MAGAZINE: Bellwether assets on the market in London

Properties up for sale in the UK capital span the risk and price spectrum and hint at rising investor appetite amid the gloom caused by the pandemic.

Fresh lockdowns to tackle rising Covid-19 infections in the UK threaten to prolong adverse conditions which have dampened investment in London during 2020, just when there were signs that things might be getting better in Britain’s most prime market.

Pandemic-related travel restrictions, quarantines and social distancing rules have hampered the process of marketing properties this year, with London particularly exposed due to its appeal to foreign investors. To put this in context, international capital comprises comfortably more than half – and up to 80% – of all deals done in the capital city in most years – but not in quarters two and three of 2020.

‘It has been a difficult year and I reckon we are heading for a mid to late single-digit billions turnover level, which is actually okay based on the past 10 years,’ says a senior agent at a major brokerage firm.

‘The enforced impracticalities of international travel are the cause of reduced volumes in London, but the capital and equity markets show us that there is a lot of money out there. It will find its way back into hard assets and London is one of the top three most important property markets in the world.’

Research suggests there are reasons for a positive outlook on Q4 in London. As of the beginning of November, there is around £3.1 bn (€3.4 bn) of assets under offer in the capital city, and a further £6.5 bn (€7.1 bn) of stock available, according to figures.

So-called ‘bellwether assets’ are currently on the market, whose fortunes may indicate just how buoyant and upbeat a finish to a troubling year London enjoys. Agents PropertyEU consulted report a strong increase in the supply side - assets coming to market - across the risk spectrum. This is promising for volume levels - as long as vendors have realistic expectations.

City of London
Towards the higher end of the price spectrum, New Ludgate near St Paul’s Cathedral is currently for sale with a target price of £600 mln (€662.4 mln) being sought by CBRE on behalf of seller, Land Securities. Comprising two buildings with a total of 33,124 m2 of mixed-use space, the asset won the City of London building of the year in 2016. It is under offer at a 6% yield and PropertyEU understands the likely buyer in this off-market transaction is a Singaporean investor.

Also up for sale is the headquarters of services giant, Deloitte, which has a 15-year lease on the property at 66 Shoe Lane. The asking price is in the region of £265 mln (€292.5 mln) and the asset has yet to attract bids. The extent of the appetite for an office building like this which boasts long-dated income could be an indicator of something significant in the London market.

Meanwhile, St James Square has just come on to the market, with owner BP seeking around £220 mln (€243 mln) for the asset, on a two-year sale-and-leaseback deal, after which the oil giant is set to move to Canary Wharf, in east London’s financial district.

One of the bigger potential deals in the city will be the distinctive-looking Scalpel building, which is being sold by US insurer W R Berkeley. It is on the market for a price in the region of £800 mln (€883 mln). If it achieves this, the transaction will provide a boost to volumes and to sentiment as well.

Elsewhere, asset manager British Land is selling 7 Clarges Street in Mayfair for an asking price in the region of £180 mln (€198.7 mln), targeting a 3.5% yield.

West End market
A major fillip for London’s market could be that the biggest-ever office deal in London‘s West End is potentially on the cards. Reports say US-based web giant Google is pursuing an £800 mln (€883 mln) purchase of the Central St Giles office hub, near to the junction of Oxford Street and Tottenham Court Road. A venture comprising L&G and Asian firm Mitsubishi are the sellers.

Separate from the big-ticket deals are a host of assets in the £50-£100 mln (€55-€110 mln) range, that will underpin the levels volumes will hit in the capital city during Q4.
Currently attracting bidders is One Great St Helen’s near the Tower of London. Comprising 4,738 m2 and occupied by Hiscox, the asking price is around £50 mln (€55 mln). Between five and 10 parties have registered bids, PropertyEU understands. It has two-and-a-half years’ of income left, indicating there is some appetite for risk in the market, even amid the challenges of the continuing pandemic.

Another is Eden House in Spitalfields, near to Liverpool Street station. It is up for sale for around £46 mln (€50.7 mln). Currently vacant, it will be interesting to see how much interest BNP Paribas Real Estate drums up, when it goes to bid in the coming weeks. How important to potential buyers is income certainty? What is their faith in demand for offices with 2021 around the corner?

Pandemic-related conditions are also holding back deals, adding around three weeks to a transaction which would normally take five weeks to close, according to one agent. An example of this is Plantation Place, which has been under exclusive offer by Safra to Brookfield for nearly six months for around £700 mln (€772 mln) at 7%. As yet, this is one deal still to close.

Similarly, the recent £480 mln (€530 mln) deal for One London Wall Place, the headquarters of asset manager Schroders, has taken months to close. The property was put under offer as far back as April, but the sale by Brookfield and Oxford Properties to Middle Eastern investor AGC completed only recently.

However, not only did this transaction show that transaction processes have been more sluggish than usual, it also spoke to the resilience of London, achieving an aggressive yield of 3.8% which was out of step with wider conditions, and was actually even sharper than pre-pandemic pricing.

Leasing hit hard
Unsurprisingly, the city’s leasing market has been hit hard during the Covid-19 pandemic and vacancy rates are expected to continue to nudge up, say market watchers. ‘It has been on its knees,’ admits one agent. The deadly viral pandemic has triggered a related outbreak of doubt in sentiment towards the office segment, long a staple of many portfolios.

What is the future of demand for the office leasing market if employers stick with remote working practices that the pandemic forced them to adopt? This calendar year has been tough, with total volumes in London year-to-date down by around 50% on 2019, according to agents PropertyEU consulted. But appetite is also returning to the market, they say.

One green shoot this quarter may be Munich RE, the German reinsurer, which is pre-leasing 8 Bishopsgate and doing the same at 1 Leadenhall. Likewise, fellow hyperscale web giant Amazon is rumoured to be in the process of taking an additional 18,580 m2 at North City in Shoreditch, on the borders of the Square Mile.

Recently completed deals for prime office assets underline London’s status as one of the leading gateway locations.

Last month, the £450 mln (€497 mln) acquisition by Ara Dunedin of a 50% stake in the landmark Nova office property in Victoria, central London, from the Canada Pension Plan Investment Board, stood out. The buyer was a joint venture which included a South Korean investor, ARA Trust Management, making its UK debut, after months of Asian capital retreating from London.

Meanwhile, mixed-use asset White City Place – located in the west far from the City of London – also achieved £235 mln (€259 mln) for its sellers, Stanhope, Mitsui and AIMC.
One senior agent predicts Q4 will show a bounce in volumes adding up to around £6 bn (€6.6 bn), which is back-end loaded. Another reported they are presently involved in £2 bn (€2.2 bn) of property deals as of the start of November, a sharp contrast to figures showing London’s entire commercial property market turned over £1.27 bn (€1.41 bn) in the preceding three months.


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