Freshfields to Freshers - Challenging assets in changing times
Market Insight
The biggest deal in the City of London in Q1 of this year, accounting for over 25% of total investment volume, was the acquisition of the former Freshfields HQ on Fleet Street, set to be converted to student housing. From Freshfields to freshers in less than 5 years, it is a great example of the growing need for a flexible, creative approach to assets across sectors as levels of obsolescence increase in both a physical and practical sense. 

The source of obsolescence varies – be it the wrong location, specification, environmental performance or use – but it is a theme we see across the market, and one that presents significant risk but can offer up opportunity as well. What is required is flexible capital and a detailed, tailored approach to mitigate and manage the potential downside as well as identify and capitalise on the opportunities. 

In our portfolio, we have delivered a number of asset management initiatives in this space in recent years. We have recently completed the comprehensive refurbishment of 20-25 Glasshouse Yard. It was previously single-let to the University of York, but now with the changing occupier environment we have delivered the space on a multi-let, plug and play basis to meet the latest demand. The works have also been targeted to achieve the relevant environmental standards to futureproof the investment.  

Further afield, we have also delivered extensive changes at Königsbau Passagen, our mixed-use office and shopping centre in Stuttgart. Here, we invested substantially to introduce a food court within the underutilised retail area servicing both the retail and office spaces, as well as temporary exhibitions to mitigate Covid-driven vacancy. Analysis is also ongoing to introduce potential medical or hotel uses into the centre. 

We are also currently analysing a number of potential opportunities in the market with strategies ranging from minor re-lifeing and future-proofing of existing uses, through refurbishment, fitting out works, and EPC analysis all the way to wholesale repositioning and alternative uses such as office to industrial conversions or opportunities underpinned by significant power infrastructure. 

Alongside the property analysis, the current challenges and opportunities are not just confined to the asset level. The recent property market upheaval – Covid, inflation, interest rates – has coincided with major tax changes that have a very significant impact on UK real estate investment yet can easily be overlooked.  

Comprehensive investment management across the full structure is critical to ensure that any potential cost savings and mitigation are realised, be it through the changing regulations around capital allowances and investment or the now much tighter restrictions on interest deductibility for UK assets. Both can be very material factors in the overall economic analysis, coupled with the potential latent benefits associated with historic base cost analysis following the change in capital gains treatment in 2019. 

At times like these, active and holistic management comes ever more into focus and is central to navigating the uncertainties we all face.