InvestIng In london commercial real estate

InvestIng In london commercial real estate

contacts gareth Williams Partner Property Department for Royds LLP Tel: +44 (0) 20 7583 2222 gwilliams@royds.com andrew cruickshank Tel: +44 (0) 020 7338 4434 andrew.cruickshank@bnpparibas.com InvestIng In london commercial real estate BNP Paribas Real Estate and Royds law firm joined forces to prepare this paper which explains why there is such interest from international organisations and individuals looking to invest in UK (particularly London) commercial real estate and explores the process for doing so in an effective manner. About Royds Royds is a long established 17 partner commercial City law practice with strong private client facing teams. The firm is well known for its commercial, retail property, employment and commercial litigation practices. It includes a number of banks, airlines, AIM listed and large private companies in its client portfolio. As a member of international association Interleges, Royds regularly advises clients entering the UK market and works on transactions with an international element acting for companies in Europe, the United States, Asia and the Middle East. www.royds.com About BNP Paribas about BnP Paribas real estate UK BNP Paribas Real Estate is one of the UK s leading providers of commercial property advice. It offers a comprehensive range of services to its clients and is committed to delivering excellent strategic, fully integrated services for property occupiers, owners and investors. In the UK, the company employs approximately 650 professional and agency staff from its 13 UK offices. about BnP Paribas real estate BNP Paribas Real Estate is a leading international real estate provider, and the market leader in Europe. It offers clients a comprehensive and unparallelled range of services that span the entire real estate lifecycle: property development, transaction, consulting, valuation, property management and investment management. BNP Paribas Real Estate has local expertise on a global scale through its presence in 29 countries including our alliances network, across Europe, India, Middle East and United States with 3,500 employees. It is an independent subsidiary of BNP Paribas, one of the 6 strongest banks in the world according to Standard & Poor s and Global Bank of the Year 2008 by The Banker Magazine. contents 3 Favourable conditions in the London commercial real estate market 3 An overview of the London real estate market 4 An overview of the Central London office market 5 How to manage your UK real estate transaction 7 Definitions realestate.bnpparibas.com real estate for a changing World This report is provided for general information only. While every care is taken to ensure its accuracy, BNP Paribas Real Estate and Royds Solicitors accept no liability for any loss or damage arising from its contents. Copyright BNP Paribas Real Estate and Royds Solicitors 2010 2

FavoUraBle conditions In the london real estate market There are a number of factors making the commercial real estate market particularly attractive at present: Post recession In common with the rest of Europe, there has been a market down turn in the UK and commercial real estate prices have suffered, therefore there is a window of opportunity to buy while the market is at a low point. The main stream view Is that there will not be a double dip and that we are coming out of the recession in the UK. Most comment is indicating that interest rates are looking to stay low in the UK in the near future; this has resulted in solid commercial property investments producing yields in excess of those received from other forms of investment in the UK. exchange rates The continued low interest rates and other economic factors means that there is the potential to take advantage of advantageous exchange rates. Both BNP Paribas and Royds can recommend companies that specialise in currency on international real estate transactions. new government With the new coalition Conservative/Liberal Democrat Government in power there have been some sweeping changes made to corporation tax that are due to take effect over the next few years. Many financial advisors are suggesting that by setting up a company to hold property you can avoid paying the Capital Gains Tax that an individual may have to pay on the sale of the property and pay corporation tax at a lower rate. Again, we are able to put international investors in touch with independent financial advisors who can provide advice on the appropriate structures through which to purchase real estate in the most tax efficient way. an overview of the london real estate market Investment property in London has traditionally referred to large portfolios and REITS (Real Estate Investment Trusts). However, the past few years have seen a strong influx of foreign investors investing in the London property market. The UK property market comprises a number of distinct categories: Offices. For commercial occupiers which is one of the largest real estate sectors in London, and consequently this article will focus upon the results of the same. Retail. These premises will either be located on the High Street (this is the major shopping streets in any town or city) or within an out of town shopping outlet, which is a purpose built shopping village. Industrial. For example, factories, distribution centres and plant. Leisure and hospitality. This includes hotels, bars and restaurants. Residential. Within London the buy-to-let market focuses on the traditional prestigious areas such as Knightsbridge, Chelsea, Mayfair and St James. There are also areas such as Notting Hill and Covent Garden which are attracting interest from younger and media types. There are also many beautiful old country houses that can be bought in the English countryside. Every country has its own unique real estate laws, the UK in particular has unusual landlord and tenant laws. In the UK therefore it is essential to get legal advice from an early point in any transaction. We are aware that many transactions fail to complete because international buyers were not aware of the complexities and unusual attributes of UK real estate law. There are two different interests that you can purchase in real estate in the UK, one is freehold (where you own outright) and the other is leasehold (where you are buying a lease that governs your interest in and use of the land for a limited period of time which will be detailed in the lease). When you own the freehold of a property you can create a lease out of your freehold interest. 3

