Strange things are afoot in the office investment market. While deals haven’t dried up in the way many feared immediately after the EU referendum, activity has undoubtedly slowed, with the institutions in particular sitting on their hands.
Granted, not much has come to market, so there’s not a huge amount to buy. But unexpectedly, the stuff that has been put up for sale has chiefly attracted the interest of a slew of new entrants rather than established players - and now even more unexpectedly, local authorities appear to be getting in on the act.
As we reveal this week, Spelthorne Borough Council - yes, you read right - has splashed out a mega £300m on BP’s business and technology campus in Sunbury-on-Thames.
So are councils poised to become a new class of investor in their own right, taking on the institutions, private equity, REITs and overseas buyers?
They have certainly been increasingly acquisitive in commercial real estate of late, attracted by the growing gap between the cost of debt and property yields. And they have generally targeted long-term ‘safe’ income from reliable tenants, taking advantage of cheap loans from the Public Works Loan Board and eyeing yields of 5% to 6%.
Flurry of activity
But their main focus has been shopping centres. As we reported in July, there has been a flurry of activity in this sector over the past few years, partly driven by a need to plug funding gaps from central government, partly by a desire to regenerate their high streets and take greater control of the retail offer at the heart of their communities.
If local authorities are going to invest in anything, retail makes a lot of sense. Office and industrial buildings are another matter altogether. Spelthorne is not the first to take the plunge. In April, Surrey County Council bought EE’s regional headquarters in Bristol for £20m and in May, it bought the former Friends Life building in Dorking for around £36m. Meanwhile, Portsmouth City Council bought a DHL-let shed in Minworth for £12.4m in July.
But the acquisition of the BP site is by far the biggest commercial investment by a local authority to date. Questions surely have to be raised about the logic. There’s not as obvious a regeneration play with offices - it’s more blatantly about the money - and local authorities are not exactly experienced in managing such assets.
Cynics will argue that it is an accident waiting to happen and that if the market crashes, councils could be left with a large debt pile and properties no longer worth what they were. But they have done alright in the retail arena… so far, anyway. Who’s to say they won’t learn quickly about offices?
Local authorities are not the only ones capitalising on the Brexit vote. Landlords in Amsterdam are also eyeing the opportunities. No major companies have relocated from the UK to Amsterdam yet, but they are making enquiries and local agents believe it is only a matter of time. Fortunately for London, there are obstacles to setting up shop in Amsterdam, not least shortages of both office space and homes.
Unfortunately for London, Brexit is still some way off - and a bit of Dutch courage on the development front could yet pay off.