The market continues to wake up – as investors hunt for stock
May saw four transactions totalling £558.5m, a jump of 307% on the volume achieved in April (£181.9m). This is the highest turnover in May since 2018 (£724.9m) and is the highest monthly turnover so far in 2021. Total investment volume for the year stands at £1.37bn across 20 transactions, approximately 19% down on the same point last year and nine fewer transactions.
The highest-profile deal of the month saw Union Investments acquire One Braham Street, E1. The freehold newly built best-in-class office building, designed by Wilkinson Eyre, was developed by Aldgate Developments. The property comprises approximately 335,000 sq ft of new Grade A office accommodation arranged over lower ground, ground and 18 upper floors with circa 10,000 sq ft of retail accommodation at ground floor level. The entirety of the office accommodation was pre-let to British Telecom PLC from December 2020 for a term of 15 years at a rent of circa £58.00 per sq ft. Pricing remains confidential.
The easing of lockdown restrictions has certainly resulted in a notable increase in interest and confidence from investors. This sentiment was clearly evident in the sales process of 1 St John’s Lane, EC1, which attracted over 40+ inspections and 15+ formal bids. Following fierce competition, the building has now been acquired (in June) by Royal London Asset Management at 20% ahead of the quoting price, reflecting a net initial yield of c.3.50%, representing new benchmark pricing for this sub-market.
May saw a continuation of the theme we have seen in 2021, being a lack of openly marketed buildings, with only two properties formally launched to the market in the entire month. In total, we are aware of 34 assets being actively marketed, totalling £4.04bn, of which £3.51bn is accounted for in six buildings. As we move into June, and with the UK’s successful vaccination programme continuing to accelerate, we expect this trend to change and anticipate an increase in available stock in the second half of the year.
With over 12 months of market disruption caused by the pandemic, there is now a significant amount of ‘pent up’ investor demand. As such, we are witnessing a number of overseas investors willing to visit London and quarantine in order to inspect and bid on buildings in the capital. The increase in overseas travel is highlighted by the statistics produced by the Civil Aviation Authority which show a 159% increase in passengers to Heathrow Airport and a 400%+ increase in visitors to Gatwick Airport in April 2021 (compared with April 2020).
An inevitable result of the lack of stock and weight of investor demand has been the significant proportion of off-market activity, with investors making speculative approaches on assets that are not on the open market. In the year to date, 52% of all activity has been off-market, with the most high profile being Aberdeen Standard's acquisition of Friars Bridge Court, SE1 from Kennedy Wilson last month. At the end of May, Savills are aware of approximately £1.80bn of off-market deals currently under offer, 82% (by volume) of all buildings under offer within the City market. Given the nature of such transactions, it is likely that our figures are not a true reflection of the number of deals actually in progress. Savills expect this high level of off-market activity to continue through June as investors continue to hunt for assets within an increasingly competitive central London market.
With the acquisition of One Braham Street, European investors are now the most active within the City market, accounting for 38% of total turnover across four deals. UK investors are the most active in terms of number of transactions acquiring eight buildings (25% of total volume).
Savills Prime City Yield remains at 4.00%, albeit, given the level of pricing achieved at 1 St Johns Lane, this is coming under downward pressure. West End prime yields remain 3.50%. The MSCI City average equivalent yield currently stands at 5.57%, while the net initial yield rose to 3.60%.