UK CRE portfolio market warms up with £500m in live deals

Approximately half a billion pounds in UK commercial property investment portfolios has come to market within the last couple of weeks, as deal flow finally starts to pick up.

It has been a relatively slow start to the year for new deals with a number of Q4 deals still to close. But momentum is finally starting to build with at least seven new portfolio deals, spanning core, core-plus and opportunistic investment opportunities.

The current visible pipeline of deals, as seen by CoStar News, comprises: two London-focused office portfolios, both core to core-plus investments; two granular high street retail portfolios; two mixed-use portfolios weighted towards multi-let industrial assets; and a business parks portfolio.

Three of the seven portfolios which CoStar News has visibility of are offered both individually as well as in a portfolio trade, including the two largest portfolios, which – perhaps – is an indication that the somewhat spurious ‘premium for portfolio’ trend is now behind us.

Details of the seven portfolios are provided below. In addition, CoStar News reports on the backlog of three 2015 legacy portfolio deals which are still to close and the five portfolio deals which have already closed in 2016.

The final tally of live, pending and recently closed portfolio deals is given in summary at the end of this report.

Macro context: ‘lower for longer’ interest rate environment continues to benefit CRE

The macro backdrop is mixed. The New Year has seen renewed global market turmoil, led by China, which has depressed demand for commodities impacting certain emerging economies. The rapid slowdown in China has been matched by fears of a moderate slowdown to come in the US.

This over-arching “low growth” theme is likely to have played into the Bank of England’s thinking into keeping interest rates unchanged at 0.5%. Governor Mark Carney last month said “a powerful set of forces” prevented policymakers from raising rates. “The world is weaker and UK growth has slowed,” he added.

Consensus expectations for a UK interest rate rise seems now to be pushed to the back end of 2017, although notably The Economist Intelligence Unit (EIU) has forecast this ‘low for long era’ could run for another four years.

On Tuesday lunchtime, The Guardian reported Danielle Haralambous and Aengus Collins, analysts at the EIU, saying: “We now expect record-low interest rates to remain in place in the UK for at least the next four years.”

This is, of course, net positive for UK commercial property. On the Continent, the interest rate picture is similar with Eurozone interest rates unlikely to rise until 2018, supporting prime property yields in core Eurozone markets.

The familiar theme endures: capital flows into commercial real estate in the UK and Europe continues to be supported on a relative-value basis compared with other asset classes.

Live UK CRE portfolio deals

The seven confirmed live UK portfolio deals are as follows (with full details below):

  • The London Portfolio – vendor: UBS-CLOVA; asking price: £247.7m; 4.85% NIY; no. of assets, 5;
  • The London Collection – vendor: BWPT; asking price: £120m; 4.77% NIY; no. of assets, 8;
  • Stromboli Portfolio – vendor: an overseas investor; asking price: £39.5m; 9.78% NIY; no. of assets, 6;
  • Genesis Portfolio –  vendor: SteamRock/Catalyst; asking price:£30m; 7.5% NIY; no. of assets, 9;
  • Ladbroke Portfolio – vendor: Chancerygate; asking price: £20.25m; 6.85% NIY; no. of assets, 4;
  • Lion Portfolio –  vendor: Kildare Partners; asking price: £16.175m; 7.15% NIY; no. of assets, 4;
  • Space portfolio – vendor: Marick Real Estate; asking price: £12.5m; 8.16% triple NIY; no. of assets, 5;

These combined seven portfolios comprise £486.125m worth of UK commercial property across 41 properties.

In addition, CoStar News has visibility of a potential eighth potential portfolio, which is not confirmed as a definitive sale, although a sales brochure has been circulated.

The five-strong portfolio consists of four industrial assets and one office block. The indicative asking price – in the event of the sale trajectory – is £17.5m, reflecting a net initial yield of 7.8%.

Taking this eighth portfolio into account, the total stock on the market nudges just above the £500m mark – at £503.6m in 46 properties.

The London Portfolio

UBS Global Asset Management is selling its remaining four central London offices in its UBS Central London Office Value Added Fund (UBS-CLOVA), ahead of the closed-ended fund’s maturity this December.

UBS is selling the portfolio through Tudor Toone with an asking price in excess of £247.7m, which reflects a 4.85% net initial yield and a capital value of £856 per sq ft.

The London Portfolio spans 289,373 sq ft, a weighted average unexpired lease term of 8.8 years and 7.3 years to break clause.  The NIY is based on a total rent of £12.7m per annum.

