A rare opportunity for UHNWIs
With the European Central Bank acting slower than the UK to raise interest rates (and likely slower to reduce them), and the feeling that these rates have now peaked in the UK, London is at a crucial point for investors looking to increase their holdings and be ahead of the curve.

It is a rare moment after 10 years of sellers holding the cards, and the next year is set to offer a unique opportunity, especially for all-equity buyers, to secure prime investments at a significantly reduced value – but acting now before rates do fall is key.

Significantly, one cohort is poised to reap the rewards without their need for expensive financing, and their ability to act quickly and flexibly – gaining a significant advantage over institutional investors. Ocorian found that 72% of family offices are looking to increase their property holdings with 30% looking to do this dramatically. In London Knight Frank recently reported that private investors with liquidity had been behind 44% of central London office investments in the last year (when the historic average is 36 %). In numbers, it represents £1.3 billion in transactions funded by family offices and UHNWIs – numbers that demonstrate increased confidence that London’s commercial property sector is ahead of other European capital cities at turning the pricing corner.

Maximising returns
Unica Capital has a track record of negotiating exceptional deal value and maximising ROI. All-equity acquisitions mean being a step ahead, securing deals on the most coveted properties that have all the assets needed to realise the highest returns, including a “green premium” for those that meet high sustainability ratings from the likes of BREEAM and LEED.

Interestingly of the recent increase in investment by those with cash to buy, £690 million went on assets that needed capital expenditure to bring them up to date with desired sustainability standards. Unica Capital knows this type of investment well and has demonstrated success by investing in capital improvements to reveal the true worth of properties – future-proofing them and elevating them to the standards being demanded.

Our new working life
There is no denying it, the way we work has changed. Remote and hybrid models look here to stay and have caused occupancy to reach new lows – and demand for shorter leases to increase, with uncertainty from occupants who might not know what their requirements will look like in the future. Apart from workers embracing a new work/life balance, high inflation has also meant increased costs for commuters, dissuading them further from forgoing working from home, or increasing time in the office, when hybrid models have been embraced.

Making things even tougher for the sector are rising interest rates, and for highly leveraged portfolios loan repayment hikes can simply become unmanageable, which has led to devaluations across the market.

Even with this landscape there is still hope for traditional offices, and for those who can future-proof themselves to align with the working world of today – and tomorrow – the outlook might not look so gloomy.

Is the future all about being flexible?
The answer for many at the current time is flexibility. Savills 2022 Landlord Flexible Office Survey showed 72% of landlords expect tenants to require more flexible lease terms, and cited a number of flexible landlords who have embraced this trend and are expecting strong growth – some doubling their portfolio in the coming years.

Separately, The Instant Group’s recent research shows flexible workspace occupancy at a record high of 83% across the UK. It is imperative that building owners evolve to meet this demand – both in terms of leases and spaces. However, it’s not only flexibility that will help landlords to future-proof their assets. Tenants are requiring a new kind of workplace, one that marries the social with working life, and locations and buildings that allow those who come to them to easily live, work and play.

What landlords can do

• The “15-minute city” & mixed-use buildings and environments
  For some the uncomfortable daily commute has become a distant memory, and persuading those people to return to the office on a more regular basis can be hard. Fast and easy access to buildings is key, as are environments and locations that offer attractive public spaces, dynamic social outlets and homes that people want to live in. Concepts like the 15-minute city may not be new (renowned urbanist Jane Jacobs had them in her sights in the early 1960s), but post-pandemic this model marries most with what contemporary life might look like.
• Environmental concerns
  As environmental concerns become ever more pressing, building owners must also face up to the need to find solutions that will lower carbon emissions. Portfolios that are retrofitted are often seen as more favourable than new builds with their substantial environmental impact.

The time is now
It is clear that office portfolios must be primed for both our evolved working lives and contemporary concerns to perform well. Landlords who are ahead of the curve can surely only benefit from responding to what the working landscape will look like, with workspaces that blend convenience, flexibility and accessibility, and address environmental concerns at the same time. We’ve seen working life change fast over just 3 years, so landlords must have the agility, ability and desire to adapt to make the most of their assets.

