What trends are we seeing in the commercial value add market?

Ollie Thornton: At the beginning of 2020 we were tracking 40bn worth of capital ready to invest into Central London. We all know what happened re Covid-19 but, it’s very easy to forget what happened at the back end of 2019.

Andrew Harrison: It’s really easy to forget with everything that’s gone on but it’s important to remind ourselves where we started in 2020, because it provides some context, especially from a capital markets / development market point of view, especially re exit assumptions for these type of projects. Going into 2020 we were aware of certain investors putting bids forward on assets, for example in Farringdon at 4% yields, if one of those owners had accepted and executed that deal, we would have looked at a new bench market in Farringdon at or even over £2,000 per sq ft. That sentiment heading into the Pandemic is very easy to forget. 

Ollie Thornton: One of the best examples of a key trend from 2020 was our sale of 20-24 Kirby Street, 22,000 sq ft, freehold, short income and then a refurbishment play. We saw a flight to quality, irrespective of risk and this was evidenced on this sale. We undertook over 70 inspections, 15 offers from 10 different nationalities and a price achieved £1.5m ahead of asking. We saw investors willing to take this VP risk on the basis that longer term after a repositioning you would be creating a product that enticed occupiers and employees back into the office.

Andrew Harrison: We had the benefit, as a team to be involved in so many of 2020’s value add transactions and the final quarter ended up being a really busy period. We acted for clients on Eden House, 7 Newgate Street, 135 Park Street, Fleet House to name a few. These carried on the trend we say at the start of the pandemic where capital wanted to create best in class office space. If there was an opportunity to get hold of the whole building, reposition, create amazing back of house amenity, terracing, hotel style lobbies, these were the opportunities where substantial capital wanted to invest. 

Ollie Thornton: So what trends can we pick out from last year, one of the things that really stood out for me was location, those assets benefiting from Crossrail or sought after sub-markets, those assets with aligned lease expires where you could get hold of the whole building and the increased proportion of all transactions being in the value add risk profile. I actually did some analysis at the beginning of 2021 on the WAULT profile of all assets that traded in 2019 and 2020 to understand this trend a little better. In 2020 we saw a sharp uptick in the number of transactions with less than 3 years income, 60% of all deals up from 34% in 2019. In fact 80% of all transactions were either +8 year income or -3 year income.

Andrew Harrison: This is pertinent re the trends we are seeing in 2021, firstly the new stock levels are low, especially in relation to the core + part of the market. This risk profile really wasn’t tested at scale in 2020 and this is likely to continue into 2021, however this could be a really interesting part of the market going forward. I think overall stock levels will slowly increase, we’re advising on a number of sales, we’ve never been busier but for the larger investment lots you need international travel to open up. The flight to quality trend will only get stronger, irrespective of risk profile and these assets will trade less and less as more investors focus on longer hold periods and creating a yield on cost.

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