An increase in number of transactions as sentiment improves in anticipation of lockdown restrictions easing
It’s been 12 months since the first Covid-19 lockdown, during which time market conditions across many asset classes have been volatile. Whilst widely considered a ‘safe’ asset class during turbulent macroeconomic events, the perceived safety of Real Estate (Offices) was at times questioned as working from home became the new norm. A year on, lockdown restrictions remain; however, the success of the vaccination program should pave the way to return to what once resembled normality.
March saw £248.1m transact in the City across seven deals, which is approximately 28% down on February (£346.55m) and around half that recorded in March 2020 (£541.25m). While turnover remains subdued, the number of transactions increased from February (4) and is more in line with March 2020 (9).
Total investment volume as of the end of Q1 2021 is approximately £625.75m, around 50% down on Q1 2020 (£1.32bn) and 65% down on the five-year average of £1.79bn. A relatively strong March contributed to 12 transactions, which compares with 22 in Q1 2020. Furthermore, we understand there is approximately £1.93bn currently under offer in the City across 16 transactions, down from last month (£2.21bn).
The most notable transaction of the month saw M&G acquire Saffron House, 6–10 Kirby Street, EC1 from Columbia Threadneedle (Zurich Pension Fund) for £78.3m, which reflects a net initial yield of 5.00% and a capital value of £1,073 psf. The building is situated in a prime Farringdon location and comprises 72,989 sq ft of Grade A office accommodation arranged over ground, upper ground and five upper floors. The freehold property is fully let to six tenants at a passing rent of £57.27 psf overall and provides a WAULT of 6.6 years to expiries and 3.8 years to breaks.
In yet another deal first marketed last year, a private Middle Eastern investor acquired 124 Theobalds Road, WC1 from ESAS for £70.5m, reflecting 4.59% and a capital value of £869 psf. Situated in the heart of Midtown directly to the north of Red Lion Square, the freehold property comprises 81,110 sq ft of office and ancillary accommodation arranged over basement, ground and eight upper floors. The property is let to MediaCom Holdings Ltd and Vodafone, reflecting a rent of £40.65 psf overall. The property provides the opportunity for a redevelopment to provide a landmark building totalling circa 211,260 sq ft.
A recurring theme this year is the lack of new stock marketed and therefore much of the activity has been focused on historical sales; of the transactions in 2021, only one was first marketed this year, equating to just 6% of the quarterly turnover. This is largely a result of ongoing lockdown and travel restrictions that impact sales processes.
Unsurprisingly, given the uncertainty over the past 12 months, there has been increased demand for income-led assets and a ‘flight to quality’. This is in part due to a lack of stress in the debt markets who are again offering favourable terms for prime investments (where margins have increased the all-in rate has remained below pre-pandemic levels) helping investors achieve comparatively attractive cash-on-cash returns. Accordingly, Savills Prime City yield remains at 4.00% and the West End prime yields has also remained at 3.50%. The MSCI City average equivalent yield currently stands at 5.58%, which the net initial yield fell to 4.17%.
There is growing optimism that as life in the UK begins to return to some normality, at a rate our European neighbours can only be envious of, that market activity will begin to pick up and satisfy the pent up capital that has been observing the market over the past 12 months.