstheCityofLondondatabase.Herethechanges intheownershipareanalysed,

bothintermsnationalityandtypeofowner,to

highlighttheglobalisationofownershipandtrendsin

the type of owner, using supporting third party data that show investment and occupier trends. The

structureisdesignedtohelphighlightthemanynuancesintheinvestmenttrendsthatshowwavesof

interestthathavebuiltupthenon‐domesticownershipof

London,drivenbydomesticpolicyandglobal

trends in deregulation and economic development.  Thus, showing that the mix of non‐domestic

ownershiphas evolveddriven bythe plethoraof motivations that havenot onlymaintained levels of

non‐domesticownership,butalsoetchedawayatthedomesticshare.



2. The

DominanceofLondonforInvestment



Withthepost‐crisisinvestoremphasisonperceive dhighqualitylowriskassetssuchasgoldortriple‐A

Governmentbonds,thefocusofinvestorsonprimerealestateandmajorurbanmarketscouldbeseen

asaflighttosafety.However,commonlyacceptedrisk

measures,suchasSharperatios,donotsupport

the idea that large city office markets are inhere ntly  safer. Evidence suggests that City of London

provides poor risk‐adjusted returns when compared to other European cities and to UK regional

markets. It has been suggested, then that the high concentration of

investment in major  centres

reflectsbehaviouralandsocialbiases,alongsideinvestorpreferencesforliquidityandassetsthatdefine

theirbenchmark(i.e.constituentsofindicesorproxies).



The city‐making process associated with institutional and property investors  and their advisors in

commercial office markets is a social process. This is associated

with long‐term regional variationsin

the spatial relationship between propertyinvestme nt and the pattern of economicactivityin the UK

(HenneberryandMouzakis2014).HenneberryandMouzakissee evidenceof“mis‐pricing”,or“pricing

inaccuracies”onaccountofasupposed“bias”ofactornetworkstowardtheLondonmarke t.Thisbias



in property investment decisions is a supposed outcome of “familiarity” on the part of not only

investorsbutalsotheirprofessionalinvestmentadvisors.Investmentsaredecidedbywhatisaccording

to Henneberry and Mouzakis, a “relatively small, long‐established, dominant network of portfolio

managersandprofessionaladvisersandintermediariesbased

inLondon”(opcit.,p.535).



Familiarityisoneexplanationforthefactthatinvestorandbrokerdecisionscontinuetofavourglobal

city markets that are seen as likely to offer returns “that are low relative to risk” (Lizieri 2009)

apparently uninfluenced by studies pointing to market price imperfections. Building

 on familiarity,

investinginLondonmaybeadecisionmakingbiastowards safety‐“Nobodyevergotfired forbuying

IBM”comestostandfordecisionswhosechiefrationaleissafety(BuchananandOConnell2006).



LizieriandPain(2014)suggestthattheflightofglobalinvestorstothelargestmarkets

withhigherunit

pricesandgreatertransactionvolumeattheexpenseofother citiesrepresenteda“flighttoliquidity”

(saleability) even though, as Henneberry and Mouzakis (2014) note, liquidity as measured by

4



transactions’ rates is higher in “peripheral” than in “core” office  property markets (Lizieri and Bond

2004).Liquiditymayhavebeenconfusedwithaflighttoquality,borrowingideasfrombond literature

(Longstaff 2002, Beber et al. 2009). Given the volatility in prices, the quality  argument may lack

support;however,theperceived

investmentqualitymaystemfromthehistoricalclassificationofthis

areaasprime officereal estate,whichis notreflectedin recentfinancial performance. Thenotionof 

primeversussecondaryandtertiaryrealestateishighlysubjectiv e andlacksprecision;theyarecrude

terms used widely by investors to grade

the quality of individual properties.If there is a deliberate

flight to quality, the financials suggest that it is a perceived notion of quality rather than based on

investmentperformancedata.



Globalcity officemarket liquidity is considered aproduct ofthe behavioursandtacitknowledge ofa

complex of producer

 services actors, including investors and their brokers. Liquidity cannot be

understoodwithoutknowledgeofcomplexactorrelations betweenservicesuppliers,officeoccupiers,

and investors, and the interdependencies between them. The apparent irrationality of investment

decisionsintheUKreflectsthefactthattacitknowledgeandinvestorlocationpreference scannotbe

capturedinquantitativestudies.



Selecting the familiar geographies of investment may also be an artefact from findings  that fund

managers desire to perform satisfactorily against a benchmark, restricting their investments to areas

dominating the benchmark and limiting spatially diversified investment (Henneberry and Roberts

2008).Themajorfinancialcentresarelikely

tobekeycompone ntsofbenchmarks,makingthemakey

targetforinvestment.



