Over £3bn under offer at the end of April
Following a record-breaking Q1, April saw a modest turnover of £139.55m over seven deals, with an average deal size of £19.94m reflecting a 25.57% year-on-year decrease for April. The year to date investment volume totals £4.36bn across 47 deals reflecting a 433% year-on-year increase. In the largest transaction of the month, Savills advised Alduwaliya on the acquisition of 22 Chancery Lane, WC2. Located in the heart of Midtown, the building comprises 38,479 sq ft (3,575 sq m) of Grade A office and ancillary accommodation arranged over lower ground, ground and six upper floors. Multi-let to five office tenants, the building provides a weighted average unexpired lease term of 3.1 years and benefits from value enhancement opportunities, including refurbishment and extension, with the potential to increase the net internal area by over 15%. The quoting price was £41m reflecting a 4.78% net initial yield and a capital value of £1,066 per sq ft overall.
In the second-largest deal of the month, CLI Dartriver entered into an agreement with Whitbread to forward-purchase the Zinc Building, 68–86 Farringdon Road, EC1, for £39.7 million, reflecting a capital value of £1,431 per sq ft. Currently under construction, the building is set to reach practical completion by April 2023 and will be delivered to a category A office standard and provided with full vacant possession. Designed by Sheppard Robson, the building is located in a prominent position and a five-minute walk from Farringdon Crossrail station.
As we enter the second quarter of the year, we continue to see healthy levels of demand and activity in the market, with Savills tracking £3.02bn currently under offer and £5.57bn of available stock in the City of London market. There are currently nine deals over £100 million under offer as at the end of April 2022. We are closely tracking a handful of core plus transactions which are either coming to market or available, including the sale of MidCity Place, WC1, a core multi-let office and retail building which is occupied by 14 tenants. Held freehold, the property totals 348,999 sq ft (32,423 sq m), arranged over lower ground, ground and nine upper floors.
Providing a weighted average unexpired term to expiries of 5.75 years, the building is a good test of the market appetite for large multi-let active management opportunities.
Another large lot size which commenced marketing in April is Bank of America’s headquarters building located at 2 King Edward Street, EC1. Held freehold and totalling 585,000 sq ft (54,347 sq m), the building is leased to Bank of America Merrill Lynch for a further ten years, subject to annual uplifts to RPI with a collar and cap of 0% and 5.0%, respectively. The current owner, Norges Bank Investment Management, is seeking a price of c.£750m, reflecting a net initial yield of 4.00% and a capital value of £1,282 per sq ft overall.
Savills is closely monitoring the potential impact that the inflationary pressures and the increase in the cost of overall debt financing will have on the market
Will Wilson, Analyst, Commercial Research
We continue to closely monitor the rise in the UK inflation rate, which according to the Office for National Statistics, reached a near 40-year high in April at c.8.5%, up 1.5% from March. This has been underpinned by a rebound in economic activity following the Covid-19 pandemic, rising energy prices, supply bottlenecks exacerbated by the Russia-Ukraine war and continued lockdowns across China, but to name a few inputs.
Further to the high levels of inflation, The Bank of England base rate increased for the fourth consecutive quarter to 1.0%, still historically low in the context of interest rate levels; however, combined with other market pressures, the resultant impact has been the increase in SONIA rates by c.150 bps over a 12-month period and for debt-backed buyers an increase in their overall cost of funds. Savills is closely monitoring the potential impact that the inflationary pressures and the increase in the cost of overall debt financing will have on the market.
Savills City 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 5.3%, while the net initial yield is 3.5%.