Central London office buildings considered riskier bets are commanding higher prices as a shortage of properties available to lease sends rents soaring.
Office buildings where leases are close to expiring rose 19.6 percent in value in the year through June compared with a 14.9 percent gain for the longest-leased workspaces, according to data compiled by Investment Property Databank Ltd. Rents jumped 10.4 percent for properties with the shortest leases, compared with a 6.5 percent increase for properties being occupied the longest, the London-based research firm said.
Buying properties with leases nearing their end is risky because tenants can move out, leaving the landlord without income. Yet, the amount of central-London workspace for rent is at its lowest in seven years, Deloitte Real Estate said in May, reducing the risk of vacancy even as rents rise. Investors including Blackstone Group LP, the world’s biggest buyout firm, and London-based developer Workspace Group Plc have been buying short-lease buildings to take advantage of the trend.
The gains for short-leased office space shows “growing occupier demand for space in London is encouraging investors to look for assets that they can actively manage to generate higher income returns upon tenant expiry,” Phil Tily, a managing director at IPD, said in a e-mail.
The cost of leasing office space in central London has risen 8.5 percent in the 12 months through June, almost twice the increase a year earlier, IPD said.
Workspace bought Vestry Street Studios, a converted warehouse in London’s Shoreditch district, for 12.6 million pounds ($21 million) in May. One of the main attractions was that the leases were close to expiring, Chief Executive Officer Jamie Hopkins said in a June 4 call with analysts.
“We can get in there and quickly drive that rental model up,” Hopkins said on the call.
Blackstone bought the Adelphi Building near London’s Trafalgar Square last year for about 260 million pounds in part because a lease on half the building ended last summer. The New York-based buyout firm is spending about 30 million pounds refurbishing the property to attract tenants, occupancy services provider ISG Plc said in March.
The IPD data compared the performance of the top 25 percent of office properties by unexpired lease term with the same percentage where occupiers are closest to having the option of leaving.
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