As noted in previous Who Owns the City reports, non‐domes tic investors play a significant role in

owningcentralLondonofficespace.Thisisatrendwellpublicisedforthepotentialadvantagesandthe

questioningofwhatinvestors

reallyunderstandaboutrealestateownership:



“It’saglobaltrend,theshifttowardrealassetsthatprovideinvestorswithdiversification,inflation

hedging,assetbackingandmoreoperationaleffortthansomebargainedfor.”(PwC2013)



Diversification, following Markowitz’s portfolio theory, is a convenient argument for holding non‐

domestic real estate.

Investing in foreign real estate has been found to offer more diversification

benefits than foreign equities. Foreign real estate was found to have a lower correlation with U.S.

stocksthanforeignstocks(Conover,Fridayetal.2002).Nonetheless,theapproachestocapturingthe

exchangerateriskvary(SirmansandWorzala2003),

withoutaclearpathforresolution.Assumptions

(e.g.re‐investingincome,hedgingandrepatriationofcapitalorincome)maynotbeimplementableor

thepreferenceforparticularinvestors.However,whilenationalindicesofcommercialrealestatemay

exhibitlowcorrelation,thepracticalinvestmentstrategiesfollowedbyinvestorsmayfail to

deliverthat

diversification,iftheassetsacquiredareheavilyconcentratedinprimeofficesandglobalcitiesdriven

by common economic drivers such that financial shocks may create downside risk across  the whole

portfolio(Lizieri,2009,LizieriandPain,2014).



3. TheCity’sStory



Big Bang, the Thatcher era financial deregulation and economic liberalisation are often cited as the

originsofLondon’scontemporarystandingasaglobalfinancialcentreanditseconomy’sbiastowards

international financial services. Nonetheless, the building of office space and the investment in

commercial real estate, as

 well as the functional specialisati on, has long historical antecedents.

Detailedreviewscanbefoundinpriorliterature(Scott2013);herewefocusoneventsthatencouraged

orfacilitatedofficebuildingandinvestment,aswellastheconcentrationofaskilledpopulationwithin

London. In addition, investor interest shows a pattern

of waves, where different investors have built

5



andheldassetsdependingontheeconomiccycle,exogenouseventsandthesourceoffunds,leading

tofurtherintensificationsoflanduseandmorerecentlytocomparablylowyields.

In1700,Londonwastheworld’slargestcity.London,asatradehubforEngland,providedthebasisfor

thedevelopmentof

theCity’scommodity,insuranceandmoneymarkets.Owingtothelowofnumber

of employees (if any), business was mainly conductedin homes, counting houses and coffee houses.

Real estate stock consisted of warehouse, residential and industrial; therefore, still lacking the

appearance of purpose built offices. Foreign ownership was predominantly

from attract ed settlers,

who would in our City of London office Database be considered UK owners owing to place of main

residence.



Purpose‐builtofficesemergedinearly1820s,andspeculativedevelopmentin1840s(BuamandLizieri

1999).Inthe1860s,thereducingsupplyofsitesintheCityledto

risinglandvalues,sparkinganinterest

in commercial real estate investment. Publicly quoted property companies specializing in City offices

emerged, with early sign of foreign interest. The City Offices Company Limited was floated by the

Mercentile Credit Association in conjunction with a French bank, Credit Mobilier, in 1864. Stimuli for

office development came from improv ement in mass transportation and the development of the

hydraulic lift which permitted larger builds. The emergence of real estate investing parallels the

development of institutional investment and real estate would have been one asset class that they

could choose. The 19

 Century is a marked by the entry of property companies and institutional 

interestinthesector,makingashiftawayfromtraditionalowners.



In 1914, the ownership of land was mainly in the hands of traditional owners (such as the Church,

aristocratic families and worshipful companies) and institutions; whereas for

 the ownership of

buildings,propertycompaniesplayeda major role.Owner occupationremainedstrong,whilesmaller

properties were rented by individuals. In the inter‐war years, property companies suffered from

nationalandglobalrecession.Inthe1930safewmanufacturingfirmsestablishedheadquartersinthe

City,takingadvantageoflower

rentsandbreakingwiththetraditionalarrangementoflocationnextto

placeofmanufacture,togainaccesstosourcesoffinanceTariffbarriersandskilledlabourencouraged

someforeignfirmstoestablishaU.K.presenceinCity.