How do short-term lettings benefit Landlords?
At a glance, short-term rentals entice landlords with the promise of higher rates, yet expert assessments cannot overlook the intricate demands inherent in such arrangements.

Insights drawn from the English Housing Survey shed light on an interesting trend: seasoned private residential landlords tend to lean towards short-term tenancies. Landlords with three or more years of experience displayed a greater inclination towards offering shorter tenures, driven by the advantages of easier removal of problematic tenants.

• Residentially, short-term lettings such as holiday rentals or 6 month contracts for prime locations can mean that the tenants can pay a higher rate and landlords can strategically use tenancy breaks to align rents with inflationary trends. This can work equally well for tenants as it allows them the flexibility to stay in a specific location for a matter of weeks or months, adapting to their work or lifestyle requirements before considering a move to another property.
• Commercially, in this current environment where the prime real estate market shows no sign of slowing, even with tenant turnover, landlords can enjoy continuously occupied premises and increase the rental amount to the market rate for subsequent tenancies.
• Flexibility for the landlord and tenant, this particularly advantageous for properties situated in commercial prime real estate areas. This is especially important to some tenants renting office space in central London, as having flexibility within a short lease provides the ability to move to a different location in order to attract and hire new staff, which can be vital to growing businesses.

How do Long-Term Lettings benefit Landlords?
The inclination for extended tenancies reflects an appreciation for stability, something valued by Unica Capital. While short-term rentals may hold immediate appeal, the broader view of long-term arrangements can streamline management complexities and nurture lasting tenant connections. This perspective resonates with a Property Loop article. It highlights the significance of factors like location, demand, and the balance between costs and stability in profitability. While short lets have their benefits, the durability of long-term rentals underscores a dedication to stable income and sustainable and predictable portfolio growth.

• In the prime real estate commercial market, landlords can calculate the anticipated return on investment (ROI) over the term of the lease. For landlords who may be considering divesting their portfolios, knowing this ROI means that the property may sell for a higher price because of the projected yield and guaranteed annuity stream. This impact is greater if you’re leasing in a location where there is more demand than supply, such as central London (Soho, Mayfiar, Westminster, etc).
• These long-term commercial real estate leases are particularly attractive to tenants wanting to offer stability to their business, and the opportunity to secure an office in a prime location for a longer period of time. This benefits the landlord as it fosters trust between themselves and their tenants. The tenants’ employees are able to structure their lives and daily commutes around a consistent office environment, eliminating the uncertainty of relocation.
• For residential properties, the long-term rental landscape offers the opportunity to foster relationships with respectful tenants as well as the stability and predictability of an assured income.

Summary

Ultimately, the choice between short and long-term rentals is dependent on the investors’ long term goals. In the real estate property investment landscape, rental duration choices made by Unica Capital are informed by their commitment to keeping up with the latest research and market data, making strategic decisions based on yield and risk.

Unica Capital’s REIT portfolio prefers the safety of long-term rental investments both commercially and in the residential sector. The preference of an extended lease ensures consistent tenancy over a longer span, minimising the risk of potential income gaps during the search for new occupants.

It’s not just about assured rental income but also about forging relationships with respectful tenants. The stability and predictability intrinsic to long-term rentals, builds a real estate investment strategy that encourages thriving and enduring communities.

Future Drivers of the Office Market
Marcus Phayre-Mudge from TR Property identifies two key elements driving the office market: demand for high-quality space to entice staff back to the workplace and demand for energy-efficient buildings to fulfil environmental commitments and cost-saving efforts.

The rise of green buildings is anticipated to create a supercycle in the property market. As companies seek energy-efficient spaces to align with their environmental goals, investors can find opportunities in properties that embrace sustainable practices.

Positive Signs in the London Residential Property Market
Despite the challenging times, financial experts believe that the downturn has ended in the residential property market. The recent sell-off has created opportunities for bold investors to make strategic moves and capitalise on the potential for growth.

