London office values: further to fall?

Is it time to call the bottom for London’s falling office values? Agency old hand John Slade thinks maybe so. “Everyone’s asking: is the London office market at its bottom at the moment?” said Slade, sitting down with EG at MIPIM, which he attended as the chair of Kroll’s international real estate advisory group. “If you can buy well-let buildings with long leases, which are ESG-orientated and BREEAM Excellent, at yields now in the City which may be at 5%, compared with 3.75% or 4% a year ago, I think it’s probably time to fill your boots. “I think you’ll look back in a year, 18 months, and think ‘I should have been in the market then’. The last time we had this was 2008, 2009. In 2008, you could still buy these buildings at 6.5%, 7%. By the end of 2009, they had come in to 5%. When they come in, they come in quickly.” Not all of Slade’s peers share that gung-ho attitude – neither those on la Croisette last week nor those back in the City. For many in Cannes, even the sun, sea and optimism that usually characterise MIPIM could not lift the gloom that has loomed over the investment market. They pointed to ongoing problems including cautious sentiment around the outlook for offices and rising debt costs that could now be exacerbated by a fresh banking crisis, all of which are leading to investment deals flatlining with many investors biding their time for the right asset at the right price. Taking pain quickly Few were as keen as Slade to call the bottom just yet. “If we could all just buy the dip when the dip happens, we’d all be multimillionaires,” said Bradley Baker, chief executive of Co-Re. “It’s about what stacks up. In the next six months I’m sure we will see major players making major plays, but it’s going to be product-driven, rather than ‘right, this is the dip, let’s buy’.” A lack of transactions is making it tougher for dealmakers to get a handle on where values lie. But recent results from public REITs give some colour – CLS, for example, said earlier this month that the book value of its London offices was down by 10%. Agents talk of dragged-out deals having their price tags chipped away by savvy buyers, and earlier this year the team at index group MSCI said London office prices would most likely have to fall by almost 30% this year to get dealmaking back to “normal levels”. Some see that kind of fall already happening – and are anticipating more to come. “I think the clearing prices are 20%, 25%, 30% off for prime assets, and that probably is really helpful,” said Duncan Owen, former head of real estate at Schroders and now chief executive of Immobel Capital Partners, in an on-stage interview with EG at MIPIM. “We have taken pain really quickly,” Owen said of falling values. “I think that’s good for the future because people can afford to then invest in these assets and invest capital into them to improve them. I think the issue is – and this is not an attack on the valuation sector at all – the valuations have tended to lag that little bit still. I know they look for more evidence and they must say one isolated transaction cannot reset the whole market. But the fact of the matter is, you cannot sell an asset at 5% or 10% off what the valuation was last year. I think some of the net asset valuations, some of those things on paper, need to be recorded with greater correction.” Savills chief executive Mark Ridley described London offices as “the fastest-repricing market that I can think of”, adding that international investors have had their interest piqued by the rapid correction. “I get asked more questions about London than I do about any other market for cross-border activity, so I see investors’ interest,” he said – at least for prime properties. “Secondary offices are a different kettle of fish,” Ridley added. “They have to be repositioned; grade-B space has got to look at capital expenditure to bring it up to scratch. We really do need to see that improvement occurring.” The price discovery process for those less-loved assets is ongoing, said Savills chief financial officer Simon Shaw. “There isn’t yet price transparency in the secondary part of the market, which we would expect to start to see through the back end of this year,” he said. “There is a fair amount of value-add and opportunistic money raised over the past 18 months for exactly this type of opportunity.” Reactive and emotional Tomáš Jurdák, head of real estate at MiddleCap, told EG that he sees a “herd mentality” among real estate investors akin to the stock market and equity investors, with many players delaying investing and developing until the market becomes clear – which he added could be months from now. That cautious approach is “destroying the natural cycle because it is reactive and emotional”, Jurdák said. “As a developer, I feel this is an opportunity. Everyone is postponing, so supply to the market will be so limited – I might be the only building coming to the market in 2026.” For some agents, keen to see deal flow pick back up, calling the bottom of the market is not only “very hard” but is perhaps even a moot point. “It could have been a week ago or it might be today,” said Rob Jackson, head of City capital markets at CBRE. “Some investors in London buy for generations, so does it matter if you get the absolute lowest point? “Does it matter that you call the bottom or that you buy in the right period? It’s all about the [longer-term] period – or at least it should be.” To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews See which agents are doing the most deals in the London submarkets with our On-Demand Rankings >> Photo © Robert Stump/Unsplash