Shankul Bhandare
Large London office buildings are becoming nearly impossible to sell due to high interest rates and investor concerns over hybrid working, which are hindering dealmaking efforts.
According to property data group CoStar, only a few office buildings in London have sold for more than £100 million in the first half of the year. Notably, the City of London has seen no sales of this magnitude, a stark contrast to previous years when the largest deals exceeded £1 billion.
Major office landlords like GPE and Derwent have attempted to sell high-value buildings, but most of these efforts have failed or been quietly abandoned as potential offers fell short of expectations.
The sharp increase in interest rates over the past two years has led to a significant repricing in commercial real estate, especially for office buildings. Investors are also uncertain about the demand from companies due to the rise of hybrid working post-pandemic.
An MSCI index indicates that investors who bought central London offices since 2014 would likely incur a loss if they sold today. The index shows that at current prices, 64% of London offices would sell for less than their purchase price.
Earlier this year, property agents expected sales to increase due to upcoming refinancing deadlines. However, few transactions have occurred, owing to lower overall leverage levels compared to the 2009 property downturn, stabilized interest rates at higher levels, and lender flexibility.
Office owners trying to revive the market for larger transactions are facing difficulties. Recent listings indicate that landlords are still exploring pricing and buyer interest.
Julian Sandbach, head of central London office markets at property advisory group JLL, said, “Owners know that liquidity in a lot size over £150 million is really, really difficult. There will be a whole raft of stuff out there that is not suitable for current market conditions.”
Just £2.5 billion worth of central London offices have changed hands this year, a 28% decline from last year’s already depressed market, according to a brokerage report.
FTSE 250 office owner Derwent attempted to market 90 Whitfield Street for around £120 million, while rival GPE tried to sell 1 Newman Street for over £200 million. Both buildings received bids that fell short of the landlords’ expectations, leading to the sales being put on hold, according to sources familiar with the deals.
“There is little evidence today of forced selling. There is increasing evidence of motivated selling,” said Toby Courtauld, GPE’s chief executive. GPE also recently raised a £350 million fund for buying opportunities.
Both Derwent and GPE regularly sell established properties to finance new acquisitions and developments. The companies declined to comment on the specific transactions.
Recent cut-price deals on two larger buildings, 20 Old Bailey in the City and 5 Churchill Place in Canary Wharf, were also cancelled.
Expectations that the Bank of England will start cutting interest rates in the summer have strengthened some sellers’ resolve not to sell at current prices.
“I think the resolve of the sellers is beginning to firm up a bit because we’re probably through the worst,” said Richard Garside, head of central London at Savills.
However, the high cost of debt continues to make it difficult for most buyers to find financially viable deals. Many active buyers in the current market are extremely wealthy families who typically buy with little debt, but there is a limit to the size of buildings they can purchase.
While forecasts of a flood of distressed sales hitting the market have not materialized, there have been some instances. Herbal House in Clerkenwell, once the Daily Mirror’s printworks, was placed in the hands of receivers who recently agreed to a sale for £105 million, just above the £102 million of debt secured against the building. Additionally, 51 Eastcheap, a City building leased to WeWork and once owned by the co-working group’s investment arm, has been put on the market after receivers were appointed in late March.