Data from Q1 of this year indicates that buyer demand for London properties is 70% higher than the five-year average, while the average pipeline of listed-to-sale has shortened to just three weeks. Rents are on the rise, outpacing property prices, leading to an increasingly positive outlook for the London rental market.

Investors are urged to consider the rental yield of a property as a vital indicator of its performance potential. Rental yields in London have stabilised and currently average around 4.2%. Demand for rental homes in the capital rebounds, which presents an ideal time for property investment opportunities within London.

Heritage and Distressed assets
Older and distressed assets can realise their new value through repositioning, renovations, or adapting to new uses within a sector or even completely new sectors. These assets can be used for traditional office-to-lab or office-to-residential. In many cases, extensive work is needed, due to the current landlord being unable or unwilling to finance.

Green and sustainability targets
For “green” assets, acting sooner rather than later offers the best opportunities for capitalising on the lack of supply in what is becoming a highly sort after sub-category to premium or AAA. Meeting such standards will prove expensive, but critical for maximum returns. Be ready to act fast when the market price reaches its full potential. These assets will require confidence, patience, and decisive action.

Cycles have peaks and troughs
Now is the time for strong and strategic investments to capitalise. The interest rate cycle is close to peaking and the outlook is starting to become clearer. Frustration and confusion will begin to subside as we transition to a thriving recovery phase. Warren Buffet famously said that investors should be “fearful when others are greedy, and greedy when others are fearful.”

Investment trusts are highlighted as a preferred route for investors, offering flexibility and resilience during turbulent periods. Focusing on quality management within property businesses is key to successful property investment decisions.

Summary
London’s property market has proven its resilience amid challenging circumstances. Investors can capitalise on the city’s enduring appeal, growing demand for high-quality spaces, and the emerging green building trend. By identifying opportunities and leveraging the expertise of reputable investment partners, investors can position themselves for success in London’s thriving property landscape.

For those with vision and the confidence to back themselves, we are approaching the point where peak uncertainty will transition into peak opportunity. The coming years will undoubtedly be challenging, but they will also be some of the most exciting and rewarding that we will ever see.

As we learned from the pandemic, everyone needs a place to live, not everyone needs a place to work. However, done right, commercial property is in fact a far stronger and safer investment. One of the key reasons is your tenants: They will be long-term and likely to lease your building for a substantial portion of its life. And some will invest their capital in upgrading your property to attract and retain the best staff.

Not all commercial property is a smart investment, getting this right is all about one thing: Location.

Why central London?

Key movers and shakers are extremely keen to be as close as possible to the city centre. This is a dynamic that has existed for centuries in London and isn’t going to change any time soon.

London has roughly 105,000 civil servants, but that is just the start. Much of the national economy is centred here, and much of the global economy flows through too. Law, finance, media, creative agencies, and wealth managers for example, all have their own hubs making business flow better than anywhere else in the world.

The endorsement of a central London postcode like SW1 carries real weight, and might get people meetings they otherwise wouldn’t have managed. Most importantly for these organisations, London is a place where the best talent in the world wants to live and work.

There is no better place to be a global citizen, with world-class culture, a plethora of cuisines, an events calendar with something on offer every night of the week, and Europe just a short flight away. With English still the most-studied language in the world, the newly-educated elite can easily feel at home here. Even if English is not the 1st or 2nd language, every culture and nationality is well represented in London.

This talent knows their value and will not settle for second best, why live and work somewhere boring when something as exciting as London is on offer. That kind of excitement isn’t going to fade away just because the United Kingdom is not in the EU any more. A great example is Switzerland and its continuous growth since 2016, when it decided to suspend further negotiations for EU membership, making Switzerland known as a country with “good offices” due to their neutrality.

Why the right buildings are in central London

Architectural tastes can change and buildings that seemed sleek and modern in the 1990s can feel incredibly dated now. That’s why focusing on legacy architecture is key. This is the so-called “Lindy Effect” – an organisation that has existed for 100 years is far more likely to survive another century than an organisation that has only existed for 100 days. The same is true of buildings, especially buildings that have the blessing of being grade-listed.

