What’s On The Market And Where Have The Koreans Gone? 12 Things You Need To Know About The London Investment Market
The fact that more clarity about Brexit would be helpful is a given in the London investment market.
But beyond that, what are the key trends dominating the sector? And what are the big deals in the market to be watching as a bellwether for the rest of the year?
Ahead of Bisnow’s London Capital Markets Review, we asked those in the market what to watch out for. The trends include the return of savvy buyers who have for years been priced out of the market. The deals are an eclectic bunch, with the sale of core assets sparse.
The trends — the Koreans are out
Last year was a big one for Korean investment in London, with about £3.5B spent in the UK capital if you count the £1B acquisition of Goldman Sachs’ HQ, which was agreed but not completed. Not so much this year.
“The biggest change is the withdrawal of the Koreans,” Colliers Head of International Capital Markets Andrew Thomas said. “That is a broad generalisation, and of course there are still specific groups. But London became oversold in the secondary market.”
Many transactions undertaken by Korean firms were led by a sponsor that syndicated the equity among institutions in Korea. Appetite for London deals among the buyers of the equity has waned, and until it returns, the sponsors are looking more to Europe.
But savvy UK buyers are back
The withdrawal of cautious overseas investors caused by Brexit uncertainty has given an opportunity to UK firms that had for some years been priced out of the market.
“Those who are able to do so, who recognise that real estate investing is by nature a long game and that the capital will remain a location of choice for global occupiers will take the opportunity to invest whilst others are not,” BH2 founder Tony Gibbon said. “This is demonstrated by ‘smart money’ beating off competition, institutional and otherwise, for assets that in more stable conditions they would be unlikely to be able to acquire or which would be bid up. Some of this stock has been sold by retail investors who will have been surprised by the depth of demand.”
Examples include Brockton Capital, which has spent more than £400M on a trio of deals this year; and Great Portland Estates, which is under offer to buy BT’s City of London HQ for £200M, which it will redevelop.
The occupier market looks pretty good, so development deals are doing well.
“Interestingly, occupational demand has been strong since the referendum, save maybe for smallish deals where the option of serviced offices has been understandably popular,” Gibbon said. “Going forward I hope that landlords will show more resilience when it comes to the extent of tenant incentives for larger-scale lettings; new supply is low and will probably remain so.”
For this reason, development deals and deals where investors buy vacant buildings in an attempt to lease them up have remained popular: Allied London's £150M acquisition of ITV’s South Bank HQ is an example of the latter. The list of underbidders was long.
But some investors in deals with lease-up risk in particular might be disappointed, Gibbon said.
“I am not surprised by the extent to which value-add has remained firm — a wave of opportunistic capital has ensured this — yet I wonder how target returns will be realised, not least as construction cost inflation continues.
“Land for ground-up development and core-plus now represents relatively good value, not least as replacement costs have risen so dramatically.”
Sale of core, prime assets are few and far between
One thing most people in the London investment scene seem to agree on right now is the lack of sales of prime assets, something which is likely to keep overall transaction volumes subdued. And it is down to the attitude of sellers, not buyers.
“There’s a standoff,” said Stephen Down, Savills head of Central London and International Investment. “Owners don’t want to put something out there and receive what they think is a derisory offer. There is a feeling of, why sell now, but that has been the case since the referendum, and we’ve had a record couple of years in that time. Partly owners are still looking back over their shoulder at 2017 prices and hoping they can achieve that.”
The deals — Nova
The biggest single-asset deal in the market is CPPIB’s sale of its 50% stake in Nova, the 560K SF office scheme in Victoria, which could fetch as much as £450M. Joint venture partner Landsec could also sell its half-share of the three-building scheme, which is fully leased. Eastdil Secured is advising on the sale.
23 Savile Row
Royal London Asset Management was under offer to buy the 100K SF 23 Savile Row office building in Mayfair from a joint venture between Lasalle Investment Management and Angola’s central bank. That deal fell through because of Brexit at the beginning of this year, but the building remains up for sale, with several investors having made approaches at a discount to the previous £280M price but been rebuffed.
One to watch out for is the Cabot in Canary Wharf. Earlier this year 95K SF of leasing deals meant that the 455K SF office was fully leased after a major refurbishment programme that cost Hines £113M. The building is owned by Hines’ global REIT, an unlisted vehicle which said last year that it would liquidate all of its assets and return money to unit holders. No agents have yet been appointed, but a sale will likely happen this year, with a value of around £400M possible.
Another large and complex potential sale is the disposal of a section of the Holborn Links estate by Teddy Sagi’s Citwax Investments. Sagi has appointed Cushman & Wakefield to sell 250K SF of the 465K SF estate for about £275M, according to CoStar. The estate comprises offices, shops and restaurants. Sagi bought the whole estate for £300M in 2016, and it has potential for redevelopment.
Eastdil is also advising retail specialist Meyer Bergman in its hunt for an equity partner to help build the £300M Borough Yards retail and leisure scheme near London Bridge. According to CoStar, £150M of development finance from Bank of China has been sourced, meaning a further £150M of equity is needed.
Marriott Grosvenor Square
In the hotel sector, Hong Kong investor Joint Treasure has appointed JLL to sell the 39-year lease on the 237-bedroom Marriott Grosvenor Square up for sale for £180M, a 6% yield. It tried to sell the hotel for £200M two years ago.
One of the largest corporate deals on the market is in the build-to-rent sector. Delancey has appointed Eastdil and Lazard to find as much as £600M of new capital to fund the expansion of Get Living, its UK rented residential business. Current backers include APG, Qatari Diar and Oxford Properties.
Join us 21 May for the London Capital Markets Review to learn all about the latest investment trends.