Foreign ownership of commercial property in the City has rocketed, making the sector vulnerable to external shocks and a sudden withdrawal of investment, according to a report published today.
City office buildings are also now heavily leveraged and are increasingly in the anonymous, fragmented, possession of private equity vehicles, many with short-term interests, research by Colin Lizieri of Reading University found in a study commissioned by Development Securities, the property company.
The proportion of overseas ownership has more than doubled in less than 10 years, from 20 per cent to 45 per cent - or 36 million sq ft of City office space. Buildings that have multiple owners account for 54 per cent of the total floor space available in the City. The debt outstanding on all commercial property in this country stood at £138bn at the end of 2005 - more than three times the size of the lending peak that preceded the last property crash.
The report said: "Traditionally, City property owners took a long-term view on their investments and traded infrequently, with almost all offices having a single owner. By contrast, much of today's investment activity seems focused on short-term gains with less regard for risk. This, in turn, raises a key question: what if a substantial number of investors exited the market at the same speed as they entered?"
The value of property in the City has soared in recent years as a wall of money has chased after real estate in the Square Mile and other central London areas. Between January 2003 and December 2005, the City saw an injection of more than £14bn, of which 46 per cent came from overseas investors. The rate of turnover of property - investors buying and selling - has also risen dramatically, making for a much more liquid market.
Michael Marx, the deputy chairman and finance director of Development Securities, said: "The real estate market in London is now as global as the equity market. Twenty years ago, the City was almost entirely owned by UK institutions."
He said the City had seen the unusual phenomenon of prices that had risen sharply, without an increase in demand from occupiers.
"Global money comes to places that it finds attractive. But this is not loyal money.... At some point, something will happen and people will decide to look elsewhere. The investors are atuned to thinking globally," Mr Marx said.
Institutional ownership of City property declined from 38 per cent to 28 per cent between 1995 and 2005. Over the same period, private equity vehicles increased their market share from just 1 per cent to 14 per cent.
Among foreign investors, Germans have become the predominant owners. Germany's share of commercial City space grew from 8 per cent in 2000 to 18 per cent by 2005. Rising stars in the City market include Middle Eastern nations and the Republic of Ireland.Reuse content