Inverted yields drawing 'unconventional' investors.

A new Salomon Brothers research report has uncovered an unconventional investment market in office buildings simultaneously emerging in New York and London, as plummeting property values and interest rates create opportunities for investors who are "buying on yield."

The market, while untraditional, is certainly rational, concludes the publication, "London and Manhattan: Yield Playgrounds in |Tried and True' Cities." The report cites a positive leverage environment in which spreads for office financing in the two markets are running 150-250 basis points above conventional mortgages.

"A new order of investors is coming forward and carrying out innovative transactions outside the normal channels," said Therese E. Byrne, who wrote the report. "The trend is being led by a group of owners and users using creative structures that are resulting in manageable transactions with broadly diversified levels of participation."

Three types of acquisition opportunity are proving attractive to the new players, the report says: the self-financing building, made possible by the inversion between increasing yields and declining interest rates; development sites appropriate for build-to-suits, based on the collapse in raw land values; and over-leveraged properties, transformed into viable propositions after debt restructuring and securitization.

Driving investors' interest in these transactions are some compelling numbers, the report notes. Current yield spreads on existing assets are 320 and 420 basis points above long-term government bonds in Manhattan and London respectively. New build to suits financed with the tenant's credit can achieve positive spreads of 150-250 basis points off conventional financing, leading to the best self-financing climate in 30 years. And restructured debt transactions are yielding returns above 15 percent. Within this yield universe, the report says, real returns of 6 to 8 percent can be realized.