D2 bucks the crunch with £180m West End office buy

D2 Private is set to buy an office block in London’s West End, in what will be the area’s largest office deal since the onset of the credit crunch.

The company, headed by Irish investor David Arnold, is believed to be paying around £180m for the 340,000 sq ft block at 1-19 Victoria Street, reflecting a yield of 4.75%. The yield is expected to revert to nearly 7% after the next rent review in 2011.

Legal & General’s Life and Linked Life funds put the block on the market in September at a price of £200m, reflecting a yield of 4.25%.

Cynicism

This was viewed with cynicism by some agents in the market, who were anticipating a price adjustment as a result of the increased cost of debt that was pushing many buyers out of the market.

The office block, which is just 200 metres from the Houses of Parliament, is the headquarters for the Department for Business, Enterprise and Regulatory Reform and the Department for Innovation, Universities and Skills.

Following a refurbishment to grade A standard in 1996, the entire building was let to the government for 25 years with upward-only rent reviews in 2011 and 2016. The government has been paying £9m a year in rent – equivalent to £32/sq ft since last year’s rent review. Average office rents in Victoria are £67.50/sq ft.

D2 owns 12 St James’s Square in Mayfair, where US hedge fund manager Permal is paying £140/sq ft – the highest rent in the world.

Uncertainty

The purchase could be seen as a bold move by D2, considering the uncertainty in the markets.

In recent months the market has been littered with high-profile deals that have collapsed.

The latest research from financial services group Smith & Williamson has revealed that respondents’ confidence in commercial property has fallen to 58%, compared with 91% last year.

John Voyez, head of Smith & Williamson’s property group, said: ‘The ripple effect of problems in the US subprime lending market has been felt in the UK. After over a decade of growth, the property market has finally peaked.’

In September IVG Asticus pulled out of buying 7-8 St James’s Square from Hermes for £140m. The block has since been sold to Pacific Group for £120m.

Victim

Berkshire House, a 52,000 sq ft office building at the corner of High Holborn and Shaftesbury Avenue, was another victim of the credit crunch following the collapse of the £44.3m offer from City Offices, backed by Eurohypo.

It is understood that Berkshire House is under offer at £35.5m to a private investor after Invista dropped the £38m asking price.

Jones Lang LaSalle advises L&G on Victoria Street and Invista on Berkshire House; Knight Frank acts for D2.