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According to the managing director of one of the UK’s largest listed property landlords, office buildings are like “melting ice cubes” for investors because they lose value so quickly in the current market.
Andrew Jones heads LondonMetric, which will join the FTSE 100 this week after a series of deals culminating in the £1.9 billion acquisition of smaller rival LXi completed this year.
Measured by market capitalization, the company now ranks third among British real estate investment trusts (REITs).
But unlike most other landlords listed on the stock exchange, LondonMetric does not have a fixed specialization in a particular real estate sector such as offices or warehouses, according to Jones.
“Very few REITs have changed their strategy in the last 15 years,” says Jones, who founded the company in 2010 as Metric Property. He blames the decline in the listed property market compared to private funds in part on the “sector’s habit of sticking to historical specializations and not wanting to evolve.”
A decade ago, a quarter of LondonMetric’s portfolio consisted of office properties, but the company has since sold its holdings in this sector.
Jones said a trend towards shorter office leases, stricter environmental criteria and higher tenant demands on facilities meant that “[office] Obsolescence has increased over the past 20 years” – especially since the pandemic and the advent of hybrid work.
“The money needed to [offices] “Rents are rising faster than the utility of the property,” he said.
His comments come at a difficult time for commercial real estate investors. Rising interest rates have driven values down across the sector, but office properties are also suffering from concerns about demand as companies switch to hybrid working. European office values have fallen by around a third on average since their recent peak in 2022, according to consultancy Green Street.
This decline has been painful for many property investors who traditionally invested a third or more of their capital in offices. Major listed property landlords include British Land and Land Securities, both of which own multi-billion dollar portfolios in London.
Office owners and some analysts argue that widespread negativity toward office investment ignores a divide in the market: a shortage of high-quality space and an oversupply of older buildings.
Jones believes the sector will find it difficult to escape disruption from technology, just as e-commerce has destroyed the value of shopping malls. “Everyone will claim they have the best, greenest office building and the most experiential store,” he said. “The fact is we have too many offices and too many physical retail locations.”
LondonMetric’s £6 billion portfolio includes some eclectic holdovers from a series of acquisitions, including garden centres and car parks. The company said it had already reached agreements to sell £140 million of LXi’s redundant assets and was looking to get rid of its remaining £35 million of offices.
Jones favours the roughly 45 per cent invested in warehouse investments, alongside large stakes in what he calls “convenience retail” – typically small grocers such as Aldi, roadside convenience stores or discounters. The acquisition of LXi added a large portfolio of “entertainment” assets, including Alton Towers and Thorpe Park.
The theme parks are an example of a unique feature of LondonMetric’s approach: a preference for “triple-net” leases, where the tenant bears all maintenance costs. These leases are more common in the US, while many UK landlords prefer to retain more control over their properties to increase their value through active management.
“I think a lot of people in our industry associate activity with success,” Jones said. “Income and income growth should be the foundation.”
As for future activities, LondonMetric will be busy selling some of the properties it has acquired through its acquisitions and will also be evaluating offers to buy smaller REITs.