Here are some key reflections on what has defined success in the London office market during the first half of the year.
Unlocking Value in Stranded Assets
There still appears to be a disconnect with vendors aspirations and the pricing level the market is willing to pay. Debt-sensitive investors have particularly pulled back, resulting in a reduction in large transactions. There is significant demand for high-quality, new, and refurbished office spaces. Over two-thirds of transactions have involved top-tier properties, with ongoing interest in sustainable and amenity-rich buildings. As a result of this we are still seeing many stranded assets that are of secondary condition left in the open market. This can present significant value add opportunities for the right purchaser.
Investor’s Guide to 2024
Institutional investors and private equity players have been particularly active, often driven by a blend of core and value-add strategies. The most successful purchasers are those with a keen focus and expertise on ESG, a clear vison and business plans for the assets and direct access to capital. With interest rates still being a key factor any party looking to take on a significant amount of debt financing with high LTVs will be seen as a high risk purchaser.
Retrofit Revolution: Shifting Development Focus
The focus for development has shifted due to planning policy to a retrofit first approach. Justification of full demolition, requires a forensic review of the existing building and a science backed approach to embodied carbon, alongside a clear circular economy plan to reuse the materials on site. The approval to demolish Savile Row Police Station, proves demolition in the right circumstances is still achievable. Deep retrofit is fast becoming a popular strategy for repositioning of assets. However it comes with complexities, retaining structure can mean compromises in slab to slab levels – compromise quality and is not a guarantee of reduced costs and still requires a proactive and forensic approach to planning and justification. Therefore picking the right design team to drive innovation is key to delivering best in class design within the parameters of an existing structure.
The Path Ahead
Looking forward to the rest of the year, uncertainty still lingers. Levels of inflation and interested rates will continue to be key areas of focus. Ongoing conflicts and the upcoming general election is creating a level of market hesitation. However, generally it appears that the future with good occupational demand will remain positive, focus needs to be given to restoring London’s labour market which to enable future growth.
Oxygens plans for the rest of 2024
Given Oxygen’s extensive successful track record of the purchase, upgrade and management of prime London office buildings. We see opportunity in some of the small lot sizes (£5-£20m) where we can deploy equity to value-add opportunities.
Our day one mantra has been to create the best space and provide a service to our tenants. Now, we are building on this to create best in class sustainable buildings. Every building we manage is on a journey that we document to be fit for the future. We want to capitalise on the rental growth and associated performance. As the year progresses we hope to acquire further larger assets and continue our track record of working out NPL’s and providing capital to structures.