Analysis-Big UK property sales to test market appetite after slump
By Iain Withers and Sinead Cruise
LONDON (Reuters) – Britain’s commercial property market is returning to life after its post-pandemic freeze, albeit largely at much lower prices.
Some big-ticket office properties now on sale will show just where the market is likely to bottom out and how briskly UK deal volumes will recover – especially in the hard-hit office market. How that plays out could in turn signal what awaits other countries still gripped by a deeper downturn.
Real estate investor Nuveen has put a 21-storey City of London tower it completed in 2019, informally known as the “Can of Ham” due to its rounded shape, up for sale for 322 million pounds ($419 million), below about 400 million pounds it had sought in 2022, a person familiar with the matter said.
Canada’s Brookfield is seeking around 500 million pounds for its nearby Citypoint tower, according to industry data provider CoStar. That compares with its most recent formal valuation of 670 million pounds, and its 560 million price tag when last sold in 2016, according to CoStar.
New office buildings are seeing robust demand, with investor M&G’s new office towers at 40 Leadenhall in the City of London more than 80% let.
But a recent tour showed what it needed to do to attract tenants, with the building offering saunas, treatment rooms, a hair salon, a yoga room, Peloton (NASDAQ:PTON) fitness suite, a cinema room and a library – most for the exclusive use of office tenants.
“We had a conviction that tenants would want to upgrade their space,” said Martin Towns, deputy global head of M&G Real Estate. Some out-of-favour older offices would have to be converted into other uses like housing, or demolished, he said.
The COVID-19 pandemic pummelled global commercial property markets by driving up inflation and financing costs, while causing a shift to hybrid and remote work that meant most tenants wanted less, but higher quality office space.
The cost of building prime offices in London has risen to more than 500 pounds per square foot now from less than 400 pounds before the pandemic, construction consultancy Turner & Townsend alinea said. Half of that increase was down to inflation, with the rest down to better amenities and green credentials, it said.
While some properties, such as older out-of-town offices, remain near-impossible to sell, the British market is improving for prime offices, rental housing and logistics, investors said.
A global retreat in inflation and interest rates is starting to ease financing costs and improve properties’ appeal relative to other investments.
“The mood music has definitely changed in the UK,” said James Seppala, head of real estate for Europe at Blackstone (NYSE:BX), the world’s largest commercial property investor.
“There is more robust activity, and more participants are coming off the sidelines.”
OFFICES LAG RECOVERY
Deal volumes across UK commercial property – which spans offices, retail, logistics and rental housing – have rebounded 26% annually in the second quarter, according to MSCI data, compared to 45% and 22% declines in France and Germany, respectively.
After plummeting in 2022 and 2023, UK commercial prices are also expected to rise 2% this year, even as they continue to fall in the euro zone and the United States, and to outperform other Western markets over the next four years, Capital Economics said.
But office sale volumes are still down 21% so far this year, MSCI said, lagging the rest of the UK market. There were also no deals over 100 million pounds in the first half of this year, the first such six-month period since 1999, according to CoStar.
Overall office vacancy rates also keep rising, hitting 10.1% in London in the third quarter – the highest for more than 20 years, CoStar said. It is nearly 17% in the city’s eastern Docklands area, where Canary Wharf Group is considering converting some empty space into hotels.
FORCED SALES
Property investors and agents say would-be sellers are coming round to accepting today’s lower prices. Some may be forced to sell by high refinancing costs, according to bankers, but foreign buyers could be willing to swoop.
“Many investors are saying the UK is a good investment location because of the stable political situation and they are wanting to get in before prices start to rise,” said Fiona Voon, head of real estate capital markets UK at BNP Paribas (OTC:BNPQY).
Among domestic investors, Schroders (LON:SDR) plans to spend hundreds of millions of pounds on British commercial properties this year and next, likely including prime offices. The market was attracting increased interest from investors in the Middle East, Asia and Australia, the asset manager said. It said it would soon begin talking to potential tenants about pre-letting its own planned 63-storey City tower at 55 Bishopsgate.
“Offices to some extent has been a bit of a dirty word,” said Nick Montgomery, global head of real estate at Schroders. “From the position we’re in, it’s more of an opportunity than a risk… The pendulum always tends to swing too far.”
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