an overview of the central london office market London is world leading city and it s real estate is divided into six main submarkets: The map below shows the boundaries of the submarkets used for all BNP Paribas Real Estate research on the London market. These areas are defined using the following clusters of postal (zip code) districts: West End: W1, SW1, W2, SW3, SW7 and W8 Midtown: WC1 and WC2 City: EC1, EC2, EC3, EC4 and E1 Docklands: E14 and E16 Northern Fringe: NW1 and N1 Southbank: SE1 and SE11 The London office market continues to be one of the most buoyant real estate markets in Europe for investment in the third quarter. Looking at the reasons behind this, it is clear that there is a decreasing level of prime stock in central London offices has led recovery and has resulted in London diverging somewhat from the general UK situation. On the demand side, London sustains its position as a stable real estate market in investors perceptions, particularly for those based overseas. The other demand factor is the availability of credit in the UK itself. Overall investment remains contained by the banks credit conditions and lenders expected credit availability and this is likely to remain unchanged for the next 3 months. Consequently Prime office yields in London have tightened significantly over recent months to 4.00% for the West End and 5.25% for the City. Overseas buyers continue to focus attention on central London, where rental growth is beginning to come through. Trophy assets achieving strong prices and capital value per square foot are seemingly more important than net initial yields. Central London investment transactions million 1,400 1,200 1,000 800 600 400 200 0 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 City Prime London office yields % 8 6 4 2 Docklands Midtown West End Source: Property Data 0 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Jul 10 Aug 10 Sep 10 City West End Source: BNP Paribas Real Estate 4

Refurbishment and Development Activity city Development activity in the City has started to surface as developers start to review schemes shelved during the recession. Although there have been no major new schemes started, total activity (taking into account planning applications, consents and developments under construction) has increased by 6% since the end of 2009. While the amount of space under construction remains unchanged over the last six months, there has been a significant rise in the planning application level with the submission of two sizeable EC2 schemes. West end The total development pipeline (applications, consents and schemes under construction) has fallen 25% since its 2008 peak, but only 2% since the end of 2009. Both the amount of office space at the planning application stage and with planning consent has fallen slightly since the end of 2009. Meanwhile the amount of space under construction has shown a small increase, as a handful of West End developments get underway, including Land Securities 167,000 sq ft Park House, W1. midtown The amount of space under construction in Midtown has fallen to just 243,000 sq ft from 616,000 sq ft six months ago. This decline is due to the recent completion of Legal & General s and Mitsubishi Estate Company s 406,000 sq ft mixed use Central St Giles scheme. docklands Office development in the Docklands is limited to Riverside South at Westferry Circus, where just under 2m sq ft is due to complete by the end of 2011. The entire building is pre-let to JP Morgan, although this may change as there remains some speculation as to whether they will take occupation on completion. how to manage your UK real estate transaction Appoint a real estate agent commercial It is advisable when purchasing commercial property to instruct an investment agent to act on your behalf. They will have a detailed knowledge of the local markets and will be able to supply you with the best product at the best price. In addition investment agents often rely on early market knowledge enabling them to provide investment opportunities to you before they become widely available. The role of the investment agent will include sourcing the property, providing strategic advice, analysing its investment, undertaking initial due diligence and managing the transaction. residential With the internet it is easy to search many websites and find a property that you are interested in buying, so it may be the case that you have found a property that you would like to make an offer on. However, if you do not have time to search the market or would like someone to view the properties for you, you can instruct your own agent to search the market and find the ideal property for you. We have many agents within London that we can put you in contact with to aid you in this process depending on the type of property you seek and the location of interest.. Please note that if you have found a property yourself and approached the agent selling the property, this agent will be acting in the sellers best interests and not yours. It may be that at this stage you wish Kings Cross St. Pancras Northern Fringe Regents Park Midtown Covent Garden Royal Courts of Justice City Bank of England Mayfair Hyde Park West End Buckingham Palace St. James s Green Park Park Houses of Parliament Waterloo Southbank Canary Wharf Docklands 5

