Offices are out of favour for many investors, evidenced by the near illiquidity of lot sizes more than £100mn in the City of London area.
The silver lining to the recent downward valuation of the once record-breaking Walkie Talkie building in London by a reported £380mn is that the market is adjusting to a new norm.
With falling values and wider environmental, social and economic trends continuing to affect the office sector, many owners are considering their strategies for the future of their assets.
Options vary according to which part of the market you are looking at and these opportunities will be fact-specific as there is no one-size-fits-all solution, especially at the lower end of the market.
Pockets of the market remain active with smaller assets attracting cash buyers and the core West End consistently outperforming the City.
However, central London transaction volumes remain low, meaning fewer comparables to value larger assets.
It feels like we are slowly turning a corner and should expect more activity later in 2025 as the bid-ask spread narrows.
With steadying inflation, the election behind us and the hope of lower interest rates on the horizon, the UK is once again looking like an attractive market.
There are good fundamentals as prime yields stabilise and strong rental growth is anticipated in the months and years to come for areas where supply of good offices remains constricted.
Investors needing a target return within a fixed period may be under pressure to do something now, but others that have the luxury of time (and can bear the cost of refinancing) can choose to wait and trade larger assets later.
Being the best
Strategies for owners will be governed by the quality of the assets, which are increasingly seen through the lens of 'the best and the rest'.
Sustainability credentials are a key aspect of what constitutes quality and both the green premium and the brown discount are affecting the anticipated returns.
This is driven in part by discerning corporate occupiers that need offices which align with their own ESG strategies.
Government policy is also playing a role, as the current minimum energy efficiency standards for buildings and the proposed tightening of the thresholds for permitted office lettings has presented landlords with little choice but to upgrade or risk environmental obsolescence.
The flight to quality has been further fuelled by employees needing reasons to return to the office.
To attract and retain the best talent, companies require welcoming receptions and amenities such as terraces, cafes and gyms, as well as end-of-trip facilities – think showers, cycle storage and lockers.
New schemes at 30 Golden Square and 8 Bishopsgate have scented entrances to create that five-star experience.
Owners will need to identify which older assets can be given a new lease of life to compete with these prime developments that come with modern features as standard.