The four assets – also available as individual sales – are:

  • the 117,326 sq ft multi-let 110 High Holborn in Midtown, with a guide price in excess of £105.19m, reflecting a 5.00% NIY based on total rent of £5.5m per annum. WAULT is 6.9 years and 6 years to break clause.
  • the 105,935 sq ft 160 Blackfriars Road in Southwark, with a guide price of in excess of £75.27m, reflecting a 4.65% NIY based on total net rent of £3.7m per annum. WAULT is 11.7 years and 9.5 years to break clause.
  • the 27,090 sq ft 12 Golden Square in Soho, with a guide price in excess of £51.5m, reflecting a 4.25% NIY based on total rent of £2.3m per annum. WAULT is 9.5 years and 7.6 years to break clause.
  • the 39,022 sq ft 4 Cam Road in Stratford, with a guide price of in excess of £15.7m, reflecting a 6.85% NIY based on total rent of £1.1m per annum. WAULT is 5 years and 3.7 years to break clause.

The London Collection

BlackRock Workspace Property Trust (BWPT), a joint venture between Workspace Group and the BlackRock UK Property Fund, is put up for sale the remaining eight multi-let offices spread throughout Greater London.

BWPT has enlisted Allsop to sell the assets, dubbed, The London Collection, ahead of the joint venture fund’s maturity later this year, seeking offers in excess of £120m, reflecting a net initial yield of 4.77%, based on a total portfolio passing rent of £6.1m per annum. The vacancy rate is 3.94%.

The London Collection portfolio – also available for sale individually – spans 285,130 sq ft are comprises:

  • the 26,113 sq ft Europa Studios, Victoria Road, Park Royal, with an asking price of £6.55m at 6.93% NIY;
  • the 46,169 sq ft Chandelier Building and Light Factory, Old Oak Common, with an asking price of £9.25m at 6.0% NIY;
  • the 67,710 sq ft Union Court, 20-22 Union Road, Clapham, with an asking price of £22.5m at 5.0% NIY;
  • the 25,461 sq ft Baden Place, Crosby Row, Southwark, with an asking price of £13.5m at 4.03% NIY;
  • the 31,052 sq ft Little London, 8 Mill Street, Butlers Wharf, with an asking price of £15m at 4.98% NIY;
  • the 32,570 sq ft 197-205 City Road, with an asking price of £22m at 3.78% NIY;
  • the 34,781 sq ft 6 Lloyds Avenue, with an asking price of £25m at 4.52% NIY; and
  • the 21,274 sq ft Burford Road Business Centre, 11 Burford Road, Stratford, with an asking price of £6.2m at 5.5% NIY.

These properties are held in a JPUT which is available for purchase.

Last April, BWPT sold a portfolio of 4 light industrial properties to Westbrook Partners for £32.1m, reflecting a 3.8% premium to their March 2015 valuation and a capital value of £176 per sq ft.

Stromboli Portfolio

Lambert Smith Hampton (LSH) has been instructed to sell a seven-strong portfolio of high yielding industrial properties, dubbed the Stromboli Portfolio, by an overseas investor.

LSH is mandated to seek offers in excess of £39.5m, reflecting a net initial yield of 9.78%, based on a £4.1m annual net rent from two anchor tenants: Pork Farms Limited and Park Cakes Limited.

The properties are let co-terminus leases expiring in June 2027, providing a WAULT of 11.5 years. Pork Farms Limited and Park Cakes Limited have a combined annual turnover of £299.7m in 2015.

Leases are subject to annual RPI rent reviews subject to a cap and collar of 2% and 3%, with the next review in June 2016.

The Stromboli portfolio comprises:

  • Riverside Bakery, Nottingham
  • Tottle Bakery, Nottingham
  • Dorset Foods, Shaftesbury
  • Palethorpes, Market Drayton
  • Bella Street & St Helens Road, Bolton
  • Ashton Road, Oldham

Genesis portfolio

SteamRock Capital, which targets opportunistic CRE investments and developments within the £1m to £15m lot size range, in a joint venture with Catalyst Capital, has appointed CBRE to conduct the receivership sale of the Genesis portfolio.

The Genesis portfolio is a sub-pool from £370m nominally-valued Nationwide loan portfolio acquired by SteamRock and Catalyst late last year off-market.

The portfolio is comprised of nine high street retail assets, predominantly located in the North West, with an asking price of in excess of £30m, reflecting a 7.5% NIY. The WAULT is 9 years and portfolio carries an average rent of £8 per sq ft.

