City & City Fringe Investment Market
Overview
Total investment volumes were £868M in Q3 2023 across 20 transactions, a 76% increase on Q2’s £495M (one of the lowest quarterly transaction volumes on record), but approximately 55% down on the long-term average. Q3 2023 was only 26% higher than during the same period in 2020 during the Covid-19 pandemic.
The 2023 running total stands at approximately £3Bn, which is 60% below the same point last year and 46% below Q3 2021.
Given the rising cost of finance, most activity has been for smaller lot sizes with the majority of deals transacting sub £20M, with just two deals of over £100M trading in Q3. These were Lion Plaza EC2 (£207.5M/ £785 per sq ft / NIY 6.01%) and Bloom, Clerkenwell EC1 (£218.5M/ £1,517 psq ft/ NIY 5.25% - reported).
Following further interest rate rises, prime City and City fringe yields have moved out 25bps to 5.25%, which is 125bps increase in 12 months. However, following the first plateauing of interest rates since Q4 2021, the pressure for yields to move out any further is somewhat relieved temporarily at least.
There is approximately £324M under offer over 12 transactions, the largest being 12 New Fetter Lane EC4 which is being sold by Nuveen to UBS for a reported £137.5M/ NIY 5.60%/ £965 per sq ft; a 20% discount to the original £170M/ NIY 4.50%/ £1,169 per sq ft guide price. The 2015 development is let to Bird & Bird for a further 12.5 years.
Investor appetite from core buyers remains for best-in-class office buildings with high ESG and sustainability credentials. ESG criteria remains top of the agenda for developers.
Who is buying?
European investors (39%) overtook Asian investors (34%) in terms of total volumes for the first time in over a year, transacting five and four deals respectively. The private Swiss client of UBS’s purchase of Bloom, Clerkenwell EC1 enhanced their contribution with the substantial lot size of £218.5M/ £1,517 psq ft reflecting a reported 5.25% NIY. The long leasehold interest (6.35% geared) is predominantly let to Snap Group for a 7.7 year term certain.
UK investors completed the highest number of transactions with 9, but only accounting for circa 21% of the total volume, demonstrating once again their prevalence in the smaller more liquid lot size market, attracted to historically attractive pricing.
Watling House, EC4
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. Therefore funds meeting redemption requests, illustrated by Blackrock’s sale of Watling House, EC4 for £67.7M/ £716 per sq ft/ 6.39% NIY, or landlords experiencing finance related events, remain the principle drivers.
- There are 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. For example, 65 Fleet Street, EC4 was launched for sale in September by Jing Mei Holdings at a guide price of £100M/ £435 per sq ft with full vacant possession.
Headline Deals
- The sale of 8 Bleeding Heart Yard, EC1 (£45.25M/ 4.35%/ £1,580 per sq ft) provides a key data point for long let core income, trading at 90 bps lower than the prime yield of 5.25%. The newly developed freehold is let to Julius Baer for a 9.5 year term certain and demonstrates demand for best in class assets with long term income in the Farringdon sub-market.
- Allsop sold 107 Cannon Street, EC4 on behalf of AXA IM for £13.8M/ £881 per sq ft/ 6.39% NIY to a private Hong Kong buyer. The majority refurbished 1980s property is multi-let to six office tenants and two retailers with a WAULT of approximately 8.5 years to the earliest determination.
Direction of Travel
Given the first plateauing of interest rates after 14 consecutive rises, several market commentators are suggesting the market could have bottomed out. The next set of inflation figures and interest rate decision will be key in determining market sentiment going forward. There are cautious signs that the worst point has been reached and green shoots of recovery could be on the horizon in 2024, so long as inflation continues on its anticipated downward trajectory. In the next six months, we anticipate an increase in sales driven by finance related events as banks apply pressure to borrowers to sell at market pricing.