Grade I and II listed buildings can be found all over the city, but they are especially clustered in desirable postcodes where Government departments and top tier private sector organisations want offices – and are willing to pay a premium for them.

Why now is the right time to invest in London’s commercial property

The future for the office itself is bright. While the pandemic added some flexibility to the work week, a future of entirely remote work is simply unsustainable. Survey data shows Gen Z employees want a return to the office, where they can build connections and learn from their older colleagues. Data from Transport for London suggests weekday tube usage has almost completely recovered to pre-pandemic levels. Organisational leadership – whether that be CEOs, ministers, or permanent secretaries – are also pushing for full returns to the office. And for any Government agencies that handle sensitive information, a fully remote working environment is simply not possible.

Then there is the financial situation itself. Because of high interest rates and some post-pandemic uncertainty about the amount of office space required, it’s a great time to buy long-term assets at prices below their usual value. Most of your competition will have to raise finance in a very costly environment, so if you have the liquidity to make one of these long-term investments, there could not be a better moment.

This extends not just to the purchase itself but also to any renovations required. Older buildings often need to be retrofitted to attract the most secure and lucrative tenants, particularly ones who have exacting ESG standards to meet. The current owners may not have the liquidity to undertake such a project, meaning a good price can be negotiated.

Many investments promise something like generational wealth. But ask yourself what you are more confident about: The price of a particular stock or index exceeding inflation over the next 50 years, or the fact that people will still want to inhabit beautiful buildings that have existed for generations in London come the year 2073? Now think about how the population is continuously growing. If you have the ability to get into the market, there couldn’t be a better time to invest in it.

In the realm of prime commercial real estate, one notable advantage lies in the abundant array of assets that cater to investors across various investment levels. This market’s inherent versatility allows astute investors to explore options that align precisely with their financial goals and risk appetite, without the need to overextend their resources.

In Q1 and Q2 Unica Capital has observed that acting swiftly is key to securing the best deals. As the market rebounds and adjustments continue, the timing is ripe for strategic investment. Notably, the seven core markets, including London, have shown a return of investor interest after a period of weaker investment volumes. With central London appearing to have fully corrected, followed by Hamburg and Amsterdam, investors can anticipate increased transaction activity in these markets.

Higher interest rates have impacted the UK commercial property market, resulting in a decline in buyer activity and downward adjustments in valuations. According to CBRE figures, since July 2022, all-property capital values have fallen by 20%, with the industrial market experiencing a significant drop of nearly 30%. The rise in interest rates and changes in investor sentiment have played a pivotal role in depressing capital values. However, occupier demand and rents have remained resilient amid these changes.

Q3 and Q4, predictions for the year ahead.

This cautious stance is attributed to the anticipated continuation of above-average headline inflation, prompting a thoughtful approach to navigating the evolving real estate landscape. The lending environment may not be accommodating enough to alleviate this pressure, and the possibility of further rate hikes cannot be discounted. Consequently, investors must carefully navigate the market landscape to identify optimal investment opportunities.

Despite the challenging conditions, leasing activity in London remains steady. Notably, in their Central London office market report JLL have reported thirteen pre-lets across prime London City locations taking place during the second quarter, indicating ongoing demand for high-quality spaces. The service industry sector has been particularly active, with retail and leisure, insurance, and service office operators contributing significantly to quarterly leasing volumes.

Unica Capital is poised for Q3 and Q4 with their deep-rooted understanding of the market dynamics, allowing them to capitalise on opportunities that others may overlook. Their strategic approach to renovations and refurbishments ensures that they can elevate vacant spaces to higher standards and meet new ESG standards, maximising the potential of each property. As the London property market shows resilience and rebound, Unica Capital stands as a reliable and experienced partner for investors seeking success in the prime commercial real estate market.

As the London commercial property, office and residential property market rebound and opportunities arise when others are looking to divest, we stand ready to expand our current portfolio. With a deep-rooted understanding of the market dynamics, and a commitment to delivering value and driving positive change, we aim to continue capitalising on the demand for high quality commercial office space and the surge in residential rents, building upon previous success in the world of property investment.

