UK Property News 14th September 2011

Around £4bn worth of predominantly large City offices are coming to the market in the final months of the year according to City sources, in a sell-off which eclipses even the pace of divestment at the height of the credit crunch. The disposal of mainly big ticket prime City offices could create “indigestion at the top of the market", given the relative scarcity of investors with large buying power. Leading city agents are vying for the remaining sales mandates behind the total 22 City offices and one office development which have – or are soon to – officially come on the market. The latest understood to be set to come to market is the 155,000 sq ft Senator House on 85 Queen Victoria Street, EC4V (pictured). Avestus Capital Partners, formerly Quinlan Private, is understood to have instructed Jones Lang LaSalle to sell the building, which is expected to fetch £80m. Quinlan Private bought the building for £100m from Resolution Property in 2007. Around 36,500 sq ft is understood to be available for lease at the building which is occupied by tenants including Moneygram and Business Monitor International. Elsewhere, the Woolgate Exchange office at 25 Basinghall Street (pictured, right), the London headquarters for German-nationalised WestLB, is set to come to market after the owner D2 Private did not refinance the securitised loan once it defaulted at maturity, as reported by CoStar News on August 5. CBRE, JLL and Knight Frank are vying for the mandate to sell the office block for £265m, after it was bought in 2006 for £325m. Yesterday, CoStar News revealed that the same three agents – CBRE, JLL and Knight Frank – are understood to be among those pitching to ADIA and Rockpoint on the potential sale of its jointly-owned 13-strong Devonshire Square Estate, which the partners bought near the top of the market for £410m. It is now expected to fetch around £300m to £320m. Ireland's National Asset Management Agency (NAMA) has also instructed CBRE to sell the 185,000 sq ft mixed-used office and retail property at 107 Cheapside with a guide price of £120m, in one of the first London assets NAMA has brought to market. Tenants include law firm Orrick, Herrington & Sutcille, recruiter Hays and Pizza Express. The annual rent roll for the office block is £7.5m, reflecting an initial yield of 5.5%. Elsewhere, Evans Randall has been linked to a £280m sale of the Drapers Garden at 12 Throgmorton Avenue. The building is let to BlackRock on a 25-year lease and produces an annual rental income of £13.5m. A sale would come only 13 months after Evans Randall completed the purchase from Canary Wharf Group and Exemplar Properties for £242.5m, reflecting a net initial yield of 5.2%. CB Richard Ellis has been reportedly mandated to sell the 292,490 sq ft office building. Evans Randall’s clients put£36.5m of equity into the purchase of Drapers Garden, with debt financed by a combination of a £170m five-year senior debt facility, provided by Eurohypo, and a £36m mezzanine loan by Pramerica. Last week it emerged that KanAm, the German real estate investor, is selling its £1bn City office portfolio to take advantage of the demand for big ticket prime assets. The four-strong portfolio comprises: One Exchange Square; Winchester House at 1 Great Winchester Street; 30 South Colondale; and 90 Holborn. Also for sale is the office development, Trinity Scheme, in Minories for around £100m and Salisbury House at 31 Finsbury Circus, which is being sold by DTZ for £47.5m. The total, so far, comes to around £2.2bn across 22 properties and one office development. However, City sources have told CoStar News that leading agents are understood to be preparing to bring to market several more ‘big ticket’ offices before the end of the year, bringing the total value of the offices up for sale to closer to the £4bn mark. A leading City source said: “There is a concern that the amount of stock coming to market will dissipate the investor appetite there is. But if the product is of high quality and priced well it will sell.” Another senior City source added: “A lot of these properties are very large lot sizes, and there will be indigestion in that part of the market because there aren’t that many investors that can buy £200m to £300m office buildings – so there will be indigestion at the top. If they were all £50m no-one would bat an eye-lid.” Paul Rivlin, co-founder of Palatium, said: “There is a lot of money around, but if there is too much stock, then there will be a self-balancing mechanism and prices will soften.” According to the IPD UK Quarterly Index, which tracks transaction activity within the circa £100bn databank, over the entire 2008 around £1.8bn of City offices were sold, followed by £1.9bn in 2009 and £719m in 2010. The glut of offices all up for sale at the same time is, in part, a co-incidence as the investor exits have been sparked by a combination of: refinancing difficulties after securitised debt has defaulted at maturity; and investors seeking to realise profits driven by a perception that City values are getting “very toppy” and that recovery, at least for now, is over. To support the latter argument, over the two years to June 2011, the last time CB Richard Ellis ran its Prime Monthly Index, prime central London office values rose by a staggering 42.8%, while rents grew 9% over the same period, based on the Monthly Index. In the last six months to the end of August, according to CBRE Monthly Index, there has been substantial slowdown in capital appreciation as well as moderation in rental growth. The significance for the lending markets needs also to be considered. Rivlin added: “The sale of a large building usually takes six to nine months. Where the value is underwater the servicer is likely to be in control of the process to sell the building. Even where debt is replaced by equity, the volumes are unlikely to result in any meaningful freeing up of debt lines.”