LONDON (Reuters) - Investor rivalry for blue chip London commercial property has forced prices up and yields down, compelling many to mull a so-called emerging “upper secondary” class to pick up choicely priced assets and appealing returns.
“What we are finding is weight of money buying certain stock at a certain price. There are offices now -- these aren’t 25-year leases but core-plus central London -- being viewed as prime,” Pramerica Managing Director Andrew Radkiewicz said.
He and several other speakers at the 2011 Reuters Real Estate and Infrastructure Summit said the prices being achieved for core, or top-end, properties in London meant they had to be regarded with caution from an investment returns viewpoint.
Secondary property is that positioned on and beyond the periphery of blue-chip business hubs, such as London’s City and West End districts.
“There may well be an advantage in buying what you call upper secondary in the hope that you can turn it into close to prime and that it’s got scope for improvement,” Legal & General Property Managing Director Bill Hughes Hughes said.
Henning Kloeppelt, managing director of Warburg-Henderson, said across the UK the risk-return ratio for good-quality secondary properties was now more attractive than for prime.
“You get a much higher yield on secondary assets than on prime assets. If you look at the (yield) spreads, especially in the UK, they’re huge between secondary and core investments because there is no market for secondary these days,” he said.
Pierre Cherki, chief executive of Deutsche Bank’s real estate investment arm RREEF, told Reuters the appeal of upper secondary, or core-plus, properties depended on investors’ criteria for allocating capital.
“When you look at the risk profile in some of these investments, it actually makes sense to go a little further away (from London) ... You can buy very good quality assets in London and some of the regional UK cities where the underlying asset is there and the underlying covenants are good,” he said.
“What clients are looking for is strong assets and good long-term cashflows, and they can achieve that, and it doesn’t have to be in West End of London,” he said.
Kloeppelt said while Warburg-Henderson had identified an opportunity to invest in upper-grade secondary properties, it was not always easy to convince investors of its merits.
“It’s a good opportunity, but we act on the behalf of the requirements of our investors. And they are reluctant to take those risks these days,” he said.
(See www.reutersrealestate.com for the global service for real estate professionals from Reuters)
Additional reporting by Brenda Goh; Editing by Andrew Macdonald and Will Waterman