Bomb damage and low wartime prices created sites for redevelopme nt  and led to changes

 in 

ownership(BaumandLizi eri1999).Speculatorsanddevelopersconsolidatedsitesforthedevelopment

of larger footprints. Industry and warehouses, particularly targeted in the bombings,  made way for

offices. By 1963 it is estimated that net office  floor space was around 50% higher than in 1939. The

marketvalueof

quotedUKpropertycompaniesrosefrom£39min1939to£437min1960.Insurance

companies and pension annual net investment in U.K. property rising from £5m in 1937 to £71m in

1960. Owner‐occupation declined in significance in the post‐war period and the age of large scale

commercial realestate

 investmentbegan. The City of London also bought a significant proportion of

the City, with remnants of its freeholds still being observed in the Database. Even though victorious,

the UK’s global economic strength was damaged and the colonies gained independence reducing its

sphereofcontrol.Nonetheless,thebatontore‐

buildtheCitywasplacedwithpropertycompaniesand

institutionalinvestors.



Congestionandrisingrentsfavouringmoreprofitablebusiness,le adtotheCity’sgrowingspecialisation

infinancialservicesandexternally‐orientedbusinessthatwastobecontinuallyreinforcedwhenrents

rose or companies needed to cut costs (e.g. during recessions). The

 1974 property crash, led to a

secondary banking crisis and the transfer of property assets from the property company sector to

institutionalinvestors.The1980sderegulationhelpedestablishtheCityasaglobalfinancialcentrewith

foreignbanksestablishing officesandbuyingdomesticfirms.Nonetheless,ittookoveradecade

later

forforeignownershiptosharplyincrease:realestatewasleftbehindinthefirstroundofglobalisation.

6



Our Databas e shows that foreign office ownership rose rapidly from ~20% in 1998 to 63% by 2014

driven by deregulation in other markets. The significant influx of foreign investment has led to

transactions in the City to be increasingly foreign to foreign, providing capital and demand for 

developerstocontinually intensify

land use in theSquare Mile.Over this period, foreigninvestment

has come from different sources and there is a turnover as investor non‐UK national investors have

arrived and departed. The capital flows reflect changes in foreign regulations and in investment

objectives, as well as the domestic success of

the economies where the funds have originated. The

City’s ability to attract the next interested investor in the relay race has helped provide liquidity and 

helpedconstructioncranestocontinuetobepartoftheLondonskyline.



Londonhashadvariousactorscome,remainorgo,dependingontheirneedsand

preferences,aswell

as shocks to the economy (regulations, wars etc.).Domestic played a major role in developing the

officemarkettobeaninvestibleasset,establishingpubliclylistedcompaniesforthispurposeearlyon.

Eventssuch astheWorldWarIIprovidedtheopportunitytoconsolidateplotsandincrease

thesizeof

single investment opportunities, as  well as encouraging the transfer of land  to speculators. Initial 

returns drove investment. It is important to remember that institutional investment paralleled the

developmentofthatindustry.Differentactorshaveenteredthemarketbasedontheirpreferencesand

temporalopportunities. Indissecting thenon

‐domesticinvestment, the dynamicsof investmenthave

becomemoreglobalandnon‐domesticownershiphasincreased;however,thespecificdemandsfrom

investorsstillshowanevolvingtrendthatisexploredthroughtheDatabase.



4. TheWhoOwnstheCityDatabase



Thepivotaldataforouranalysisisthesample 

databaseofCityofLondonofficesusedintheprevious

Who Owns the City reports (the “Database”)

. The database contains  information on 126 properties

(representing currently 14% of the City’s office floor space) and a further 65 newly constructed (or

subject to significant major refurbishment and expansion) properties in the period 2001‐2014. The

newly constructed properties were identified from the Corporation of London’s Development

Schedules. This

 paper focuses on the 126 properties that have been tracked back to 1972, since we

wish to trace the changing tides of ownership on the existing built structure of the City. Two of the

buildings havebeen converted to alternative useand their contribution to the databaseremain until

such

conversion.



Ownership is quantified by the net floor area of the buildings; capital values are not collected. By

applying conservative assumptions on rents and yields we can estimate that the capital value of the

“historic”officesinthedatabaseisintherange£8.5billion‐£10.5billion

.Giventhenewdevelopments

inthedatabaseand,attimeofwriting,escalatingcapitalvalues,thismaybeanunderestimate.



The concept of ownership is complex. When determining ownership two principal factors are

considered. The first is the flow of benefits received: that is, where the cash‐flow received is

 clearly

linked to performanceof the underlying office(s). This factor excludes  conventional bondholders and

lenders as owners and would define a long  leaseholder paying a fixed or stepped ground rent (or

peppercorn rent), rather than the freeholder, as  the beneficial owner. The second factor is effective

control. A shareholder in

a listed REIT or a  property company owns rights to the firm’s assets and

residual cashflow but, typically, has  very limited decision‐making influence. Thus, a listed property

company(with a reasonable free float) is classified asa single owner, domiciled where its shares are

principally listed. Similarly, a  private real

 estate fund pooling investment from multiple  sources was

typically classified nationally by the nationality of the general partner or fund manager. However, a





EarlierWhoOwnstheCityresearchwassupportedbyDevelopmentSecuritiesplc.Weacknowledgetheroleof

AndrewBauminestablishingthedatabaseandtheresearcherswhohelpedbuildthehistoricrecords.

