Castleforge Partners’ chipping of a further £20m off its acquisition of Deutsche Bank’s London headquarters has underscored the widening gap between the expectations of sellers and buyers– one that could cause one of the worst ends to the year on record for the London market.
The sale of Winchester House, EC2, is nearing a close as property players predict sharp drops in asset values. The investor went under offer on the building in August at a price of £260m-£265m, down from the £275m initially marketed by China Investment Corporation and Invesco Real Estate. With the economy worsening over recent weeks, Castleforge is now understood to be under offer at a revised £240m, with the deal expected to complete before the end of the year.
Over recent months a tougher economic outlook has led to deals being put on ice, including a £720m sale by Norges Bank Investment Management of Bank of America’s UK headquarters. Recent interest rate rises have made funding more costly and the threat of recession has grown. A deal for the City of London Corporation’s 25-27 Store Street, WC1, is understood to have been scuppered by financing issues, with the property now withdrawn from sale.
Start your free trial today
Your trusted daily source of commercial real estate news and analysis. Register now for unlimited digital access throughout April.
Including:
Breaking news, interviews and market updates
Expert legal commentary, market trends and case law
Castleforge Partners’ chipping of a further £20m off its acquisition of Deutsche Bank’s London headquarters has underscored the widening gap between the expectations of sellers and buyers – one that could cause one of the worst ends to the year on record for the London market.
The sale of Winchester House, EC2, is nearing a close as property players predict sharp drops in asset values. The investor went under offer on the building in August at a price of £260m-£265m, down from the £275m initially marketed by China Investment Corporation and Invesco Real Estate. With the economy worsening over recent weeks, Castleforge is now understood to be under offer at a revised £240m, with the deal expected to complete before the end of the year.
Over recent months a tougher economic outlook has led to deals being put on ice, including a £720m sale by Norges Bank Investment Management of Bank of America’s UK headquarters. Recent interest rate rises have made funding more costly and the threat of recession has grown. A deal for the City of London Corporation’s 25-27 Store Street, WC1, is understood to have been scuppered by financing issues, with the property now withdrawn from sale.
Martin Lay, Cushman & Wakefield’s head of London offices capital markets, said challenges from earlier in the year “are expected to be laid bare” in Q4.
Less than £500m has transacted since the start of October, Lay said, meaning 2022 could mark “one of the lowest levels of activity on record in the final quarter and a far cry from the Q1 level of £5.4bn”.
He added: “There is, however, a substantial weight of capital that remains focused on the London market and with the current repricing in the market, which will feed through in year-end valuations, we expect activity levels to pick up markedly next year.”
Earlier this month, Schroder REIT chairman Alastair Hughes said average market values for UK real estate could fall by as much as a fifth as interest rates rise and investors demand higher yields from property.
Knight Frank’s head of London research, Shabab Qadar, said yields for London offices are now between 25 and 50 basis points higher than at the end of September, adding that it is “difficult to quantify” how many transactions could be pulled in the aftermath of interest rate rises.
The market has seen “much more interest from private buyers who are less sensitive to rises in interest rates,” Qadar said. “There remains considerable interest from APAC investors attracted to best-in-class buildings with long and secure income streams that provide a hedge against inflation.”
Bayes Business School has said UK property values may need to drop by 25-35% “to reach a new market balance”. Bayes senior research fellow Nicole Lux has since said there is evidence of prices being cut by as much as 40%.
Helical chief executive Gerald Kaye said this week the “pricing rediscovery is still ongoing” and the company will look to take advantage of cheap assets and “turn these tired office buildings into market-leading and highly sustainable new spaces”.
LondonMetric chief executive Andrew Jones said “with the benefit of hindsight, it is clear now that investor sentiment was too bullish in the first half of 2022 and valuation yields had compressed too far”.
“While there has been some recovery in REIT share prices since the lows seen at the end of September, current prices are still suggesting material outward yield movements in forthcoming valuations that better reflect current gilt rates,” Jones added. “The real estate market is currently paralysed by a distinct lack of liquidity and therefore valuations will take time to find their pricing equilibrium.”
Schroder REIT’s Hughes said: “To date we have indeed seen rapid yield expansion, with lower yielding assets such as prime South East industrial and logistics experiencing the sharpest declines. “The next phase of the correction will be more influenced by weaker GDP growth impacting occupier demand and therefore rental values, leading to a greater negative impact on secondary assets with poor fundamentals.”
To send feedback, e-mail chante.bohitige@eg.co.uk or tweet @bohitige or @EGPropertyNews
Image: Steve Cadman CC BY-NC-SA 2.0
