‘The flow is coming’: London dealmakers hope for strong end to year

Hopes are high for some big-ticket investment deals to close in the capital before the year is out – transactions that could help owners of London offices get a clearer idea of their value – and the types of buyers that would take them off their hands. Nuveen is again trying to sell its “Can of Ham” at 70 St Mary Axe, EC3, this time for around £320m rather than the previously attempted £400m. And Brookfield is said to want at least £500m for its Citypoint tower, EC2, also a drop on its most recent valuation. Other rumoured deals include CC Land looking to offload 1 Kingdom Street, W2, which could make the fourth quarter a relatively busy spell in what has been a tough year. In a recent study of 800 global investors by JLL and Opportunity London, a public-private partnership tasked with attracting investment to the city, more than 80% said London was either moderately or very attractive when compared with other major real estate investment markets around the world. Half predicted the US would drive the most investment into the UK over the next year, which Adam Challis, head of UK research at JLL, attributes to the country’s proactive private equity sector. He says: “Private equity investors are typically the first movers during the recovery phase of the cycle due to the opportunistic nature of the capital and the potential for high returns.” US private equity companies have a “deeper pool” of capital “that is able to see value and transact during this phase of the property cycle”, he adds. He points to Ares Management’s £43.5m acquisition of 25 Charterhouse Square, EC1, from Helical, its £60m purchase of the Charlotte Street portfolio from Shaftesbury Capital and other West End assets the firm is understood to have agreed deals for. Others, such as Elliott Capital, have teamed up with local partners. Elliott formed a joint venture with UK developer Oval Real Estate to acquire Samuel Tak Lee’s Lotus portfolio of office to retail and educational in the West End for £360m late last year. They teamed up on another deal more recently, acquiring 14 St George Street in Mayfair, W1, for around £130m in August. “The cyclical opportunity created by recent yield expansion and strong rental growth expectations has created favourable conditions for [private equity firms],” Challis adds. Glass half-full Beyond the US, respondents to JLL’s survey predicted further investment would come from the Middle East, Europe and the Far East over the next year. And although the study found total real estate investment volumes in London stood 41% below the 10-year average at £6.3bn for the first half of this year, some industry figures expect volumes will soon rise. “I’m in the camp of ‘the flow is coming’,” says Jonathan Harris, chief executive of agency Harris Associates. Harris attributes the recent lack of investment to political mismanagement, in particular former Conservative prime minister Liz Truss’ tumultuous mini Budget in 2022, which he says undermined London’s reputation as a stable investment market. Now, with inflation and interest rates falling, he says the outlook is more positive. “Liz Truss shut the door and now it’s definitely swinging open again,” he says. “Investors are very close to really coming back into the market.” Harris says his company’s contact with investors from the Far East through the company’s close collaboration with Singapore-based, pan-Asian real estate consultancy Edmund Tie has convinced him that investors are ready to return. “They are selectively, but it hasn’t yet completely flowed,” he adds. “It will do very shortly.” Christopher Daniel, founding partner of London-based asset manager and developer Quadrant Estates, agrees: “What we’re hearing is some stirring. There’s definitely more interest.” After Quadrant acquired an office at 6 Gracechurch Street, EC3, for £37.7m on behalf of a Singapore-based family office with funds from Taiwan in August, Daniel predicts more capital will be “flowing in this direction” soon. “Asian family offices tend to be ‘patient capital’ and take a generational long-term approach to investing” he says. “That also lends itself well to brown-to-green redevelopment opportunities where valuations for such strategies in London are currently attractive.” And investor interest is in a broad range of assets, Daniel adds, with student accommodation, data centres and hotels all being “very much in vogue and in demand”. Indeed, JLL research shows that in January almost 40% of respondents said London offices were the greatest opportunity for investment over the next five years. But by July the figure had dropped to 28%, overtaken by data centres and student housing. As interest increases globally, competition for assets will rise too, which Daniel says has led to unlikely face-offs between risk-hungry private equity outfits and more patient family offices. “We have bid on properties for family offices and been outbid by these other [private equity] guys and the only way we can see them making it work is taking a very ‘glass half full’ approach to your underwriting and adding a good chunk of leverage,” he says. “You’re putting max rental growth in there. Your [capital] value per square foot is massive.” Daniel stresses that he is “not sitting here pouring cold water on their assumptions” but he says such an approach differs greatly from the methods taken by family offices, which are typically concerned with preserving intergenerational wealth through longer-term investments. He says the current situation, which pits these unlikely rivals against each another, is a symptom of sentiment shifting. “That’s how you get this sort of psychopathy,” he says. “It is bizarre. It’s very rare that you see these two parties, who should be completely different, bidding against each other.” Price tag mismatch But while some are bullish about the potential return of global investment flows, others are sceptical. “I think the trickle is increasing. I wouldn’t call it a flow,” says Nick Pemberton, partner Allsop. Pemberton agrees that interest is rising, but he says interest in “big, chunky office building” acquisitions is still “thin”. Although investors are keen to acquire assets in the UK, Pemberton says the prices offered by vendors of office buildings are still too high – especially considering how inflation has pushed up the costs of refurbishments and fit-outs, as well as the impact of hybrid working in reducing the perceived value of offices. This means that, while interest in acquisitions might be rising, it is still not translating into bids, Pemberton adds. “We bought a building 10 years ago from a Middle Eastern client and there were 32 bids,” he says. “Now on a purchase there are probably two or three; and often the buyer knows they are one of one or one of only two.” Pemberton adds: “We are seeing people who were cautiously observing now starting to look at stuff. So it is definitely picking up – but it’s far from a flow.” Image © The Rooftops/Bav Media/Shutterstock  See which agents is doing the most deals in London >>