Private equity buyers are taking big bets on City offices. Will they end up looking like geniuses or gamblers who backed the wrong horse?
According to our latest London Offices Market Analysis (p69), the EGi consensus rent in the City now stands at £58.50, a 2.4% quarter-on-quarter rise. Meanwhile, average new-build rents are at their highest level since Q3 2008. The big boys of private equity, who have been so active in the Square Mile in recent years, need that trend to continue. Indeed they need it to accelerate if they are to deliver the 15% IRRs they require to satisfy their business model.
Mercer Real Estate Partners bought 160 Aldersgate last year. CMS Cameron McKenna is about to vacate the 200,000 sq ft building with rival DLA Piper poised to take the soon-to-be-redeveloped space (p27). Meanwhile Starwood this week bought 55 Gresham Street, and will also be hoping it can let quickly and ride a wave of rising rents.
Then there’s Blackstone, which has bought several similar buildings like 20 Old Bailey and, but as yet hasn’t let significant space in any of them.
There is a dearth of stock in the City and rents are rising. But despite some headline-grabbing deals, demand still looks patchy. If that changes and rents ramp up, these investors will look like geniuses. But if it doesn’t they may start to look like a herd who made over-punchy purchases on overconfident assumptions. ‘Distressed purchasers’, some are suggesting.
It’s not squeaky bum time quite yet. But there’s a lot riding on the autumn nevertheless.
¦ As David Cameron sought to inject more gender balance into his upper ranks this week – and the Church of England sought to do the same by allowing women bishops – all eyes are on diversity. I gather a shortlist for the next chief executive of the British Property Federation has been finalised. Interviews will take place by September with four candidates – two men and two women, I understand.
¦ After the starburst of last week, where ministers were sent to cities across England to launch regional growth funding, MIPIM UK is shaping up to deliver the conference equivalent. Some 20 cities and local authorities are now signed up from the Scottish Cities Alliance to Southampton and Portsmouth and points in between. Details at www.mipimuk.co.uk.
¦ Agents have been saying so for some time, now Capital Economics sees evidence that uncertainty caused by the independence vote is hurting the Scottish economy. The region’s 2.6% annual growth rate already lags the UK’s 3%. And June’s regional PMI stats – a key economic bellwether measuring purchasing by corporates – indicated that output has grown more slowly in Scotland than in any other region of the UK for the third month in a row. Meanwhile unemployment is bucking the UK trend by rising, while business confidence is below average. “Nonetheless,” say the economists, “if the opinion polls are right and Scotland votes to remain part of the UK, then a period of outperformance may swiftly follow as activity and investment that was postponed is undertaken.” Let’s hope so.
¦ LandAid embarked on an important new initiative this week, launching a pro bono campaign to encourage this industry to do more to help disadvantaged young people in the UK. Through LandAid Day and other events, property has shown how generous and effective it is at raising money. Now the charity hopes to persuade 40 companies to commit at least 10 days of free professional advice in 2014-15. So far 16 companies – from Chancerygate to Telereal Trillium – have committed over 160 days in total, equating to more than £120,000 of pro bono property advice to LandAid’s charity partners. A specialist team has been set up that will work to match available expertise with the right projects. Find out more via www.landaid.org.
damian.wild@estatesgazette.com
