“We had a conviction that tenants would want to upgrade their space,” said Martin Towns, deputy global head of M&G Real Estate. Some out of favour older offices would have to be converted into other uses such as housing, or demolished, he said.
The Covid-19 pandemic pummelled global commercial property markets by driving up inflation and financing costs, while causing a shift to hybrid and remote work that meant most tenants wanted less but higher quality office space.
The cost of building prime offices in London has risen to more than £500ft² (R11,423) from less than £400ft² (R9,143) before the pandemic, construction consultancy Turner & Townsend said. Half of that increase was down to inflation, with the rest down to better amenities and green credentials, it said.
While some properties, such as older out of town offices, remain near-impossible to sell, the British market is improving for prime offices, rental housing and logistics, investors said.
A global retreat in inflation and interest rates is starting to ease financing costs and improve properties’ appeal relative to other investments.
“The mood music has definitely changed in the UK,” said James Seppala, head of real estate for Europe at Blackstone, the world’s largest commercial property investor.
“There is more robust activity and more participants are coming off the sidelines.”
Deal volumes across UK commercial property — which spans offices, retail, logistics and rental housing — have rebounded 26% annually in the second quarter, according to MSCI data, compared with 45% and 22% declines in France and Germany, respectively.
After plummeting in 2022 and 2023, UK commercial prices are also expected to rise 2% this year, even as they continue to fall in the eurozone and the US, and to outperform other Western markets over the next four years, Capital Economics said.
Office sale volumes are still down 21% so far this year, MSCI said, lagging the rest of the UK market. There were also no deals of more than £100m (R2.28bn) in the first half of this year, the first such six-month period since 1999, according to CoStar.
Overall office vacancy rates also keep rising, hitting 10.1% in London in the third quarter — the highest for more than 20 years, CoStar said. It is nearly 17% in the city’s eastern Docklands area, where Canary Wharf Group is considering converting some empty space into hotels.
Property investors and agents say would-be sellers are coming about to accepting today’s lower prices. Some may be forced to sell by high refinancing costs, according to bankers, but foreign buyers could be willing to swoop.
“Many investors are saying the UK is a good investment location because of the stable political situation and they are wanting to get in before prices start to rise,” said Fiona Voon, head of real estate capital markets UK at BNP Paribas.
Among domestic investors, Schroders plans to spend hundreds of millions of pounds on British commercial properties this year and next, likely including prime offices. The market was attracting increased interest from investors in the Middle East, Asia and Australia, the asset manager said. It said it would soon begin talking to potential tenants about pre-letting its own planned 63-storey City tower at 55 Bishopsgate.
“Offices, 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’re in, it’s more of an opportunity than a risk. The pendulum always tends to swing too far.”
Reuters