LONDON • Goldman Sachs has slapped a sell sign on London property. The United States bank has sold its headquarters in the British capital for £1.2 billion (S$2.1 billion). While the terms of its leaseback deal might suggest a long-term commitment post-Brexit, the net effect is more bearish.
Betting against London property can be risky. Large offices have enjoyed an almost uninterrupted 10-year bull run of rising prices, according to Savills.
Yet telecoms giant BT and financial services firms KPMG, Lloyds Banking Group and now Goldman are cashing out. All have announced or completed sale and leasebacks in the past two years. The risk is these presage a repeat of what happened a decade ago.
During the peak years of the financial crisis, 2007 to 2009, UK commercial property prices fell over 40 per cent. Firms such as Tesco, HSBC and BBVA sold off their bricks and mortar, raising more than US$3 billion (S$4 billion) via sale and leasebacks.
HSBC's May 2007 deal to offload its London headquarters to Spanish property firm Metrovacesa raised £1.1 billion and implied a rental yield under 4 per cent.
Goldman's 2018 deal has been struck at a similar yield, according to a person familiar with the situation. That is below historic averages and a sign that the market has got toppy.
Given the risks to the City from a no-deal Brexit, Goldman's approach is reasonable.
The United Kingdom government warned last Thursday that banks like Goldman could not rely on being able to do the same level of European banking business from London. Hence CEO Lloyd Blankfein will need flexibility to move staff to the continent.
The fine print of the Goldman sale allows for this. Although the bank signed a lengthy 25-year lease with a 20-year break clause, its ability to sublet the building to other tenants will allow it to shrink its London workforce.
Foreign buyers are more sanguine about Britain's future. A collapse in sterling has spurred Asian pension and property funds to buy up a new stock of London skyscrapers like the "Walkie Talkie" and the "Cheesegrater".
In a world where 10-year UK government bonds are yielding less than 1.5 per cent, the current 4 per cent rental yields look attractive.
After a hard Brexit, buyers could wind up feeling like Metrovacesa did 10 years ago.