A £6bn wave of City offices coming up for sale has raised questions over whether the stellar pricing achieved so far this year can be sustained.
Record-breaking sales of trophy assets such as the £1.3bn Walkie Talkie, EC3, and £1.15bn Cheesegrater, EC3, to Hong Kong investors, but with a sudden rush of assets, each valued at more than £100m, becoming available at “trophy” prices, will values have to fall for assets to sell?
Around £3bn of City offices is being marketed actively with a further £1bn under offer and another £3bn-£4bn of stock expected to come out in the next six months, according to Knight Frank. The latest additions to agents’ crib sheets include Madison International Realty’s £240m Houndsditch Estate EC3; Mitsui’s £200m 70 Mark Lane, EC3; and Ashby Capital’s £320m 200 Aldersgate, EC1.
Nick Braybrook, head of City capital markets at Knight Frank, says: “A lot of it is relatively similar stock. It’s all quite big lumps of scale, fairly dry, with yields in the low fours, so it will be interesting to see if all of that shifts. Certainly there is still plenty of money trying to come over here and south-east Asian demand is still as strong as ever.”
Other triggers
Other than the surge in available product, are there other triggers that could cause a correction? Chinese capital abandoning London, an interest rate hike and Brexit workforce nerves are all potential catalysts that priced-out investors waiting on the sidelines are watching.
Ross Blair, senior managing director and head of UK for Hines, which has been investing more in mainland European cities than in London in the past year, says: “On balance we felt London City offices would decline in value rather than increase from where they settled post the referendum vote.
“Certainly as we move into 2018 with the March 2019 deadline drawing closer, it seems highly likely there will be another pause for breath, and that, coupled with an abundance of stock coming to market, must surely lead to softening prices.
“Many of the so-called trophy buyers have very specific requirements and will not settle for more secondary assets priced so close to prime. That gap has become too narrow and I think we’ll see it widen again as this quarter evolves.”
Already some assets priced in this range have been slow to shift. Skanska’s long leasehold of the Monument Building, EC3, was launched in April at £130m – a net initial yield of 4.61% – but has yet to sell.
Tony McCurley, co-founder of GM Real Estate, says: “Vendors are seeking to take advantage of some strong prices being achieved on various high-profile sales before the summer.
“For me it’s creating an unhelpful impression that investors are selling heavily and it will cause some nervousness and no doubt indigestion for the big-lot sector of the market. The investors not only have more choice but can and will become more discerning.
“The top-quality, sensibly priced assets will sell and sell well but I think some of the other product will stall where they are either lower quality or too aggressively priced.”
Investors waiting for a correction might be disappointed if vendors choose to hold assets rather than sell at a lower price.
Vendors in 2017 such as Oxford Properties, which agreed to sell its 50% stake in the Leadenhall Building, EC3, to CC Land in May, remain optimistic about the long-term prospects for London.
Paul Brundage, executive vice president, senior managing director – Europe, for Oxford Properties, says: “At the moment there is no question that there is some uncertainty in relation to Brexit, which is cause for some concern, but London is a global city that will likely be resilient in the long term.”
He adds: “We will look to make strategic additions to this at the appropriate time and in the appropriate locations.”
More refinancing
Paul Coates, RBS’s head of real estate finance, says he expects to see more refinancing activity from both investors and developers.
“You may see people holding on to assets because they can’t redeploy their capital, then naturally you will see some refinancing activity,” he says. “Will you see people refinancing existing positions to try and get better deals from their debt provider? Possibly. I think it depends on how attractive that offer would be in order to go through the time and the cost and the kind of inconvenience of moving your debt.”
Owners already looking at refinancing as an option include the trustees of the late Brazilian billionaire Moise Safra, which instructed agents over the summer to sell Plantation Place, EC3, for £700m – a circa 4% net initial yield.
Bryan McDonnell, head of Europe, senior debt, at PGIM, says the lender remains “bullish” on London. “We’re cautious around some tenants, those directly affected by Brexit, and/or properties that have a lot of repositioning in the next 36 months, because Brexit unfolding could cause it to be a bit choppy. But if you get solid properties in good location, I think we’d be keen to look at them.”
How much of the £6bn wave finds a home will be a litmus test for the depth of the market. “If it’s not very deep and most of those buyers are happy with what they’ve bought and not interested in anything more, I think you could see a minor correction,” McDonnell says. “But the thing about London is that it is still a top destination for global capital, so when some investors leave, others think, ‘now is my chance to get into London’.”
