Trophy assets are overpriced? Not necessarily, according to Sorgente Group. Richard Lowe looks at the significance of some recent deals.
The BAFTA headquarters in London can be considered a ‘trophy asset’ in more ways than one. Every year, Princes House in Piccadilly hosts awards ceremonies, handing out gongs to the best in new television and film. The 81,000 sq ft property straddles Jermyn Street and Piccadilly, providing office and retail space, and housing the famous Princes Arcade.
Its acquisition by the Crown Estate, announced this week, provides one of the last missing pieces in the organisation’s large St James’s portfolio in the West End of London. Rather than being driven by a pure investment rationale, the deal is clearly part of the Crown Estate’s wider investment programme in the area.
“The acquisition is in a strategically important location and represents the last remaining gap in our interests on the north side of Jermyn Street,” said James Cooksey, head of St James’s at the Crown Estate.
This would explain the sub-5% yield that came with the trophy asset’s £87m price tag from seller Aviva Investors.
There has been much written about the influx of foreign capital entering the London commercial property market, chasing capital preservation and favourable currency dynamics, and the way this has pushed down yields for prime assets.
Value investors - especially those based in the UK - have avoided what they see as an expensive prime end of the market in favour of segments where there is less competition. However, if you are looking solely for capital preservation and are holding over the long-term you may not care. This is certainly another rationale for buying trophy buildings in London.
Last month, Sorgente Group, which manages European and US real estate investments on behalf of Italian institutional investors, acquired Queensbury House in London’s Mayfair for £167m, representing another sub-5% yield.
Was this simply another case of foreign money - in this instance Italian - looking for a safe haven asset with less concern for the entry price? Perhaps. But perhaps not.
Sorgente, which was the first company to launch a dedicated institutional real estate fund for Italian investors, has an explicit strategy to invest in ‘historic and trophy’ buildings, and owns among others the Flatiron building in New York and Piazza Colonna in Rome.
Stefano Cervone, director general at Sorgente, argues that historic and trophy buildings offer a superior risk-return profile by their very nature: they are unique, retain their value better, attract tenants and are very liquid. This contention has always been at the heart of Sorgente’s “philosophy”, he says.
Sorgente even commissioned independent research institute Scenari Immobiliari to investigate the performance of trophy buildings versus the wider market in Rome, Milan, Paris and New York over the past 25 years. The study found that trophy buildings - defined as having “historic interest”, “interesting architectural credentials”, “prestigious and exclusive locations” and being “viewed as an icon of a particular place” - outperformed both during upturns and downturns.
Sorgente, which has established an office in London and has obtained a licence from the Financial Services Authority in the UK, is in the market to discuss its strategy with global institutions and widen its investor base. Cervone admits that many investors argue that trophy assets are too expensive in the current market. But he is hopeful the strategy will gain traction.
In a recent report, UK-based real estate investment manager PRUPIM summarised the traditional thinking among institutional investors, especially domestic ones. “There is an increasing feeling that UK investors are leaving the Central London ‘trophy’ office market to non-domestic sources of capital and are focusing on smaller markets which they view as better value and where they have a greater feeling of comfort and relative knowledge,” it read.
Is it time for institutional investors to rethink their views on trophy assets?