London Gherkin Co-Owner to Make Its Biggest Purchase Since 2007
The co-owner of the London tower known as the Gherkin says the time is right to buy more offices in the U.K. capital and is about to make its biggest acquisition since 2007.
Evans Randall Ltd. will pay as much as 250 million pounds ($391 million) in the next few weeks for offices in Drapers Gardens, Michael Evans, the closely held investment bank’s founder and chairman, said in an interview. The building in the City of London, the main financial district, is owned by Morgan Stanley, Canary Wharf Group Plc and Exemplar Properties and leased by BlackRock Inc.
Evans Randall could spend as much as 1.5 billion pounds in a year to buy more central London properties, as it seeks to profit from rising demand for modern space, Evans said. City of London office values have rebounded 19 percent in the past 10 months, following a two-year slump that wiped 45 percent off prices, according to Investment Property Databank Ltd. A shortage of new developments is pushing up rents as companies recruit more staff.
“Now is the time to buy the best quality assets if we can get our hands on them,” said Evans, 57. “The pound is very weak, interest rates are at a record low, rental demand is at an exceptional level -- the best at any time since 2006.”
BlackRock, the world’s biggest asset manager, has a 25-year lease on Drapers Gardens, a 270,000 square-foot (25,100 square- meter) building near the Bank of England. Deka Immobilien, the real estate unit of Frankfurt-based Dekabank Deutsche Girozentrale, pulled out of an agreement to buy the site for about 240 million pounds in June, according to a report last month in Property Week.
Evans Randall, which owns about 5 billion pounds of real estate assets in the U.K., the Netherlands, Belgium, Germany and Russia, is “‘working on a couple of others” in central London, the chairman said.
“London corrected more than some other markets and it has come back more quickly,” Evans said in his London office. “We will continue to focus more on London as we feel a lot more comfortable there and the tax environment is relatively benign.”
Evans Randall has already benefited from the market’s recovery. The company sold Milton Gate, the head office of law firm Addleshaw Goddard in the City, for about 164 million pounds earlier this year. That was about 37 million pounds more than it paid UBS AG for the building last year and gave Evans Randall’s investors a return of 60 percent before costs and fees, Evans said.
“Given the strength of the rental market in Mayfair, the City of London and Canary Wharf, we will see significant rental growth between now and 2014,” said Evans, who founded the bank in 1993. Some buildings in those districts are “under-rented,” meaning landlords could charge more than what current tenants pay, he said.
Evans Randall has bought more properties than it sold since the real estate slump started. Assuming the Drapers Gardens deal goes through, the bank will have invested almost 1 billion pounds since the beginning of 2008, compared with divestments of about 270 million pounds, he said.
Evans Randall bought Silver City, an office development in central Moscow, at the end of last year for about 180 million euros ($236 million), its first investment in the Russian capital.
Most of his investors are what Evans calls “ultra high-net -worth individuals,” and he has recently been approached by some sovereign wealth funds that are interested in the types of properties he buys. The majority of purchases are funded by five or six people, with four investing about 10 million pounds each. Evans declined to say how big his pool of investors is.
In April, Evans Randall branched out in a new direction by forming a venture with Northacre Plc, which develops luxury residential apartments in the U.K. capital. Evans Randall will raise equity and debt for projects that Northacre will design and develop.
The bank’s biggest purchase was 5 Canada Square in Canary Wharf, the European headquarters of Bank of America Corp., for 452 million pounds in July 2007. That was the same month that office prices in the City of London peaked. In February of that year, Evans Randall and IVG Immobilien AG paid Swiss Reinsurance Co. 630 million pounds for the pickle-shaped Gherkin tower.
“I don’t think anyone could realistically say we have come out of the downturn just as we were before,” he said. “We have managed to steer our way quite effectively through the turmoil.”
The bank now has to “deal with some of the assets in our portfolio,” Evans said, without elaborating.
Yields in London are returning to a level supporting the investment in the tower occupied by Swiss Re, Evans said.
“Over the next five years, we will see very substantial rental growth,” which would allow Evans Randall to sell the Gherkin for an attractive price, he said.
“We plan to invest over a five-year to seven-year period, but you have to expect you may have to be in there for longer,” he said.
The unwillingness of banks to lend on the same terms as they did before means Evans Randall and its investors have to put up about 30 percent of the cost, which does reduce returns, he said.
“We are making a strategic decision about which assets we will hold in the long term and those which we feel will be less good,” he said. “The best properties will always prove to be good investments as long as you are willing to hold out for the long term.”