Includingthenewerdevelopmentsinthedatabase,wehavecoverageofsome£21‐24billionofofficespace.

7



privateequityvehiclesuchasalimitedpartnershipwitharestrictednumberofinvestorsisdifferentin

nature: particularly if the vehicle is the medium for joint venture or club investment. Here, the

ownership classification would reflect the characteristics of the major investors. Where possible,

ownershipwouldbeapportionedamongstthe

partners.



For each of these proper ties,  ownership details  are traced historically as far as possible. Owners are

classifiedby nationality andcountry of ownership. Wheretheowner is a special purpose vehicle, we

have attempted to “look through” the vehicle to the beneficial owners. Where there are multiple

ownerships,we

havesoughttodiscovertheownershipstakesofindividualpartiesbut,whereitisnot

possible to find this information, have assumed equal shares. Prior reports identified some of the

problemsofdefiningownershipandthisupdateofthedataexperiencedsignificantrisein“unknown”

owners.Thisriseisthoughtto

predominantlystemfromariseinprivateownership,whoseidentities

arenotactivelydisclosed.



Ownership structures and regulatory structures (including changed in pr operty taxes) have made

tracking ownership more complicated. With traditional property market structures, attribution of 

ownership was a relatively straightforward task, since most buildings were owned by a

single

organisationorindividual(withlegalrestrictionsconstrainingmultipleownership),oneitherafreehold

or a long leasehold basis. Long leaseholds generally carried a fixed or infrequently reviewed ground

rent.Similarlydebtstructuresweretypicallyfullrecourse,chargeabletothecompany.Thesignificance

of foreign investors in UK property make nationality

 a  challenge. While much of the investment has

been direct and under the parent company name, other investors have establishe d or acquired

UK‐registeredanddomiciledvehiclestochannelinvestmentorhaveusedjoint‐venturestructures.In

marketsdominatedbyfinancialservicefirms,thisinternationalactivityisfurthercomplicatedby

global

mergers and acquisitions activity (such that a  property can remain under the same effective

management yet pass through three or four legal ownerships with  different parent nationalities as a

resultofcorporaterestructuring).



4.1TrendsinCityOfficeOwnership



In 1980, only 10% of space was owned by non‐

domestic inv estors (including owner‐occupiers).

Following “Big Bang”, foreign ownership began increasing, driven by financial deregulation and the

removalof entry barriers. Theinitial influx of foreignowners came from Japan and Europe.By 2000,

withthegrowthofglobalrealestateinvestmentandtheexpansionofprivaterealestatefund

vehicles,

a third of all space on the database was owned by non‐UK investors. The 2014 update shows the

continuingdeclineinUKownershipofCityofLondonoffices,withnearlytwothirdsofthespacebeing

inforeignhands.Thisresultisconside r edmorerobustforlarger,prime

officespace;itisprobablethat

theproportionofforeignowners insmaller,older,secondaryandtertiaryspaceislower.Assumingthe

proportion holds over the whole of stock, the result implies that foreign investors own approx. 5.8

millionsquaremetresofCityoffices.InFigure3,theownershipofthe

newlybuilt/refurbishedofficesis

shown(by2014,itincludesabout60buildings).Itshowsthatsince2006,thenewerofficestockis50%

innon‐domesticownership,reinforcingthefindingsfromthecorepartoftheDatabase.





8



Figure2Non‐UKOwnershipofCityOffices



Source:WhoOwnstheCityDatabase



Figure3Non‐UKOwnershipofCityOfficesbuilt/refurbishedsince2001(excl.Databasesproperties)



Source:WhoOwnstheCityDatabase



Foreigninterestdoesnotappeartohaveabatedfollowingtherecession;farfromcausingcapital

flight,

themarketdownturnappearstohaveincreasedthe extentofnon‐domesti c ownership.  Thiseffectis

more pronounced than the slight increase observed following the 1989/1990 downturn. Foreign

ownershipincreasedbetween2007and2011intheaftermathofthefinancialcrisis,despitethefalling

capitalvaluesandweakreturnperformance

(seeFigure4).UsingCBREmarke tdata,wecanexamine

therelativeperformanceofEuropeanofficemarkets,althoughitisimportanttoacknowledgetherisk

ofover‐interpretationofcomparativedatabasedontheviewsoflocalmarketagents

.





Itshouldbenoted,though,thatCBREareamajorglobalrealestateadvisorwhoseviewswillinfluenceglobal

investors.Whilelocalmarketofficeshavesomeautonomy,alevelofcommonpracticeanduniformityis

imposedbytheglobalnetwork.

