City & City Fringe Investment Market
Overview
Typically the lowest quarter in terms of volumes, there were just £302M of transactions in Q1 2024 across 18 deals following continued challenging macroeconomic conditions and a lack of newly available product. There are signs of the sentiment improving, however, with competitive bidding for prime assets.
The last time the City of London market experienced a Q1 turnover of less than £1Bn was during the Global Financial Crisis in 2009 (£370M) and 2010 (£820M). The Q1 2024 volume is only 25% higher than the £239M realised during the peak of the Covid-19 lockdown in Q2 2020.
The continued high cost of finance has ensured there remains a distinct lack of £100M + transactions with an average deal size of just £16.8M. The largest deal of the quarter was student accommodation and hotel developer Dominus Real Estate’s purchase of 65 Fleet Street, EC4 for £83M/ £343 per sq ft. 13 of the 18 deals were £20M or below.
With the Bank of England holding interest rates at 5.25% since August 2023, prime City yields remain stable at 5.50%. However, with positive inflation news in March, the market could experience a tightening of yields following anticipated interest rate cuts later this year.
Allsop has recorded approximately £330M under offer across 11 transactions which is significantly below the long term average and is unlikely to experience any significant uptick in activity until greater supply is forthcoming. Following the collapse of 20 Old Bailey, EC4 which was under offer to Sinar Mas Land for c. £235M/ 6.15%/ £971 per sq ft, the largest deal currently under offer is Derwent London’s The Turnmill, 63 Clerkenwell Road, EC1 for approximately £75M.
Investor appetite from core buyers remains for correctly priced best-in-class office buildings with high ESG and sustainability credentials in the best locations. ESG criteria remains top of the agenda for developers against a backdrop of historically high build costs.
65 Fleet Street, EC4
The Turnmill, 63 Clerkenwell Road, EC1
52 Bedford Row, WC1
Who is Buying?
UK purchasers accounted for both the highest numbers of deals (10) and volumes (49%), attracted to historically attractive pricing in the sub £20M lot size range. European investors accounted for 25% of total volumes, with two US purchases (16.5%). There was just a single Asian purchase (10%) of 52 Bedford Row, WC1, reflective of the lack of good quality assets of a larger lot size.
The living and hotel sectors remain very active with limited opportunities and significant capital wanting to invest. This is best demonstrated by Dominus Real Estate’s £85M/ £434 per sq ft purchase of 65 Fleet Street, EC4. The vacant 248,000 sq ft office building was purchased unconditionally for a change of use to student accommodation.
Who is Selling?
The market is characterised by a lack of product newly available at market pricing. Historically low values have deterred the majority of landlords from selling unless there is some pressure to do so.
Funds meeting redemption requests or winding up, remain a principal driver for sales. The British Coal Pension Fund sold Old Change House, 128 Queen Victoria Street, EC4 to BauMont/ Addington Capital for £22.8M/ £439 per sq ft against an original guide price of £36M/ £693 per sq ft when marketed in Summer 2023. The 8% geared long leasehold interest has short term multi-let income and will require cap-ex in the short term.
There remains a number of vacant possession sales where vendors do not have the resource or appetite to refurbish/ redevelop, given all time high build costs exacerbated by additional costs required to meet modern ESG criteria. This likely encouraged the sale of 65 Fleet Street, EC4 by Jing Mei Holdings for £85M/ £434 per sq ft.
There are an increasing number of previously consensual sales which have gone into receivership following a recent loan event. Macquarie Capital has appointed LPA receivers at Teneo over Herbal House, 8-10 Back Hill, EC1, a multi-let freehold that was put up for sale last year for £140M / £1,228 per sq ft / 5.00% NIY by Herbal House Investments, a company formerly owned by the Ruimy brothers. We anticipate the property will ultimately trade closer to £100M/ £934 per sq ft / 7% NIY when relaunched in Q2 2024.
Old Change House, 128 Queen Victoria Street, EC4
Herbal House, 8-10 Back Hill, EC1
25 Charterhouse Square, EC1
21 Whitefriars, EC4
Deal Highlights
Helical’s sale of 25 Charterhouse Square, EC1 to Ares for £43.5M/ 6.70%/ £992 per sq ft represents a potential turning point in the market given it had been available for some time before experiencing competitive bidding this quarter. It comprises a high quality multi-let long leasehold interest, overlooking a garden square, adjacent to Farringdon Elizabeth line station.
Allsop acted on five of the 18 deals this quarter including the purchase of 21 Whitefriars, EC4 for a private UK investor for £5.25M / 8.87% and £466 per sq ft from The City of London Corporation. The multi-let freehold is located immediately adjacent to the City of London Corporation’s forthcoming 480,000 sq ft Salisbury Square development. The transaction demonstrates how domestic buyers are capitalising on historically good value.
Direction of Travel
Given the continuing plateauing of interest rates and positive March inflation figures, the anticipation is that there could be some rate reductions this summer. Sentiment is therefore improving with more impetus from buyers to conclude transactions.
We expect to see a continued lack of newly available product in the short term, with the majority of sellers holding off until later in the year following anticipated interest rate reductions. Despite this, the buyer pool is increasing which may encourage some vendors to act sooner in a stock starved market with little competition.
