Landsec and Canary Wharf Group have exchanged contracts to sell the Walkie Talkie, EC3, to Hong Kong’s LKK Health Products Group for £1.28bn – the UK’s largest ever single asset office deal.
The remarkable deal, which is unconditional and expected to complete next month, will see the City trophy in possession of the great grandson of the inventor of oyster sauce, Lee Kum Seung, who is said to have first created the condiment when he accidentally overcooked a pot of oyster soup in the late 19th century.
The price reflects a net initial yield of 3.4%, marginally keener than the 3.45% achieved on Hong Kong-listed C C Land’s £1.15bn acquisition of the Cheesegrater, EC3, in May from Oxford Properties and British Land, and demonstrates the continued appetite from Hong Kong investors for City “trophy” assets.
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What is Lee Kum Kee?
Lee Kum Kee was established in 1888 by founder Lee Kum Sheung who is said to have invented oyster sauce in Nanshui, Zhuhai, Guangdong Province of China, when he accidentally overcooked a pot of oyster soup.
LKK has subsequently become a household name with five production bases in Xinhui, Huangpu, Hong Kong, Malaysia and Los Angeles, with its the Xinhui factory one of the largest operations in the world, occupying 1,700 acres and 74m sq ft. LKK Health Products Group, part of the Lee Kum Kee Group, was founded in Hong Kong in 1992 and engages in the research, development, production and sale of Chinese herbal health products and has subsidiaries in China, Hong Kong, Taiwan, and Malaysia.
The group is chaired by Lee Man Tat, the grandson of the founder and oyster sauce inventor. LKK health products is chaired by Man Tat’s son Sammy Lee.
LKK acquired the landmark building at 20 Fenchurch Street through Infinitus Property Investment, a wholly-owned subsidiary of LKK Health Products Group, which is part of Hong Kong sauces and condiments giant Lee Kum Kee.
LKK said it intends to hold the Walkie Talkie as a long-term investment and sees the acquisition as an opportunity to extend its property portfolio to “major overseas financial centres for sustainable and stable capital appreciation”. The acquisition is LKK health group’s first UK property investment deal. However, the condiments arm of the business bought a Docklands building, 3 Harbour Exchange, E14, for £37m in December, taking a floor of the building to set up its UK operational business.
James Beckham, head of London capital markets at Cushman & Wakefield, who advised LKK, said the deal was a “global diversification” play for the group. He said: “They’ve already got a big portfolio in Asia, and [are now] buying best in class assets in the City. So it underlines their confidence in the long term position of the London market.”
How was the deal done?
Canary Wharf Group, the Qatar Investment Authority, China Investment Corp, Morgan Stanley Real Estate Investment and Brookfield Property Partners instructed CBRE and Eastdil Secured to sell their 50% stake in the building for around £600m in March.
Landsec, which jointly developed the building with Canary Wharf, did not actively market the remaining 50% stake it owns. However, an approach by LKK, advised by Cushman & Wakefield, for the whole asset, convinced it to sell.
Landsec chief executive Rob Noel said: “Our decision to sell 20 Fenchurch Street at an exceptional price and return cash to shareholders reflects our disciplined approach to the use of capital.” The £634.5m achieved by Landsec for its 50% share reflects a 13% uplift on its £567.5m book valuation on 31 March 2017. Landsec said it intends to return around £475m to shareholders in a form of payment of 60p per share, which would be accompanied by a share consolidation.
Toscafund chief economist Savvas Savouri said: “We are seeing capital travelling in search of value. For those in Hong Kong and China the pound’s decline has opened up considerable value in sterling assets. For the prop cos considerable value has been opened up by their shares trading below NAVs. The result is the arrival of investors using their valuable currencies and the departure from physical assets of UK investors. The latter are or should use the proceeds to de-equitise; exchanging highly valued property assets for the deep value which has opened in their shares.”
What makes a trophy?
The City office investment market has been dominated by trophy investment deals as overseas capital, particularly from China and Hong Kong, seeks a safe home. In the first half of 2017 Asian investors accounted for 2.3bn, or 43% of the record-breaking £5bn of deals transacted, according to Cushman & Wakefield.
Speaking to EG in June about its future London investment plans, Hong Kong-listed C C Land’s vice chairman Dickie Wong summed up: “If it’s not trophy, not high quality, definitely not suitable for C C Land.”