10%

20%

30%

40%

50%

60%

70%

Germany OtherEurope USA Japan MiddlesEast

China BRI International Other/unknown

10%

20%

30%

40%

50%

60%

70%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

USA Germany OtherEurope International Japan

MiddlesEast Other/unknown BRI China

9



Examining those Western European office markets where rental, yield and capital value data are

available over the period 1995‐2014, the City of London ranks 13

 of 35 markets in terms of mean

capital value growth, but 6

 in terms of capital  value volatility. It experienced the 4

 largest fall in

capital values during the financial crisis, although it has rebounded strongly post‐crisis (this rebound

driven by falling yields rather than rising capital values). Estimating pseudo‐returns using the rental

valueandyielddata,theCityranks30

of35marketsonaSharperatiobasis.Overthatperiod,real,

inflation‐adjustedrentalvaluegrowthisnegative–indeed,realrentalvaluespersquaremetreinthe

Cityremainbelowtheir1988levels,befo rethe1990crash.ThisevidencesuggeststhattheCityoffice

market’s reputation as a

safe haven is misplaced, for all the continued evidence of the City as a key

targetmarketforglobalrealestateinvestors.Ascanbeseen,capitalvaluefallswerefarsharperthan

rentalvaluef alls, emphasisingtheimportanceofinvestmentflowsontotalreturnperformance.From

2011‐2014,thetrend

continued withthenew arrivalsfromtheBRICs,despitefallingyieldsandrising

capitalvalues.



Figure4:CityofLondonOffices:Rents,CapitalValuesandYields



Source:authors’calculationsfromCBRECentralLondonOfficeMarketdata.



Since the Database is a sample, results regarding individual national holdings should not

be over

interpreted.However,theredoesappeartobeshiftsinregionalownershipovertime:forexamplethe

growthandthendeclineinJapaneseholdings(whichpeakataround11%intheearly1990s);therise 

of German investment from the late 1990s led by the German openended funds; and

 the small but

significantgrowthof“international”investmentfundsthatpoolcapitalfrommultiplenationalsources.

BRICSenter theDatabasedecisively in2012, drivenby significantinvestment  fromChinese sovereign

wealthfundsandprivateindividuals. Since2011,GermanandUSinvestorshavedivestedtheirshareof

thefloorspace,potentially

explainedbymoreattractiveopportunitieselsewhereandbydeleveraging

following thefinancial crisis. There is a  significant rise in unknowninvestors, potentially explained by

EGI’s policy of not disclosing private individuals and the rise in private investment by very high net

worthindividualsandfamilyoffices.



Figure5,below,illustratesthe

importanceofforeignownershiptothemain tenanceofliquidityofthe

City of London office  market, one of the market’s key investment advantages. Transactions activity

provides a stream of information, reducing pricing uncertainty and giving investors confidence that

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

220.0

240.0

Index2002Q4=100

CapitalValue RentalValue Yield(RHS)

10



theywill beabletoenterandexitthe marketaccordingtotheirrequiredportfoliostrategy.Thedata

illustrateshowvitalforeignplayersareinmaintainingthatactivity.Inthedecade2001‐2010,lessthan

a third of transactions were between UK buyers and UK sellers; 19% of sales were between

 foreign

purchasers and sellers. Following the dramatic increase in foreign ownership, only 16% of sales

2011‐2014wereUKtoUK;but33%wereUKtoforeign,with14%foreigntoUK.SalesofUKtoforeign

may be plateauing as 2011‐2014 and 2001 – 2010 havesimilar proportions

ofsuch sales. Supporting

furtherrisesinliquidity,transactionvolumeshaveconsistentlyincreasedfromdecadetodecade.



Figure5:TransactionActivity,CityOffices,2001‐2014



Source:WhoOwnstheCityDatabase



Overall,turnoverratesforthepropertiesontheWOTC databasefellsharplyinthedownturn.Turnover

peakedin2006

withnearly20%ofthefloorspaceonthedatabaseexchanginghands;thenumbersof

investors anxious to enter the market was matched by investors taking profits near the top of the

market. Turnover then fell sharply away, with very low levels ofactivity  in 2009; however, it sharply

increased

thereafter,ascompaniesde‐leveredordivestedforotherreasons.Therecentlargeextentof

foreigntoforeignsalessupportedthenon‐domesticownership withproportionallyfewsalesbeingto

UKinvestors. The relatively lowforeign to UK salesshow that thereis little sign of thetrend to non‐

domestic

ownershipreversing.



