London Comp Shows 46% 2-Year Decline; Santa Clara Parallel

A WSJ article from a few days ago discussed briefly the resale of an office building in London. New Star UK Property Unit Trust sold its Governors House office building for £70 million to GLL, an asset it acquired two-years ago (July 2007) for £124 million, representing a roughly 46% drop in the asset’s value.

The 125,920 sq ft property is the European headquarters of Prudential PLC, which holds a 20-year lease that expires in about ten years. The property traded at a 7.25% capitalization (CAP) rate, a far cry from the insane 4.5% cap rate it was acquired at. Looks like a pretty compelling deal, particularly for foreign investors in light of the beating the British Pound has taken.

What’s more is that this deal very clearly highlights the amount of risk that was taken on by buyers during 2006-2007 when properties were being acquired at cap rates sub 6%. The sensitivity of an asset’s value becomes increasingly large as CAP rates go lower, and at 4.5%, a 100 basis point (+1%) move in CAP rates equates to an 18% loss in value. If you acquire an asset at a 7.25% capitalization rate, and CAP rates move the same 100 basis points (+1%), the loss in value is only 12%.

And there you have it, writing on the wall. Prices are off 40%+ from the peak two-years ago. And this isn’t the some tertiary market. And if you want to draw a parallel of this deal to this market, have a look at Tishman Speyer’s purchase of McCandless Towers back in July of 2007. It was acquired in the same month as the above deal for $213M, and at the same 4.5% cap rate, and half of those phantom lease rates they were expecting not only didn’t materialize, but rents have fallen precipitously from what was proforma’d for that deal.

I suspect both Tishman Speyer is hurting, and Shorenstein as well, who managed to take a bite of the lemon. Their only saving grace is that they were able to renew McAfee (MFE: 0.00 N/A) for a 208K SF, 5-year term in April of 2008 at a rumoured $2.75 NNN. At a 7.25% CAP, that would give roughly half of the 423K SF project an implied value of $455 psf if no discount were taken for what is now an above-market rate.

Similar Posts:

• Juniper Networks Renews 425K SF Headquarters Lease
• More Good News From Tishman
• Manhattan Deal Volume Scarce; Cap Rates In The 7′s
• Tishman Speyer Office Fund Values Off 33.5% YoY; Renegotiates Debt
• Mezz Debt Loses Its Luster

Comments

Chris Rodriguez March 20, 2009

I can’t believe these so-called smart guys were buying anything at 4.5% CAP Rates. Needing continually increasing rents and 100% occupancy is not the most conservative way to underwrite an acquisition.

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