City & City Fringe Investment Market
Overview
Despite what is a typically subdued period at the start to the year, transaction volumes in Q1 2025 increased again quarter on quarter, resulting in the highest quarterly turnover for two years with £879M across 17 transactions. The continuing increase in transaction volumes reflects improving market sentiment but remains approximately 30% down on the five year average.
The average deal size of circa £52M reflects the steady increase in larger lot sizes trading, with three £100M + lots having transacted this quarter and three more under offer. This is hugely significant when compared to just four £100M+ deals trading in the whole of 2024.
The largest transaction of the quarter was Broadgate REIT’s (British Land & GIC) sale of a 50% stake in 2-3 Finsbury Avenue, EC2 to Abu Dhabi based investor Modon for c. £200M. The 750,000 sq ft best in class development is scheduled for practical completion in 2027 and has secured a 250,000 sq ft pre-let to Citadel on a 15 year lease at £98.00 per sq ft.
The Bank of England’s Monetary Committee decided to reduce the base rate from 4.75 to 4.50% in February and to 4.25% in May. The markets are now predicting a further 2 rate cuts this year, which will likely encourage further improved market sentiment and increased activity.
We anticipate downward pressure on yields going into the second quarter for prime assets with long term income but currently prime City yields remain stable around 5.25% - 5.5%.
The market remains largely characterised by a lack of newly available product at market pricing with historically low values deterring the majority of landlords from selling unless there is some pressure to do so. However, as sentiment improves, there are increasing examples of vendors gaining in confidence to launch end of business plan sales, in what is becoming an increasing competitive marketplace.
Allsop are currently tracking just over £1.55Bn of transactions which are under offer across 31 deals suggesting transaction volumes will continue their upward trajectory. Recent highly competitive bidding processes for prime assets such as Equitable House, 47 King William Street, EC4 will encourage previously reluctant sellers, to bring forward sales as cheaper costs of capital and UK institutions return to the office market following a long hiatus. We understand that bidding reached c.£35M/ £778 per sq ft/ 7.64% for Equitable House, which is a repositioning opportunity.
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, with a focus on buildings that can ultimately deliver best in class accommodation.
Tan & Hide, 47 Tanner Street, SE1
Who is Buying?
Purchaser nationality was more evenly distributed this quarter, with UK purchasers still accounting for both the highest number of deals (8) and volumes (37%), mostly attracted to historically attractive pricing in the sub £20M lot size range. Asian investors increased their presence in the market significantly accounting for 34% of total volumes across three purchases, with two Middle Eastern purchases (24%), and four European purchases (4%). Japanese and Israeli investors are particularly active.
The living and hotel sectors remain very active with limited opportunities and significant capital wanting to invest. Allsop advised Bywater Properties on their purchase of Tan & Hide, 47 Tanner Street, SE1, for £8.125M from Legal & General. The 13,146 sq ft attractive warehouse building offers significant development potential to create a much larger co-living scheme. HUB and Bridges Fund Management continued their buying spree with the off market acquisition of 42 Southwark Bridge Road, SE1 for £36M from UBS Asset Management. The 97,774 sq ft office building is currently vacant with HUB/ Bridges Fund Management planning to convert it into a residential led redevelopment.
Owner occupiers continue to be more prevalent than ever seeking to capitalise on historically low pricing and high rental costs. Most significantly, university LSE purchased 61 Aldwych, WC2 from Chinese investor COLI for £175M/ £986 per sq ft for their own occupation. The 177,410 sq ft freehold office building occupies a prominent corner site at the heart of Midtown and is mostly vacant.
Japanese investors have returned with two landmark transactions of scale, with a private client of Sumitomo Mitsui Banking Corporation purchasing 1 Portsoken Street, E1 (£160M) and Sotetsu Urban Creates & Yasuda RE’s purchase of a 20% stake in 21 Moorfields, EC2 (£64M of equity). Both purchases are recently developed buildings with strong ESG credentials and long term secure income.
Who is selling?
