We recently submitted our planning application for 68-71 Newman Street.
We recently submitted our planning application for 68-71 Newman Street.
We recently submitted our planning application for 68-71 Newman Street.
We recently submitted our planning application for 68-71 Newman Street.
Insights | 08.03.24
Written by Theo Utton-Gaunt
Where is the risk adjusted return in London workplace capital markets right now?
It would stand to reason that value add / development within the office sector would be the no brainier investment decision and it is in specific London neighbourhoods.
An investment product is a commitment of capital that yields a return. This is how real estate can be perceived as a diversified offering and for many reasons, too many to list here… those investors that choose real estate as a class are well versed in their reasoning.
Diversification is often too loosely the driver in a clouded marketplace of choice. Buy a bit of everything and some will perform when do less well... spread the risk profile across core – value add.
But in the trenches of real estate, specifically offices and those located within Central London, where to stock select investments has never been more challenging. In a landscape of wellness and sustainability, the office market has irrevocably changed and for the better.
This realisation was kicked into overdrive with the population being forced to WFH during COVID. The data now supports what we all expected, that humans are social animals and thrive in collaborative environments, even better when the environment is a nicer place to be than our home (let’s leave the heating out of it). Those businesses that recognise this and are waging the war on talent, are driving occupational demand in Central London, which is the highest it has been on record. With these facts and that it is human nature to form social collaborative interactions, the office is far from dead - the bifurcation of best-in-class offerings has now been proven.
This is in part due to the fact that approximately eighty percent of buildings are presently unable to meet MEES regulations unless certain regulatory dates slip. The Government approach to this has to be adjusted, as although landlords have had to focus on their assets in a more meaningful way to recognise sustainability and performance, most won't get there in time.
It would stand to reason that value add / development within the office sector would be the no-brainier investment decision and it is in specific London neighbourhoods. But with investment volumes at the lowest levels since 1999, uncertainty is still prevalent and those investors with exposure to US markets are issuing a watching brief. With some settling of inflation, debt and construction costs that only leaves business pressures, GDP and politics both global and domestic to consider! The variables are narrowing to enable defensible underwriting even on a conservative basis. London has an investor base that is truly worldwide domiciled (more so than any other city) and for them with the market headwinds described, the risk-adjusted investment opportunity at this moment has to be Core+.
With the expectation that most of the aforementioned risk items will settle in due course, in the interim, there is huge value to be had on Core+ assets. This is therefore the risk-adjusted position presently. Provided, the base real estate is good enough and the location can be supported in both the occupational and capital markets. This approach does require a period of pricing discovery for most assets and for valuation practices to translate this. The market needs to present evidence, or else real estate will increase its lag on more liquid transactional investment marketplaces.
The hurdle is stock, or lack thereof, which is of sufficient quality. With over eighty percent of real estate financing due for repayment before 2027 and the average over the next 4 years being £30 Billion (£13 Billion in 2023), it stands to reason that stock levels should be replenished.
The question remains: with the greatest levels of global liquidity and allocation to real estate as a class, will the demand be sufficient to hold pricing and at what discount to pre COVID levels? If institutional investors can stem redemptions over H1 of this year and some transactions are evidenced, with wider macroeconomic improvements, pricing will continue to find its level on balance against the risk-free rate.
This should be the targeted buying opportunity of a career.
