City & City Fringe Investment Market
Overview
A total volume of £492M was achieved across eleven transactions which is just above the transaction numbers achieved during the height of the Covid pandemic in Q2 2020 where eight transactions occurred.
Continued high inflation coupled with further interest rate rises (50bps increase on 22 June to a base rate of 5%) have been the major cause of this deal stagnation creating pricing uncertainty and further yield movement. There has also been very little new stock actually brought to the market because of the gap between vendor and purchaser pricing aspirations.
Whilst marginally higher than the Q4 2022 volume of £355M, total investment volumes this quarter are substantially down on Q1 2023, where a total of £1.54BN across 23 transactions so down 68% bringing the total volumes for the half year to £2.032BN substantially down on H1 2022 where volumes were at £5.172BN. Again this figure is roughly 50% down on the five year average.
64% of the total volume for the quarter is dominated by Mitsui and Greycoat’s £315M acquisition of Sancroft, Paternoster Square meaning Asian investors once again are responsible for most of transactional volume albeit this is focused on one large transaction.
Nine of the remaining transactions for the quarter were domestic or European buyers with an Israeli investor making up the difference.
5 year Sonia swap rates have moved out from 4% to in excess of 5% which makes debt financing even more challenging. This is reflected in the lower transaction numbers and the very few transactions above £30M.
Prime yields sit at 5% in June 2023, however, most commentators are forecasting a movement out to 5.25% by the end of July.
Investor appetite remains for best-in-class office buildings with high ESG and sustainability credentials but owners of these buildings are currently reluctant sellers.
Who is Active?
The majority of deals transacted have been acquired by private domestic money. Asian buyers are selectively active at the larger end of the spectrum with Mitsui (Japanese) providing the equity for the largest deal of the quarter and some of the more recent buildings to go under offer, Lion Plaza and Watling House, rumoured to be being acquiring by Asian buyers but at rebased prices.
The market is closely monitoring the on-going sales process of 20 Old Bailey, EC4 which was launched to the market in April 2023 on behalf of Korean-based Mirare at a price of £320.65M (£1,325psf) reflecting 4.5% initial yield. This is a best-in class refurbished building, multi-let to four strong tenants with a WAULT of just under 10 years. The majority of the interest in the property has come from Asian investors.
The sale of 5-10 Great Tower Street, EC3 attracted a lot of attention because of the attractive quote price of £15M reflecting £269 per sq ft
Headline Deals for Q2
The largest deal of Q2 was Mitsui and Greycoat’s acquisition of Sancroft on Paternoster Square, EC4 for £315M reflecting 2.95% and £1,037psf. The freehold building was recently refurbished and part let to Goodwin Proctor and Convene for 10 years term certain and the topped up/stabilised yield is estimated to be c.6% post letting of the vacant space.
Behind this two of the next largest deals were alternative-use plays. 45 Beech Street, EC2 is a 42,946 sq ft freehold office building to the north of the Barbican estate owned and occupied by BE offices. The property was acquired by Hub Capital for a change of use to hotel.
The sale of 5-10 Great Tower Street, EC3 attracted a lot of attention because of the attractive quote price of £15M reflecting £269 per sq ft. The building held freehold by RBS comprised a vacant office building totalling 55,817 sq ft. Once it became clear that the City of London planning authority were receptive to a change of use from office to hospitality-use the top three bidders all bid unconditionally on the basis of a change of use to serviced apartments or hotel. The offers from alternative users were reportedly c.35% ahead of the parties bidding on the basis of an office refurbishment which emphasises the strength of the living sector. Dominvs acquired the property for £27.5M (£492 per sq ft) working to a five day exchange following a highly competitive bids process.
The on-going sales of these buildings emphasise the appeal of the City of London
Direction of Travel
With market sentiment taking another dip since the latest interest rate rise of 50bps on 22 June and further rates hikes predicted in August, office yields are still adjusting to the new normality and values are coming under more pressure. It feels like there is more pain to come for City landowners however there is still a weight of money sitting on the side lines wanting to invest.
In times like these investors are reverting back to the fundamental strengths of real estate as not only a ‘bricks and mortar’ investment, but also a hedge against inflation. Capital value (£psf) is becoming a more important metric than yield and with build costs still at historic highs some investments will start to trade at a £psf in line with vacant possession values which could look attractive in the longer run.
Prime yields currently sit at 5% but as we move into July some commentators have shifted this to 5.25%.
Some larger deals are under offer/exchanged as we move into Q3; Lion Plaza (c.£200M), a large freehold building in the City core owned by Doric and majority let to White and Case lawyers exchanged to a private Vietnamese purchaser at c.6.1% yield. Also, Watling House (c.£70M), a multi-let freehold being sold by Blackrock is rumoured to be under offer to a Chinese investor.
The on-going and completed negotiations of these buildings emphasise the appeal of the City of London and reinforce the attraction of core well located buildings to Asian buyers who are still active despite being more selective.