Link REIT Buying Morgan Stanley European HQ From Hines for £371.4M

Link REIT has moved forward with its first acquisition in the western hemisphere as the Hong Kong-listed real estate investment trust today announced a deal to purchase 25 Cabot Square in London for £371.4 million ($475 million).

Asia’s largest REIT said in a statement that it has agreed to buy the 17-storey office building on Canary Wharf from a unit of Hines Global REIT around six weeks after local press reports in London had indicated that a deal was imminent.

Link REIT is acquiring the building known as The Cabot just over seven months after purchasing an office building in Sydney as its first asset outside of Greater China. The trust manager said that this latest acquisition, like the Australian deal, is part of the Vision 2025 strategy announced in 2019 that paints a path for the investment vehicle to expand its reach into the United Kingdom and Australia, as well as Singapore and Japan, as it spreads its investment focus to gateway cities globally.

Buying a Fully Leased Office Property

“The Cabot is exactly the kind of stable income-producing high-quality asset with long-term growth potential that we’re looking for,” Link’s Chief Executive Officer, George Hongchoy, said in a statement. “It’s a prominent, Grade A building and one of the few freehold properties in Canary Wharf.”

With the 481,605 square foot (44,742 square metre) property over 99 percent occupied, Hongchoy pointed to the Cabot’s conectivity and accessibility as making it attractive to tenants. With an weighted average period to lease expiry of nearly 11 years, 49 percent of the building is currently leased to Morgan Stanley, with another 30 percent occupied by the UK government’s Competition and Markets Authority (CMA) which leases 113,000 square feet.

IWG’s Spaces occupies 71,000 square feet across more than three floors of the tower after signing a 15-year lease in March of 2019 at a reported £50 per square foot, according to local UK media accounts.

At the announced consideration, Link REIT is paying the equivalent of £2,570.57 per square foot for the 1991-vintage property.

At present the asset generates an annual net passing rent of £18.83 million with the transaction taking place at a net property income yield of 5.0 percent. The trust manager added that the acquisition is accretive to Link REIT’s distributions and fully hedged by borrowings in British pounds.

The transaction price represents a 0.4 percent discount on a valuation by Colliers International earlier this month.

Betting on Improved Connectivity

Hines Global REIT had acquired 25 Cabot Square from Morgan Stanley in 2014 on a sale and leaseback agreement, with the Houston-based developer and fund manager having since completed a £70 million renovation of 200,000 square feet across floors 7 through 14 of the building.

In explaining its investment rationale for the acquisition, Link REIT also pointed to the Cabot’s expected improvements in access and connectivity when the Elizabeth Line of London’s Crossrail opens next year with a station on the new metro extension located just six minutes’ walk from the asset. The trust manager also noted the high liquidity in London’s office market and the city’s healthy fundamentals notwithstanding Britain’s Brexit decision.

Link REIT says it is funding the acquisition through internal resources, supplemented with new borrowing to hedge against exchange risks. When completed, the deal will boost Link REIT’s pro-forma adjusted ratio of debt to total assets from 17.8 percent to 19.2 percent, based on its consolidated financial position as of 31 March this year.

Moving to a Global Focus

Link REIT’s London deal, together with its A$683 million ($468.9 million) acquisition of 100 Market Street in Sydney in December of last year now will put 3.4 percent of the HK$193 billion ($25 billion) trust’s assets outside of Greater China, with the manager having set a goal of increasing that allocation to 10 percent.

At present some 12.7 percent of Link REIT’s assets are in mainland China, while another 83.9 percent are in Hong Kong. This latest acquisition also increases the trust’s allocation to office assets to 10.8 percent, with the manager having set a target of 15-20 percent as Link REIT adjusts away from its traditional reliance on retail.

The transaction is expected to complete on 25 August 2020. Following completion, Link will engage asset manager Patrizia UK Limited to provide asset management services for The Cabot.