The office building market in London and the South East is already showing signs of a ‘two-tier’ split thanks to demand for high-quality space and increased costs of renovation and finance.
While modern offices with high ESG credentials are holding their value well, older offices are regularly going for as much as 20 per cent under their asking price.
We caught up with Robert Haigh, partner, and a valuations expert at our London office to learn more about why landlords might be willing to sell low instead of refurbishing, and what this means for the true value of offices in the capital and the surrounding area.
“The London and South East market has reflected the demand for high-quality, eco-friendly office space for a while now.
“Modern offices are highly favoured by investors due to occupiers willing to pay premium rents for that kind of space, due to better offices being favoured by their staff in the era of hybrid working.
“But of course, there are plenty of older offices that could do with significant refurbishment to get them to the specifications needed to command higher rents, which has commonly left their landlords with a choice.
“Should they bear the cost of refurbishment and earn their money back through rents from prospective high-paying tenants, or should they sell up and let another party bear the risk?
“More recently, landlords have been opting for the latter, to the point where many agents who are putting the properties on the market are widely overstating their value.
“High interest rates and uncertainty around further inflation in build costs have made investors cautious, and for many the perceived risk weighs heavily on their mind when calculating projected returns, causing the disconnect between asking prices and transactional evidence.
“The high cost of borrowing also affects the landlords, who are struggling to afford the vastly increased costs and risks of going through with a refurbishment.
“In addition, older offices are in competition with more newly built offices, which are almost all built to a high specification. This further dilutes their value and means it would be harder to sell for a high price even if refurbishments are made.
“From our perspective, selling agents of older offices are still being overly bullish in London and the South East in terms of asking prices. However, the difference now from the previous 12 months is that current owners are now more realistic about where the true value sits.
“This in turn is leading owners either through necessity or practicality to completing on more deals on second-hand stock.
“This has effectively created a two-tier market – robust higher pricing for modern ‘green’ offices for landlords lucky enough to possess them, and subdued lower prices for older offices due to the high costs of refurbishment to increase the green credentials.”
“Unless the base rate falls and inflation remains stable, we foresee this two-tier system to stay for the time being, and potentially widen if nothing changes.
“Therefore, as valuers it is more crucial than ever to understand the inside track of comparable data we are analysing. At Fisher German, we are lucky to be able to interact with our superb investment and leasing teams, so we always have the most recent and in-depth news.
“We will continue to monitor the cost of borrowing, inflation, and the myriads of other factors affecting the office market in London and the South East to provide accurate valuations to our clients in the short term and into the future.”
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