Unica Capital’s most recently completed project is a prime commercial office space on Portland Street; this real estate investment is a testament to their commitment to excellence and investment in historic buildings in desirable locations.

Located on the vibrant Portland Street in the heart of Soho, this recently acquired property has undergone a meticulous refurbishment both inside and out, ensuring the highest standards of quality and sophistication. The building’s historic charm is showcased through exposed brickwork and exquisite parquet flooring, creating an atmosphere that blends the best of the past with the demands of modern businesses, ready for a wide mix of potential office tenants.

Connectivity is a key advantage of this latest real estate investment property, as it benefits from exceptional transport links. With five underground stations, including Oxford Circus, Leicester Square, and Tottenham Court Road, all within a short walking distance, tenants and their clients will enjoy seamless access to major transport hubs.

Spanning just over one square mile, Soho boasts walkability, a desirable feature sought by today’s modern commuters. This strategic location enhances the property’s financial investment appeal, making it a highly desirable head office location for businesses seeking convenience, connectivity and the ability to impress current and future clients.

Surrounding the building is an area renowned for its diverse, lively, and vibrant atmosphere; Soho holds a well-deserved reputation as one of London’s premier socialising destinations. However, this maze of streets nestled in the heart of the West End’s nightlife scene offers much more than just pubs and restaurants.

This dynamic district is a powerful tool for employee retention and attraction. Its unique location and vibrant environment fosters a sense of community with abundant options for dining, entertainment, and leisure activities, creating a well-rounded work-life balance for tenants and their employees.

When macroscopic events such as Covid-19 occur, it’s natural they are followed by periods of uncertainty. This is what we’ve seen in London’s commercial property sector in recent years: the upheaval of the pandemic acting as a catalyst to developments that contemporary technology and work patterns had previously set in motion. What we shouldn’t do is mistake this development for decline.

News that London is experiencing record volumes of office refurbishments undermines some of the more pessimistic predictions we are witnessing for the future of the ‘office’. Since records began in 2005, there are a record volume of office refurbishment schemes starting, according to Deloitte’s Summer 2023 London Office Crane Survey. “A vote of confidence” for the commercial property sector.

London’s West End is seeing strong demand for high-quality, well-fitted office space, with estimated rental values 8% above last December, according to one of the West End’s main landlords. In a statement issued on June 14th, Shaftesbury Capital Plc notes “confidence for rental growth prospects,” which spreads throughout its portfolio focused in Soho, Covent Garden and Chinatown.

We believe these examples to be more than just anecdotal and point to two factors that are responsible for the office market in central London continuing to defy speculation of its decline.

1. The need to upgrade offices to meet new UK Minimum Energy Efficiency Standards (MEES).

Under the UK Minimum Energy Efficiency Standards (MEES), commercial buildings with an Energy Performance Certificate (EPC) rating of less than B by 2030 will be unable to legally lease their buildings. Currently, some 80% of office space in London does not meet this specification. ESG considerations play an important part in a property fund’s credentials and are a vital consideration for investors. In particular, environmental factors are becoming more important, with tenants increasingly considering the carbon footprints of the buildings they occupy.

As a result, property funds are having to look at their existing property portfolio and improve it or divest quickly. The alternative is being left with assets that no one wants to rent or buy.

2. A new age for workspaces – spaces with up-to-date tech, collaborative environments and improved onsite services.

Among the factors prolonging uncertainty are the varying desires of working patterns among workers and businesses. As long as employers demand in-person and employees call for homeworking, it’s clear there has to be a compromise. We are seeing a new way of working that demands a new type of flexible office space.

Employers who do not invest in modern, flexible offices will suffer when recruiting new staff as they look to rebalance their work/life dynamics. Chairman of Knight Frank, William Bearmore-Gray, has said about last year: “…for our London leasing agents it was probably one of their busiest years. The majority of the interest we are seeing is from companies which realise very clearly now that the office is a strategic tool to attract the best talent and increase productivity.”

A similar story emanates from agents Cushman and Wakefield, who reported a record number of office moves in 2022. This reflects the move to hybrid working (WFH), with most companies wanting less space in modern and better-located buildings.

