Boston Properties (NYSE:BXP)
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5 Years : From Apr 2012 to Apr 2017
Boston Properties Inc., one of the nation's largest office landlords, is in negotiations to buy Drapers Gardens, a trophy office building in London's financial district, for GBP285 million pounds ($450 million), according to people familiar with the matter.
If Drapers Gardens sells, it would be the second time in two years that the building changes hands. It was sold to Evans Randall, a private equity firm, in 2010 for GBP242.5 million ($385 million) by Canary Wharf Group, a unit of Morgan Stanley Real Estate Fund, and Exemplar Properties, a London developer.
The deal would mark Boston Properties' first acquisition of an office building in London and comes as foreign buyers have stampeded into London's office market in recent years. Nearly 60% of the buyers of London office buildings were foreign investors between 2008 and 2011, according to CBRE Group. Most of the foreign investment came from Canadian pension funds, private equity money from Malaysia, and investors in South Korea and elsewhere.
Boston Properties declined to comment, but the company has said in the past that it was eyeing Britain's capital and largest city. "We have looked seriously at London ... as a possibility of another market opening up to us," said Mort Zuckerman, chief executive of Boston Properties, according to a transcript of the company's third-quarter conference call. "But we're going to be very careful about how (we) go into markets."
Demand has been strong for London office buildings in part because it's perceived as ultra safe. London tenants usually sign long-term leases that aren't subject to rent reductions, unlike New York and other cities where tenants can often request and receive rent concessions during weak economic times.
Even though rents in London have been relatively flat in the past few years at around GBP55, or $87 per square foot, investment bankers say big investors are drawn to London. "The upward only rent ... provisions and the ... long-term leases are important factors in attracting capital," said Simon Barrowcliff, executive director of Central London Investment for CBRE.
The London acquisition isn't the first time that Boston Properties has sought new markets. The company, which is known mainly as an office landlord, was among a handful of REITs to recently make a foray into developing and operating apartment buildings.
Some analysts remain wary of companies entering markets with no on-the-ground training or local partners to guile them. This is "not the first time we question a U.S. REIT management's appetite for overseas adventures," wrote David Harris, an analyst Imperial Capital in a recent report. He noted that Drapers Gardens is so safe and low yielding that Boston Properties isn't likely to get much bang for its buck.
Drapers Gardens' sole tenant is investment firm BlackRock, which signed a 25-year lease agreement in 2010 that calls for modest rent increases after five years ranging between 2.5% and 4.5%.
Mitch Germain, an analyst at JMP Securities, said playing it safe is probably a wise move because it gives Boston Properties room to soak in the market first without risking a serious misstep. "I rather that (they buy) a stable property ... to get their foot in the door and then follow up when they really get a sense of the operating history there," he said.
-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197; firstname.lastname@example.org