"Everything we buy, it needs to have good bones," says TriOffice managing partner Ben Beck, as he outlines the firm's approach to acquiring offices across the regional markets and London.
Having bought Manchester's 55 Spring Gardens with the Pears Group for 37% less than its previous owner paid in 2017, Beck says the business is confident in its counter-cyclical investment strategy after launching earlier this year.
Its strategy centres around buying offices in the "very best micro-locations" and repositioning them into high-performing properties, with an expectation that values will recover over the next five years. This comes at a time when others, namely institutional investors, are looking to reduce their exposure to offices.
Beck, who joined TriOffice as managing partner from Blue Coast Capital in September, says acute repricing of UK offices has created a "generational opportunity" to invest in workplaces, particularly when occupational resilience across the regions is growing and development pipelines are shrinking.
"It’s interesting how in real estate a lot of parties take comfort in what everyone else is doing," he says. "I think it’s easy to follow established trends. If you look today at the living sector or the industrial sector, there’s been a clear wave of capital targeting [them].
"But what that’s meant is, arguably, the returns on offer have been reduced because it’s a much more competitive space. If you want to genuinely look for value-add and opportunistic returns, the sort of assumptions you’ll need to be making will be very aggressive within those spaces because of the level of competition."
TriOffice, part of the wider Tri7 Group, is investing its own capital alongside a number of capital partners, including family offices and private equity, looking to assemble a portfolio of £250 million to £300 million over the next three years.
Beck continues: "Offices have always been a key component of commercial real estate. The office market has changed through COVID and since but, if you look at office occupational patterns post-pandemic, it looks like they have now settled [...] a number of larger corporate employers are now mandating employees back to the office [and] it's an accepted norm now that hybrid working is here to stay.
"I believe that over the course of the next few years the appetite will warm up again towards offices. I don’t think it will be as widespread as it once was and I don’t think that the secondary office markets are going to be as resilient as they were. But I think the key investment focus is going to be [on] location and quality of asset, therefore, I think the inflows will come back into the market.
"What we are trying to do with this strategy is get ahead of that and reposition these assets so we can present them back to the market at the opportune moment once capital returns."
Regional appeal
Beck describes the business as having a "bias" towards regional offices, particularly the Big Six markets, highlighting Manchester, Bristol and Edinburgh as three cities on its radar. He says the three cities offer good dynamics in respect of their demographic, with large student populations and high graduate retention rates – important factors for businesses looking to maintain or launch operations.
In addition to "good bones" and appealing locations, Beck says liquidity is another factor driving the business's investment strategy as he explains why it won't complete a deal for less than £10 million. He says: "Within the regional markets, the main concern is really about liquidity at exit.
"Everything we buy, we want to ensure that we have liquidity and, at the moment – given that liquidity is low – the one way we are counteracting that at our exit assumptions is that assets are typically no larger than at £50 million to £60 million. So, by nature, that would dictate that your entry point is probably £10 million to £40 million.
"That doesn’t mean that we wouldn’t go over £40 million, because there are some great opportunities out there, and we have some capital partners who actually would specifically rather do some larger, opportunistic assets. But I think generally speaking, that £10 million to £40 million [bracket] is really where we see the most opportunity at the moment."
He adds: "I think that there is a really compelling opportunity to go now because, normally, pricing dislocation is a reflection on occupational markets. If occupational markets are suffering, that has a direct impact and correlation to value. The reason why I think the office market is so interesting today is that it’s the exact opposite – investment sentiment has moved [down], pricing has moved significantly downwards, and yet in major regional cities you have seen significant rental growth."
Moving rents
With occupiers demanding their workplaces are more sustainable and amenity-rich than ever following wider adoption of hybrid working, Beck says many landlords face "significant capital expenditure bills" to reposition their offices back to lettable, high-quality buildings.
He adds that some owners will find it hard to do this and recover the values they invested into schemes at following the recent repricing. But he believes this will lead to situations for more opportunistic and entrepreneurial money to acquire offices in prime locations.
Beck says TriOffice falls into this category and is targeting income-producing offices "passing off reversionary rents in key micro-locations". The buildings, which it will upgrade using rental income, must also be "fundamentally good", including features such as lots of natural light, good floor-to-ceiling heights and larger, flexible floorplates – or "good bones".
He says the business found this at 55 Spring Gardens. "The building we have just bought in Manchester is already incoming producing, there is a small amount of vacancy in the building and, over the course of our hold period, we anticipate that there will be leases coming back, falling in and breaks activated. So, there will be opportunities for us to take back suites and move them on."
Beck adds that TriOffice wants to "add significant amenity to the building", including end-of-trip and wellness facilities, in addition to making improvements to the reception and addressing building fabric issues. He believes the business can also add furnished and fitted spaces at 55 Spring Gardens and other regional schemes to drive rental tone.
"The journey that we are looking to take this building on is that any asset that we are selling towards the end of the hold period, it will be a high-quality, sustainability asset with rich amenity. We have turned down opportunities to acquire assets where we don’t feel that we will be able to do enough of it over the next few years, so we are looking to take the buildings as far as we can."
Evergreen appeal
Like Aviva, whom TriOffice and the Pears Group accquired 55 Spring Gardens from in October, a number of institutional investors are reducing their exposure to offices, with M&G another disposing of regional offices, including Leeds' Central Square, which it sold to Ashtrom for £78 million last month.
Beck says that offices will continue to make up a chunk of investors' core property portfolios and will continue to look for high-quality offices in the future. He acknowledges that this could mean the TriOffice could be selling repositioned properties back to those they bought them off in five years' time.
He says: "For the very best stock I think there will be [that demand] and the reason I think that is because institutional money will always have an allocation to office, that allocation might reduce moving forward with a larger waiting towards alternative sectors, being that PBSA, or residential – they may have also upped their weighting to the logistics sector.
"But they will still have an allocation to office, which will still have to be filled somehow, that allocation will be for the very best buildings in the very best cities, which have been repositioned or built to a very high ESG criteria and are amenity-rich and in the right locations."
Looking to the future, Beck says TriOffice is assessing opportunities in a number of destinations, and is pleased to have jointly acquired its first scheme after launching in September. He says the firm would not be caught "sitting on our hands" and is "actively working" on its next opportunity, with its partners recognising the "compelling opportunity" in the regions.
He adds: "I think the real focus for us isn’t just buying things because it's cheap, because there is a temptation in a market like this to just see that prices have fallen off completely and lose focus and discipline on micro-location.
"If we are going to ensure that we will sell these assets in a three- to five-year period, we must ensure that the assets we buy are absolutely capable of becoming best-in-class buildings, and that is so heavily location dependent. There are opportunities to buy, but it’s being able to buy the right assets at the right location and crucially being able to buy them at the right entry point."