Several vendor’s do not have the appetite to redevelop or refurbish assets themselves in light of historically high construction costs so are looking at exits. Angelo Gordon/ Endurance Land sold 1-5 London Wall Buildings, EC2 to Malaysian group IJM for £72.5M which reflected a capital value of £289 per sq ft. The vacant 250,480 sq ft long leasehold interest benefits from a planning consent to refurbish and extend, with a significant pre-let to law firm Simmons & Simmons for a 20 year term.
There remain a number of sales that have been triggered by loan events, with the lender applying pressure for a consensual sale, or the property ultimately falling into receivership. 1 Portsoken Street, E1 was an example of the former where Nuveen provided the senior loan to Alfred Equities. Ibex House, Minories, EC3, is an example of a receivership sale, which has recently come to the market.
UK institutional funds seeking to raise capital through disposing of liquid assets remains a key driver of sales. Knight Frank Investors/ Lancashire Pension Fund sold 1-3 Dufferin Street, EC1 to Israeli backed Glade Capital for £15M/ £466 per sq ft. The attractive former warehouse provides 32,161 sq ft of mostly vacant office accommodation and qualifies for residential conversation under Permitted Development Rights.
Ibex House, Minories, EC3
Headline Deals
British Land/ GIC sold a 50% stake in 2-3 Finsbury Avenue, EC2 to Abu Dhabi based investor Modon for c. £200M in one of the largest transactions of the past few years. The newly formed joint venture will continue to deliver the 750,000 sq ft best in class office development located within a few hundred metres of Liverpool Street station. The development is scheduled for practical completion in 2027 and benefits from a pre-let to hedge fund Citadel for a 15 year term at a blended rent of £98.00 per sq ft. The transaction demonstrates the continued demand for the very best assets in the most prime locations and it is becoming increasingly common for prime development opportunities to be pre-let in part at least, to facilitate development and/or onwards sale.
A Japanese client of Sumitomo Banking Corporation purchasing 1 Portsoken Street, E1 from Alfred Equities for c. £160M reflecting a net initial yield of 6.87% and a capital value of £670 per sq ft. The 239,000 sq ft educational building was refurbished in 2021 and benefits from good ESG credentials including EPC B and BREEAM ‘Very Good’ ratings and provides a WAULT of 12.6 years to expiries and 8.5 years to breaks.
Morley House, 26-30 Holborn Viaduct, EC1 was purchased by Altius Real Estate who acquired the freehold from HIG for £63M. The vacant office building benefits from a planning consent to convert to a 274 bedroom hotel, with massing potential for 142,790 sq ft GIA over basement, ground and 11 upper floors. The purchase price reflected £420 per sq ft based on the consent GIA and continues the ongoing trend of office to hotel conversions following a relaxation of planning.
Direction of Travel
With a total of four interest rate cuts expected in 2025, sentiment continues to improve as swap rates and margins for real estate finance reduce. There is a feeling that the market has likely bottomed out and the most attractive buying window is coming to an end. This has increased pressure on several investors to deploy capital quickly, resulting in highly competitive bidding processes for the best assets.
We anticipate several more £100M+ transactions, with nearly as many having concluded in Q1 2025 (3) as in the whole of 2024 (4), with three currently under offer. With the velocity of interest rate cuts likely to increase, we anticipate evidence of a tightening of yields for prime assets over the next 3 – 6 months with clear evidence of values improving already.
There remains pressure on owners who have been able to extend existing loans for the short term. We therefore expect a continuation of sales driven by finance related events as banks lose patience, but also from owners of prime assets buoyed by pricing improvement experienced following recent competitive bidding processes.
The £1.55Bn+ currently under offer suggests there is already an increase in sellers and with a rapidly increasing buyer pool, particularly for larger lot sizes, transaction volumes should step up the pace of their recovery into Q2 2025. A buoyant occupational market for best in class assets has encouraged the return of private equity investors and UK institutions to the office sector, often a sign of a turning point in the market.