After five years of uncertainty, the UK office investment market is showing real signs of recovery. Ali Rana - who leads national capital markets at Carter Jonas and works across UK institutional, family office and overseas capital - joins James McGregor to break down where pricing has settled, why yield compression is already happening in grade A assets, and what the gap between "those that have and those that don't" actually means for investors right now.
We need to caveat massively that this conversation happened just as the conflict Iran had happened. Things have changes a bit since then, but the underlying themes are still relevant as of today.
PRICINGRegional Grade A assets seeing commercial property yield compression into the mid-to-low 7s - a shift that wasn't happening a year ago. |
MARKET STRUCTUREThe UK office market has split into assets that have the ESG credentials occupiers want - and those that don't. |
CAPITAL FLOWSHigh street banks are back. After a decade out of the commercial property finance market, mainstream lenders are returning - a meaningful confidence signal. |
OPPORTUNITYDislocation creates edge. 8–13% yield variance for comparable assets. One P10 client acquired Thames Valley at 15% - seller circumstances, not asset quality. |
James McGregor
Ali, lovely to see you today. I'm James McGregor, I'm the Director of P10 Financial Group- my role there is to head up the capital debt advisory team. Ali, why don't you introduce yourself, just to give a bit of an understanding to our market about who you are?
Ali Rana
I'm Ali Rana, I head up the national capital markets team at Carter Jonas. I've been here for four years now and my role is to work with investors - a range of investors from UK institutional mostly, but also overseas investors, multi-family offices, family offices and some private investors in the UK.
James McGregor
Within that role - what is the market that you're covering the most at the moment?
Ali Rana
We are cross-sector, but I find most of my time being spent on offices in the South East - but also in other regions. There's been a bit of carnage for the office space over the last five years, so to speak.
James McGregor
It's been a really challenging time, particularly in the secondary regional market. I think over the last two years it's been particularly challenging because people didn't know where pricing was. I think we're through that now - we're at a turning point in the market.
James McGregor
Probably about a year ago you'd say all the capital came flooding back again - would that be fair to say?
Ali Rana
Yeah, I think we're in a different place to where we were this time last year. Transaction volumes were down, then towards the end of the year it started to pick up in the West End and in the City. People began to find where the bottom pricing was and some realisation of where the market actually sat. As that started to stabilise, investors felt more comfortable putting capital in.
Another factor that helped was rates reducing over the last 18 months. When rates were going up it was very difficult to build a business model based on rising rates - deals stalled. As soon as they started coming down, all of a sudden the view was very different. The stuff we had out in the market started getting interest, viewings increased, we had some sensible offers in, and deals started going to offer towards the end of last year.
James McGregor
Coming back to the regional sector - that has now started finding its price points again?
Ali Rana
In the regions it's quite interesting. Everything follows the core market - London first, and it spreads out into the regions after that. That's always happened. But what we've seen in the regions is three almost distinct submarkets for offices. You've got those that have, those that don't have, and those assets where the only way out is to reposition.
Those that have - once you've got the right ESG credentials, the right floor plates, the right facilities which make occupiers want to be in that building - once you've got a building where tenants want to go, the investment follows. Where it gets challenging is where you've got offices which are more difficult to refurbish and get into that state. That's where there becomes a big difference between those that have the right elements and those that don't.
"Those that have the right ESG credentials, the right floor plates, the right facilities - once occupiers want to be in that building, the investment follows."
Ali Rana
What we are seeing is that whilst some institutions have sold their office investments, they retained the ones they felt were core — the best-in-class assets. And actually that's proven to be a clever thing to do, because they're holding on to sensible assets now and seeing rental growth. When they're underwriting, the things that are important to them are stability of income, strength of the income.
James McGregor
Are you starting to see yield compression in these assets over the last year or so?
Ali Rana
I would say probably since the budget at the end of last year, all of a sudden we have seen a shift in how people are looking at offices with income. We have a bid on an office in the Thames Valley - a Grade A building built within the last 15 years, ESG credentials all where they need to be. As we went into the first part of this year, the yield was compressing into the 7s.
James McGregor
Mid to low 7s?
Ali Rana
Mid to low 7s. It's still under offer at the moment, but that to me says something. That wasn't happening a year ago. This says there is a change happening in the market and I expect that to continue.
James McGregor
What is it that's driving this return to the office market?
Ali Rana
I think what's driving investors wanting to get into offices is the fact that occupiers want to get back into offices. And generally speaking, the more people I speak to, the more people are spending more time in the office than at home.
James McGregor
Where do you believe the opportunities are right now?
Ali Rana
I think in the regions there are some really interesting deals out there where values have come down to a level where having an underwrite for an alternative use is quite interesting. It may be that you can't reposition it straight away, but if you're buying at a sensible level today and rents are sensible, there's a strong argument for rental growth.
We are still getting to a position where we're trying to find out where pricing is. You can still have quite a wide variance - anywhere between 8 and 13%. And sometimes the price paid for a property might not necessarily reflect the quality of that building or location, but perhaps the nature of who's selling and how quickly they need to sell. One of our clients recently acquired an asset in the Thames Valley at a 15% yield. That's probably not the true value of that asset, but the circumstances allowed them to acquire at that really high yield.
James McGregor
Also from a banking perspective, we're seeing even the high street banks come back to the investment market - which they hadn't been for about ten years. When you're seeing that jump back in, it's a real signal that the fundamentals of the asset class are getting stronger.
Ali Rana
Some of our investors are once again adopting a wait-and-see approach. But I've always found that when the market is panicking and withdrawing, that's a great time to negotiate. Part of the reason for the attractiveness of being in the UK at the moment is that investors have got quite good at absorbing shocks. Deals are still happening. I've still got people looking at the assets we're selling. I think we've proven ourselves on the world stage to be quite a safe and stable place to be.
"When the market is panicking and withdrawing, that's a great time to negotiate."
James McGregor
Do you think we're going to start seeing more inflows from places like the Middle East?
Ali Rana
This has been happening for the last two years - we've been seeing more overseas interest, particularly in the US, the Middle East and parts of Asia. From a price perspective, UK offices were looking pretty cheap - really good value. And because of that it was looking very attractive to other parts of the world.
Ali Rana
I'm expecting quite considerable rental growth in the right buildings in the right locations with the right ESG credentials — and therefore I would expect to see more yield compression. I think if you still have the right office with the right credentials and the right tenant lineup, we will see some yield compression — maybe not to the degree I thought a few months ago, but I expect strong performance in that prime end of the market. And that goes for the regions as well as the West End and the City.
James McGregor
Brilliant. Thank you, Ali.