The BT headquarters in the City of London is not a risk-free investment: with the telecoms provider planning to move out within three years, any buyer will need to refurbish the building and find a new tenant just as the UK is leaving the EU.
Yet when a first round of the auction took place on the 1980s building at 81 Newgate Street last month, more than 10 bidders of varying nationalities submitted offers for the site. Some were well above the £200m asking price, according to people briefed on the sale. BT and broker Cushman & Wakefield, which is handling the sale of the building, declined to comment.
The high level of interest in the site close to St Paul’s Cathedral is the latest sign of strong demand for London office property, despite the unknowns of Brexit and predictions of a slump after the UK voted to leave the EU.
About £12bn of central London office real estate changed hands in the first three quarters of this year, according to the property agents CBRE — in line with last year’s sum, which was the highest in five years.
“The investment market has been remarkably resilient since the [Brexit] vote. Investors who are here for the long term are looking through Brexit and out the other side,” said James Beckham, managing director at CBRE.
Take-up of new offices for the year is also on track for a five-year record, according to data from Knight Frank, with deals agreed on 10.8m sq ft of new space in the first nine months of the year, including by Facebook, Deutsche Bank and the Chinese government.
“Following the shock that the market took in the immediate aftermath of the [Brexit] vote we have been consistently surprised by the robustness of demand,” said William Beardmore-Gray, global head of occupier services at Knight Frank. “Occupiers and businesses, rightly or wrongly, seem to have priced in a ‘soft’ Brexit.”
Underpinning demand is a comparative reluctance among developers to build speculatively, or without a tenant already in place, said Nick Braybrook, a partner at Knight Frank.
That dates back as far as the financial crisis, but was compounded by the Brexit vote. Some 1.2m sq ft are due to be constructed on a speculative basis in 2019, 17 per cent below the long-term average, said Knight Frank.
Lower levels of construction have kept supply tight and vacancy rates below the 20-year average. Meanwhile, fast-growing flexible office providers such as WeWork have been taking up existing space as big companies move into new buildings, said Mike Prew, analyst at Jefferies.
“They have been absorbing space that would normally come to the market and push rents down,” Mr Prew said. The average “prime” rent for City of London offices stood at just under £80 per sq ft at the end of the third quarter, the highest on record, according to Savills.
Booming office demand: largest London transactions in 2018
£1.16bn (purchaser country: Korea)
£1bn (Hong Kong)
The Adelphi Building
Verde, 10 Bressenden Place
15 Canada Square
£400m (Hong Kong)
20 Old Bailey
60 London, Holborn Viaduct
Regent Quarter, King’s Cross
£300m (Hong Kong)
Investors from South Korea, Hong Kong, Singapore and Spain have all bought London office properties this year, with tenants in place, for prices of £500m or more. But riskier “repositioning” opportunities, as agents call sites needing redevelopment, are also popular with investors: a site on Lavington Street south of the Thames attracted more than 20 bids.
The Financial Times’ headquarters on the south bank of the Thames, also seen as a redevelopment opportunity, was sold by Pearson last month to the fund manager M&G for £115m — roughly 28 per cent above the asking price. The FT moves to the City of London next year.
The vigour of the London office market contrasts with other types of commercial property, notably retail, where values are falling and the market for shopping centres is at its slowest in more than two decades. The strong office market has confounded expectations at the time of the Brexit vote, when analysts predicted falls in London office values of as much as 20 per cent.
Not all investors are equally enthusiastic, however. One senior European property investor, who asked not to be named, cited a warning from the governor of the Bank of England that in the most extreme Brexit no-deal scenario, the pound could shed 25 per cent of its value.
Mark Carney said that in the same scenario, commercial property prices would fall 48 per cent.
“At that level of risk, it is like betting on red or black in a casino,” the investor said, adding that he was ready to complete two real estate purchases if a Brexit deal was put in place.
Similar uncertainties have led some developers to continue delaying new projects. Land Securities, the UK’s largest listed property company by asset value, said last month it had £3bn of new development projects ready to start after the UK leaves the EU if a “good” Brexit deal is reached.
Mr Beardmore-Gray said that “as we approach the [Brexit] endgame, people will avoid making a decision if they can”. But he added: “Unless one sees a massive negative event which turns the financial markets upside down, then people have got to keep moving.”