The View From London: Brexit’s Impact on Central London Offices
Thanks to Brexit, hype and speculation could lead you to believe the Central London office market is in free fall at the moment in terms of pricing—particularly if you only focus on one or two deals and ignore the wider spectrum.
There have been 14 deals completed in Central London since the referendum result, nine in the West End (with a total volume of £896.61 million—approximately $1.15 billion) and five in the city (£432.23 million). There are at least 18 deals currently under offer, which the market will be watching closely, but here I will try to lay out what has occurred since June 24.
The open-ended retail funds have been under heavy redemption pressure since the referendum, all of them different cases dependent on cash reserves built up pre-Brexit. They make up less than 5 percent of U.K. commercial property ownership, but the market pays particular attention to them because of the nature of the investor and since they have recently set “high watermarks” in property sectors. Prime yields had edged up pre-referendum, and retail funds were already seeing a rise in redemptions (according to the Investment Association, investors pulled £148 million from funds in April 2016 and £367 million in May 2016. In June £1.4 billion was withdrawn.)
Aberdeen Asset Management was the first fund to sell, disposing of two of its larger Central London office assets—both within one week of them being offered for sale to a select shortlist of parties.
• Brockton Capital was the successful bidder at 10 Hammersmith Grove, W6 (£85.5 million / 6.1 percent) on the strength of its ability to exchange and complete quicker than all other bidding parties. There were a number of bids above the asking price; however, the rapid timetable was the key to Aberdeen.
• Sedley Place, 355-361 Oxford Street, W1 was sold to Norges Bank Investment Management for £124 million / 3.55 percent with the deal completing within two working days. Again there were higher bidders, but Norges was successful on the back of how quickly the deal could be turned around.
What do these deals tell us? The bidding parties demonstrated they had the capacity and inclination to purchase an asset of substantial size in cash and complete the transaction within five working days, highlighting the depth of liquidity in the market. The deals also point toward a weight of money that continues to recognize London as an attractive city for commercial property investment. Yes, there are discounts to be found where there is a vendor who needs to sell in a very short time period; however, overall, we don’t envisage there being many more of these types of deals. The initial defensive measures taken by a number of funds to protect existing shareholders have subsided as the dust settles on the wider macro environment. These funds have indicated they will be undertaking sales as normal with open marketing campaigns that look to achieve the best price possible in a standard deal timetable.
A couple of notable deals, which illustrate instances where the market is in the eyes of the vendor and not the U.K. fund, include:
• Wells Fargo has forward purchased 33 King William Street, a 227,000 square foot development in the core of the City of London, for its own occupation. The international bank paid £300 million, reflecting a capital value of £1,190 to £1,320 per square feet, and pricing levels at those that were achievable pre-Brexit.
• Debenhams, Oxford Street, W1—A deal was agreed between vendor British Land and The Ramsbury Group (US) for the prime retail asset pre-Brexit at £400 million / 2.75 percent. The price was not slashed post-Brexit and the deal exchanged at the end of July.
As these two deals would suggest, the investor landscape in Central London at present is dominated by overseas parties who are seeing this as an opportunity to deploy capital into the city in part due to perceived price movements but predominantly due to the Sterling devaluation. Currently, the West End market is more active than the city as those private overseas investors are seeking small to medium lot sizes with medium to long-term secure income streams.
Our 2015 year-end forecast was for a steady decline in investment volumes over 2016 to 2020, as the return being produced by London office property also reduced. The referendum result will reinforce this, and Central London office investment volumes will undoubtedly be lower than expected in 2016 and 2017. However, this will be less of a fall than was seen in the Global Financial Crisis, a reflection of the stronger occupational market this time around and an indicator that the referendum result is a local shock, not a global one.
Stephen Down is the head of the Central London team at Savills.