The sky’s the limit as City property prices rocket

If you wanted to tell the story of the credit crunch and its aftermath in a single building, the recent history of the banking giant HSBC’s gleaming Canary Wharf headquarters could be a good example.

Completed in 2003, just when the bank was making its disastrous foray into the United States with the acquisition of Household Financial, the Sir Norman Foster-designed tower was sold in April 2007 for a hubristic £1.09bn to a debt-laden Spanish property firm, Metrovacesa. The Spanish company was forced to sell it back to the bank just 18 months later when the financial crisis struck.

The opportunistic HSBC flipped its headquarters again in November 2009, this time to the South Korean pension fund NPS, for a more modest £772.5m, part of a wave of investments by overseas investors encouraged by falling prices and a cheap pound to hunt down bargains. And now the building is on the market again for £1.1bn.

Property sources suggest it will fetch well in excess of this, setting a new UK record for a single office building and banking a likely £400m profit for NPS in little more than four years.

The sale of HSBC’s HQ, being touted around a host of international would-be buyers by the agents JLL and GM Real Estate, is the latest sign of a revival in a London commercial property market enjoying its best year since the heady days of 2007.

The top 10 sales in the City alone, including the sale of trophy assets such the Broadgate offices estate and the iconic “inside out” Lloyd’s building, have accounted for more than £6bn of property sales over the past year. The pace has picked up significantly in the opening three months of 2014 with more than £4bn of deals being completed, according to the agents Cushman & Wakefield.

Another landmark will be auctioned off this year after lenders appointed receivers to the City’s Gherkin skyscraper, formally known as 30 St Mary Axe, this week. This building, a former holder of the title of the country’s most expensive office building before HSBC, was bought by the German bank IVG and private-equity firm Evans Randall at the top of the market in 2007. The owners have been in default on their £400m loan to buy the building since 2009. But the Gherkin is virtually full, generating valuable income: the lenders have only now decided to pull the plug as a rising property market raises the prospect of a good sale price.

Investment agents are already salivating at the opportunity of selling these prized assets and an international roster of buyers is likely to emerge, including the Chinese insurance giant Ping An, whose purchase of the Lloyd’s building last year was its first in the London market and meant as a signal of intent. Sources suggest it has billions to spend.

Meanwhile a kaleidoscopic mix of international investors from Singapore to Kuwait, Germany to the US, have also been betting on the capital as wobbles elsewhere in the world – among emerging economies in Russia and Turkey for example – underline the attractions of London as a safe haven for international cash. US Treasury bonds are yielding below 3 per cent, but prime City buildings can return between 4 and 5 per cent, as well as offering the attraction of a globally revered legal system and being outside the eurozone.

James Roberts, research partner at the property consultancy Knight Frank, said: “Financing conditions have been improving and another aspect which has increased the appeal of the London property market has been the recent turmoil in emerging markets. There’s a feeling that emerging markets have peaked while Western economies are starting to pick up again. The returns on commercial property are also attractive compared to yields on assets like government bonds.”

An imbalance of supply and demand is also pushing up prices. Toby Courtauld, chief executive of the London-listed property company Great Portland Estates, talks of a £20bn “wall of foreign money” chasing around £2bn of assets for sale on the market.

But the fundamentals for rent returns are also good. Since the Big Bang of financial deregulation in the mid-1980s, companies who signed up to 25-year or 30-year leases are reaching “lease events”, that is renewals or breaks, prompting them to look for new homes away from ageing space.

The increase in demand coincided with a lack of supply as building work virtually stopped in the wake of the financial crisis, playing into the hands of the biggest developers, British Land and Land Securities, with their Cheesegrater and Walkie Talkie skyscrapers. These two had the balance sheets to begin building three years ago to get ahead of the game. The towers, both in the City’s insurance district and aimed at a sector bearing fewer scars from the financial meltdown, are filling up, and rents are higher than expected.

According to the consultant Deloitte’s latest bi-annual crane survey, the rest of the development world is finally beginning to catch up as the economy recovers, and total office space under construction in the Square Mile is now past the five million sq ft mark for the first time since 2009.

Rents for prime City space rose for the first time in three years in August, to £57.50 a square foot, emphasising the impact of demand on limited space. Savills’ head of research, Mat Oakley, says: “Investors are attracted to London by the transparency and liquidity of the market, the large lot sizes on offer, and the fact that prime office rents grew by 20 per cent last year.”

But if the sale of the HSBC tower was a straw in the wind before, could things go horribly wrong again? Sources close to the sale say no: a “range of parties from all over the world” have already expressed interest: “This is very different to 2007. The property market is much more globalised and there’s a huge supply and demand imbalance. Trophy assets are in short supply and everybody wants a slice of the action in London,” says one agent.

Even with interest rate rises on the horizon, borrowing costs will remain close to historic lows and the search for yield continues. The appeal of London’s commercial property as the preferred shopping market of Asian pension funds and Middle Eastern petro-dollars looks set to endure.

Three iconic towers

1. No longer in a pickle

The Gherkin skyscraper will be auctioned off this year after lenders appointed receivers this week. The former holder of the title of the country’s most expensive office building is virtually full, generating valuable income: the lenders have decided to pull the plug as a rising property market raises the prospect of a good sale price.

2. Right wavelength

The Walkie Talkie is taking advantage of the increase in demand and lack of supply and is filling up with high rents being charged.

3. Back on top

HSBC’s Canary Wharf HQ charts the course of the credit crunch and its aftermath as it could be about to set a UK record price for a single office building.

The past year’s lucrative deals

£1.7bn

Broadgate Centre: bought by GIC (Singapore)

£1.7bn

More London: bought by St Martins (Kuwait)

£472m

Ropemaker Place: bought by Axa (France)

£464m

St Botolph Building: bought by Deka (Germany)

£260m

Lloyd’s Building: bought by Ping An (China)