City Investment 2O23
What has happened?
Following one of the lowest Q4 investment volumes on record, Q1 2023 began with improving investor sentiment coupled with more market data points helping narrow the gap between vendor and buyer pricing expectations. However, whilst the vastly improved transaction volumes due to several large scale transactions suggest signs of increased investor confidence, the lack of new available product in 2023 coupled with the threat of another banking crisis has meant deal numbers remain limited.
Inflation fell far less than hoped from 10.4% to 10.1% in March leading to expectations of a further increase in interest rates from the current base rate of 4.25% to come.
The collapse of Silicon Valley Bank (SVB) in mid March and subsequently Credit Suisse caused concern and increased uncertainty in the financial sectors.
5 year Sonia swap rates have been fluctuating between 3.50% and 4.00% maintaining the challenges faced by debt-backed buyers with the cost of finance remaining historically very high.
Despite the challenges, total investment volumes in Q1 2023 are up substantially from Q4 2022, with a total of £1.54BN across 23 transactions, reflecting an average deal size of £67M. This reflects a dramatic increase of more than four times the Q4 2022 volume, yet also two and half times lower than Q1 2022 (a record Q1), and more akin to the long term average.
Total volumes are distorted by a several large deals completing, which were originally launched for sale Q2 2022 or earlier. Three deals accounted for c.70% of the total volume;
St Katherine Docks
£395M
1 New Street Square
£358M
Winchester House
£257M
Allsop advised a private overseas investor on the off market purchase of The Stables, 28-32 Britannia Street, Kings Cross WC1 for c. £20.25M/£1,129 psf/ 5.96% NIY.
The attractive freehold former stables building provides approximately 18,000 sqft of offices predominantly let to Balderton Capital LLP on a new 10 year lease with RPI linked increases, with two further tenants accounting for the remaining 30% of the income on a short term basis. The total passing rent reflected £71.54 per sqft overall. The EPC B rated building is only a 6 minute walk from Kings Cross station, adjacent to the Ear Nose and Throat Hospital site and offers substantial increased massing potential in the long term.
Asian investors accounted for nearly 82% of total transaction volumes
What are the current trends?
Asian investors accounted for nearly 82% of total transaction volumes, including the five largest deals of the quarter. European and UK investors were the next most active investors with just 5% and 6.5% of deal volumes with an average deal size of £27M and £11M respectively. The average deal size for Asian investors was £209M demonstrating the chasm in lot sizes between Asian investors and the rest of the world currently.
Asian investors, who typically take a longer term view and are less reliant on third party finance, have started to return to the Central London market seeking ‘best in class’ assets, attracted by higher yields and historically weak Sterling.
Domestic buyers completed six transactions which is the same number as Asian investors, but all sub £20M with many cash backed private investors seeing now as a good buying opportunity.
Transactions are typically at least a 20% discount to their Q1 2022 peak. For example, 8–10 Old Jewry EC2 traded at a 21% discount to the guide price of Q4 2022. Macquarie Group acquired the long leasehold interest from Orchard Street for £40.85M, 6.72% NIY and £707 per sqft. It comprises a 103 year interest at a head rent of £1,000 per annum. The building is multi-let to six office and one retail tenant at a net passing rent of £2.93M per annum reflecting £52.04 per sqft overall and providing a WAULT of c.2.4 years to breaks and c.4.0 years to expiries. It demonstrates appetite for core plus assets in core locations if priced appropriately.
Prime City and City Fringe yields currently stand at 4.75%, reflecting significant outward movement from their Q2 2022 peak of 3.75%-4.00%. However, the disparity between prime and secondary assets stands at much more than 100 BPS, and is wider than it has been for over a decade.
EPC ratings and the pathway to achieving B + ratings are at the top of both buyers and sellers agenda.
There have been 13 deals in March 2023.
C.£900M for the month.
Looking forward
Allsop are tracking c.£757M of known deals under offer across 14 transactions. Around 70% of the volume is accounted for by a further two large deals; Lion Plaza, Old Broad Street, EC2, an iconic Grade II listed freehold building in prime City location, 85% let to the law firm White and Case. The building is reportedly under offer in the region of 5.25% initial yield which reflects c. £250M. Sancroft, Paternoster Square, EC4 is being sold by a Private Hong Kong family to Mitsui for c.£900psf, and c.£255M for a vacant but newly refurbished building with pre-let activity.
New stock is extremely limited with investors forced to explore previously available stock which is frequently at ‘yesterday’s pricing’. If an asset is priced correctly, the market remains well capitalised as demonstrated by the sale of 8 Bouverie Street, EC4 where the owners were under pressure from the senior lender. With an original guide price of £52M/ 4.25%, this traded at £33.5M/ 6.5%, nearly 2 years from original launch, receiving several competitive bids.
With several funds now in the process of meeting their redemption requests, future sales are likely to be driven primarily by finance related events and historically high cap-ex requirements following unprecedented construction cost inflation. Refurbishment costs are now at an all-time high, even without the increased costs associated with meeting current ESG requirements.
All eyes will be on the next inflation figures with evidence already suggesting that interest rates are plateauing following 11 consecutive increases, although commentators are suggesting there may be a further increase to come in May. This together with an official recession now looking unlikely, bodes well for more positive market sentiment in the second half of this year when we expect increased competition for assets.