Turningfromnationalitytotypeofowner,thetrendobservedinpreviousWhoOwnstheCityreports

was of a shift away from traditional ownership by livery companies, institutions and established

property companies,  characterised by a single freehold owner, low turnover rates and passive

buy‐and‐hold investment

strategies, to wards a more financial form of ownership by financial service

firms, specialist real estate funds, non‐domestic investorsand private vehicles, often with ownership

splitbetweendifferentfundsandvehicles.However,reversingthistrend,intherecentperiod,theFIRE

sector has decreased its share of the office market control

 from 2011 –  2014, thought be  linked to

seekingmoreattractiveyieldselsewhereand,possibly,beingoutbidbynewarrivalsintheCity.



50,000

100,000

150,000

200,000

250,000

300,000

350,000

Transactionvolume(area)

UKtoUK UKtoForeign ForeigntoUK Foreign toForeign

11



Figure6:Ownershipbytypeofinvestor



Source:WhoOwnstheCityDatabase



The Databas e detects the growth of two types of investor that are new to the Who Owns the City

analysis: the individual private investor and sovereign wealth funds. While  there has been a long

traditionofprivate

ownershipofcommercialrealestatebyhighnetworthinvestors,thishasbeenless

evident in the prime segment of the City office market. However, we now are recording private

ownershipofsignificantbuildings,totalling21%offloorspaceintheDatabase.Thishighnumbershould

not be over‐interpreted as it

 is biased by one single large purchase. However, it might even be an

underestimate,giventhatthe“unknown”categorymaywellcontainmoreindividualsreluctanttobein

thepubliceyeandharder totracethroughstandardsearches.Moreover,ouranalysissuggeststhatthe

majorityoftheseprivateownersare

non‐UKindividuals,althoughthedomicileofmanyhighnetworth

individualsisnotalwayseasytodefi ne.



Thehighholdingsofofficespacebyinvestorsfromthefinancialservicessectorarebroadlymatchedby

theCorporationofLondon’sanalysisoftheBusinessRegisterandEmploymentSurvey(BRES)datafor

2009,

whichshows75%ofemployeesintheCityworkinginfinance(41%),realestateorprofessional

services(28%)orinformationandcommunications(6%),withmuchofthatICTandprofessionalservice

employment being focussed on international financial services.. Once again this emphasises how

functionallyspecialisedtheCityis.Thisrepresents

astrengthforLondon:thatspecialisationproduces

thebreadthanddepthofmarketsthatsustainstheCity.However,itisalsoasourceofpotentialrisk,as

discussedinTowersofCapitalandinpreviousWOTCreports,inlockingthefortunesoftheCitytothe

volatilityofinternationalcapitalmarkets

andfinancialsystems.



Whiletherewassomeconsolidationofownershipfollowingthelastfinancialcrisis(forexample,better

capitalised firms  buying out the stakes of their partners), there were also examples of part sales,

possibly to obtain the equity injection required to deal with falling values and rising loan–to‐value

levels.Weareunabletotracetheextenttowhichtheownershipwereportisdebt‐funded.Intherun

up to the financial crisis, many purchases were heavily leveraged. In the immediate aftermath,

available debt funding declined sharply and terms hardened but the arrival of new lenders (for

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Indust/Conglom/Business Public/Charitable Institutions

RealEstateFirms PE(RE) PE(Other)

OtherFinancial SovereignWealth PrivateWealth

OtherUnknown

12



example,insurancecompany lending orthe creation ofnew debtfunds) andthe searchforyield has

ledtomorereadilyavailabledebt.Leverageservestoincreasetheglobalcapitalmarket’sstakeinthe

fortunesofCityofLondonoffices.



Theforegoing emphasisesthat the characterisation ofinvestment ownership inmuch

of urban social

scienceasbeingby“financialcapital”issimplisticandunderstatesthenuancesandcomplexitiesofthe

operationofacommercialrealestatemarketsuchastheCityof London.FinancialownershipofCityof

Londonofficesencompassesawiderangeofentitiesandorganisations,withverydifferent

investment

and risk preferences, objectives and motivations. These differences influence behaviour and, by

implication,theimpactofownershiponthefunctioningofthecity.Similarly,thenatureoftheultimate

beneficiaries of the cashflowsand valuesgenerated(or destroyed) by office investmentvariesacross

typeofinvestor.



Manyofthemore

recentarrivals,notablythesovereignsandtheultra ‐highnetworthinvestorshave

longinvestment horizonsand, as aresult, areable to tolerate short‐runvolatility. For such investors,

Londonisasafehaveninasfarasitenablesthemtoplace large amountsof capitalrapidly and

with

littlecon cern  over expropriation. Whether ornot such investors have expectations of realrental and

capitalvaluegrowth,thelonginvestmenthorizonenablesthemtoexploitredevelopmentoptionsand

benefit from intensification of land‐use and land value impacts

. To this extent, they may be less

passiveinvestorsthanthetraditionalinstitutionalinvestorsofthe1980s,whoreliedonlongleasesand

upward only rent review clauses to deliver the solid income returns needed to meet liabilities and 

match inflation  and may have some similarities to the traditional London

 landed estates with an

emphasis on place‐making and value increase from stewardship. However, since  many of these

investors are non‐domestic (and may have relatively small investment teams), initial management is

more likely to be passive and to make coordinated action across different ownership interests more

difficult.



