By Iain Withers and Sinead Cruise
LONDON (Reuters) – Britain’s commercial property market is reviving after a post-pandemic freeze, albeit at lower prices.
Some of the big ticket office properties currently for sale will show just where the market will fall and how UK deal volumes will recover – especially in the toughest office markets. How it unfolds may signal what lies ahead for other countries still gripped by a deeper fallout.
Real estate investor Nuveen has put the City of London tower 21 completed in 2019, informally known as the “Can of Ham” because of its round shape, for sale for 322 million pounds ($419 million), below the 400 million pounds that is being sought in 2022, a person familiar with the matter said.
Canada’s Brookfield is seeking around 500 million pounds for the nearby Citypoint tower, according to industry data provider CoStar. That compares with the latest official price of 670 million pounds, and a price tag of 560 million when it was last sold in 2016, according to CoStar.
New office buildings are seeing strong demand, with investor M&G’s new office tower at 40 Leadenhall in the City of London over 80%.
But a recent tour shows what needs to be done to attract tenants, with the building offering saunas, treatment rooms, hair salons, yoga rooms, a Peloton (NASDAQ: ) fitness suite, a cinema room and a library – most exclusively for the exclusive. using office tenants.
“We have confidence that tenants will want to upgrade their space,” said Martin Towns, M&G Real Estate’s global deputy head. Some old, unloved offices should be converted to other uses like homes, or demolished, he said.
The COVID-19 pandemic has affected the global commercial property market by increasing inflation and financing costs, while causing a shift to hybrid and remote work which means that most tenants want less, but higher office space.
The cost of building prime offices in London has risen by more than 500 pounds per square foot today from less than 400 pounds before the pandemic, construction consultancy Turner & Townsend said in a statement. Half of that increase is down to inflation, and the rest is down to better facilities and green credentials, he said.
While some properties, such as old offices outside the city, remain almost unsalable, the UK market is improving for prime offices, rental housing and logistics, investors say.
The decline in global inflation and interest rates has started to reduce financing costs and increase the attractiveness of property over other investments.
“Mood music has definitely changed in the UK,” said James Seppala, head of real estate for Europe at Blackstone (NYSE: ), the world’s largest commercial property investor.
“There is more intense activity, and more participants coming off the edge.”
LAG RECOVERY OFFICE
Transaction volume in British commercial property – which includes offices, retail, logistics and rental housing – rose 26% year-on-year in the second quarter, according to MSCI data, compared to 45% and 22% in France and Germany, respectively.
After falling in 2022 and 2023, UK commercial prices will also rise by 2% this year, despite continuing declines in the eurozone and the United States, and outpacing other Western markets over the next four years, Capital Economics said. .
But office sales volumes are still down 21% so far this year, MSCI said, lagging behind the rest of the UK market. There was also no offer of more than 100 million pounds in the first half of this year, the first six-month period since 1999, according to CoStar.
The overall office vacancy rate also continued to rise, reaching 10.1% in London in the third quarter – the highest in more than 20 years, CoStar said. Nearly 17% is in the eastern Docklands area of ​​the city, where Canary Wharf Group is considering turning some vacant space into a hotel.
FORCED SALES
Investors and estate agents say would-be sellers will accept lower prices now. Some may be forced to sell at high refinancing costs, according to bankers, but foreign buyers may be willing.
“Many investors say that the UK is a good investment location because of the stable political situation and they want to get in before prices rise,” said Fiona Voon, head of UK real estate capital markets at BNP Paribas (OTC:) .
Among domestic investors, Schroders (LON:) plans to spend hundreds of millions of pounds on British commercial property this year and next, likely including prime offices. The market is attracting investors in the Middle East, Asia and Australia, the asset manager said. It said it would start talking to potential tenants about the planned 63-storey City tower at 55 Bishopsgate.
“Office to some extent has been a bit of a dirty word,” said Nick Montgomery, global head of real estate at Schroders. “From the position we are in, there are more opportunities than risks… The pendulum always tends to swing too far.”
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