Brookfield Is Still Big On London

Brookfield, one of the world's largest real estate managers, has been one of the biggest investors in the London office market over the past decade — and it is not done yet. 

The Canadian firm holds the title for the largest-ever U.K. corporate deal — the £2.6B acquisition of Canary Wharf Group alongside the Qatar Investment Authority in 2015. In the same year it pushed the button on the development of 100 Bishopsgate, a 950K SF skyscraper which is now 90% let in spite of the concerns surrounding Brexit. Later this year it is scheduled to start work on the 540K SF One Leadenhall tower, although it might sell the site to a potential occupier first.

At Bisnow’s London State of Office event Wednesday, Brookfield’s European real estate managing partner Zach Vaughan told delegates how the firm is confident that London will remain the pre-eminent global investment destination for real estate, and how it was on the lookout for new deals, while working out how to negotiate the new world being created by occupier demands for flexibility and efficiency.

For Vaughan, one thing London has in its locker is the sheer breadth of interest from buyers of good quality real estate. If buyers from one particular jurisdiction begin to pull back, right now there is another group waiting in the wings to take their place.

“On the buyer side, London is one of the largest, most liquid and most transparent commercial property markets on the planet, and that’s not changing,” he said. “It’s easy to sit in a market and be immersed in it all day, but you have to put yourself in someone else’s shoes. If someone is trying to put capital to work in real assets and says, 'Where am I going to do that around the world that is liquid, transparent, where I can finance it,' then London has to be No. 1, compared to the U.S. and compared to some other places.”

Vaughan said the office assets Brookfield has sold in the past few years have all been to foreign buyers.

“They’ve all been to purchasers that you would not have thought about a few years ago, so whether it’s 20 Fenchurch [sold to the Hong Kong family that invented Oyster Sauce for £1.2B], 20 Canada Square [sold to Hong Kong investor Chen Hongtian for £410M] or Moor Place [sold to Hong Kong steel laminating business Kingboard for £271M], it was all very high net worth foreign capital coming in, and we still see that.”

Recent changes to U.K. real estate tax laws do not seem to have deterred overseas investors, in spite of some dire predictions.

“We are seeing a lot of money coming from Middle and Far East, not just institutional money but private and family offices,” RSM U.K. Head of Real Estate Construction Howard Freedman said at the event. “The tax regime has changed significantly, with capital gains tax coming up, that could have changed things but it has actually just put the U.K. on level playing field with the rest of the world.”

Brookfield is on the lookout for new acquisitions, Vaughan said. But he added that in the current market, where rental levels and future values are uncertain, it is important not to get caught out by cost overruns that could seriously damage returns.

“We have appetite for new development and buying and refurbishing assets, and we’re doing both,” he said. 

Brookfield invests two ways: Its public partnership is like a public core-plus fund, through which it does large-scale, multi-cycle development like 100 Bishopsgate and Canary Wharf. It also has opportunistic funds for shorter-term investments. Those typically involve repositionings, like the process underway to convert the former Bloomberg HQ into Citigate House and relet it.

“But you have to be cautious about what the costs are,” Vaughan said. “In all these projects, but especially the refurbs, it is not as simple as saying, 'I am going to apply X per SF to this and relet it.' There are often significant costs that people overlook. We have seen in the past that people were overlooking those costs and the spreadsheet was showing them a return that they liked, but in reality it was going to cost double once you actually do the work.

"We own a construction company and we have done a lot of these projects and we think we understand these things, but we're not always right, and it has steered us away from some of these deals unless there is some sort of movement in the value. But we have a big appetite for them. We’re looking at assets where we can buy and put some capital behind it and put our leasing machine behind it and turn it into institutional product we can sell to long-term capital.”

Vaughan said that as well as the investment side, the office leasing market was also performing solidly. The 5.1M SF leased in the first half of the year was the highest figure since 2015, according to Savills, and 13% above the long-term average.

“In terms of fundamental demand on the office side, we have several projects that are in lease-up, and I think we’re fortunate in that they are situated near Crossrail stations, so we are seeing pretty good activity on the leasing side. If you talk to Martin Wallace who runs our leasing business in the City, then it doesn’t feel by any means like leasing is falling off a cliff, he has an active pipeline of deals. It is slower than it was 24 or 36 months ago, but there is definitely activity there.”

However, this is not necessarily a blanket confidence in every district of London. Like so many investors, Brookfield is seeing the best performance in areas which have been the focus of major transport infrastructure investment like Crossrail, and it will continue to target these areas.

“We have a portfolio of offices concentrated around two Crossrail stations [Liverpool Street and Canary Wharf] and we believe that will be a major factor,” he said. "I know it is delayed but it is the biggest infrastructure project in Europe for a very long time and we think once that is opened it will be game-changer, to be able to get from Heathrow to Canary Wharf in 45 minutes — that's a huge change compared to other areas, so we are still a big believer in that and those areas.”

The dominant topic in the office world today is flexibility — to what extent flexible offices will take over the world, and what big corporate occupiers in particular want from their office portfolios.

Vaughan said Brookfield is embracing the need to provide flexibility, but that it is important to recognise that most large tenants want a balance.

“What we’re seeing from our tenants is no doubt they want more flexibility and they want us to offer that in our buildings, but our experience with them is that the large space users still need to control their environment, especially in terms of security,” he said. “We are always thinking about what we can do to provide flexibility to our tenants, so that could be leasing space in our buildings to flexible office operators, but I don’t think we are thinking about starting our own flexible office business right now.”

Vaughan echoed the sentiments of many in the real estate industry about the untested nature of flexible office version 2.0 and how it will perform when a recession arrives.

“I think that right now the market has been good and that these companies are making a lot of money and are worth a lot, but we need to see how they perform through a downturn,” he said. "They have long-term liabilities they are trying to match to short-term sales, and we have to see how that lasts and how people’s perception of value changes.

“But there is no doubt flexibility is here to stay,” he said. “It is something people will pay for, but the question is, how do you provide what a long-term corporate user needs, in terms of both flexibility and security?”

Vaughan also addressed the question of what kinds of data are valuable for office owners, and how you can build engagement with tenants.

“I don’t know that huge amounts of data about a building is valuable at the moment, its more about what you do to the building,” he said. In building engagement, he gave the example of an app Brookfield introduced at its Brookfield Place scheme in New York. The app, Ritual, allows office users to pre-order lunch at one of the street food stalls on the ground floor to beat queues, pairing them up with people who have ordered from the same stall at the same time. One person goes and collects the order, and gets a point for doing so, allowing them to compete with other users of the app to win points.

“People love it,” Vaughan said, adding that it had the effect of creating a community among users of the building.

Outside of London offices, the growing need for flexibility from corporate users was behind another major purchase Brookfield has made through its opportunity fund, Saco, the serviced apartment business it bought from Oaktree for £430M in February.

"We acquired Saco, which provides serviced apartments, often through leases, but what we are actually doing in many cases is acquiring properties and turning them into aparthotels and that sort of goes to the flexibility idea,” Vaughan said. “Corporate users send people on work assignments on a flexible basis and want to know there is a company there that has the product, and that the product has a good environment to it.”

Brookfield has launched Locke, its aparthotel brand, beginning with a location in Edinburgh. One is opening in Manchester in a few months, followed by a location in Cambridge. The site selection is based on where Brookfield thinks companies will need people but maybe on a short-term basis, and so need flexibility, Vaughn said.

Brookfield consistently vies with Blackstone as the world's largest real estate owner. In London, it has firmly established itself among the elite, and is only likely to keep growing.