Strong overall 2022 volumes flatter and disguise the challenges witnessed in the final quarter
December’s turnover of £723m, which was spread across only six transactions, contributed 81% of Q4 volumes as a handful of high-profile deals closed in the run-up to Christmas. Despite the record level of activity witnessed at the start of 2022, the series of macroeconomic events that ensued caused a market slowdown, with volumes decreasing by an average of 15% quarter on quarter to the end of the year. As such, Q4’s turnover of £893m represented the lowest Q4 figure since 2008. The annual totals of £5.96bn and 98 transactions reflect a 3% increase on 2021 and a 2% increase on the five-year average (by volume).
In December, Savills advised the vendor, Harel, together with their development partner Valeo Capital, in the largest office transaction of Q4; the freehold disposal of 50 Broadway, SW1. The 72,560 sq ft office building was comprehensively refurbished in 2021 and is single-let to the UK Government for a further 18.5 years, subject to a tenant break option in 13.5 years. The sale, which has now exchanged, witnessed competitive bidding, highlighting the resilient appeal of high-quality assets with defensive income profiles, particularly in the context of global economic uncertainty.
Domestic investors remained net sellers in 2022, accounting for 65 disposals, which reflected two-thirds of all transactions by both number and volume. On the buy-side, UK investors were also the most acquisitive nationality, representing just over a quarter of deals by volume. At a close second, Asian buyers contributed 25% of volume across only eight transactions, equating to an average deal size of £177m, led by GIC’s purchase of a 75% stake in Paddington Central (£694m) in April. Despite making such an impact, Asian investors accounted for none of the 15 deals in Q4, the most turbulent economic period of 2022 which brought with it the steepest hike in finance costs.
In times of uncertainty, a trend towards a ‘flight to quality’ can be observed whereby investor demand becomes focussed on assets with the strongest fundamentals and tenancy profiles, and there seem to be few of these. In contrast, the definition of ‘secondary’ has evidently expanded. A clear measure of this is the 98 assets marketed over the course of the year which remain unsold, totalling some £5.3bn. A number of these assets are likely to be re-marketed in 2023 at a revised price level, which will only serve to put pressure on generic values.
Savills advised on 15 transactions in 2022, representing another strong year for the West End investment team
Victoria Bajela, Associate Director, Commercial Research
We enter 2023 with £1.25bn of assets under offer, of which 75% represents deals agreed pre-Q4. Following the absence of any new sales in December itself, we await the outcome of many owners’ asset reviews, however, at this stage do not anticipate a material number of sales in Q1. Savills advised on 15 transactions (eight disposals and seven acquisitions) in 2022, representing another strong year for the West End investment team.
Savills prime West End yield remains at 3.75%, the Bank of England base rate has increased 50 bps to 3.50%, and the SONIA five-year swap rate has decreased to 3.60% in the second week of January, compared to 3.78% at the same time last month.