Annual investment turnover in line with last year despite challenging headwinds
City investment volumes reached £7.41bn across 104 deals for 2022, in line with the 2021 total deal volume and a 12% increase in the number of transactions year on year. 66% of investment activity in the City took place in H1 2022, with 29% in Q3 and just 5% of the total transaction volume taking place in Q4, with pricing of London offices adjusting to the headwinds faced throughout the course of the year.
In 2022 the average deal size reached £71.4m, reflecting a decrease of 17% on the average deal size in 2021 (£85.9m), with 16 deals transacting in excess of £100m, compared to 24 deals in 2021. Notably, only one deal over £100m transacted in Q4 2022, 50 Finsbury Square, EC2, albeit this was initially agreed in the first half of 2022. As at YE 2022, there is a total of £1.75bn under offer across 20 deals and a further £3.9bn of stock available across 76 opportunities.
Total transaction volume for December 2022 was just £76.55m across six deals with an average deal size of £12.8m, historically a low figure, with December usually seeing some of the highest volumes as investors seek to close deals before year end. Q4 2022 turnover ended up at £369.2m across 18 deals, significantly below historic Q4 levels due to the persistent disparity between vendor and purchaser aspirations, allied to a lack of distress. However, we anticipate this disparity to narrow as we move into 2023. In the largest deal of the month, The Salvation Army disposed of its freehold interest in the development opportunity at Booth House, 153–175 Whitechapel Road, E1. The former 150-room hostel was sold with vacant possession, providing the opportunity for redevelopment to a range of alternative uses. The building was acquired by a private UK investor for £32.0m / £517 per sq ft.
In the second largest deal of the month, Columbia Threadneedle disposed of 8 Lloyd’s Avenue, EC3, for £11.4m, 7.55% NIY & £610 per sq ft. The freehold interest comprises 18,692 sq ft and is multi-let to three tenants with two vacant floors and provided a topped-up passing rent of £917,863 per annum, reflecting £49.10 per sq ft. Tenants included Aderant Legal UK, Torstone Technology and Xceedance, and the building benefited from a WAULTC of 1.6 years. The property was acquired by a private UK investor.
As the year progressed, 2022 was characterised by outward pricing adjustments driven by inflationary pressures, rising interest rates, increasing cost of finance and global economic uncertainty. A lack of new opportunities contributed to constrained investment volumes in the second half of 2022, with only £1.3bn of new stock being openly marketed since September. Analysis of 2022’s supply is a tale of two halves: supply was strong during H1, 2022 with £7.4bn (76 assets) being openly marketed, reflecting a healthy average lot size of £95m. However, a lack of assets in excess of £100m being openly marketed in H2 brought the average down by around 45% to just £52.2m.
Asia Pacific investors dominated the City market in 2022, accounting for 40% of the total buying activity, followed by UK investors (24%) and European investors (12%)
Will Wilson, Analyst, Commercial Research
As anticipated in last month’s edition of the City Investment Watch, Asia Pacific investors dominated the City market in 2022, accounting for 40% of the total buying activity, followed by UK investors (24%) and European investors (12%). North American capital accounted for just 7% of buying activity in 2022, a reversal on 2021, where they accounted for 32% of all activity. As the market continues through the current phase of price discovery, we expect North American investors to return to being one of the prominent buyer groups for 2023.
Savills City prime yield stands at 4.25%, which compares to the West End prime yield of 3.75%. The MSCI City average equivalent yield currently stands at 6.07%, while the net initial yield is 3.79%.