A diamond in the rough

18th November 2016

The sale of the De Beers’ HQ in Central London comes at a choppy time for the city as reports suggest Brexit will lead to jobs being lost to other financial centres.

by Robin Marriott

We note recent press reports about a potential exodus of financial services jobs from London to other centres such as Frankfurt, Dublin, New York, and Paris.

For commercial real estate investors, this obviously adds an extra level of complexity to risk assessment when considering making a Central London office investment, despite the favourable currency situation.

It is our understanding from advisors, clients and others in the market that while demand remains broadly strong for Central London assets with long leases attached to them, the uncertainly surrounding London’s place in the financial community means that a ‘Brexit discount’ is being applied to Central London assets with short rental duration or no rental income at all. 

A perfect example exits today as two remaining bidders vie for the De Beers’ headquarters site in Charterhouse Street in Farringdon.

What makes this opportunity unique in Central London as we speak is that this owner-occupied asset is being sold with 100percent vacancy, presenting a test case of risk assessment and of course values. 

We understand that staff working for the famous diamond company are moving out of Charterhouse Street to the offices of parent, Anglo American, in April/May 2017. Anglo American already moved the De Beers diamond sorting operations from Charterhouse Street to Botswana’s capital several years ago. Since then, a loss of $5.4billion in 2015 for Anglo American amid low commodities prices has led to a cost-cutting exercise, moreover the sale of this office asset.

It is our belief that even De Beers’ property agent, BNP Paribas, would agree that the asset would have fetched more had it been sold pre-Brexit. A price tag of £100million was mooted for this light refurbishment/heavy redevelopment opportunity earlier this year. However, while we understand interest has been high coming from a range of potential buyers such as US opportunity funds and Asian capital sources, bid levels mean £100million is far less likely to be achieved. Indeed, one UK opportunity fund that did not progress beyond the first round heard second round bids of circa £80 to £90million were submitted. 

As mentioned at the outset, the sale comes at a particularly unpredictable time as far as London is concerned, so the price one can assign to an empty asset refurbishment/redevelopment to be completed perhaps in 2018/19 depends to some extent upon your confidence in the City. 

Some of the recent headlines about jobs moving elsewhere have been a major cause for concern. As we know from our own contacts, there are banks in London that have made contingency plans to shift some positions to other centres. Though these are yet to be actioned, business plans sit on desks ready to be executed in the first quarter of 2017.

And yet, having been providing real estate administration services to real estate funds and investors for 10 years now, we at Langham Hall have witnessed over the cycles how real estate investors often approach property as a local issue while being cognisant of overarching themes. This then leads to differences in the approach to valuing these assets, an issue that is even more pertinent on open ended funds and occupies a great deal of our time at year end.

Bidders for the De Beers’ site know well that London is made up of sub markets, each with their own unique tenant base and logistical dynamic. 

It is a mistake to consider Farringdon in Central London as a homogenous financial services centre. Goldman Sachs is still planning to open a new London HQ in the area, but Farringdon is also a technology, media and entertainment hub, with Google Ventures, Skype, Warner Brothers, Saatchi & Saatchi, and a host of start ups being present. Plus, from 2018 the local infrastructure will get a huge boost as Farringdon station will become a major interchange between Thameslink, Crossrail and the London Underground. 

The winning bid is due to be selected imminently, and we will be keenly watching. When it comes out in the press, we shall see what the new owner has in store and how confident it is in Central London.

If you would like to discuss this or any other matter, please contact:

Rob Short - Managing Partner
E. rob.short@langhamhall.com
T. +44 20 3597 7900
M. +44 77 7580 6308
Robin Marriott - Business Development Manager
E. robin.marriott@langhamhall.com
T. +44 20 3597 7940
M. +44 75 5712 3515