Record London property values mask wobbles

LONDON • Two miles southeast of London’s Cheesegrater tower, which sold last month for a record price, there’s proof that all is not calm in the city’s property market.

At Canada Water, developer British Land Co, which also owned half of the skyscraper, has seen the value of land slashed by almost 11% as investors lose their appetite for riskier assets. That contrasts to the best properties, which continue to draw buyers.

“Prime London assets such as the Cheesegrater with long dated-income have traded at record prices whereas assets facing short-term expiries have suffered,” said Sue Munden, a real estate analyst with Bloomberg Intelligence. “Developments were marked down after Brexit as valuers expected investors to require a higher return given the economic uncertainty.”

London’s commercial property market is in flux with the value of office buildings in the main financial district rising even as rents fall. A wave of Asian buyers have been pouring into the UK capital on the back of the weaker pound following the Brexit vote, snapping up buildings with long leases that offer better returns than government bonds. That pushed yields for the best offices in the City of London down to 4% in the first-quarter, according to broker Savills plc, despite doubts about London’s economic prospects causing the value of older buildings to decline.

British Land has taken advantage of “an increasingly polarised market where demand has remained strong for prime assets and secure rental streams,” British Land CEO Chris Grigg said in a May 17 call with analysts. “There’s been less appetite for shorter-leased assets and greater risk 
is being priced into developments. This is particularly reflected in the fall at Canada Water.”

The landlord is planning to build offices, homes and stores on the 46-acre (18.6ha) site.

The city’s property market is facing other headwinds. The cost of leasing a home has fallen 3% in the 12 months through May after landlords rushed to buy rentals ahead of a rise in the stamp-duty tax, and sales volumes are declining as the residential market loses steam. Office values may fall 25% over the next 10 years as more people work remotely, reducing the demand for space, according to Fitch Ratings.

Incentives for tenants to lease office properties are increasing because of the rising vacancy rate, Rob Noel, the CEO at Land Securities Group plc, said in a telephone interview. He predicts the underlying rent tenants pay will fall further in 
the coming six months, declining to be more specific.

“The market has paused for breath,” the CEO said. “No one really knows how the negotiations” around Brexit are going to unfold.

The value of the London office portfolio of Land Securities, Britain’s largest real estate investment trust, fell 4.4% in the year through March.

For now, the impact of falling rents on office properties is mostly limited to empty buildings and those with leases that don’t have long to run. Great Portland Estates plc, which expects rents in its office portfolio to fall as much as 7.5% next year, last month reported a 4.9% drop in the value of its portfolio. That’s because the company owns more shorter-leased buildings because it plans to develop them in future, CEO Toby Courtauld said in an interview.

The uncertain outlook has yet to affect the value of the city’s modern towers. Hong Kong real estate investor CC Land Holdings paid £1.15 billion (RM6.4 billion) to buy the Leadenhall Building, as the Cheesegrater is formally known. The price was “unprecedented” for a skyscraper there on a sq ft basis, Morgan Stanley analyst Bart Gysens said in a March 1 note to 

That has encouraged other owners to weigh sales of stakes in trophy buildings, with some owners including Morgan Stanley’s real estate investing unit seeking a buyer for stakes in the tower known as The Walkie Talkie.

Many of the investors seeking the best properties are from China via Hong Kong, Courtauld said. There’s about £39.5 billion of capital targeting London commercial real estate, an increase of about £1 billion in the last six months, according to a Great Portland Estates presentation.

Asian investors “are not so bothered about prospective growth as we are”, he said. “If you have got billions tied up in risky assets in your home territory and political risk is elevated, then the prospect of a nice little building in London could be quite attractive whatever the rental growth in the next two years throws up.” — Bloomberg