January is often characterised by subdued market activity as investors refine their business plans for the year ahead; however, 2022 started strongly as January saw eight transactions in the City totalling £317.15m, significantly up on 2021 which saw just one transaction of £30.96m. Savills is tracking £4.81bn of stock that is under offer and a further £4.91bn available, which is the highest on record for the first quarter and a promising springboard for the remainder of the year. We maintain our prediction that Q1 2022 has the potential to be the largest Q1 ever recorded in the City market, and anticipate this momentum is expected to continue throughout 2022 with the easing of government restrictions combined with the roll-out of the vaccine programme boosting investor confidence.

In the largest transaction in January, Savills advised Sun Venture on the acquisition of the freehold interest in 120 Moorgate, EC2, for £148m, reflecting a 4.50% net initial yield (NIY) and a capital value of £1,311 per sq ft (psf). Developed in 2020 and comprising a total of 112,875 sq ft of office, retail and leisure accommodation, the building is majority let to WeWork on a lease expiring December 2040 (no breaks) who account for 76% of the total income with Barclays Bank Plc and Third Space Gymnasium occupying the part ground floor retail and leisure units. The building is located close to Moorgate and Liverpool Street Crossrail stations and let at an office passing rent of just £69 psf compared to Grade A rents around Liverpool Street in excess of £80 psf. The purchase is Sun Ventures third acquisition in the last 18 months, bringing their total overall investment in the London commercial market to £880m. Uniquely, this is the first transaction of a building majority let to the serviced office occupier, WeWork, two years since the onset of the Covid-19 pandemic and illustrative of investor confidence returning to this sub-sector of the market.

Another notable deal in January was the sale of Derwent London’s New River Yard, EC1, which was acquired by Highbridge Estates for £67.5m, reflecting a NIY of 5.22% and a capital value of £955 psf. Comprising 70,713 sq ft of net internal area, the building is multi-let across four buildings to 13 tenants with a WAULT to expiries of 4.6 years and WAULT to breaks of 2.6 years. Located within a ten-minute walk to the north of Farringdon and close to Angel underground station, the cluster of buildings offers active management opportunities targeting technology, media and telecommunications tenants.

With inflation running materially ahead of the Bank of England’s target rate, the rise in government bond yields and potential interest rate rises we anticipate 2022 will continue to see a significant weight of capital directed to targeting value-add and development opportunities as investors seek to ‘outperform’ these headwinds through delivering the very best-in-class buildings with highest environmental credentials. This outperformance is likely to come from rental growth rather than material yield compression, and we still anticipate seeing the ‘flight to quality’, with record capital values being achieved for the very best-in-class office buildings with defensive income profiles.

We highlighted a continued theme of the number of larger lot sizes that are available or under offer, and transactions over £100m accounted for 72% of the total deal volume in 2021. As at the end of January 2022, there are currently twelve deals over £100m under offer, including 5 Broadgate (UBS Headquarters), EC2, at a reported c.£1.25bn, reflecting a 3.50% NIY and a capital value of approximately £1,760 psf overall. This theme is set to continue with the sale of One and Two Southbank Place, SE1, which is being marketed for a reported £935m, reflecting a 4.00% NIY and a capital value of £1,630 psf overall.

Savills prime yield stands at 3.75%, which compares to the West End prime yield of 3.25%. The MSCI City average equivalent yield currently stands at 5.39%, while the NIY is 3.39%.

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