Suchlong

‐terminvestorsshould becontrastedwithprivateequityfundsandlistedpropertycompanies

who have much shorter horizons, tied to debt maturity, to finite time horizons for manyclosed fund

entitiesand,aboveall,totheneedtodelivershort‐runpromisedorexpectedreturnstotheirultimate

investors and

stakeholders. The appetite for risk and, hence, investment behaviour, will vary across

fund types: more opportunistic investors  using higher leverage and promising higher returns being

more vulnerable to short‐term market volatility and cyclical downturns than lower‐geared core

investors,particularlythosewithmorecontroloverthetimingofexit.These

morefinancially‐oriented

funds are more likely to lock a city’s office market into global capital market instability. This will be

particularlythecaseforlargerinternationalinvestorswhoserealestateportfoliosaremorelikelytobe

exposed to other global city markets and are thus more vulnerable to systemic

contagion effects.

However,thevery size ofthose funds push them towards investing in thelarger markets in order to

placecapitalquicklywithoutmovingprices

.



Justasriskappetiteandinvestmenthorizonvaryacrossinvestorsso,too,dothebeneficiaries.Withina

catch‐all “financial capital” we find occupational pension funds (both defined benefit and defined

contribution) with widely dispersed memberships alongside private equity funds pooling capital for

professionalinvestors,privateultrahighnet

worthindividualsandfamilyofficesandsovereignwealth

funds.Evenwithincategories,therearevariationsinwhoultimatelybenefitsfromtheperformanceof

the real estate assets within the portfolio – for example, between a Nordic and a Middle Eastern

sovereignwealth fund.Withthegrowthofmorecomplexformsof

realestateinvestmentvehicle, itis

possible that very different types of investor may hold stakes  in the same building – although one





Thisisnottosaythattheywillrealisesuchoptionsandindeedmaytakeprofitsandexitearly:thepointisthat

theydonothaveanimmediatepressuretodeliverhighreturns.

Thisappliesequallytomostsovereignwealthfunds,too,contributingtoinvestmentpressureonyields.

13



outcome of the financial crisis  was a more widespread recognition that such juxtapositions were

uncomfortableintermsofalignmentofinterest.



5. Conclusions



ThegrowthofforeigninvestmentintheCityofLondonofficemarketispartofanoveralltrendtowards

amoreglobalrealestatemarketwhich,in

turn,hasbeendrivenbythedevelopmentofamoreopen

and interlinked international financial system across the late twentieth century and the early part of

thetwentyfirst.Itistooearlytosaywhatimpacttheinternationalbankingcrisisandglobalrecession

willhaveonthosepatternsofcapital

flows.Whatdoesseemclear,however,isthattheCityofLondon

hasaveryhighlevelofforeignownershipcomparedbothtootherUKfinancialassetsandtootherreal

estatemarketsaroundtheworld.Londonhasremainedastheprincipaltargetforofficeinvestmentin

Europe and stands

alongside New York globally. There has been little evidence of significant capital

flight from the City in the aftermath of the market downturn. Nonetheless, that investment has

occurred despite poorhistoricreal estate marketperformance. The City ofLondonoffice market has

notdelivered realrental orcapital valuegrowth over

the long termand has  been morevolatile than

other UK regional markets or cities in mainland Europe (at least as far as available statistics are

consideredrobust).



What advantages does the City offer, then, which might counterbalance this risk? One contender is

enhanced liquidity. We noted above that global

investors have underpinne d  liquidity over the cycle.

Transactionactivityfellsharplyinthedownturn:butaveryhigh percentageofthedealsthatdidtake

place involved non‐UK parties – and very few of those sales  were by non‐UK owners selling to UK

buyers.Thisdoesnotnecessarily mean

thattheturnoverrateintheCityofficemarketismuchhigher

thanelsewhere–it isaverylargemassofspace.However,therearetwokeyfeaturesthatmightlead

investors to conclude that the City has greater liquidity: first, that even in a market crisis, they will

probablybeabletofindabuyer:andsecond,thatiftheyseektosell–orbuy‐theyareunlikelytohave

apricingimpact,giventhescaleofthemarket.



The high value of real estate in the market also has benefits for global investors. They can gain

economies

ofscale, placing largeamountsofcapitalquickly ratherthan having tosearch for,acquire

andmanagemultipleinvestmentsinothermarkets.Weshouldalsonotethatsomeoftheinternational

investment in the City might represent a currency effect. If sterling has depre ciated against the

domesticcurrency,Londonmay

lookrelativelycheaptoforeigninvestors.



