Office buildings are sought after investments due to their long lease terms ensuring stable properties. Often Office buildings in central Business districts like La defense, Paris or Canary Wharf, London are part of core property investments of Pension funds and REITs.
Steady recurring income for a long duration is best evaluated by the cap rate approach. Alternatively, If we assume annual rental of all properties in a region will grow by the same price and will have a similar ratio of operating expenses, the gross rental yield will also provide a similar outcome to the cap rate.
No 5 Broadgate is a lauded commercial property at one of the world’s main financial centers – Canary Wharf, London.
CK assets, Hong Kong’s leading real estate developer, acquired the property for one billion pounds.
To derive the value of the transaction, we take a closer look at the lease specifications. The property was leased to UBS at 54.5 pounds per square feet increasing by the annual retail price index or UK inflation rate.
The acquirer will receive rents adjusted for inflation of 3.9% in the first year.
Office rental yields in London’s docklands, where the property is situated, averaged 4.5% These yields could range between 4% to 5% depending on the lower or higher risks associated with specific properties.
Graded amongst top office properties, located in the most prominent areas in docklands and having a bluechip lessee for over 17 years implies that 5 Broadgate has amongst the lowest risk amongst commercial office properties and we can reasonably apply a lower yield of 4%.
With a 4% yield we see the value of the property is at 991 million pounds and within range of the 1 billion pound valuation.