Kuwait’s landmark offer for London’s Willis Building this week has given the prime City office market a lift, but is not the beginning of the end for Britain’s property downturn.
By agreeing to buy the building for £400 million pounds ($791.9 million) from British Land through its St. Martins Property investment arm, Kuwait is betting on the ability of London’s financial center to ride out the credit crunch.
[IJ Ed. Note – Willis began moving into its new London headquarters in February. Located at 51 Lime Street, across from Lloyd’s, it has become an instant City landmark (See IJ web site – https://www.insurancejournal.com/news/international/2008/05/14/89967.htm)].
“It’s set down an encouraging marker for the London City market,” said Martin Lay, director of City investments at property services firm DTZ. “It shows London is still an attractive place to invest for long-term investors.”
Like other cash-rich investors, sovereign wealth funds have been active buyers of assets from bank stocks to golf courses, Kuwait can afford to play a long-term game.
Though less expensive than the billion-dollar London offices that changed hands last year — including the iconic “Gherkin” building [Swiss Re’s London headquarters] and the Canary Wharf headquarters of Citigroup and HSBC — the Willis Building opposite Lloyd’s of London will easily be Britain’s biggest office deal since the credit crunch began to bite.
“It shows we have a liquid market in the City,” said Chris Northam, director of the City investment team at property services firm Jones Lang Lasalle. “More encouragingly, it shows there is a market for larger lot sizes because the largest deal since the credit crunch has been about 150 million pounds [$296.5 million].”
Several market sources said the Willis deal — which analysts say achieved a rental yield of 5.7 percent — has helped to cement a 5.5-5.75 percent yield range on prime City office assets.
That is in line with other City deals completed recently or in the pipeline and more than 100 basis points higher than a year ago, underlining the sharp extent to which valuations have already corrected.
But with rental growth sagging or expected to turn negative as financial job losses mount and the UK economy slows, signs are that the UK commercial property market will still have to get worse before its gets better.
ATYPICAL
In addition, the Norman Foster-designed Willis Building is in one of the plummiest of locations and let in its entirety on a 25-year lease to insurance and risk management firm Willis Group, making it a trophy asset and atypical of the wider market.
Buying and selling of physical property in the UK is running at around half the levels seen before the U.S. subprime crisis spilled over onto the global stage, shrinking the amount of debt funding available to property investors.
Banks are unlikely any time soon to open the debt floodgates again for real estate investors — not while they continue to lick their U.S. subprime wounds and repair their balance sheets, and still less while UK property values are falling and loan-to-value ratios are rising.
Analysts at Morgan Stanley, citing a study by De Montfort University, said on Friday that there was barely enough bank funding available to cover the estimated 34 billion pounds of UK property debt which needed to be refinanced this year.
As a result, cash-rich buyers largely interested solely in prime assets are likely to continue dominating the UK market for some time yet — not just state-backed Middle Eastern funds but German fund firms too.
That includes DekaBank, which market sources say is poised to buy financial software firm Fidessa’s new City headquarters at One Old Jewry for around 80 million pounds from Standard Life, having bought Bloomberg’s London offices from the same UK firm in April.
Both Standard Life and DekaBank declined to comment.
“There’s clearly buyers for prime assets but that’s about it,” Mat Oakley, head of commercial research at Savills, said.
(Reporting by William Kemble-Diaz; Editing by Rory Channing)
By William Kemble-Diaz
LONDON, May 23 (Reuters)
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