London Office Drought Sparks Hunt for 1980s Relics
Modern office towers with nicknames like the Walkie Talkie and the Cheesegrater are being completed high above the City of London, giving the impression there’s plenty of room for a resurgent financial industry. Closer to the ground, developers are preparing for a shortage of space.
Investors including Blackstone Group LP (BX), the world’s biggest buyout firm, Brookfield Office Properties Inc. (BPO) and Land Securities Group Plc (LAND), the U.K.’s largest real estate investment trust, are looking for well-worn office buildings from the 1980s and early 1990s to buy and refurbish as rising demand and a shortage of prime space in the City lifts prices and rents.
“If the bricks and bones of buildings are of sufficient quality, we reposition the product and benefit from the supply and demand story,” James Lock, a managing director at Blackstone’s real estate unit, said by phone.
The 2008 credit crisis caused development to stall in the City, leaving few options for companies seeking large offices in the center of the financial district. Only six developments have as much as 100,000 square feet (9,300 square meters) available to occupy over the next 12 months, according to Chris Vydra, an executive director at property broker CBRE Group Inc. (CBG) Space sought in the area rose 15 percent in the six months through November, said Knight Frank LLP, another broker.
Developers that started office towers in 2010 have leased most of the space before the buildings are completed. The 20 Fenchurch Street tower, a Land Securities and Canary Wharf Group (SBD) project nicknamed the Walkie Talkie, is 64 percent leased, with tenants including RSA Insurance Group Plc and units of Liberty Mutual Insurance Co., and deals for another 23 percent awaiting legal approval, according to the companies. British Land Co. and Oxford Properties Group Inc. said they have agreements for more than half of the Leadenhall Building, known as the Cheesegrater, ahead of completion in the middle of this year.
Investors that upgrade existing properties and retain the basic shape can put offices on the market about six months faster than they could by constructing a new building, consulting firm EC Harris LP said, using the example of a 200,000 square-foot project. A property of that size would be large enough for about 1,850 workers, Savills Plc estimated.
Helical Bar Plc (HLCL), a London-based developer, and Crosstree Real Estate Partners LLP bought office properties at 207 Old Street on the fringe of the City two years ago. Refurbishment began in January after the investors determined that they wouldn’t have to demolish the buildings and start from scratch. Helical Bar expects to make a profit of at least 20 million pounds ($33 million) from its 33 percent stake in the 180 million-pound project, development director Gerald Kaye said in an interview.
Renovating “is generally much cheaper in terms of money and time, and you don’t have to have a huge debate with the planners,” Kaye said. “If you can turn around a refurbishment quickly, then you’re well placed to capitalize.”
At 20 Old Bailey, across the street from the courthouse where writer Oscar Wilde was tried for gross indecency in 1895, Blackstone plans “a complete refurbishment of the space, taking it back to the frame, and the introduction of a best-in-class building,” Lock said.
Leadenhall Court, a seven-floor structure built in 1988 and bought by Brookfield in 2012, will either be renovated or redeveloped -- demolished and replaced by a new structure built on the same site -- by the New York-based company when the lease expires, spokeswoman Carlin Fier said. The property is close to the Lloyd’s of London building, the center of the city’s insurance industry, and is leased to Royal & Sun Alliance Insurance Plc.
The “place to hunt for ourselves and others is that shorter-term income bracket where we can asset manage or refurbish and redevelop buildings,” Martin Jepson, president and chief operating officer at Brookfield’s European unit, said in an interview. “That’s the strategy people will naturally look for when there’s low supply.”
Viewings by potential tenants at 99 Bishopsgate, redeveloped in 1995, doubled after Brookfield spent 5 million pounds upgrading the lobby, terraces and common areas in October, Jepson said. The office building near Liverpool Street railway station has 60,000 square feet of vacant space.
“I’ll be disappointed if we don’t see this leased up in the early part of the year,” he said.
Speed is the key. Investors who now start refurbishing or constructing new buildings run the risk of greater competition arriving on the market before the work is finished.
“People have to get in and out and do refurbs before anyone sees the potential for oversupply, which will come,” Tom Elliott, head of City investment at Land Securities, said in an interview. The company, the U.K.’s largest real estate investment trust, is also looking for buildings that can be upgraded, he said.
The amount of new space completed in 2012 was the lowest in more than 25 years, Deloitte Real Estate said in a May report. About 1 million square feet was delivered in 2013, twice the level of a year earlier, according to CBRE.
Occupiers signed leases for 5.4 million square feet of workspace in the City of London in 2013, about 27 percent more than a year earlier, broker DTZ said in a report last month.
Competition for older buildings to renovate is pushing up selling prices. Blackstone agreed to pay more than 90 million pounds to Mitsui Fudosan Co., Japan’s largest developer, for 20 Old Bailey, according to two people with knowledge of the deal who asked not to be named because the details are private. That’s about 10 million pounds more than the offer price, one of the people said. Blackstone and Mitsui Fudosan declined to comment on the price.
Savills Plc (SVS) today offered the leasehold to Royal Mint Court, an office complex developed in the 1980s on a 5-acre (2-hectare) site opposite the Tower of London, for sale for more than 30 million pounds, the broker said in a statement. The property is linked to the Equinox Eclipse 2006-1 CMBS.
Henderson Group Plc (HGG), another London-based developer and property investor, is becoming more selective in choosing refurbishment opportunities because of the increased competition in the market, director of property Nick Deacon said by e-mail.
Rising demand spurred by an improving U.K. economy will probably lead to rent increases of at least 10 percent a year in the district through 2016, Goldman Sachs Group Inc. real estate analysts including Julian Livingstone-Booth said in a note to clients last month.
The prospect of higher rents is attracting buyers, especially from abroad, for prime office space in the City. Investors spent 12.2 billion pounds on offices in 2013 and 77 percent that came from overseas, according to Savills. That’s pushing up prices and increasing the reward for developers that refurbish buildings and secure tenants. Yields for prime properties in the City fell to 4.75 percent from 5.25 percent in the year through September, indicating an increase in values, Knight Frank said.
“Demand from investors for London stock appears relentless,” Henderson’s Deacon said. “It appears we have a new potential buyer enter the market every week.”
GIC Pte of Singapore in December bought Blackstone’s 50 percent stake in London’s Broadgate office complex, most of which was constructed in the 1980s. The sovereign wealth fund had agreed to pay more than 1.7 billion pounds for the stake, two people with knowledge of the transaction said in August. Some of the older buildings will be refurbished, including 100 Liverpool Street, according to the Singapore wealth fund and British Land Co. Plc (BLND), which owns the other 50 percent of the project.
Companies that can’t get out of their leases until 2017 are already in talks with Blackstone about new space, Lock said. “The underlying business confidence, combined with the fundamental reality that supply is tight and competition is increasing, means occupiers have to be proactive earlier.”