What’s on the block in the City?
£1bn – sub 3%
Owner: Safra Group
Status: No formal sale process but GM Real Estate instructed to advise on a prospective £1bn sale.
£1.1bn – 3.4%
Owner: GIC and British Land
Status: UBS and CBRE instructed to advise on a prospective sale of UBS’s UK headquarters, expected to be launched imminently.
£400m – 4%
Owner: Evans Randall Investors
Status: CBRE has been instructed to advise on a possible sale of the Man Group HQ, although it is “considering all options” that could see Evans Randall retain and asset manage it further.
■ Plantation Place, EC3
£700m – 4%
Owner: Trustees of the late Brazilian billionaire Moise Safra.
Status: Knight Frank and CBRE were instructed in April to find a £700m buyer for the building – a yield of circa 4%. No sale has been agreed and the owner is now considering holding the asset and refinancing.
■ 200 Aldersgate, EC1
£320m – 4.5%
Owner: Ashby Capital
Status: Long leasehold opportunity launched this month for the 434,000 sq ft building. The building is fully let with passing rent of between £40 and £45 per sq ft. Tenants include FTI Consulting, Cass Business School and Ford Motor Company.
£150m – 4.25%
Owner: Lloyds
Status: Sale and leaseback opportunity. CBRE instructed.
£400m – 4-4.25%
Owner: KPMG
Status: Sale and leaseback opportunity. KPMG will agree a 25-year lease for the entire building with inflation matching CPI-linked reviews every five years. It will pay a rent of £18.13m, equating to around £42 per sq ft. JLL instructed.
■ Houndsditch Estate and 133 Houndsditch, EC3
240m – 5.25%
Owner: Madison International Realty
Status: The five-building portfolio comprises around 320,000 sq ft with low passing rents of around £40 per sq ft overall. It has been identified as having the opportunity for a 950,000 sq ft tower redevelopment. CBRE instructed.
■ Athene Place, EC4
£120m – 5.25%
Owner: Commerz Real
Status: The block is fully occupied by Deloitte which has a lease until 2027, with a lease break in 2019.
■ 70 Mark Lane, EC3
£200m – 4.5%
Owner: Mitsui
Status: Cushman & Wakefield is the agent for the island site, which is the headquarters of Zurich Insurance and Miller Insurance, and which would be the Japanese conglomerate’s first central London sale of a developed building. Rents at the 181,223 sq ft block, near Fenchurch Street station, average £57 per sq ft. It is fully let and has an average lease term of more than 10 years.
■ Monument Building, EC3
£130m – 4.6%
Status: Savills instructed in April to find a buyer for the 94,000 sq ft office-led scheme.
■ 99 Gresham Street, EC2
£129.2m – 4.5%
Owner: Legal & General
Status: JLL has been instructed to sell the freehold of the recently refurbished 96,000 sq ft office building around the corner from the Bank of England.
■ St Katherines Dock
£435m
Owner: Blackstone
Status: GM Real Estate and CBRE instructed to sell the six-building, 500,000 sq ft campus. Blackstone is contemplating whether to carry out further asset management and relaunch in the future if it can’t achieve its desired price.
£280m
Owner: Heron International
Status: 37% interest up for sale via CBRE.
£123m – 5.15%.
Owner: Hines
Status: Cushman & Wakefield and JLL instructed in June to sell the 225,000 sq ft Canary Wharf office block.
£100m – 5.4%
Owner: Angelo Gordon
Status: The 105,996 sq ft, 22-storey tower in Aldgate, put on the market by Eastdil Secured and Allsop in July, is multi-let to four office tenants and provides a passing rent of £5.5m pa.
£225m+ – 4.25%
Owner: Anglo American
Status: No price is being quoted. However, it is expected to achieve more than £225m-£230m – a net initial yield of around 4.25%. Anglo American relaunched the sale of the historic London headquarters of De Beers in August through BNP Paribas Real Estate on a sale-and-leaseback basis. The building was originally launched on to the market last year with vacant possession for around £100m.
£130m – 4.8%
Owner: Reignwood
Thai-Chinese property developer Reignwood instructed JLL in March to sell the City’s Corn Exchange.
£250m
Owner: Blackstone
Status: HFF and Savills were instructed this month to sell the HQ of IG Group Holdings, which is also known as The River Building.
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