While workspaces are changing, this fluctuation by no means signals a decline in the London office sector. When we consider the recent flurry of refurbishments across the capital, it is quite the opposite. Far from constituting a last stand by a fading industry, this wave of redevelopment marks the start of a new era for the commercial property sector and ushers in a more flexible, greener future. Indeed, a recent study showed two-thirds of flex spaces are more than 80% occupied.

Improved environmental credentials and modern flexible spaces will improve demand, and therefore, valuations. Whilst repurposing existing offices for other uses will decrease supply in the sector, it is ultimately raising rental income, as has been seen in the buy-to-let market.

Looking back at the Q1 2023 outlook, the market was subdued yet strong, with an increasing number of respondents expressing a belief that economic conditions were stabilising or even showing signs of improvement, which is a promising sign for the rest of the year.

London’s prime office sector is poised for substantial rental gains in Q2 and Q3, with a net balance of +29% anticipated. This surge in rent is driven by an increasing number of businesses realising the significant advantages that come with occupying top-notch, cutting-edge spaces. The Unica Capital REIT Portfolio has benefited from this demand and is positioned to offer high returns for long-term real estate investments, with a portfolio made up of quality rental spaces in sought after locations.

Sustainability
Increasingly the allure of modern, environmentally conscious buildings with superior amenities has captured the attention of forward-thinking companies seeking to attract and retain top talent.

Deloitte’s Crane Survey confirms this trend, reporting that a record number of office refurbishment projects covering 3.2 million square feet are currently underway in the city. This surge in activity is driven by landlords racing to achieve Energy Performance Certificate (EPC) B ratings by 2030. Unica Capital leads the way in this prime office space sector with a portfolio that is tailored to meet the evolving needs of modern businesses. Our properties not only embody excellence but also boast exceptional environmental credentials that align seamlessly with the sustainability goals of forward-thinking organisations. With a strong commitment to energy efficiency, Unica Capital offers an outstanding selection of office spaces that require no additional investments to meet government targets—a remarkable achievement in a market where a mere 20% of London’s offices currently meet these stringent standards.

Industry leaders, including Helical and GPE, echo the need for sustainable development in prime commercial office space. Helical’s CEO, Gerald Kaye, emphasises the strong tenant demand for sustainably designed buildings with top-quality amenities, leading to rising rental values. GPE shares this confidence in London’s tenant demand and has increased its rental growth guidance for prime offices to 3-6%. CEO Toby Courtauld highlights the growing divergence between the financial investment prospects of premium office spaces and the rest, particularly in the highly sought-after West End, where sustainable and well-designed spaces are scarce.

Flexible Spaces
The increasing demand for prime office spaces in London is driven by a variety of factors. Businesses, both large and small, are embracing the concept of hybrid working, leading to a healthy mix of tenants with requirements to downsize. Simultaneously, prominent organisations are opting to leave their outdated headquarters behind, seeking refuge in modern, environmentally conscious buildings that project a strong commitment to sustainability.

Unica Capital’s team of Property Investment specialists possess an unparalleled ability to identify, finance, and manage these real estate opportunities. With their expertise and strategic insights, they ensure that our clients’ investment needs are not only met but exceeded. Our track record speaks for itself, as we consistently deliver exceptional investment vehicles tailored to our clients’ exacting requirements.

Investors, too, are eagerly embracing the positive outlook for prime office rents in London. Despite a brief period of caution, the latest figures indicate a renewed confidence, with a net balance of -14% for investor demand in Q1—an improvement from the previous quarter. This reaffirms the resilient nature of London’s commercial market and the vast potential it holds for astute investors seeking promising opportunities.

Unica is at the forefront of London’s transformative real estate investment landscape, driving the surge in prime office rents. With our unwavering commitment to excellence and our portfolio of energy-efficient, state-of-the-art spaces, we are shaping the future of the city’s office market. As prime office rents increase, Unica Capital and our investors play a pivotal role in the city’s growth and prosperity. London’s skyline is set to reach new heights, and Unica Capital is leading the way.