Breakfast provided by Knight Frank at the Dorchester last week included two succulent sausages, rather than one. Legend insists a second banger signals that feast, rather than famine, lies ahead. A superlative presentation on the London office sector suggested the banquet continues.
A graphic presented by London office boss Stephen Clifton stole the show. Submarkets were signified by bright discs whose size reflected the volume of the space in spots such as the West End and the City. The blobs danced to the (loud) music of time, from 1995 to 2020.
But absent were records from a sector that rents out 1m sq ft of office space in London alone. Not that this matters over-much. What matters more is that the rules of valuation have yet to come to terms with this market. The market in question is, of course, the “rent-a-desk” sector.
This market is represented by suppliers from Regus to Instant Offices to Workspace and dozens of others. But for the purposes of the valuation argument, it is represented by Steve Jude, managing director of Citibase. In EG (24 January, p54), the man renting out 1m sq ft of space suggested that new methods are needed to value short-term income.
I saw him for breakfast on 3 February and asked him to say why. “We are in a situation where theoretical, fairy-tale lettings from long-term occupiers, which may never materialise, are seen as being of greater value than immediate income from shorter-term occupiers desperate for flexible workspace.”
OK. For instance?
Example one: 16,000 sq ft of offices in the Midlands fully occupied by 32 SMEs with a £600,000 rent roll. Value? Vacant possession only, said the valuer. Why? Because the monthly income fluctuates. Luckily, the occupier is happy with real money and doesn’t care much about the VP value.
Example two: a private investor with an empty block in a northern town with potential revenue of £720,000 a year from “rent-a-desk” working. Citibase recommends a very basic refurb and fit-out costing £12 per sq ft. The valuer said the end value would be so small the client would risk breaching banking covenants.
The client then spent £65 per sq ft for a “full-monty” refurbishment to attract a single long-term tenant at a rent 50% higher than the £720,000 that Citibase said it could get. The work was done. The higher valuation protected the client’s LTV covenants. One problem: the place is still empty after 13 months.
What’s the solution, Steve?
“When calculating a cash-flow and a valuation for a secondary office building, the real friction costs should be taken into account: professional fees, refurbishment costs, holding costs (including rates) and void costs. The calculations should reflect the reality that potentially obsolete buildings cannot hide behind inflation to maintain value, but have to make the buildings generate an actual rather than a hypothetical cash-flow.”
Right. Not quite sure I fully understand. But Stephen Clifton of Knight Frank says: “When the serviced office firm acquires space to open a centre, that goes into our figures. When the serviced office firm subsequently lets space to its clients, we do not include it. But its growing size and importance make it an interesting topic.”
A topic to discuss over one (or two) sausages next year?
A new investors’ tool
Forget measuring rents, yields and take-up. How about taking an entirely subjective but quantifiable view of the acumen of buyers and sellers? Bill’s Buyers and Sellers Index will work like this. Take the 10 biggest deals mentioned in EG each week. Ascribe your own “wisdom” points on a scale of one to 10 to either party. (We think Land Securities is wise – give it 10. We think those clowns hoovering up any old rubbish for their European core-plus fund are heading for a fall – give them 1.) Tot up the wisdom points ascribed to each of the 10 buyers and sellers. If each side rates 50 points, the market is in balance, hold. If the BBSI index is 70:30 in favour of buyers, buy. If the index is 70: 30 in favour of sellers, sell. At a guess, this is about where the BBSI sits right now.
