An office can be ready for customers long before it is ready to pay investors back.
The latest market reports are useful context for that gap.
JLL’s Q3 Central London research recorded 3.1 million SqFt of take-up, describing it as “the strongest Q3 since 2019”. Active demand increased by 5% over the quarter, while supply tightened for the fourth consecutive quarter.
Companies are committing to space for their teams.
Meanwhile, Savills’ October investment report describes buyers taking longer over decisions and renegotiating prices as financing costs rise. Prime office yields in London City, the West End and Manchester moved out by 25 basis points during Q3, putting pressure on what buyers will pay for a given income.
Reading those reports alongside our own conversations,
I can understand the hesitation.
In one of our current project conversations, there’s interest from a potential buyer in the completed asset. But funding the development/repositioning is still a separate discussion.
Someone can see a building they’d want to own without wanting to take construction risk.
For a project being underwritten today, stronger demand sits alongside pressure on financing costs and exit values. We have to make the numbers work with both.
Because someone still has to fund the work before the income arrives.
At Brave, our projects include Members Clubs for Lifestyle Working™ and mixed-use destinations combining workplaces, food and beverage and, in some cases, hotels. We’re looking at the property and the businesses planned for it together.
Getting the doors open
In one structure we’ve been discussing, the landlord would fund the building works, while we would bring the working capital needed to get the business up and running.
The landlord needs to know how its investment will earn a return.
Our investors need to know how much cash we’ll need while membership grows.
Both rely on customers choosing the building and staying with us.
Alongside the fit-out, there’s a team to hire, a sales effort to pay for and a service to deliver from the day the first member arrives. And it’s crucial that those early members get the experience they signed up for while we’re still filling the building.
Running short of cash at that stage could undermine the experience we’re selling.
I’ve found that no two deals are the same.
We’ve been discussing different arrangements with owners, including leases, a base rent with a share of the upside, as well as management agreements. Each comes with different responsibilities. So we need to work through what the owners and equity investors are comfortable funding and what the operating business can afford.
I find those conversations are much more useful when everyone can see what the numbers are based on.
Different stages, different investors
The buyer interest I mentioned earlier is in the completed asset.
That leaves us to work through the development or repositioning finance.
I think this helps explain why improving occupier demand doesn’t immediately bring new investment with it. Investors taking construction risk often have a different timeframe and appetite for risk from someone backing the business inside the building.
Sure, different investors can fund those stages. That means we need a workable plan for moving between them, including what a new buyer or lender would need to see before committing.
The more deal conversations I have, the more convinced I become that family offices and private investors have an opportunity to fund the offices companies want.
Giving these businesses time to stabilise costs money. Investors need a return that reflects that commitment and the risk they’re taking.
In their report, Savills puts it plainly: “Income will remain the driver of total returns.”
When revenue comes from memberships, hospitality and other services, we need customers to keep choosing us. That means funding the team and service that give them a reason to return while we build the customer base, with a clear plan for covering those costs and delivering our target return.
My view is that private capital has an opening where it is willing to underwrite that process ahead of institutional investors who want more evidence of operating performance before committing.
Stronger occupier demand gives us a reason to examine these opportunities. For private investors coming in early, the entry price and share of the upside should reflect the risk they’re taking.
I’d want the projected return to hold up under conservative exit assumptions, with allowance for a slower start or higher costs.
The opportunity I see for private investors with a longer horizon is to create assets they’re well paid to hold. That means targeting strong cash-on-cash returns from sustainable operating income, with the option to sell when the timing and price make sense. A proven operating record could widen the pool of potential buyers, including institutions.