Canary in the coalmine?
#Week43 was in some ways a quieter one for real estate, with the arrival of the UK’s half-term holidays bringing easier journeys to work and a proliferation of out-of-office autoreplies. But at a tricky time for the office sector, some notable announcements highlighted how major players are grappling with the challenges.
The news that Brookfield and Qatar Investment Authority – the owners of Canary Wharf Group – are pumping in £400 million of new capital is a fillip for the estate, and a vote of confidence in a portfolio that has come under recent scrutiny over rising vacancy rates. But perhaps the most interesting part of the commitment is what the new cash is to be used for.
Falling office values have prompted Canary Wharf Group to look at repositioning, both in terms of repurposing existing assets and diversifying the range of uses through developing new assets. Life sciences, hotels, residential, retail, leisure, medical, education and even last-mile logistics have all been mooted.
Repurposing existing buildings is no picnic – especially the large towers designed to have the massive floorplates demanded by the original banking occupiers – but Canary Wharf Group has the expertise and financial backing to grasp the nettle. As well it should, because it is increasingly clear that doing nothing and hoping the old normal returns is not an option. The low sale price of Finsbury Dials in The City shows where values for older stock will head without effective asset management plans in place.
Declining demand for all but the very best office stock is far from a UK problem, and is now at a point where not just owners but lenders are facing considerable issues. As Ambrose Evans-Pritchard writes in today’s Daily Telegraph, US banks are increasingly threatened by their exposure to real estate.
Most news from the office sector makes for sobering reading. The causes are well understood, but the solutions are somewhat harder to identify. But all is not lost, and current pessimism should be countered by the optimism that comes from knowing that real estate has faced and overcome similar challenges before.
Nick Leslau is as canny an operator as any, having navigated his fair share of property cycles in the past, and as such his latest column for Property Week is well worth a read. Based on his recent visit to California, he is realistic about the issues – indeed, he thinks values still have some way to fall – and foresees growing problems around the availability and pricing of debt.
But as he points out, a similar downturn in the 1980s when supply far exceeded demand did eventually work itself out. Moreover, the situation today is arguably slightly more positive than 35 years ago, with plenty of capital looking for opportunities (at a price, of course).
There will be losers along the way, but the market can be trusted to ultimately adapt to whatever the new normal needs. It may not look like it at the moment, but among the troubles of today, tomorrow’s fortunes are being forged. In a cyclical business such as real estate, it was ever thus.
Enjoy your weekend.