Lack of distress and uncertainty culminating in a continued lack of transactional activity
May saw total transactional volume of £207.4m in the City, up on April’s figure of £149.4m, but 20% down on the same point last year (£242.5m). This was across four transactions, up on the two deals last month but down on that recorded at the same point last year (six). As at the end of May, total investment volume in the City stands at approximately £1.7bn, across 29 transactions, which compares with £2.7bn in 39 transactions at the same point last year and is 40% below the five-year average of £2.81bn.
The most high-profile transaction saw CLI Dartriver acquire their first City asset in Eldon House, 2–3 Eldon Street, EC2 from Aberdeen Standard Investments for £40m, which reflected a net initial yield of 4.81% and a capital value of £878 per sq. ft. The property was first brought to the market in July 2019 at a guide price of £42m. The freehold building occupies a prominent corner position approximately 170 metres from Liverpool Street station, adjacent to the Broadgate Estate. The property comprises approximately 45,535 sq. ft. and is multi let to seven office and three retail tenants, providing a passing rent of £2,056,589 per annum, reflecting £45.17 per sq. ft. overall, and a WAULT of 5.34 years.
There is approximately £2.2bn of stock currently under offer across 19 transactions, of which only two transactions totalling £21m were placed under offer during May. The remaining deals were under offer prior to government restrictions being enforced, which has caused well documented delays that are likely to be further compounded as overseas investors are required to quarantine for two weeks on entry to the UK.
The lack of investment activity can in part be attributed to a lack of available stock due to (1) no distress (as yet), (2) lack of certainty in terms of pricing and (3) owners not wanting to be perceived as being under pressure. There is currently approximately £877.7m of stock across 22 assets available for investors to consider, compared with £2.37bn across 32 assets available at this point last year.
Most activity has been in the smaller lot sizes –sub £100 million. In the larger price bracket, investors are scrutinising transactions often looking for a price correction which has resulted in casualties; most recently 5 Fleet Place, EC4. We understand an overseas purchaser initially exceeded the guide price of £182.50M, reflecting a net initial yield of 4.17% and a capital value of £1,399 per sq. ft., however, terms could not be agreed following a proposed price renegotiation. We expect the building to be re-launched later in the year.
While the lag in market activity has dragged on for another month, there is some positive news as the rate of infection across the capital is reportedly declining at a steady rate and along with the controlled relaxation of the stringent measures we’ve been subject to. Offices are slowly beginning to open again, albeit at a reduced capacity to ensure social distancing measures are maintained, allowing some semblance of normality. We anticipate investment activity will remain comparatively subdued in the short term as attention switches to the June quarter rent collection for landlords, banks and valuers alike.
Savills Prime City Yield remains at 4.00% with still no evidence to date to suggest there has been any impact on core pricing but it is clear sentiment and attitude to risk is shifting. The only evidence since the lockdown reinforces our Prime Yield. West End prime yields remain 3.75%. The MSCI equivalent yield has hardened slightly on last month and currently stands at 5.60%, while the MSCI net initial yield as softened slightly on last month, currently at 4.44%.