City & City Fringe Investment Market
Overview
- Despite the typically quieter summer period, transaction volumes increased again quarter on quarter with £625M of turnover in Q3 2024 across 21 deals. The continuing increase in transaction volumes reflects improving market sentiment, but volumes remain approximately 70% down on the five year average.
- The average deal size of circa £30M reflects the ongoing trend for smaller lot sizes, principally due to the reduced reliance on financing. Whilst total volumes are much lower, the number of deals is only circa 15% down on the five year average.
- The only transaction of over £100M was Royal London’s purchase of Atlantic House, 45-51 Holborn Viaduct EC1 for £185M/ 7.44%/ £707 per sq ft from CBRE IM. The 261,506 sq ft office building is let to Hogan Lovells for three years and offers a substantial repositioning opportunity close to the Elizabeth line station in Farringdon.
- The Bank of England’s long awaited first interest rate cut was welcome news in August but was quickly followed by a rate hold in September suggesting further declines will likely be slow and steady, with limited impact on values in the short term. As a result prime City yields remain stable around 5.5% but with further evidence of transactions close to 5.00%, we anticipate downward pressure on yields going into the final quarter for prime assets with long term income.
- The market is characterised by a lack of newly available product at market pricing. Historically low values have deterred the majority of landlords from selling unless there is some pressure to do so, with many banks willing to extend loans, or owners now able to refinance at more palatable interest rates. There are, however, more recent signs of banks starting to increase pressure on borrowers who have already extended loans in the short term.
- Allsop are currently tracking just over £900M of transactions which are under offer across 31 deals suggesting a relatively healthy turnover for Q4, but the continued lack of newly available product could still result in one of the lowest annual turnovers on record.
- 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.
Who is Buying?
- UK purchasers once again accounted for both the highest number of deals (10) and volumes (54%), attracted to historically attractive pricing in the sub £20M lot size range. European investors accounted for 27% of total volumes, with three Asian purchases (8%), one US purchase (7%), and a single Middle Eastern purchase.
- The living and hotel sectors remain very active with limited opportunities and significant capital wanting to invest. Allsop advised HUB/ HIG on their off market acquisition of Finsgate, 5-7 Cranwood Street, and 28 Brunswick Place EC1 for £30.82M from Rocket Investments. The 0.43 acre site currently houses three office buildings and offers significant development potential to create a much larger building with co-living and office uses.
- Owner occupiers are more prevalent than ever seeking to capitalise on historically low pricing. Allsop acted for The Chartered Institution of Building Services Engineers (CIBSE) on their purchase of 91-94 Saffron Hill, EC1 for £7.55M/ 4.86% / £455 per sq ft. The 16,608 sq ft prime Farringdon office building provides vacant possession of the majority in 2025.
- French retail funds remain active buyers of high yielding assets that are fully let. Remake purchased their second City asset of 2024, the virtual freehold interest in 100 Middlesex Street, E1 from Nuveen for £33.965M/ 6.87%/ £535 per sq ft. The 64,000 sq ft educational building is primarily let to INTO London MDX Street LLP for a further five years off a low passing rent of £39.27 per sq ft overall.
Who is Selling?
- There are a number of previously consensual sales which have gone into receivership following a recent loan event. 51 Eastcheap, EC3 was originally put up for sale by WeWork in July 2022 but fell into receivership in 2024 when US fund Polis acquired the senior loan for £45M/ 8.95%/ £503 per sq ft. The 90,000 sq ft office building is let to WeWork for a term of six years with a landlord rolling break option from year two.
- UK institutional funds seeking to raise capital through disposing of liquid assets remains a key driver of sales. Nuveen sold The Stock House, 17-18 Britton Street, EC1 to an owner occupier for £15.2M/ 5.66%/ £1,160 per sq ft. The property is located in prime Farringdon and is multi-let to four tenants with a WAULT of 3 years to lease expires. The modern office building is in good condition and the purchaser intends to occupy the space as it becomes vacant in the short term.
Headline Deals
- Danish fund Habro continued being highly acquisitive with the purchase of One Bow Churchyard, EC4 from Aviva for £57M/ 5.07%/ £1,283 per sq ft in the highest £/ per sq ft transaction of the year so far. The 44,000 sq ft property was comprehensively refurbished by Aviva in 2020 to provide a high quality office building with excellent ESG credentials, let to Shoosmiths LLP until 2035 with CPI linked five yearly rent reviews. This deal demonstrates the strong demand for rare ‘best in class’ assets with ten year income in the City core.
- Allsop acted on four of the 21 deals this quarter including the sale of 7 Birchin Lane, EC3 on behalf of Columbia Threadneedle to private Swiss investor Triple B for £18.65M/ 6.65%/ £822 per sq ft. The attractive freehold is located at the heart of the traditional City core and is multi-let to ten tenants with a WAULT of two years to the earliest determination. The transaction is one of several examples of overseas investment for wealth preservation purposes at an opportunistic point in the cycle.
Direction of Travel
- Following the first interest rate cut in August, the anticipation is that there will be one further cut this year in November. Sentiment is therefore improving as the cost of finance becomes cheaper, with more impetus from buyers to conclude transactions. However, any significant increase in values is unlikely until the velocity of cuts increases.
- There is increasing pressure on owners who have been able to extend existing loans in the short term. We therefore expect more sales to be driven by finance related events as banks lose patience, but also from owners of ‘best in class’ well let assets who will have been buoyed by transactions such as One Bow Churchyard where strong pricing has been achieved.
- The £900M+ currently under offer suggests there is already an increase in sellers and with a steadily increasing buyer pool, transaction volumes should continue their recovery in Q4 2024, into 2025 when further interest rate cuts are expected.