Sherborne House, Cannon Street was brought to our investors in November 2018, via our partner Riverside Capital. Riverside Capital’s plan is to actively manage lease events within the plan to enhance retail rents, to let recently refurbished vacant office units at competitive market rents; to refurbish the lifts, common parts and remaining vacant space before letting at increased rents, leading to an exit in Q4 2021.
Update: 5 July 2019
Commercial property market update
City and East London investment volumes totalled £3.3 billion in Q4 2018, a 16% increase from the previous quarter. This brought the total volume for 2018 to £11.9 billion, approximately £0.6 billion down from the previous year, however considerably above the five-year average of £11.1 billion.
Leasing activity in Q4 2018 in Central London was strong, with the annual take-up volume 6.0% above the five-year average. At 24% of total leasing volumes, the media & technology sector accounted for the largest share of take-up across the City during 2018. Banking & financial occupiers were the second most active, taking 1.2 million sq. ft., or 16% of the total take-up.
Q1 2019 saw a reduction in investment volumes driven by the uncertainty caused by the UK’s decision to defer its exit from the European Union. Central London investment volumes for the period stood at £2.7 billion, 8% ahead of the same period in 2018 but 27% below the long-term average. City leasing activity was slightly subdued for the same period, reaching just 823,000 sq. ft. This was a 59% fall on the strong final quarter of 2018.
The subdued take up, together with higher levels of speculative development completions, led to a 7.0% increase in overall supply, which reached 4.8 million sq. ft. Whilst vacancy rates increased to 4.1%, they remain significantly below the ten-year average of 6.2% and five-year average of 4.8%.
Whilst wider economic uncertainty remains, the London commercial market has remained relatively steady, this is reflected in the positive update on Sherborne House outlined below.
The first floor, totalling 8,388 sq. ft., has recently been let to Kellen Group Plc. The new lease is for a term of ten years with a tenant operated break at year five. The tenant took occupation on 1 February 2019 and will enjoy an initial 15 months rent-free. The annual rent secured totals £377,460 per annum, equating to our target £45psf.
Riverside Capital has recently received planning consent which will allow for the creation of a new lift overrun and dormer windows to the 6th floor of the Cannon Street elevation. Since the grant of planning permission, works have commenced and include the installation of three new lifts to be completed by August.
In addition to the original proposal, Riverside Capital has received a second planning consent that will enable them to carry out extension works to the 4th, 5th, and 6th floor levels, and includes the creation of new roof terraces at 5th and 6th floor levels. We believe this is positive news for investors as it should add further value to the development. Additional works, including the creation of new bike storage and shower facilities at basement level, as well as an improved reception, will enable them to achieve their goal of repositioning the asset as a Grade A office building in a prime location.
Riverside Capital are currently exploring funding options that will enable them to build out the extension works and will be reporting to investors shortly. It is likely that debt funding will enable Riverside Capital to complete the project.
Current property valuation
The property has been valued by Cushman and Wakefield as at 31 March 2019. The valuation at £50.40m is on the basis of an asset value assuming full purchaser’s costs. This is an increase on the initial purchase price of £47.5m.
Given the above, we are happy with the progress made by Riverside Capital in line with their initial investment strategy.
Update: 5 April 2019
Since fully funding in December, Riverside Capital have been granted planning consent to improve and extend Sherborne House. This permission will allow for an additional 4,167 square feet of lettable floor area at 5th and 6th levels as well as new roof terraces to each of these floors. In addition, the consent will enable improvements to the reception area, and provide communal cycle storage and shower facilities to the building. Combined with the existing works which are currently taking place to the lifts in the building, this permission will assist Riverside Capital in repositioning the property as a prime asset in a central London location.
At present Riverside Capital are now in the process of exploring the funding options in relation to this permission, that were not envisaged as part of the original business plan. Once they have been through this process, they will provide a further update to investors. We will not be seeking any further investment from Property Partner investors in line with the above update.
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