West End Investment Market
Following one of the lowest volumes on record in Q1 (£375M) we recorded £840M of volume either exchanged or exchanged and completed in Q2 in 21 transactions with an average lot size of £40M.
Overview
Two further interest rate rises to 5% (the highest since 2008) to curb inflation did not help the West End market this quarter with another underwhelming quarterly volume recorded, but on a more positive note there are some indications of the market starting to pick up with 65% of the quarter’s transactions happening in June.
Following one of the lowest volumes on record in Q1 (£375M) we recorded £840M of volume either exchanged or exchanged and completed in Q2 in 21 transactions with an average lot size of £40M. This brings the half year total to £1.22Bn in 35 deals which is 61% below the 5-year H1 average of £3.1Bn. A stark comparison of the current slowdown is that in Q2-Q3 2020 when the world was grappling with a pandemic and lockdowns the West End still managed £900M in 6 months. The 10-year average annual volume for the West End is £7Bn – so as we hit the half year, despite there being c. £7.2Bn of stock on the market, we anticipate this period of price discovery to continue.
Who is Active / Headline Deals
The well documented polarisation of the occupational market is mirrored in capital markets with well located properties offering either good income or repositioning opportunities continuing to attract considerable interest.
A prime example being The Portland Hospital, 215 Great Portland Street, W1 which was purchased by a private Singaporean Investor. The freehold building is single let to HCA International, part of the world’s largest private healthcare provider, until December 2040, 17.5 years unexpired, with a tenant option to renew for further 25 years. The property received multiple offers and exchanged for c. £51M reflecting a 3.99% NIY and £1,500 per sq ft.
20 Rathbone Place, W1 exchanged to JP Morgan after considerable interest from different investor groups for a price of £61.88M which reflects a NIY of 4.65% and £1,476 per sq ft. Investors were attracted by its freehold tenure, prominent corner position in Fitzrovia and the opportunity to refurbish some of the office floors and drive the rents – currently let off a low passing rent of c. £74 per sq ft overall.
Soho also continues to be one of London’s most sought-after locations for investors and occupiers alike with Wardour Street seeing a flurry of investment activity in Q2 – two major deals completed / exchanged on the street accounting for c. 21% of the quarterly volume. GPE purchased 141 Wardour Street for their growing Flex office portfolio for £39M, reflecting £1,157 per sq ft. The 33,717 sq ft building is currently vacant, has been stripped out and benefits from planning consent for a comprehensive refurbishment to provide a best-in-class office and restaurant accommodation. Hines also exchanged on Film House, 142 Wardour Street for an unconfirmed price of £136M. The long leasehold interest was sold with vacant possession and will now be subject to a comprehensive refurbishment programme.
Aside from Film House, the only other transaction over £100M to trade in Q2 was the acquisition of the long leasehold interest in 77 Grosvenor Street, W1 which exchanged to Brookfield for an estimated £105M reflecting £1,824 per sq ft. The building is predominantly occupied by Bluebay Asset Management who are due to vacate, and a full refurbishment of the building will then be undertaken. The building is subject to a 10% ground rent from Grosvenor and was redeveloped in 2006.
The unflappable Bond Street continues to defy the market with two further deals exchanging / completing on the street in Q2. 44 Old Bond Street measuring 1,613 sq ft and let to Boghossian until 2029 exchanged to a private Middle Eastern investor for £18.25M, reflecting a NIY of 2.26% and £11,314 per sq ft and 94 New Bond Street sold with vacant possession to a private Japanese investor for £32.5M / £3,765 per sq ft. Bond Street has now accounted for c. 18% of the 2023 H1 volume across four transactions with 32/33 Old Bond Street also under offer and two further properties on the street being marketed.
We are tracking just under £1Bn of assets under offer in London’s West End
London West End Volumes
Some key takeaways of the quarter’s activity are:
- 65% of the Q2 volume occurred in June – a positive sentiment for the market moving into H2.
- A third (by value) of the transactions were in Soho.
- Most of the transactions were for Freehold or Virtual Freehold assets – although both Film House and 77 Grosvenor Street - the two largest office transactions - were Long Leasehold tenure.
- Private investors are still the dominant purchasers but with a significantly reduced share of 38% (by number of deals) compared with 100% in Q1. The three largest deals in Q2 were purchased by Hines, Brookfield and JP Morgan – all modern office buildings in prime streets.
- The average lot size is under half that of the same period last year - £35M in 2023 versus £76M for the first half of 2022. This highlights that large transactions have been notably absent this year – for the same period last year Paddington Central & Central St Giles made up more than this year’s total. Since 1st April 2022 there have only been a dozen transactions in the West End in excess of £100M.
Direction of Travel
Looking forward, we estimate around £900M+ “under offer” which includes the Soho Square / Oxford Street Estate, W1, Nobel House, 21 Grosvenor Place, SW1 and Westbourne Terrace, W2 making up c. £355M.
We have also tracked around £1.2Bn of West End stock in 22 opportunities launched to market in Q2 – sales of assets such as 60 Great Portland Street, 125 Shaftesbury Avenue, Wingate House, 50% of Fitzroy Place and 7 Old Park Lane account for two thirds of this total. And the market eagerly awaits the formal launch of the c £500m Langham Estate Portfolio.
We have continued to see a return of best bids which became a rarity for a period “post Truss” but very much related to location and / or building quality. Probably the most significant being 55 St James’s Street, SW1 which is being sold by Lothbury. The property was redeveloped in 2015 and comprises a rare freehold mixed-use investment on a prominent corner site in St James’s. The offices are let off £118 per sq ft overall which is highly reversionary and with lease events in 2025/2026 there is the opportunity to drive the rental performance for the building. The property is quoting £75.6M, 3.60% NIY and £2,850 per sq ft – given its prime location and rare freehold tenure there will be a lot of market interest in the number and level of offers received. This sale is likely to test where prime yields currently sit in the West End.
Looking at current supply in the West End we are tracking circa £7.2Bn of asset in 82 opportunities either on the open market or withdrawn (but in many cases still buyable).
Through our mandate with Citi Private Bank, we are seeing an uptick in interest from Middle Eastern capital as long-term average pricing continues to adjust. There is also continued interest from Asia capital which we are seeing through our tie-up with Millennium Group.
There remains a significant weight of capital allocated to Central London from across the globe and given the amount of stock currently under offer, with bids called or recently launched to the market we expect the second half of the year to paint a more positive picture in terms of volume.