Record London skyscraper values mask ‘property wobbles’

Bloomberg

Two miles southeast of London’s Cheesegrater tower, which sold last month for a record price, there’s proof that all is not calm in the city’s property market.
At Canada Water, developer British Land Co., which also owned half of the skyscraper, has seen the value of land slashed by almost 11 percent as investors lose their appetite for riskier assets. That contrasts with the best properties, which continue to draw buyers.
“Prime London assets such as the Cheesegrater with long dated-income have traded at record prices whereas assets facing short-term expiries have suffered,” said Sue Munden, a real estate analyst with Bloomberg Intelligence. “Developments were marked down after Brexit as valuers expected investors to require a higher return given the economic uncertainty.”
London’s commercial property market is in flux with the value of office buildings in the main financial district rising even as rents fall. A wave of Asian buyers have been pouring into the UK capital on the back of the fall of the pound following the Brexit vote, snapping up buildings with long leases that offer better returns than government bonds. That pushed yields for the best offices in the City of London back down to 4 percent in the first quarter, according to broker Savills Plc, despite doubts about London’s future economic prospects causing the value of older buildings to decline.
The UK’s decision to leave the European Union has raised the prospect of the city losing jobs to rival European capitals, as businesses seek to maintain access to the world’s largest market. That increases the risk of a fall in rents and values as the uncertainty created by the two years it will take to negotiate the terms of the country’s exit causes companies including GAM Holding AG to
delay decisions about leasing new headquarters.
British Land has taken advantage of “an increasingly polarized market where demand has remained strong for prime assets and secure rental streams,” British Land Chief Executive Officer Chris Grigg said in a May 17 call with analysts. “There’s been less appetite for shorter-leased assets and greater risk is being priced into developments. This is particularly reflected in the fall at Canada Water.” The landlord is planning to build offices, homes and stores on the 46-acre (18.6 hectare) site.
Incentives for tenants to lease office properties are increasing because of the rising vacancy rate, Rob Noel, the chief executive officer at Land Securities Group Plc, said in a telephone interview. He predicts the underlying rent tenants pay will fall further in the coming six months, declining to be more specific.
“The market has paused for breath,” the CEO said. “No one really knows how the negotiations” around Brexit are going to unfold.
The value of the London office portfolio of Land Securities, Britain’s largest real estate investment
trust, fell 4.4 percent in the year through March.
For now, the impact of falling rents on office properties is mostly limited to empty buildings and those with leases that don’t have long to run. Great Portland Estates Plc, which expects rents in its office portfolio to fall as much as 7.5 percent next year, last month reported a 4.9 percent drop in the value of its portfolio.