Bring on the Year of the Office Portfolio, a Market That Could Easily See Volumes of £1bn to £2bn
In recent years, office and mixed-use portfolios have not been a significant feature of the market. I see this situation changing in the near term and anticipate the return of portfolios as a medium to sell property and achieve premium pricing — particularly offices.
In 2012, which was the year we first saw renewed portfolio activity after it had been dormant in the immediate aftermath of the Great Recession, the market grew exponentially with volumes, excluding alternative markets, of £1.12bn in 2013, £8.5bn in 2014 and £5.34bn in 2015.
Mixed-use portfolios were a significant proportion of the market accounting for 50% or so of activity with single-sector portfolios making up the remainder. Mixed-use portfolios are, however, less likely to feature going forward in my opinion for two reasons. The first is retail remains generally out of favour, and secondly, demand for industrial is extremely strong — particularly from specialist investor groups. This clearly devalues the case to aggregate mixed-use portfolios of this nature for pricing and liquidity reasons.
In 2012, I was quick to spot the depth of demand from particularly private equity funds for scale, with the case for large scale now being stronger than ever. At the time, common thinking was that demand capped out at £30m-50m and a series of sub-portfolios needed to be offered to facilitate a successful sale of a larger quantum of property. I argued quite the opposite: that scale enhanced liquidity. On the back of this, we won the mandate to sell the Peloton portfolio, which at £120m was the largest mixed-use portfolio to be launched.
Like then, aside from the investors’ ambitions to invest sizeable equity cheques, debt is also a factor, with it being cheaper and more plentiful for larger more diverse portfolios. Individual lease events also become less extreme.
With the office sector occupying the central ground between the weak retail and strong industrial markets and offering very generous yield, the opportunity exists to launch large single sector office portfolios. In addition to the pull factor to investors of attractive yield for offices, there is a strong push factor away from both retail and industrial reducing the investable universe. Vendors willing to do this will undoubtedly find greater liquidity than individual sales, shorter deal time frames, and a premium to individual asset pricing. With depressed transaction volumes generally and significant pent-up demand the portfolio argument is even more compelling.
James Leach is a partner at ACRE Capital Real Estate.
By James Leach
Acre Capital Real Estate
April 13, 2021 | 3.03 P.M.
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