Anotherkeyfeatureistransparency.Thesizeofthemarketleadstoahighvolumeofrentalandsales

transactions,irrespectiveoftheturnoverrate.Inturn,thisprovidesaflowofinformationtoinvestors,

whichprovidesgreaterconfidence,reducingrequiredriskpremia .Theextensive

researchavailableon

thismarketprovidesafurthersourceofconfidence.Asnotedabove,thepresenceofglobalbrokerage

firms with (relatively) standardised practices provides a key benefit to investors building global

portfolios. In turn, though, this will tend to direct investors to the same set of markets, increasing

competition

foravailableassets(and,hence,potentiallyforcingdownyields)andpotentiallydirecting

investorsawayfromgreaterdiversificationpotentialinothermarkets.



In considering liquidity and transparency, the differentiation between types of investors and the

changing characteristics of ownership become critical. Liquidity and transparency depend on

transaction activity and monitoring. If the

 market has seen a shift away from investors with shorter

timehorizonstothosewithlonger,thenthismightimplyareductionintransactionactivity,ifholding 

periodslengthenandinvestors seektoexploitmoredistantredevelopmentoptions.Privateinvestors

andforeigninvestorsmaybelesswillingtoallowthe

performanceoftheirassetstobemonitored. Itis

evident, for example, that Investment Property Databank’s information on the performance of City

14



officesisbecomingamuchsmaller(an d possiblyunrepresentative)segmentoftheoverallCitymarket

as domestic investors are replaced by non‐UK owners. This has implications for performance

benchmarkingforthoseinvestorsseekingrelativeratherthanabsoluteperformancemeasures.



Ouranalysisdididentifysomenewfeaturesofthemarket.The

shiftawayfromUKownershipmasksa

trendawayfromcontinentalEuropeanownership(particularlyifGermaninvestorsareexcluded),with

anincreasingsharetakenbyUS,MiddleEasternand,morerecently,non‐JapaneseAsianinvestors.The

long‐rundatashowthattherearewavesofregionalinvestment,soitmay

betooearlytoseethis asa

structuralshift,butthecapitalmarketandcurrentaccountimbalancesbetweentheAtlanticeconomies

andtheemergingAsianandMiddleEasterneconomies mayleadtoanincreaseininward investment

overtime.



The database also  reveals shifts over time in the nature

of investors, which suggests that an over‐

simplifiedcategorisationof“financialcapitalinvestors”orsimilar failstoaccommodatethenuancesof

ownership.Intheearlyperiod,weseesubstantial holdingsfromtraditional investorsandinstitutions,

typicallywithrelatively passive investment strategies groundedinthelong“institutional” leasegiving

cashflow security. From

 the financial deregulation era to the pre‐GFC boom,  there is an increase in 

financial ownership, with shifts in character within that. In particular, the rise of private equity real

estate investors  and other investors using leverage and with shorter investment horizons puts more

emphasis on short run returns and

capital appreciation (and in large measure contributes both to

greaterpotentialmarketvolatilityandsystemicrisk).Morere cently,thegrowingpresenceofsovereign

wealthfunds,privateinvestorsandfamilytrustsmaymarkashiftbacktoalongerperspectiveonthe

City,albeitoneperhapsmoregroundedincapitalpreservationthan

incomereturn.Differenttypesof

investorhavedifferenttimehorizons,riskappetitesandobjectives:consequently,theirimpactonthe

functioning of the City cannot  be collapsed into a single dimension. These changes in investor type

needtobe overlaidonthe shiftsinthe nationalityofownership tounderstand market

dynamicsand

the way in which investment patterns serve to integrate the City into global financial and urban 

networks.



Understanding current and future investor needs is critical to maintain the successes of the City of

London.TheDatabasehasshownanincreasingtrendofforeignownership,builtupbydifferentways



of foreign investment. The influx  of capital provides funds for investment that can help build up and

maintaintheoffice stock to astandard forthechangingneeds ofoccupiers.Capitalvalueshaverisen

sharply and yields have been compressed, with poor risk adjusted returns. Despite this, the City of

Londonappearstoattractcontinuednon‐domesticinterests.Localpolicymakersandplannershavean

integralroleinmanagingtheofficestockandtheneedsofdifferentinvestors.Theresultshighlightthe

risingtideofforeignownershipandtemporalchangesininvestortypes,whoseneedsandpreferences

differ. The challenge for

 policy makers is to manage the increasing capital flows for economic

advantage,usingthedifferentleverswithineachinvestorgroupwhileconsideringtheimpactofthese

investmentflowsandownershippatternsforthefunctioningandstabilityoftheCityeconomy.



15



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