A bird in the hand is worth two in the bush. You’ll never go broke taking a profit. Certain proverbs spring to mind when you consider this week’s sale by Malaysia’s $171 billion Employees Provident Fund of One Sheldon Square in London’s Paddington to UK REIT British Land.
After the state investor sold the 210,000 square foot office for £210 million (€291.84 million; $309.47 billion) at a 4.5 percent yield, having bought it for £150 million in 2010 at a 5.75 percent yield, it crystalized a 40 percent capital value hike.
Naturally then, EPF should be applauded for its vision. It picked up the asset back in 2010 as part of a £1 billion investment spree in the UK, and when it talked PERE through the strategy in last year’s Blueprint profile interview, it cited One Sheldon Square as typifying what it was looking for. It also tipped the asset to provide a stellar return.
Also of note is that this sale further disproves the theory that the largest institutional investors from the east will be the stickiest when it comes to their dealings with core assets in European gateway cities. Just as Korea’s National Pension Service proved with its £1.1 billion sale of the HSBC Tower in London’s Canary Wharf to the Qatar Investment Authority last year, some of these investors are willing to take their money off the table when conditions are compelling enough.
But was selling One Sheldon Square the right call? On the one hand, confirming a sizeable profit at a northerly point in the investment cycle is hard to criticize. Of course, this does depend on how north we really are. Buoyed by still-lowly interest rates, low bond yields, persistently sensible leverage ratios and improving rental fundamentals, certain London-based brokers see current record levels of equity continuing to bolster demand for these kinds of assets for three to four years more. Such a belief might suppose a sale was premature.
However, it is important to note how this office only has one tenant. Visa Europe Services is a blue-chip covenant, but with just seven years to go on the lease, and with a break option in 2018, why risk having an occupancy issue just as the capital marketplace boils over? One broker with knowledge of NPS’ HSBC Tower sale said the single-occupancy nature of that office was also a relevant factor in its decision to exit. Sell when there’s 13 years of income left, not when there’s nine, the theory went.
On the other hand, anyone au fait with London’s Paddington and the wider Crossrail railway initiative might have considered that infrastructure factor as too much value left on the table. One broker told PERE how he felt the deal was good for British Land, even at a yield of 4.5 percent. He suggested it was a better hold option for EPF and wondered whether outperforming indexes or benchmarks was a keener motivation in the moment than adhering to the long-term holding principals that many large institutional investors maintain.
EPF was not available at press time to regale its motivations – its official communique had scant detail. If it had been, it would have been interesting to learn how it intended to redeploy the proceeds from the sale. In PERE’s interview last year, the state investor said it was starting to look further afield for future real estate opportunities. In the previous 12 months alone it had begun acquiring assets in France and Germany and said it would also consider Southern European markets like Italy and Spain too. Funnily enough, that’s also what the advisors PERE spoke with suggested it should do.
Current research, however, suggests that a spell of abstinence may be warranted. Just this week, IPD-buyer MSCI said property globally had generated 9.9 percent last year, with most markets at or close to historic low yields, and that returns from rental income were now lower than before 2008. It inferred price growths in the world’s biggest investment markets were not sustainable.
As such, EPF might become one name on a growing list of investors chasing similar yields to that achieved in its sale of One Sheldon Square – but in a far riskier climate than when it bought that asset. If that is so, why sell One Sheldon Square and incur the reinvestment risk? ‘A penny saved is as useful as a penny earned’ is another adage worth considering.
It goes without saying, however, that knowing which proverb to adhere to requires a granular projection of a given asset against the wider macro-picture. EPF no doubt did just that and felt, on balance, it was time to offload.
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