KKR remains optimistic about the central London office sector and, with its 5.35 percent stake acquisition in Great Portland Estates, has chosen an opportune time to invest.
Share prices of London office landlords have taken a thumping since the onset of covid-19, with GPE trading at minus 40 percent versus NAV, according to a research note published by UBS last week.
“You’re looking at an area which is trading at discounts at the widest they have been this current market cycle,” Colm Lauder, head of real estate at Irish investment bank Goodbody, told PERE. “KKR saw an opportunity to get involved with a quality name like GPE at a relatively attractive price.”
He added that liquidity has returned, albeit not to normality, to the central London office market, which is supported by strong rent collections for pure office assets.
Out of the 69 percent of rent collected by GPE in the second quarter, 74 percent came from its office portfolio while just 28 percent came from its retail or hospitality units.
According to GPE’s 2020 annual report, offices accounts for 71 percent of GPE’s €2.62 billion real estate portfolio, while retail makes up 28 percent and residential 1 percent.
KKR’s acquisition might not necessarily lead to a takeout of GPE, however, said Max Nimmo, senior research analyst at Dutch investment bank Kempen. Many would argue the real estate investment trust’s real value is in the management team and its ability to source deals rather than acquiring a stake simply to get access to the underlying assets, he explained.
He added: “Instead this could simply be a direct-listed market arbitrage play, but the news alone could well put pressure on short sellers.”
The stake is worth around £74 million ($95 million; €81 million) and makes KKR the sixth largest shareholder for GPE, according to Rob Jones, equity research analyst at Exane BNP Paribas.
Spokespeople for KKR and GPE declined to comment.
London office: the opportunity is still on
KKR’s acquisition follows Canadian investor Brookfield Properties’ September 16 announcement that it had upped its stake in London-based REIT British Land from 7.3 percent to 9.2 percent.
British Land collected 88 percent of office rent in the June quarter compared to 36 percent for retail, demonstrating similar resilience to GPE when it came to its office portfolio.
KKR and Brookfield remain confident in the London office market despite the fact that only 34 percent of UK office workers that have actually returned to the work, according to a Morgan Stanley survey published last month. This is lagging behind the 83 percent of workers that are back at their desks in France and the 70 percent in Germany.
But the London office market is more resilient to mass remote working than other European markets, according to a UBS analyst note.
UBS reported a 2.5 percent job growth for London over the past 10 years, compared to New York and Hong Kong, for instance, which was 0.3 percent and 1.1 percent, respectively. It also boasts relatively low vacancy and supply, particularly in the West End, with a 10-year average lease length.
An analyst report by Berenberg last month expressed further confidence in the future London office market. Although a 20-25 percent reduction in building utilization is expected, Berenberg analysts expect no major changes to tenant floor space beyond trends towards flexibility, which were already established pre-covid-19. Increased need for collaboration and flexible working spaces plus a roll-back on densification were cited as the reasons for this.
But Jones said he is still seeing a bull versus bear discrepancy in the London office market.
“London office is probably where we are seeing the biggest two-way debate with investors at the moment,” he said. “The bears appear to be winning and new lockdown restrictions aren’t helping.”
UK listed property companies such as Derwent London and GPE – although to a lesser extent – are featuring “at the top of the bears’ short screens” due to their high percentage of leases up for renewal and upcoming break clauses, according to Jones.