Market in Minutes: City Investment Watch

Prime City yield below 4.00% for the first time in history

July saw ten transactions totalling £743.1m, the second-largest monthly turnover in 2021 (to date) and a 68% increase on July 2020 figures (£443m). Total investment for the year stands at £3.74bn across 44 transactions, a 39% uplift on this point last year and a 32% decrease on the five-year average for investment turnover (up to July), which is £4.92bn. There is currently a further £1.40bn under offer across 20 transactions.

The market continues to go from strength to strength, with July seeing a further three £100m+ buildings trade. The City market today is characterised by a large pool of investors targeting a small number of opportunities; this weight of money, coupled with historically low borrowing costs, has meant that 2021 continues to see record pricing being set for best-in-class real estate. In light of these market dynamics, and with recent/emerging evidence, Savills is putting our prime City of London yield to 3.75%, which is the first time in our history when the prime yield is below 4.00%.

July saw another muted month for new sale launches with only three buildings brought to the open market totalling £425m, with the most high profile being DWS’s 2&3 Bankside, SE1, which is being marketed at a reported price of £410m, taking total availability to £4.1bn across 34 properties. The Savills team advised on 83% of July’s transactional volume, acquiring or disposing approximately £615m worth of real estate in the City market.

In the largest transaction of the month, Brookfield, advised by Savills, acquired the freehold interest in Milton Gate, 60 Chiswell Street, London EC1. The property comprises over 200,000 sq ft of office accommodation single let in its entirety to Addleshaw Goddard on a lease expiring September 2024, at a passing rent of £10m per annum, reflecting a highly reversionary rent of £49 per sq ft overall. Brookfield’s acquisition of Milton Gate marks their second purchase in 2021, taking the asset manager’s investment into the capital to over £850m so far this calendar year.

In another notable transaction, Barings, advised by Savills, acquired Capital House, 85 King William Street, EC4 for £130.5m, reflecting a capital value of £1,039 per sq ft. The freehold building occupies a 0.486-acre site overlooking the Bank of England. The property comprises 125,590 sq ft (11,667.70 sq m) of office, retail ancillary accommodation arranged over basement, lower ground, ground, and eight upper floors. The property is currently 55% let to six tenants, including Alpha Bank, Beale & Co, Sainsbury’s and Pret A Manger.

July saw a number of development and value-add opportunities going to formal bidding within the City market, most notably EDGE London Bridge and Moorfields Eye Hospital, City Road. Development and value-add opportunities are being well received and attracting interest from a wide range of investors from around the world, highlighting the confidence global capital continues to have in the long-term future of the City.

This increased interest in development and value-add opportunities is being driven in part by the increase in focus on the ESG agenda, which emerged from 2020 as more urgent than ever. Both investors and developers are looking to develop/reposition buildings to create environmentally sustainable properties suitable for future generations.

Following the flurry of deals across June and July, North American investors have emerged as the number one buyer group in the City, acquiring £1.17bn worth of transactions accounting for 31.5% of total volume. European investors are close behind, acquiring £979m worth of buildings, accounting for 26.2% of volume.

Savills City prime yield now stands at 3.75%, which compares to the West End prime yield of 3.25%. The MSCI City average equivalent yield currently stands at 5.48%, while the net initial yield is 3.04%.