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Big London office buildings are proving almost impossible to sell because of high interest rates and investor jitters over hybrid labor thwarting efforts to jump-start deal-making.
Only a handful of office buildings in London sold for more than £100m in the first half of the year, according to data from the CoStar group. The City of London has not seen any sales of this size, a stark contrast to when the biggest deals in that market once topped £1 billion.
GPE and Derwent are among several large office landlords that have tried to sell more expensive buildings, but those attempts have mostly ended or been quietly canceled after potential prices fell short of expectations.
A sharp rise in interest rates over the past two years has caused sharp revaluations across commercial real estate, but especially office buildings, where investors also face uncertainty about the strength of demand from companies after hybrid work became popular after the pandemic.
Investors who have been buying central London offices since 2014 would likely have to sell at a loss today, according to the MSCI index. The MSCI index shows that at current prices, 64 per cent of London offices would sell for less than they were bought for.
At the beginning of this year, real estate agents predicted that sales would pick up thanks to a wave of refinancing deadlines.
However, there have been relatively few such transactions due to lower overall debt levels compared to the 2009 housing downturn, stabilization of interest rates, albeit at higher levels, and flexibility on the part of lenders.
Office owners, now trying to revive the market for larger transactions from a position of strength, are trying to do just that. Recent listings show that landlords are still testing prices and buyer interest.
Julian Sandbach, director of central London office markets at property advisory group JLL, said: “Landlords know that liquidity in excess of £150m is really, really difficult. There will be a number of things that are not suitable for the current market conditions.”
Just £2.5bn of central London office space has changed hands this year, down 28 per cent from last year in an already depressed market, the brokerage said.
FTSE 250 office owner Derwent has sold 90 Whitfield Street for around £120m, while rival GPE has attempted to sell 1 Newman Street for more than £200m. Both buildings received offers that fell short of the landlord’s expectations, and sales were put on hold, according to people familiar with the transactions.
“There is little evidence of forced sales today. There is increasing evidence of motivated selling,” said Toby Courtauld, chief executive of GPE, which also recently raised a £350m war chest for buyout opportunities.
Both Derwent and GPE routinely sell established properties to finance new acquisitions and development. The companies declined to comment on specific transactions.
Cut-price offers for two larger buildings, 20 Old Bailey in the City and 5 Churchill Place in Canary Wharf, have also been withdrawn in recent months.
Expectations that the Bank of England will start cutting interest rates in the summer have also strengthened the determination of some sellers not to part with buildings at any cost.
“I think the resolve of sellers is starting to firm up a bit because the worst is probably behind us,” said Richard Garside, head of central London at Savills.
At the same time, the high cost of debt is still making it difficult for most buyers to find financially viable deals. Many active buyers in today’s market are extremely wealthy families who typically buy with little debt, but are limited in the size of the building they can swallow.
While predictions that a flood of distressed sales would hit the market turned out to be wrong, there were some.
Herbal House in Clerkenwell, once the printing house of the Daily Mirror, has been placed in the hands of receivers who have agreed a sale in recent weeks for £105m, just above the £102m of debt secured by the building. 51 Eastcheap, a City building leased to WeWork and once owned by the co-working group’s investment arm, was also placed on the block after receivers were appointed in late March.