Kuwait’s landmark offer for London’s Willis Building this week has given the prime City office market a lift, but i
s not the beginning of the end for Britain’s property downturn.
By agreeing to buy the building for £400 million pounds ($791.9 million) from British Land through its St. Martins Prope
rty investment arm, Kuwait is betting on the ability of London’s financial center to ride out the credit crunch.
[IJ Ed. Note – Willis began moving into its new London headquarters in February. Located at 51 Lime Street, acros
s from Lloyd’s, it has become an instant City landmark (See IJ web site – https://www.insurancejournal.com/news/international/2008/05/14/89967.htm)].
“It’s set down an encouraging marker for the London City market,” said Martin Lay, director of City investments at
property services firm DTZ. “It shows London is still an attractive place to invest for long-term investors.”
Like other cash-rich investors, sovereign wealth funds have been a
ctive buyers of assets from bank stocks to golf courses, Kuwait can afford to play a long-term game.
Though less expensive than the billion-dollar London offices that changed hands last year — including the ic
onic “Gherkin” building [Swiss Re’s London headquarters] and the Canary Wharf headquarters of Citigroup and HSBC — the Willis Building oppos
See more beautiful photo albums Here >>>
ite Lloyd’s of London will easily be Britain’s biggest office deal since the credit crunch began to bite.
“It shows we have a liquid market in the City,” said Chris Northam, director of the City investment team at property services firm Jones Lang Lasalle. “M
ore encouragingly, it shows there is a market for larger lot sizes be
cause the largest deal since the credit crunch has been about 150 million pounds [$296.5 million].”
Several market sources said the Willis deal — which analysts say achieved a rental yield of 5.7 percent — has helpe
d to cement a 5.5-5.75 percent yield range on prime City office assets.
That is in line with other City deals completed recently or in the pipeline and more than 100 basis points hig
her than a year ago, underlining the sharp extent to which valuations have already corrected.
But with rental growth sagging or expected to turn negative as financ
ial job losses mount and the UK economy slows, signs are that the UK commercial property market will still have to get worse before its gets better.
ATYPICAL
In addition, the Norman Foster-designed Willis Building is in one of the plummiest of locations and let in its entire
ty on a 25-year lease to insurance and risk management firm Willis Group, making it a trophy asset and atypical of the wider market.
Buying and selling of physical property in the UK is running at around half the levels seen before the U.S. subprime
crisis spilled over onto the global stage, shrinking the amount of debt funding available to property investors.
Banks are unlikely any time soon to open the debt floodgates again f
or real estate investors — not while they continue to lick their U.S. subprime wounds and repair their balance sheets, and still less while UK property values are falling and loan-to-value ratios are rising.