Cushman & Wakefield’s Beckham said buildings like the Walkie Talkie and the Cheesegrater, which he also advised on, are trophy because “they stand out on the London skyline”. He added: “They are well-known buildings on a global basis. So it’s not as though you’re buying a low profile building in a back street. You’re affiliating your brand to the building effectively – so everyone will know who owns the building from now on.”
The Walkie Talkie deal has outshone the Cheesegrater deal, with a sharper yield of 3.4% (compared to 3.45% for the Leadenhall Building). The Walkie Talkie has longer income, with a weighted average unexpired lease term of 13 years to term breaks, compared to just over 10 years on the Cheesegrater.
The 37-storey tower, which completed in 2014 and is fully let, also sits in isolation from the City’s central tower cluster, so it has better views all the way around. Designed by Rafael Viñoly, the commercial brilliance of the building is put down to the fact that it gradually flares out, providing larger floor plates on the upper levels. The 713,000 sq ft building generates revenue of £37.6m with top rents at close to £90 per sq ft. Tenants include law firm DWF, Deutsche Pfandbriefbank and traders Jane Street Capital. It also features Sky Garden, one of London’s biggest tourist attractions, and two restaurants.
How reliant is the City on Hong Kong money?
The City investment and leasing markets are operating at different speeds. While investment volumes transacted in H1 2017 hit a new record, rents fell by 2.2% in Q2 year-on-year and there is a degree of hesitancy among occupiers around the outcome of Brexit.
Despite strong H1 take-up figures, some deals such as Deutsche Bank’s agreement to go to Landsec’s 500,000 sq ft 21 Moorfields, EC2, represents an overall reduction in London take-up. For Deutsche, the move will result in an overall occupational take-up reduction in the capital from around 1.3m sq ft to 900,000 sq ft.
However, the capital markets side is being driven by different factors – the depreciation of sterling since the EU Referendum vote in June 2016 and push factors encouraging investors to take of money out of Asia.
Simon Baptist, global chief economist at The Economist Intelligence Unit, said: “London property has long been attractive for Asian investors, particularly from places like Hong Kong and Malaysia with historic ties. The devaluation of the pound has now made such assets cheaper, particularly for Hong Kong investors whose currency is pegged to the US dollar. Those are the pull factors. Push factors are that many Asian countries, including HK, have a glut of savings looking for a return and, probably more importantly, there’s a lot of nervous Chinese capital looking for a route out of the country. Much of that money passes through Hong Kong and is no doubt fuelling such purchases.”
If Hong Kong money went away would the market crumble? Hong Kong investors are not the only buyers in the market, although they were the most active in H1, splashing £2.3bn in the City. German institutional investors accounted £974m of investment in the City in the first half of the year, compared with just £160.5m in the whole of 2016, according to Savills. Data from Real Capital Analytics for the year to June 2017 shows investors from outside of China and Hong Kong are also prepared to pay at tight yields.
James Crookes, global head of real estate at Pinsent Masons, said: “Currently it doesn’t look like there will be a sudden slowdown of investment from Hong Kong; we’ve just seen record office leasing numbers in the City which wasn’t predicted, continuing to drive values and attract investors.
“However, speculation surrounds a ‘Brexodus’ and any political, economic or market uncertainty may deter Hong Kong investors. Current analysis of the Eurozone’s economy shows it growing faster than the UK’s which hasn’t generally been the case in recent years, so they may increasingly divert their attention to opportunities in other European cities.”
Andy Bruce, Linklaters’ global head of real estate thinks deals like the Walkie Talkie demonstrate that Asian and Hong Kong investors are “here to stay”. He said: “They see perhaps what we see as big uncertainties around Brexit or around a hung parliament as not big waves on the ocean but just little drops in the ocean and London remains a really important and significant investment place.”
However, he said investors from other parts of the world advised by Linklaters were similarly positive about the prospects of London real estate for long term investment.
Currently the demand is focused on “landmark” income producing assets, of which London has quite a few. “What we don’t see and would be interesting to see whether it develops is those sorts of investors having an appetite for risk in terms of other things – which is either a wider development or regeneration project or possibly something which is outside London,” Bruce said.
To send feedback, e-mail Louisa.Clarence-Smith@egi.co.uk or tweet @LouisaClarence or @estatesgazette
