LONDON - Goldman Sachs has slapped a sell sign on London property. The U.S. bank has sold its headquarters in the UK capital for 1.2 billion pounds. While the terms of its leaseback deal might suggest a long-term commitment post-Brexit, the net effect is more bearish.

Betting against London property can be risky. Large offices have enjoyed an almost uninterrupted 10-year bull run of rising prices, according to Savills. Yet telecoms giant BT and financial services firms KPMG, Lloyds Banking Group and now Goldman are cashing out. All have announced or completed sale and leasebacks in the past two years.

The risk is these presage a repeat of what happened a decade ago. During the peak years of the financial crisis, 2007 to 2009, UK commercial property prices fell over 40 percent. Firms like Tesco, HSBC, and BBVA sold off their bricks and mortar, raising over $3 billion via sale and leasebacks. HSBC’s May 2007 deal to offload its London headquarters to Spanish property firm Metrovacesa raised 1.1 billion pounds and implied a rental yield under 4 percent. Goldman’s 2018 deal has been struck at a similar yield, according to a person familiar with the situation. That’s below historic averages and a sign that the market has got toppy.

Given the risks to the City from a no-deal Brexit, Goldman’s approach is reasonable. The UK government warned on Thursday that banks like Goldman could not rely on being able to do the same level of European banking business from London. Hence CEO Lloyd Blankfein will need flexibility to move staff to the continent. The fine print of the Goldman sale allows for this. Although the bank signed a lengthy 25-year lease with a 20-year break clause, its ability to sublet the building to other tenants will allow it to shrink its London workforce.

Foreign buyers are more sanguine about Britain’s future. A collapse in sterling has spurred Asian pension and property funds to buy up a new stock of London skyscrapers like the ‘Walkie Talkie’ and the ‘Cheesegrater’. In a world where 10-year UK government bonds are yielding less than 1.5 percent, the current 4 percent rental yields look attractive. After a hard Brexit, buyers could wind up feeling like Metrovacesa did ten years ago.

CONTEXT NEWS

- Goldman Sachs said on Aug. 22 it had sold its new, unfinished European headquarters in London to South Korea’s National Pension Service for 1.17 billion pounds.

- As part of the deal, the U.S. investment bank will lease the building, which is still under construction and not due to be occupied by the bank until 2019, for an initial period of 25 years.

- The bank announced it would build the 1.1 million square foot office, called Plumtree Court, in February 2017.

- Goldman Sachs said the sale and leaseback was part of its long-term global real estate strategy, enabling it to capitalise on the value created via the development while securing a long-term occupation of the site.

- The sale and leaseback agreement includes a break option after 20 years and the possibility for the bank to extend this beyond the initial term.

(Editing by George Hay and Karen Kwok)

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

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