According to the CEO of one of UK’s biggest listed landlords, office buildings are “melting ice” for investors due to how quickly they depreciate in the current market.
Andrew Jones is the leader of LondonMetric. The company will enter the FTSE 100 in this week’s trading after a series deals culminated in a £1.9bn takeover of smaller competitor LXi. This year, a £1.9bn deal was completed.
The company is now ranked third in the UK by capitalisation of real estate investment trusts.
Jones, unlike many other listed landlords, said LondonMetric didn’t have a specialization in any particular sector of real estate such as warehouses or offices.
Jones, the founder of Metric Property who founded his company in 2010, said that “very few Reits have changed their strategies over the past 15 years.” Jones attributed the decline in the listed real estate sector to the “habit” of the sector to cling to its historical specialization and to not want to evolve.
LondonMetric sold its office portfolio ten years ago.
Jones stated that the trend of shorter office leases and stricter environmental criteria, as well as higher expectations from tenants about the facilities they use have all contributed to the “[office] obsolescence” that has increased over the past 20 years — especially since the pandemic hit and the rise in hybrid working.
He said that the money needed to keep [offices] in good condition is increasing faster than rents.
Sein comments come during a challenging time for investors in commercial real estate. The rising interest rates in the commercial property sector have pushed down prices, but office values have also been affected by concerns about demand as companies adopt hybrid working. According to Green Street, European office values are down about a third in average from their recent peak of 2022.
This drop in office prices has hurt many investors who have traditionally invested a third of their capital into offices. British Land, and Land Securities are two of the largest listed landlords with multi-billion pound portfolios.
Some analysts and office owners argue that the widespread negativity towards office investments ignores an important split in market conditions — a lack of high-quality space and an oversupply of older buildings.
Jones believes that the retail sector will face the same disruption as online shopping did to the value of shopping centers. He said that everyone will say they have the greenest, best office building or the most immersive shop. “The truth is that we have way too many retail locations and offices.”
LondonMetric has a portfolio worth £6bn that includes garden centres, car parks and other eclectic remnants of its acquisition spree. The company has already sold £140mn worth of LXi extraneous assets and wants to dispose of the remaining £35mn in offices.
Jones favors the approximately 45 percent allocated to warehouse investment, along with large holdings of what he refers to as “convenience retailers” — small grocers like Aldi, roadside convenient stores, or discount retailers. The LXi acquisition added a portfolio of “entertainment assets” including Alton Towers, Thorpe Park and roadside convenience stores.
Theme parks are a good example of LondonMetric’s unique approach. They prefer “triple net”, where tenants pay for all maintenance costs. The US is more likely to use these leases, while UK landlords tend to prefer active management to increase the value of their property.
Jones said, “I believe that many people in our industry equate activity with success.” “Incomes and income compounding are the foundation.”
LondonMetric’s upcoming activities include selling properties it acquired through takeovers and evaluating deals to purchase smaller Reits.
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