Blackstone is considering withdrawing the £430m sale of Cushman & Wakefield’s City office at 125 Old Broad Street, EC2, as sellers readjust their expectations in a softening market.
The move to pursue asset management and a potential refinancing follows eight properties with a combined asking price of circa £3.4bn being withdrawn from the City market at the end of Q4, according to Knight Frank research (see table).
Two of those assets have since been revived to pursue off-market deals.
Blackstone, advised by BH2 and JLL, had been in talks to sell the 328,000 sq ft EC2 office building last November. However, the sale did not progress.
City agents have reported a cooling of appetite for large lot sizes, which achieved record yields in 2017 to Hong Kong buyers such as LKK’s £1.3bn (3.4%) acquisition of the Walkie Talkie, EC3, and CC Land’s £1.15bn (3.5%) purchase of the Cheesegrater, EC3.
Depth for bids
“The depth of bids for trophy buys at the £500m-plus end of the market is definitely not as deep as it was, owing predominantly to a diminution in the number of Hong Kong and Chinese buyers looking at the UK and London,” said Oliver Sadler, partner in Knight Frank’s City investment team.
He said the smaller number of buyers was caused in part by the capital controls introduced by the Chinese government but more importantly, by a recovery in the value of the pound.
Hong Kong investors bought £6bn of commercial London real estate last year, representing 40% of the market, according to JLL. Chris Brett, head of international capital markets at CBRE, said there were “still deep pools of capital” in Hong Kong seeking to invest in UK real estate. However, sellers need to recognise the new paradigm.
“For some deals that people perceive to be priced in the right way, there is a high level of interest and deep bidding, but that is not the case where pricing is not where investors want to see it, and that is always symptomatic of being late cycle.”
‘Trophy’ assets
The trend for assets to be withdrawn is associated with sellers seeking to achieve “Walkie Talkie and Cheesegrater pricing” on large lot sizes without the same “trophy” status, such as Plantation Place, EC3, which was marketed last year with a price tag of £700m, a yield of circa 4%.
The loss of a currency play for Hong Kong investors is giving an opportunity for other investors to get into the market, with South Korean institutions, Singaporean REITs, Taiwanese firms and, slowly, the re-emergence of Japanese investors back-filling some of that demand.
However, where Hong Kong investors have been prepared to pay keener yields of circa 3.5%, South Korean investors, which are close to committing £1bn in the City already this year, will be generally seeking yields of 4.5%-plus and long income streams, according to Julian Sandbach, lead director, central London capital markets at JLL.
Adapt to pricing
He said: “The market will have to adapt to where pricing is and Koreans will invest if pricing is at a level where they can make the sort of returns they are required to make.”
Sellers are also being helped by a lack of new stock on the market, which has led to some of those nine properties withdrawn at the end of last year being revived and sold at levels close to or in excess of the asking price. Malaysian sovereign wealth fund Pnb also withdrew its prospective £195m sale of 90 High Holborn, WC1, at the end of last year but this month completed a £200m off-market sale of the building to Israeli entrepreneur Teddy Sagi’s LabTech.
Some £3.8bn of stock is now available on the open market in the City, compared with £6bn in Q4 last year, according to Knight Frank. The only large lot sizes launched so far this year have been Blackstone’s 20 Old Bailey and 125 Old Broad Street and AXA IM-Real Assets, Gingko Tree Investment and South Korea’s Hanwha Group’s £700m prospective sale of Ropemaker Place, EC2.
The £3.4bn of City sales withdrawn from the market…
■ 30 St Mary Axe, EC3
BH2 was instructed by Gherkin owner the Safra Group last June to advise on a prospective £1bn sale, reflecting a sub-3% yield. However, the informal sales process has been halted.
■ Plantation Place, EC3
Trustees of the late Brazilian billionaire Moise Safra appointed Knight Frank and CBRE last April to find a £700m buyer – a yield of circa 4%. No sale was agreed and the asset has now been withdrawn.
■ St Katherine Docks, E1
Blackstone appointed BH2 and CBRE to seek offers in excess of £435m for the 500,000 sq ft campus last May but subsequently aborted the sales process to pursue asset management including the redevelopment of Devon House.
■ Tower Bridge House, E1
Malaysia’s Employees Provident Fund instructed Savills to seek offers in excess of £200m, a 4.5% yield, for the building last January. After two negotiations to sell the building with Korean investors Mirae and later Dongbu Group, failed to complete, the asset was formally withdrawn.
■ 70 Mark Lane, EC3
Mitsui appointed Cushman & Wakefield in September to sell the 180,000 sq ft building for £200m, a net initial yield of 4.5%, but halted the sales process at the end of last year.
■ Houndsditch Estate, EC3
Madison International Realty appointed CBRE in September to sell the five-building freehold portfolio for around £240m, a 5.25% yield. The asset was withdrawn at the end of last year.
…and the withdrawn sales since revived
■ One Silk Street, EC2
Malaysian sovereign wealth fund PNB instructed Knight Frank in September to sell the Linklaters HQ for £400m, a yield of 4.71%. It withdrew the asset at the end of the year with the intention of putting it in a unit trust fund but has now re-opened sales discussions with prospective buyers.
■ 90 High Holborn, WC1
PNB also withdrew the former Olswang HQ in Midtown at the end of the year, which it has instructed CBRE in October to sell for £195m, a 4.71%. However, this month it agreed an off-market deal to sell the building to Teddy Sagi’s LabTech for £200m.
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