Spenders Gotta Spend: Why A Vaccine Could Be Triggering A Surge In Birmingham Office Investment

Well-resourced and cheaply leveraged private equity, core-plus and value-add funds have a war chest of up to £1.25B to spend on Birmingham’s off-prime office stock, with hopes of a coronavirus vaccine putting pressure on them to act now.

According to market makers, the recently raised cash pile was already burning a hole in their pockets. 

Investment market observers in the city said the last month has seen a marked uptick of interest from international and local buyers anxious to act now, with between five and 10 funds actively looking for lots of £10 to £50M, and as many again seeking opportunities of £75M plus.

The interest represents an acceleration of a trend apparent over the summer as opportunity-driven investors seek homes for bulging capital reserves.

According to the quarterly report by Knight Frank Birmingham, highlights for the quarter included the stand-out sale to Oval Real Estate of One Colmore Square for £87M, a net initial yield of 6.2%; the setting of a new headline rent at £37/SF; and an inspiring 742K SF of active requirements searching for office accommodation in Birmingham city centre, which new office investors hope to tap into.

BMO-owned 158 and 170 Edmund Street were marketed at £10.75M, reflecting a net initial yield of 6%, and placed under offer to Adapt Real Estate at just off the asking price, said the report; whilst 55 Colmore Row is close to exchange of contracts to Union Investments in a £100M deal.

But for vendors, some analysts believe, the surge in buyer interest represents a difficult judgment call: sell now, in a less crowded field, or wait until a coronavirus vaccine becomes available and hope to repeat the uplift in currently depressed values the return to normal will bring.

“Against the continued backdrop of sensitive nervousness as to the immediate future, the Birmingham and UK Cities markets are emerging, and not without a little gusto,” Knight Frank Head of Birmingham Ashley Hudson said. “Many investors have raised funds and are keen to gain access to these markets and whilst there is no distress currently, there is certainly an opportunity to compete in a less crowded field.

“These funds are looking for slightly out-of-core but good locations, buildings maybe 10-15 years older with shorter unexpired leases, that maybe need asset management. Where they are from the UK, Far and Middle East, Germany of the U.S. they see an opportunity in a market with less competition than they might have had. And many of these funds are very well equipped, we’re talking £500M raised recently. We’ve had them all looking in the last month, and they are all keen.”

Restless buyers need to deploy capital quickly, with the proviso that the deal matches their algorithm. The rise in Birmingham office yields by a minimum of about 50 basis points since the crisis began provided a trigger for their interest.

Besides yield movements, the biggest spur to activity is the prospect of a coronavirus vaccine and a return to a more normal-looking workplace culture.

“Some are definitely expecting some kind of yield improvement based on a vaccine and the world coming back to work as normal, though that isn’t the whole story behind their investments," Hudson said. "We’ve seen pricing slip as we got deeper into the crisis, perhaps 75-100 yield basis points for some value-add assets as buyers got more nervy.

“But if we get a vaccine, and we’re not all wearing masks, people return to the workplace and the uncertainty ends, that price slip could reverse. So some vendors want to hang on and wait and try to benefit from that return to normality.”

Hudson said there was no evidence of distressed sales, although some sales were constrained by cash outflows from retail funds or by closing funds.

However, the prospect of a vaccine giving the office and capital markets a kick-start is treated with scorn by some observers.

“Yes we’ve seen an uptick in buyers in the private equity and opportunity fund category," Avison Young Birmingham Managing Director Carl Potter said. "And no we are not seeing any forced or distressed sales although by Q1 and Q2 next year vendors may be under more pressure. But the idea that after a vaccine we can just emerge from home working and say it will all be back to normal because we can walk around without a mask is bonkers because coronavirus lockdowns have left our economy in a very bad way. 

"There will be fallout — insolvent tenants, troubled loan-to-value ratios — and vendors and buyers might be better off thinking about the economic shock that’s coming rather than vaccines. We’re fooling ourselves if we don’t think there are severe impacts ahead.”

Potter predicted the buildings to come out of the trauma with the best chances will be high quality with the prospects of real longevity of income.