The Genesis portfolio is comprised as follows:

  • Units A & B, Frogmore Road, Market Drayton, Shropshire;
  • 49-53 Market Street, Newton-Le-Willows, Merseyside;
  • Nolton House, Nolton Street, Bridgend;
  • 152-158 High Street, Blackwood;
  • Units 1 & 2, Watts Cliff Way, St Helens;
  • 9/10 High Street, Hitchin;
  • 26/30, Deansgate & 60-62 Bridge Street, Bolton;
  • 56-58 & 60-62 Bridge Place, Worksop; and
  • 8/10 Hagley Street, Halesowen.

Ladbroke Portfolio

Chancerygate, the UK industrial and warehouse investor and developer, is bringing to market the four-strong Ladbroke Portfolio, comprised of three multi-let industrial estates and one trade park development, for an asking price in excess of £20.25m.

The asking price reflects a net initial yield of 6.85% and a reversionary yield of 7.36%.

Marketing began under a week ago with interest is expected from a variety of investors such as propcos, institutions and high net individuals.

Tudor Toone has been enlisted to sell the portfolio, which spans 261,467 sq ft and delivers £1.47m in annual net rent from 33 tenants.  The Ladbroke Portfolio’s WAULT to expiry is 4.7 years and WAULT to break is 3.7 years.

The portfolio is comprised of

  • the 34,522 sq ft Birmingham Trade Park, a trade park estate;
  • the 85,494 sq ft Mercury Park, an industrial warehouse and office scheme in Trafford Park, Manchester;
  • the 54,194 sq ft Ashton Road / Lingard Lane, a single-let industrial warehouse scheme adjacent to Stockport’s established Bredbury Industrial Park; and
  • the 87,257 sq ft Tewin Court, a multi-let industrial warehouse scheme in Welwyn Garden City.

Lion portfolio

Kildare Partners has brought to market the four-strong Lion portfolio, comprised of four prime high street retail stores, predominantly let to New Look, seeking offers in excess of £16.175m, reflecting a net initial yield of 7.15%.

Curzon Advisers, a wholly-owned asset management and loan servicing subsidiary of Kildare Partners, has mandated HRH, the retail and leisure agency firm, to sell the portfolio.

The Lion portfolio has an annual income of £1.2m and a WAULT of 10.5 years, secured by strong covenants. The portfolio is a sub-pool of the Oval portfolio acquired from RevCap and Oval Real Estate for £200m last June, comprised of UK shops and industrial properties from European funds.

The portfolio is three-quarters secured by New Look, accounting for three of Lion’s assets, in Crawley, Gosport and Hereford.  The fourth high street asset, in Oswestry, is let to ABF Properties, the ownership and lettings department of the Associated British Food Pension Scheme.

The four assets – which can also be sold individually – are valued as follows:

  • 3-5 High Street in Hereford is valued at £6.3m, reflecting a 6.75% NIY, based on annual current rent of £450,000; and
  • 1-5 Queensway & 48-52 The Boulevard in Crawley is valued at £4.8m, reflecting a 6.75% NIY, based on annual current rent of £342,694;
  • 8-10 Cross Street & 19 English Walls in Oswestry is valued at £3.575m NIY, based on annual current rent of £302,377; and
  • 81-84 High Street in Gosport is valued at £1.5m, reflecting a 8% NIY, based on annual current rent of £127,670.

On June 26 2015, New Look sold an 89% stake in the business to Brait, a listed South African investment company, for c.£780m.

Given Brait’s pedigree as an invetsor in South Africa, it is likely that a buyer could be found among South African investors looking to enter or expand their footprint in UK commercial property.

South African investors will likely be familiar with the covenant profile of New Look, given its new majority ownership.

Space Portfolio

Marick Real Estate has brought to market the Space portfolio, a five-strong value-add South East business parks portfolio, with an asking price of £12.5m, reflecting an 8.16% triple NIY.

The South East and South West-focused Space Business Parks portfolio is comprised of:

  • the 19,541 sq ft SBC Aylesbury with an annualised NOI of £165,481 and a 79% occupancy;
  • the 29,371 sq ft SBC Cheltenham with an annualised NOI of £208,577 and a 71% occupancy;
  • the 26,055 sq ft SBC Gloucester with an annualised NOI of £166,577 and a 74% occupancy;
  • the 23,426 sq ft SBC Medway with an annualised NOI of £227,391 and a 86% occupancy; and
  • the 24,638 sq ft SBC Wokingham with an annualised NOI of £311,287 and a 91% occupancy.

JLL has been appointed to manage the sale of the Space portfolio and potential acquisition finance for the wining buyer, if required.

