City & City Fringe Investment Market
Overview
Following a record low Q1, the City market has experienced an uptick in volumes, albeit marginally, in Q2 2024 with £549.2M of transactions across 18 separate deals. Concluded by what appeared to be one of the most predictable General Election results in decades, the 4 July election date did cause some investors, overseas particularly, to pause for thought, but mostly it was business as usual at the end of June as several deals closed including the year’s largest so far, Herbal House.
With momentum behind Labour’s landslide victory and optimism fuelling what we still hope will be an interest rate cut in Q3, sentiment is improving and there is competitive bidding for prime assets where vendors are realistic in their pricing aspirations.
The H1 volume of £851M is still incredibly low. It is 58% below the 2023 half year volume of £2.03Bn and the roughly 85% down on the 5 year average.
The first deal of the year over £100M transacted in June, the Receivership sale of Herbal House, 8-10 Back Lane, EC1 for £101M to Israeli investor Yellow Tree. The £101M price was broadly in line with the senior loan for the asset and reflects a yield of 6.58% and a capital value of £886 per sq ft. The building, held freehold, was multi-let to five tenants with a WAULT of approximately 5 years. It was originally launched to market in June 2023 guiding £140M, 5% and £1,228 per sq ft.
Interest rates remain at 5.25% and as a result prime City yields remain consistent around 5.5% but with evidence of some deals transacting at closer to 5%, for reversionary assets as evidenced by Titan Investors acquisition of Turnmills, Clerkenwell Road EC1 from Derwent London for £77.3M reflecting 4.9% and £1,100 per sq ft.
Allsop remain optimistic for Q3 and are currently recording c.£760M under offer across 20 transactions with bids called on a further £500M of stock which should result in greater volumes next quarter. The largest of these transactions reportedly under offer are Atlantic House, Holborn Viaduct, EC1 for c.£190M which is a medium term repositioning play being sold by CBREi.
There is a still a lack of correctly priced best-in-class office buildings with high ESG and sustainability credentials for sale in the best City locations and investor appetite remains strong for these assets. ESG criteria remains top of the agenda for developers and tenants against a backdrop of historically high build costs.
Who is Buying?
Once again, UK-based purchasers accounted for both the highest numbers of deals (9) and volumes (41%) but two of the largest deals of the quarter were acquired by US-domiciled investors and European investors remain active with French, German and Turkish buyers all investing. There was no direct investment from Far-East Asian capital into the City of London in Q2.
Despite a running theme of the last 12 months, there were far fewer transactions from the hotel, serviced apartment and living sectors this quarter. Angel Gate was the largest transaction which was acquired by Q Square for a conversion to residential via permitted development. Q Square acquired the 65,000 sq ft commercial-led freehold estate from Picton for £29.8M reflecting £467 per sq ft.
Who is Selling?
There is still a distinct lack of quality stock on the market and most of the recent sales, particularly the larger ones, have been driven by debt or loan events or a lack of desire from the owners to refurbish or redevelop existing vacant buildings.
There remains a number of UK institutional sellers divesting from offices; The Coal Pension Fund continues to divest from London offices and recently launched the sale of 100 Middlesex Street, E1. This freehold building is majority let to the University of East Anglia until November 2029 off a relatively low overall rent passing of £39.27 per sq ft. It has attracted a lot of interest because of the seemingly attractive pricing. A quote of £33.3M equates to an initial yield at 7% and capital value of only £525 per sq ft.
Similarly Aviva Investors have decided to sell 1 Bow Churchyard, EC4, a prime freehold building equidistant between St Pauls and Bank. This best-in class building will likely dictate a new prime yield for the City following its bids process at the end of June. The building is majority let to Shoosmiths LLP until 2035 and benefits from CPI-linked rent reviews. The quoting price was £63M, 4.5% and £1,418 per sq ft however we anticipate pricing to land at north of 5% yield post bidding.
Headline Deals
The Receivership sale of Herbal House, 8-10 Back Lane, EC1 for £101M was the largest deal of the quarter. The building is one of the best examples of a refurbished former warehouse in Farringdon and the larger floorplates attracted interest from many institutional investors with Legal and General, JP Morgan and AXA IM forming a strong under-bidder list to Israeli outfit (slang) YellowTree. Strong interest in the asset was dictated by sensible pricing aspirations, helped by the ‘Receivership tag’ and fundamentally excellent real estate in a strong sub-market.
Another interesting deal was CLI-Dartriver’s off market acquisition of 1 Parternoster Square, EC4 from Commerzbank. The building is held long leasehold at a peppercorn rent with the majority of the office space single let to Gateleys for a further eight years. CLI-Dartiver paid £24.5M for the asset reflecting a yield of 4.98% and £1,211 per sq ft demonstrating that premium pricing can be achieved for well-located core assets with strong income profiles.
Direction of Travel
With the new Labour government keen to establish itself against a backdrop of positive economic forecasts in respect of GDP growth as well as continuing lowering inflation the stage is set for sentiment to improve over the summer. If the Bank of England is to deliver the news of a reduced interest rate then we expect to see investment volumes continuing to improve as we move into Q3 and Q4. The evidence of 20 transactions under offer as we move into July is supportive of this.
The City market would welcome some more £100M plus transactions. There has been a distinct lack of sensibly priced assets of over £100M and buildings of this lot size tend to be let and income producing which is where there is typically less bank pressure as exemplified by some of the sales processes of Korean assets like 20 Old Bailey and Cannon Green, both of which were ultimately refinanced. Until interest rates start to lower we sense the Asian market will remain opportunistic and investigative in the short term.