Commercial property values in London have mirrored those of Ireland, slumping quickly as recession took hold. The city had been a favoured location during the boom years for Irish investors, who ploughed billions into property there before the market crashed. However, now some positive news is emerging as realistic values draw buyers back into the market.
The Sunday Tribune can reveal that an Irish investor has spent more than €35m to acquire 62-74 Broadwick Street in Soho, in the west end of London. The purchase price for the building, which is close to Carnaby Street and a short walk from Oxford Circus and Tottenham Court Road tube stations, equates to a net initial yield of 7.9%. The yield is the rental income from the property as a percentage of the purchase price and highlights the extent to which property values have fallen. Two years ago yields of less than 4% were common for office and retail properties in prime areas of London.
Several Irish investors have also managed to offload properties in recent weeks. DTZ Sherry FitzGerald, for example, recently sold a building in St Alban's in central London on behalf of a private Irish investor. The property had been acquired by the Irish investor in 2001 and sold for £1.66m in recent weeks, a net initial yield of 6.35%. Farther afield, the same agent sold a retail building let to Laura Ashley on Cheltenham's high street to CBRE Investors for £2.875m on behalf of an Irish vendor.
Michele Jackson, an investment director at DTZ Sherry FitzGerald, said cash buyers in London are viewing the property acquisitions as a yield play as they believe yields will fall in the future, causing property values to rise. She said cash buyers had been priced out of the market in the boom years because of the availability of leveraged finance, but that they were now active for lots worth between £2m and £15m.
"There's a global factor to London. There will always be people interested in purchasing there. One big plus is that development and construction was stopped. The tap was turned off and valuers moved yields out quickly and that meant things could sell," she said.
"There's definitely interest in hearing what's going on. People are making enquiries; they have re-engaged because of where values have gone to," said Andrew Gunne, an investment director at CBRE, who says that German and Middle Eastern money is helping underpin values. However, he feels that while prime properties with long leases and "bullet-proof" tenants are stabilising in value, the secondary market is still declining and sellers are willing to accept heavily discounted prices.
Jackson also pointed out that for office buildings in the City of London, investors are able to buy buildings with vacant possession for less than what it would cost to buy the land and build them, attracting medium-term investors for whom any income they can generate in the meantime would be a bonus.
An example of how office values have fallen in the City is Garrard House which sold in recent weeks for £70.4m, three years after it was sold by Warren Private Clients, the Irish private equity group owned by Kevin Warren and Enda Connolly, for about £95m, netting their clients a substantial profit.
"On a risk-adjusted basis, we believe that London City offices will offer some of the best opportunities for investors as yields peak in the latter part of the year," new DTZ Research found.
Jackson reports significant Irish interest in a mixed-use retail building in Clapham, which is for sale through DTZ with an asking price of £5m. Best bids are due this week on the building, where tenants include Tesco and the Metropolitan Police. Jackson said food stores have held up in value better than other sectors because the income stream is secure and there's often an agreed fixed uplift in the rent after a certain number of years.
Jackson admits though that it's still early days for the investment market in London because rents continue to drop.
"It's too soon to call what will happen," a senior British investment agent agrees. "London has risen a little bit but there's a high risk that it will come back down again."
Lots of under £10m, he said, have significant private investor interest because the yield is higher than the return from cash on deposits. However, he believes those investors who are bidding up prices have yet to take into effect capital erosion, but will soon do so.
"Rents are falling and some tenants will go bust. Investors are not factoring it in at present," he said, adding there is a big imbalance at present between the investment market and the rental market.
That said, he has seen significant overseas interest in properties from investors looking to take advantage of the sterling-euro exchange rate.
Irish investors own significant parts of Bond Street, which is regarded as Europe's most upscale shopping street, and had been regarded as relatively recession proof as luxury retailers are willing to run their shops as loss-leaders to give their brands more visibility. Yields are down on the street to between 4% and 4.5%, compared to 3% or 3.5% at the peak of the market, although there is still interest in purchasing property there. The DKNY building, which is Irish-owned, is understood to have attracted at least two large off-market bids, even though it is not for sale. The bids were rejected.
The British expert has yet to see significant Irish-owned buildings being quietly put on the market but believes it's a matter of time.
"A lot of them were highly leveraged and will have to sell," he said, adding that one office building bought by an Irish investor for about £200m at the peak of the market would now be valued by him at about £60m.
Despite the rental market struggles, there was a boost for private clients of Bank of Ireland last week when three tenants signed up to the 125 Old Broad Street office scheme, which is 25% owned by them, their stake having been acquired for €55.8m in 2006.
Developed on the site of the former London stock exchange, the backers of the development have signed up Kuwait-based Gatehouse Bank, commodity fund investment manager AMCO and serviced office provider Landmark Business Centres. The deal means the building is now nearly 70% occupied.
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