JLL has forecast an IRR of c.17% on leveraged purchase of the Space portfolio over a five year hold. This projection is based on: the portfolio’s anticipated five-year cash flow; £6.875m in acquisition finance, at circa 275 basis points; and a five percentage points rise in the portfolio’s occupancy level over a five year hold.

Since April 2011 the average portfolio occupancy level has increased from 51% to 80%.

Legacy 2015 portfolio deals

There are still three UK portfolios which came to market last year to complete which in aggregate amount to £368m worth of commercial property, comprised of 81 assets.  

For two of the portfolio, contracts have been exchanged, but for the third, a buyer is still sought.  These comprise:

  • Harbert and XLB Properties secured exclusivity to buy Blackstone’s circa £215m Project Webb portfolio back in mid-November. The closure of the portfolio is time-consuming, not least because the 46 properties are owned through 13 Luxembourg SPVs.
  • M7 Real Estate exchanged contracts with Goldman Sachs to buy the 26-strong Omega portfolio for circa £128m on 10 January, and is scheduled to complete the deal before the end of March. CoStar News reported on M7’s win back at the turn of December. The portfolio has been purchased by M7 REIPV, managed by M7 Real Estate.
  • Threadneedle Investment’s mixed-use Loch portfolio is in the process of a re-launch after a potential sale to Fortress Investment Group fell through. The portfolio consists of nine assets throughout Scotland: one trade counter asset, one distribution warehouse, two offices and five retail/retail warehouse units totalling 261,836 sq ft. The original asking price was £25m, reflecting a net initial yield of 8.53%, based on a total annual income of £2.26m from 13 tenants. Allsop is selling the portfolio on Threadneedle’s behalf.

Portfolio deals closed in 2016

This year, five UK portfolio deals have closed, according to preliminary calculations by CoStar News, which in total amounts to £309.8m of property deals, consisting of 58 assets.  They are:

  • Europa Capital, together with Addington Capital, has acquired a the 27-strong Prospect portfolio, a mixed pool of assets spanning offices, leisure, retail and industrial, out of receivership for £41.5m, which reflect 8% triple NIY.  The portfolio is comprised of 28 assets nationwide, with 43% by value in the South East and 38% by value in Yorkshire. Current passing annual rent is £4.3m per annum after head-rents. Almost one quarter of the portfolio’s 483,464 sq ft, or 113,722 sq ft, is vacant. Offices account for 55% by value, mixed-use buildings 15%, leisure 15%, retail 10% and industrial 5%.
  • Workspace Group confirmed today it has exchange of contracts for the disposal of five light industrial buildings to Capital‎ Industrial One for £64m.  The industrial estates – in Acton, Atlas, Bounds Green, Fairways and Hamilton Road – span 396,000 sq ft. The portfolio was sold at a premium of 12% to the September 2015 valuation and at a net initial yield of 5.4% and a capital value of £171 per sq ft.
  • Regional REIT exchanged contracts this week to buy the 12-strong Rainbow Portfolio from Northwood Investors for £80m, after Ares Management’s deal to buy the portfolio at the very end of last year.  The Rainbow Portfolio comprises five offices and seven industrial sites totalling 1.15m sq ft in Bristol, Manchester, Cardiff, Sheffield and the West Midlands. The portfolio produces a net yield of 8.2% at a capital rate of only £70 per sq ft, well below replacement cost.
  • Tellon Capital bought the Rose Portfolio from Aviva Investors for approximately £24m, reflecting a net initial yield of 4.67%. The portfolio consists of nine prime high street retail investments, which generates a net annual rental income of £1.2m. The deal closed this week.
  • Kennedy Wilson Europe Real Estate (KWE) completed the disposal of five UK regional high-tech fire control centres to a UK infrastructure fund in January for £100.3m, reflecting an exit yield of 6.5%.  The direct property sale was dubbed the Slate portfolio. The five assets were the underlying collateral of the Avon loan portfolio, a sub-pool of the wider Lloyds Banking Group £649.3m Project Avon UK loan portfolio. CoStar News reported on the deal here.

The Final Tally (for now)

The total volume of UK commercial property from all three categories – live deals, legacy 2015 deals and closed portfolio in 2016 – amounts to 15 portfolio deals together worth £1.16bn comprised of 180 assets.

If the unconfirmed eighth potential portfolio deal is included, the total marginally increases to: £1.18bn in total stock, in 16 deals comprised of 185 assets.

Inevitably in a dynamic market like the UK commercial property market, deal flow will continue to change over time. Where we have missed more deals, please do let us know and CoStar News will gladly report the events.

About CoStar News

Finance Editor, CoStar News
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