London real estate is preparing for a dire end to the year for investment, as interest rate rises, political musical chairs and the looming possibility of recession take their toll on the market.
With UK institutional investors largely at a standstill, leading investors and agents are now pinning their hopes on private money and overseas investors seeking to capitalise on the weak pound.
Felix Rabeneck, head of city investment at Savills, said that despite being a “very quiet market”, the make-up of buyers and sellers has changed. He added that the amount of money targeting London was “still significant”, pointing to Great Portland Estates’ deal to sell 50 Finsbury Square to German family office Wirtgen Invest Holding earlier this month, which traded at a 3.9% net initial yield.
Rabeneck described this “period of transition” as the result of rising interest rates, which has seen some deals “fall over” but he believes that “in this environment, freehold on a London office block looks really compelling”.
He said: “The impact [of the interest rise] was quite sudden and quite quick [and] it just creates a crash [as deal values drop]. Over time people readjust their expectations and you begin to get deals done.”
“It’s quiet out there and will remain so,” one London investor, who did not wish to be named, told EG: “The market will have to re-base, and that could take six months.
“If you’re not governed by what’s happening in the markets, there might be opportunities. But the funds are out, the REITs are out, foreign money is out. Private money is the only game in town.”
“It’s hugely uncertain right now,” said Ross Blair, managing director of Hines UK. “Judging where cap rates will settle in the near term is a tough call, so there needs to be a strong driver for making a bet today.”
Blair added: “Many of the issues impacting the investment market are global, but the political to-ing and fro-ing we have witnessed over the past weeks here in the UK just adds to the volatility in our market and reasons why an overseas investor will be more cautious.”
According to Blair, it has become paramount for buyers to consider unlevered positions or alternative ways of structuring deals to meet return objectives, as the cost of financing surges. “The old maths just doesn’t work anymore,” he said.
“A number of deals were withdrawn in H1 because pricing didn’t get to sellers’ expectations,” added Blair. “I bet a few are now wishing they had transacted at those levels because today it’s even more challenging and pricing will come in lower.”
Some investment agents are struggling to find upsides to the situation, with one unnamed source describing the market as a “shitshow”.
However, others are staying upbeat. Chris Gore, principal in the capital markets investment team at Avison Young, said he is “still very positive” about the market. He said: “There is always a different wave of international capital coming into London with money that has slightly different reasons for being here.
“I think the market just needs to sort itself a bit, but everyone wants a quick fix and there are no quick fixes, some things just take time. Unfortunately, tax cuts and interest rate rises take time to be effective.”
Jonathan Harris, chief executive and founding partner at Harris Associates, said: “Despite the uncertain economic and political backdrop, we see the current market as an opportune moment for motivated sellers and cash buyers.
“UK pension and retail property funds are seeking to dispose of assets to meet redemption stress. Similarly, to what we saw in the economic crisis in 2008, there are now opportunities in the real estate market to access prized assets that were previously out of reach. We expect the majority of activity from long-term, cash buyers who can execute transactions quickly and have accessible capital.”
Outside of London, some listed real estate owners have largely stalled their activity. Town Centre Securities chief executive Edward Ziff said last week that “opportunistic disposals” to reduce debt would continue, but the REIT is not “envisaging any further property investments until there is stability in the real estate sector and wider economy”. Meanwhile, Palace Capital has hit pause on the “timing of significant property disposals”, as market volatility hits pricing.
Despite the turmoil in investment circles, the London leasing market continues to be bolstered by a number of major deals in the pipeline. GPE has confirmed advanced talks with magic circle law firm Clifford Chance on a prelet at 2 Aldermanbury Square, EC2, while asset manager Lazard has agreed a 15-year lease at Invesco Real Estate’s 20 Manchester Square, W1.
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