West End Investment Market
The 10-year average annual volume for the West End is £7Bn – so as we enter the final quarter of what has been a highly turbulent year, despite there being c. £7.4Bn of stock on the market, we anticipate this period of price discovery to continue.
Overview
Despite just the one rise in the base rate to 5.25% in Q3 (the highest it has been for the past 15 years) its direct impact on SONIA (Sterling Over Night Index Average) and all-in cost of debt on commercial property has led to a decline in the number of larger transactions and consequently one of the lowest quarterly volumes ever recorded in the West End.
We recorded just c. £362M either exchanged or exchanged and completed in 17 transactions with an average lot size of £21M. This brings the total Q1-Q3 volume to £1.58Bn in 51 transactions, which is 61% below the 5-year Q1-Q3 average of c. £4Bn.
A stark comparison of the current slowdown is that in Q3 2020 when the world was grappling with a pandemic and lockdowns the West End managed to record a volume of £697m – almost double.
The 10-year average annual volume for the West End is £7Bn – so as we enter the final quarter of what has been a highly turbulent year, despite there being c. £7.4Bn of stock on the market, we anticipate this period of price discovery to continue.
On a more positive yet personal note, the Allsop West End Investment team has been involved in 5 of the 17 transactions in Q3 – a 30% market share in the number of deals either exchanged or exchanged and completed.
Who is Active / Headline Deals
In the absence of larger transactions – only three transactions over £100M have completed in 2023 to date (one in Q1 and two in Q2) – investor activity in Q3 has largely focussed on the £5M - £20M bracket which appeals to private investors who can trade all equity and are looking to secure buildings in busy vibrant locations that are well connected. Of the 17 deals recorded in Q3, 76% were purchased by private capital or special purchasers / owner occupiers and only three transactions recorded above £20M. To put this in context, the average lot size across Q1-Q3 stands at c. £31M which is approximately 46% below the Q1-Q3 10-year average of c.£57M.
One of the largest transactions in Q3 was GPE’s purchase of Soho Square Estate, W1 for £70M which reflects £1,218 per sq ft on the existing NIA. The mixed-use buildings are currently multi-let with vacant possession expected by March 2024. The site benefits from planning consent to deliver 90,000 sq ft of new Grade A office and prime retail space.
Aside from 30 Jamestown Road, Camden, NW1 which was purchased off market for £75M by a private investor for owner occupation, the only other transaction above £20M was the purchase of ENI House, 10 Ebury Bridge Road, SW1 by La Francaise for £55M reflecting circa 6.25% NIY and £879 per sq ft. The property is held on a new 125-year leasehold interest at a peppercorn rent and is single let to ENI UK Limited until February 2038 but subject to mutual break options in 2028 and 2033. The lease benefits from five yearly rent reviews linked to RPI compounded annually with the running yield expected to increase to circa 7.5% at the next review in December 2023.
The Allsop West End investment team has been involved in 5 of the 17 transactions in Q3 including advising Labtech Investments on their sale of 1-11 Hawley Crescent, Camden, NW1 to a private European investor. The building comprises 19,510 sq ft of offices let to Dr Martens until April 2027 and 5,058 sq ft of residential accommodation comprising six apartments let on ASTs. The property sold for c. £17M reflecting 6.23% NIY and £692 per sq ft.
Allsop also jointly advised a private Hong Kong investor on the sale of 301-305 Euston Road & 69-71 Warren Street, W1 which comprises two vacant freehold properties with dual frontage to Euston Road and Warren Street totalling 15,102 sq ft of office, retail and residential accommodation. After more than 40 inspections and two rounds of bids the property was purchased by Beyond Collaboration / Carey Group for £8.25M which reflected £546 per sq ft.
Soho Square Estate, W1
Direction of Travel
Looking forward, we estimate around £1BN+ “under offer” including a half share in the new development at 247 Tottenham Court Road, W1 (c. £80M), 125 Shaftesbury Avenue, WC2 (£150M), 55 St James's Street, SW1 (c. £70M) and 121-141 Westbourne Terrace, W2 (£85M) making up c. £385M of this total.
We have also tracked around £2.4Bn of West End stock in 34 opportunities launched to market in Q3 – albeit 50% of this is against three portfolio / estate sales including The Homax Portfolio (c. £600M – including 30 Broadwick Street W1, 95 Wigmore Street W1 and New Brook Buildings, Queen Street WC2), The Lotus Portfolio (c. £450M slice of the Langham Estate with bids received) and The Charlotte Estate, Fitzrovia (£115M - 29 assets owned by Shaftesbury Capital). We also understand The City Corporation are close to launching The South Molton Street Estate – 20 Freeholds along the east side of the street, for around £65M.
Pricing for freehold, trophy assets in core locations continues to be very resilient as demonstrated by the sale of 55 St James’s Street, SW1. The property was redeveloped in 2015 and comprises a rare freehold mixed-use investment on a prominent corner site in St James’s. The offices are let off £118 per sq ft overall which is now seen to be highly reversionary and with lease events in 2025/2026 there is the opportunity to drive the rental performance for the building. The property received 7 bids and is now under offer second time around to an Asian Family – understood to be around 4% c £70M and a capital value of c. £2,600 per sq ft. At the time of writing, it is yet to exchange with many investors watching closely as a test to where prime yields currently sit in the West End.
Whilst best bids have become much more of a rarity in 2023, the sale of 125 Shaftesbury Avenue, WC2 generated significant interest with 130+ inspections. The freehold property is being sold with vacant possession by Korean investors. The property received 13+ offers and following 3 rounds of bids went under offer to Mitsubishi Estates and Dutch developer Edge for c.£150M which reflects £843 per sq ft on the existing NIA – c. 16% below the asking price of £180M and 44% below the £267M they acquired the property for in 2018, with a prelet to WeWork.
The launch of Vogue House, 1 Hanover Square, W1 in Q3 has also attracted considerable interest with 60+ inspections and bids now received. The landmark building occupies a substantial corner site at the southern end of Hanover Square and provides the opportunity to comprehensively refurbish and extend the building to provide 88,000 sq ft of best-in-class office space. Offers were invited for the 85-year long leasehold interest in the region of £70M which reflects £1,115 per sq ft on the existing and £795 per sq ft on the proposed NIA. The level of interest shown for an 85-year leasehold interest further emphasizes the importance of location (location) (location) in investor decision-making. Vendor Condé Nast have stated in their invitation to bids that the successful buyer will not be able to use the name “Vogue House” but “One Hanover Square” should be a good enough alternative.
Looking at current supply in the West End we are tracking circa £7.4Bn of assets in opportunities either on the open market or withdrawn (but in many cases still buyable).
Through our mandate with Citi Private Bank, we are seeing an uptick in interest from Middle Eastern capital as long-term average pricing continues to adjust. There is also continued interest from Asia capital which we are seeing through our tie-up with Millennium Group.
There remains a significant weight of capital allocated to Central London from across the globe and given the amount of stock currently under offer, with bids called or recently launched to the market we expect the final quarter of the year to paint a more positive picture in terms of volume given the lot sizes at play – although perhaps the number of transactions will continue to remain subdued.