Tower sales take London commercial property from gloom to boom
London’s commercial property market has gone from gloom to boom in just 18 months – and its skyline is the biggest beneficiary.
A flurry of big-ticket transactions in the past couple of weeks has illustrated investors’ dealmaking appetite, with existing towers changing hands for record prices and new skyscrapers set to light up the capital’s horizon.
Brazilian billionaire Joseph Safra paid £726m for Square Mile landmark the Gherkin on Monday, eclipsing the £600m the building sold for as the market steamed ahead in 2006.
Meanwhile Canary Wharf’s HSBC Tower is under offer for £1.1bn, topping its previous record of £1.09bn – a price tag that made it Britain’s most expensive building in 2007.
The tower’s aspiring buyer, the Qatar Investment Authority, teamed up with Canadian fund manager Brookfield to make an audacious £2.2bn offer for Canary Wharf’s parent company Songbird, although this was rejected last week. Brookfield has also bought developer Great Portland Estates’ 12.5 per cent share in the 100 Bishopsgate project, and plans to start building the new tower early next year.
Meanwhile the neighbouring City site, the long-stalled Pinnacle skyscraper, is likely to finally see activity in 2015 as veteran developer Sir Stuart Lipton nears a deal with current owners Arab Investments and Sedco to inject new cash into the scheme.
The turnround has come very quickly, making it the sharpest-ever property cycle upswing.
“The last property cycle took five or six years to get to this level,” says Don Jordison, managing director of Threadneedle Property Investments. “This time it has taken 18 months. I’ve never seen such a sweet spot.”
International institutions, wealthy individuals and funds are all engaged in a desperate search for yield, and real estate is one of the few sectors to offer reasonable returns.
“We have never seen so much equity trying to get into the London real estate market,” says Simon Barrowcliff, an executive director at property advisers CBRE.
As the most prominent of a city’s buildings, skyscrapers have a particular appeal to deep-pocketed investors. Although their steep prices mean returns are generally lower than those of less glamorous property assets such as industrial or retail, their often iconic status makes them trophies for buyers whose main concern is to find a safe store for their cash.
However, the recovery has also filtered down to other areas of the market. Around the capital, the amount of office space under construction is at a 10-year high, Deloitte revealed this week.
At 3.5 per cent West End office yields are near 2007 levels, with City yields at 4.4 per cent, according to figures from data service MSCI/IPD.
London’s famous skyscrapers have experienced their share of public relations setbacks due to freak accidents and design flaws
“London’s soaring office market has been the main beneficiary of the UK’s economic recovery – but few could have predicted the sorts of deals currently being struck or the yield compression we’re now seeing,” says Phil Tily, executive director of MSCI/IPD.
But Matt Hodgkins, head of European listed real estate at Australian institutional investor AMP Capital, says investors are not motivated simply by returns.
“For many investors, the preservation of capital is more important than the return on capital,” he says. “The diversity of buyers, cheap financing and real estate’s proven cycle resilience is driving yields lower at a time when fundamentals are moving dramatically higher – a goldilocks scenario.”
Mr Jordison at Threadneedle Property Investments characterises the market as “exuberant but not yet irrational”.
However, risk-taking is growing as borrowers look to compete with the dominant equity-rich buyers.
A survey of borrowing requests by adviser Laxfield Capital found that applications for debt have risen by 27 per cent in the past six months, with particular growth in big-ticket deals.
Institutional investors are beginning to compete with the banks as lenders, according to Emma Heupfl, a Laxfield co-founder.
“UK institutions have in the past not moved easily between equity and debt, but a lot of international institutions from the US and Asia have no problem with this,” she says.
The listed sector is also benefiting from rampant investor demand. Real estate investment trusts came out of last month’s stock market wobble looking good, outperforming by around 5 per cent.
“They’re substantially rehabilitated in investors’ minds,” says Michael Burt, an analyst at Liberum. “The sector has come full circle.”
The main question is how long the upswing can last. This, analysts say, is at heart a macroeconomic prediction.
“The big choice now is the extremes of the cycle – a perma-bubble or a tailspin into Japan-style deflation,” says Mike Prew, a managing director at Jefferies.
Agents, analysts and investors anticipate that the coming weeks will see a rush of activity as purchasers hurry to spend before the end of the year. But most then expect a slackening-off in the run-up to the general election next May.
“People are now starting to think about the next phase of the cycle,” says Caroline Simmons, an analyst at UBS Wealth Management. “The election and possibly an EU membership referendum bring uncertainty, and may start to play on investors’ minds.”
They will be analysing whether any slowdown is just a breather for the London market, or if it triggers wider jitters.
Danger up above: difficult moments for London’s skyscrapers
● In early November, part of a large steel bolt the size of an arm broke off the Cheesegrater skyscraper at 122 Leadenhall Street and fell to the ground. A second bolt also broke off on the 19th floor but was contained in the building. No one was injured.
● In September 2013, the 37-storey Walkie-Talkie “fryscaper” on 20 Fenchurch Street, melted panels and a wing mirror of a Jaguar XJ saloon when blinding rays from the sun reflected on the luxury car parked underneath it. No one was injured, but the incident prompted the nickname Walkie-Scorchie and jokers tried to fry eggs on the sidewalk beneath it.
● In April 2005, the 40-storey Gherkin became the focus of a major safety alert when one of its giant triangular glass windows plunged 400 feet to the ground and smashed. The area was empty at the time.
● In June 2014, about 900 people had to be evacuated from the Shard over a fire alert following reports of smoke coming from the basement of London’s tallest building. The London Fire Brigade said there was no evidence of a fire.
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