- Reits represent a shrinking share of purchases
- High interest rates still problematic
Private equity firms are piling in to the London office market, buying buildings at bargain prices as debt-laden real estate investment trusts (Reits) struggle to keep up.
Real estate experts said the London activity could be a sign that the whole UK commercial real estate market is recovering after 18 months of turmoil after interest rates shot up in late 2022. However, they added that most Reits would not benefit from this buying window because interest rates remain high.
Private party
According to data from real estate agency Colliers for the year to date, private equity companies account for 11 per cent of purchases and around a quarter of under-offer deals over £10mn in the London office market. Private equity’s 2024 market share is almost double that of last year, when it accounted for 6 per cent of all London office acquisitions, and nearly triple 2022’s 4 per cent.
Christian Capocci, associate director at Colliers, said this was a “fairly typical market trend” for this point in the cycle and added that many would see it as a turning point. He said that because private equity is nimbler, less accountable to shareholders and less dependent on debt than Reits, it tends to rush in earlier after a market slump.
However, some analysts believe there could still be more pain for the London office market, meaning the private equity bets could take some time to pay off. London offices have fared much worse than other UK real estate asset classes because the higher interest rates came alongside weaker office demand after Covid. “We don’t have a crystal ball, and people get it wrong sometimes,” said Capocci.
On the other hand, if the private equity companies buying now represent a turnaround in valuations, Reits risk losing out. High interest rates, higher loan-to-value (LTV) ratios because of lost value, and discounts to net asset value (NAV) restricting equity raising make it hard for most to go on spending sprees.
There are exceptions. Capocci noted that Great Portland Estates (GPE), which has one of the lowest LTV ratios among the UK Reits, has been acquiring smaller assets for its flexible workspace offering. He predicted that most other Reits looking to spend would also buy modestly-sized buildings for lower price tags.
He added that Reits’ relative reticence to buy is not just a current phenomenon but reflective of a more general change. Where Reits were once the “juggernauts” of London office acquisition activity, he said they now tend to buy less. Meanwhile, he said other buyers, not just private equity but wealthy private individuals and owner-occupiers, are now much bigger buyers than in previous decades.
One firm, Feldberg Capital, has raised £100mn in recent months to refit London offices to make them “modern green workplaces”. It is majority owned by a Turkish family office. “The London office market provides one of the most attractive risk-adjusted investment opportunities in Europe,” said Feldberg managing partner David Turner in December. “Rarely does such value exist in a global gateway city, but the window may close quickly as interest rates fall.”
Beyond London
Colliers’ head of economic research, Oliver Kolodseike, said the burst in private equity buying in the London office market may also be happening in the rest of the UK real estate sector.
Kolodseike said the data showed this happening in the London office market first because it remains the go-to place for private investors to park their money. He said this was partly due to the market’s historical significance as a “safe haven” but also because it remains the only market in the UK where you can acquire a single building worth hundreds of millions of pounds. For other assets, investors looking to accumulate that level of value would have to buy a collection of buildings.
Kolodseike said that Reits’ declining share of market activity and private equity’s rise in the general UK real estate market was, like with London offices, something that has been happening for years. According to data from MSCI, UK Reits accounted for just 4.5 per cent of deals transacted last year across the UK real estate market compared with a 10-year average of 6.2 per cent.
The big difference between now and when the real estate market began to recover after the 2008-09 downturn is that interest rates are higher now. When they were close to zero, Reits could snap up assets alongside private equity at the bottom of the market. In turn, he said this makes cash buyers more active than in 2008-09, as they look to take advantage of a window where they have the market to themselves.
That leaves development as a more likely option for Reits. Segro (SGRO) and Unite (UTG) have successfully raised equity over the past year to fund doing so, but both trade close to NAV and operate in attractive sectors. Other Reits are not in as fortunate a position. Many will have to wait until lower interest rates mean they can start buying or building again. Of course, by then, others may have snapped up the best stock and the best land.