Investors are being warned to steer clear of UK office buildings, as their value is rapidly declining. Andrew Jones, CEO of LondonMetric, one of the UK’s largest listed landlords, has compared the office market to “melting ice cubes”.

A Shift Away from Offices

LondonMetric has completely exited the office market after seeing a significant drop in value over the past decade. Jones argues that the office market is facing a perfect storm of factors, including:

• Shorter leases: Tenants are increasingly opting for short-term contracts, making it difficult for landlords to secure long-term income.
• Environmental pressures: Landlords are facing increasing pressure to make their buildings more environmentally friendly, which comes with a hefty price tag.
• Higher expectations: Tenants are demanding more from their office space, requiring upgrades and modernisations.
• Hybrid working: The rise of remote working has reduced the demand for office space, particularly for traditional office buildings.

A Difficult Time for Commercial Property Investors

The combination of these factors has made offices a risky investment.

• Rising interest rates: Higher interest rates are making it more expensive for investors to borrow money, further impacting the value of commercial properties.
• European office values down 33%: European office values have plummeted by an average of 33% since their peak in 2022.

LondonMetric’s Focus on Warehouses and “Convenience Retail”

LondonMetric is focusing its investment strategy on warehouses and “convenience retail” – think Aldi, roadside convenience stores, and discount retailers. They believe these sectors are less susceptible to the challenges facing the office market.

Why LondonMetric Favors Triple Net Leases

LondonMetric prefers “triple net” leases, where the tenant is responsible for all upkeep costs. This approach, common in the US, allows them to avoid the burden of managing and maintaining properties, which they believe is a distraction from the core business of generating income.

What’s Next for LondonMetric?

LondonMetric is looking to sell some of the properties they acquired through recent takeovers and are actively assessing potential deals to acquire smaller REITs.

The Takeaway for Investors

The warning signs are clear: the office market is undergoing a significant transformation. Investors need to be aware of the risks associated with office investments and consider alternatives like warehouses and “convenience retail” that are less vulnerable to disruption.