to instruct an agent to conduct the negotiation process for you, as they will be more familiar with the UK negotiation process. If you decide to negotiate the deal yourself it is important that you mark all correspondence subject to contract. In London there are many large agencies that are multinational, however there are also some small agencies that cover very limited geographical areas, particularly in relation to high end residential property. Buy at auction only after seeking legal advice There are a number of properties sold at auction in the UK. It is advisable to obtain legal advice about any property that you are considering bidding for at an auction before you bid, because the moment you have a successful bid at auction you are contractually bound buy that property subject to all burdens and benefits that the property may have. You cannot withdraw from the purchase without contractual and financial consequences, which will include but is not limited to losing your deposit and paying damages. Appoint a lawyer to guide you through the legal process Once you have found a property to buy and the main terms of the deal have been agreed (these are then summarised in a document called the Heads of Terms ) you will need to instruct a UK lawyer (called a solicitor). The lawyer will obtain the documents that relate to the property from the sellers lawyer. The lawyer inspects these papers to check that the seller has good title to sell the property to you, and investigate all the rights both positive and negative that are included in the property purchase. The lawyers will also conduct a series of searches against the property to protect you against any matter of local or planning legislation that may affect the property. Under English law you are deemed to have knowledge of any matter of public record, therefore your lawyer must obtain this information for you as you will be buying subject to it. Provided you are personally funding the transaction and there is no lender involved you may choose which searches you wish us to carry out. There may also be other searches which are location specific. Once your lawyer is satisfied that you have all the necessary information they will then report to you in full on the property that you are buying, so that you may make an informed decision as to whether or not you will go ahead with the transaction. [At Royds we work around client preferences, and usually provide a written report but to meet tight timeframes or international time zones we can discuss this by phone or by email Once all the legal documents have been agreed and you are content with our report you can exchange contracts. Traditionally a 10% deposit is payable on exchange, however this depends upon what you have negotiated with the seller/landlord. This is the point at which you become contractually obliged to complete the transaction, and if you do not you will suffer financial consequences. At exchange a date is set for completion of the transaction. On completion, the balance of the monies payable are due, once the transaction has completed you will be the legal owner of the interest in the property that you have purchased. It is possible to simply move straight to completion without exchange if you wish a transaction to move quickly. Following completion, dependant on the interest in the property you have purchased, the lawyers will arrange for the Stamp Duty Land Tax (a tax that is paid to the Government within 30 days of completion) to be paid and register the interest at the Land Registry. Every transaction is different and the needs of each individual buyer are different, therefore it is difficult to estimate the length of time it will take for a transaction to go through although it can take either a matter of days at the quickest to a matter of months for a particularly slow transaction. At Royds we aim to give you a personal service throughout any transaction that you instruct us on, and our service can be tailored to your specific needs. We often work with many different professionals throughout the property world and we are happy to make recommendations that you may request. The lawyer will then raise a series of questions to the seller to ascertain further information about the property and then draft and negotiate all the legal documentation in relation to the transaction. 6

conclusion The London market continues to be one of the most buoyant real estate markets in Europe for investment. Investors, particularly those based overseas, continue to view London as having a stable real estate market, consequently it is an exciting time to consider investing in the London real estate market. If you would like any further information on the London real estate market and the potential investments that you could make in it, please contact BNP Paribas and we can arrange a time to suit you to go through your options. Once you have decided which investment to make, and need legal representation, please contact Royds Solicitors and we will start the legal process of purchasing the interest in your chosen property. definitions Investment volume represents the total capital value of freehold and long leasehold purchases during the survey period. Quoted investment volumes are not definitive and are consequently subject to change. Only office transactions are included in this report. Prime rent is an opinion of the highest headline rent achievable at the quarter end of a hypothetical 5,000 sq ft unit of the best quality office space in the best location in each submarket. Prime yield is an opinion of the net initial yield which would be appropriate for a freehold prime office investment let to a tenant with a strong covenant. take-up represents the total floorspace known to have been let or prelet, sold or pre-sold to tenants or owner occupiers during the survey period. It does not include space that is under offer. A property is deemed to be taken-up only when contracts are signed or a binding agreement exists. All deals (including pre-lets) are recorded in the period in which they are signed. Lease renewals are not included. Sale and leasebacks are not included as there is no change in occupation. Quoted take-up volumes are not definitive and are consequently subject to change. total supply represents floorspace which is on the market and available for occupation. We distinguish between space that is under offer and other available space. Speculative developments that are under construction are not included. Space available for subletting or assignment is included. Under offer is where an offer for a property has been made and accepted in principle, but the where the transaction is still subject to contract. vacancy rate represents the total supply divided by the total stock at the survey date. 7

BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP T: 020 7338 4000 F: 020 7430 2628 www.realestate.bnpparibas.co.uk Royds Solicitors 65 Carter Lane London EC4V 5HF T: 020 7583 2222 F: 020 7583 2034 www.royds.com