People are lined up in an hour-long queue outside the latest skyscraper to rise on London's skyline.
They're vying for a brief peek inside the 46-floor Leadenhall Building – nicknamed the "Cheesegrater" by locals for its iconic right-angle design – during a citywide open house of London's architectural wonders.
In November, tenants will begin moving into the Leadenhall, which isn't just a symbol of the radically changing face of London, like The Shard and other tall buildings that have caught the public eye. It embodies the decisive role Canadian firms have staked on the frontlines of London's white-hot real estate market.
"I'm standing in my office right now looking out my window and [the Leadenhall Building] dominates the Square Mile skyline," says Paul Brundage, executive vice-president of Canadian commercial real estate giant Oxford Properties Group Inc.'s Europe division.
"It's very difficult not to put it in what you call that trophy category," he says proudly of the Graham Stirk-designed, 610,000-square-foot commercial building, which Oxford holds in a 50-50 joint venture with local firm British Land.
At the height of the financial crisis in 2008, Mr. Brundage arrived in London to begin building Oxford's strategy in Europe. The plan was to shift the company's portfolio from 100 per cent Canadian holdings to a 60-40 per cent Canada-foreign split.
Altogether Oxford has bet $5-billion on London so far. Today the firm outright owns, or has a stake in, five large London office properties. These include St Martin's and King Edward Court, home of the London Stock Exchange, which border the historic London square beside St Paul's Cathedral.
Mr. Brundage's mission was to focus on office properties with investments across the risk spectrum. Key to this was building relationships. "We knew we needed to find an opportunity to get into one of the next-cycle development sites," he says.
"We were lucky to get to know the British Land team when I first came over here," he adds. "They owned the site, they were looking for a partner to de-risk the amount of capital they were going to put in it." Construction on the Leadenhall Building began in 2011 when London's property market was still in a fragile state. The strategy is already paying off, Mr. Brundage says. The Leadenhall Building, which sits at the heart of London's financial district, is now valued at significantly more than its £340-million ($610-million) development cost in 2010, he notes.
Nearby, a bidding war under way for the iconic Gherkin tower, which went into receivership last April after one of its joint owners, Germany's IVG Immobilien, filed for insolvency, is a microcosm of the city's sizzling market. With more than 200 bidders lined up, the price for the 40-floor building is pushing north of $1.1-billion. Roughly 40 per cent of its would-be buyers are from Asia, 20 per cent from North America, and 15 per cent from the Middle East.
In 2013 $35-billion worth of London commercial real estate changed hands, according to CBRE Global Research and Consulting, surpassing a record $32-billion in 2007. Foreign buyers made up 72 per cent of those transactions, and some 35 nations have entered the market, according to Deloitte's real estate team. There is high demand for that space on the rental side, too. In a recent analysis of the office market, CBRE reports a third quarterly decline in vacancy rates in central London in a row. Prime space is now in very short supply. The most recent quarterly report on office properties by Knight Frank shows a 9-per-cent hike in prime office rents in the City and 8 per cent in the West End.
Not all of the opportunity is in London's financial district. "We did have some earlier investments in The City, but we exited just over a year ago," says Andrea Orlandi, head of real estate investments, Europe, for Canada Pension Plan Investment Board (CPPIB), which entered the market in 2008.
The crown corporation expanded last year into other areas of London, particularly the West End, in a joint venture with Hermes Real Estate Investment Management Ltd. The large British pension fund, Mr. Orlandi says, has been able to pick out smaller properties CPPIB may have overlooked.
"It's really a value-add strategy that extends itself across London," he says of CPPIB's $314-million half-stake in eight West End office buildings owned jointly with Hermes. "The City is a more cyclical market," he says, "The West End tends to show more growth in a secular fashion, let's say, and a little bit more supply constraints."
Moving forward, the more than $3-billion CPPIB has invested in Britain will be directed to deals with Hermes in London's South Bank and the city's eastern sector. It is also about to realize a new $1.3-billion development in partnership with Land Securities that will make over 5.5 acres near the West End Victoria underground station by 2016. The ambitious design features 480,000 square feet of office space, as well as retail, restaurants and 170 luxury modern apartments.
CPPIB isn't the only Canadian firm that has exited London's financial district. In August, Ivanhoé Cambridge sold the Woolgate Exchange, its only office property in The City, and London at large, in favour of a residential focus.
"We decided to take the profit and recycle that money," says Sylvain Fortier, executive vice-president, residential, hotels and real estate investment funds. After nearly two years in the Ivanhoé Cambridge portfolio, he says, Woolgate had made a 20-per-cent return. "We basically felt like we had achieved our business plan, but way earlier than expected." They want to have more office properties, he adds, but aren't rushing into any deals.
The market is two or three years into uplift in rental values, says Mr. Orlandi, meaning buyers must be more selective. The Bank of England also indicates it intends to raise interest rates. When it comes to financing, there's a squeeze on returns if the cost of borrowing is higher.
A whiff of instability also hangs in the air. U.S. banks recently threatened to move their staff to Dublin after Prime Minister David Cameron promised a referendum to decide whether Britain stays in the European Union if he wins the 2015 general election.
But none of this fazes Mr. Brundage. "The portfolio is diversified enough that we can manage that risk and withstand those kind of shocks," he says.
"London has been viewed as, arguably, the safe haven in the world for global investors," he says. "We think that the direction and range of pricing here for core assets has got some legs."