City office prime yield moves to 5.00%
May saw another muted month of activity as just three deals totalling £49.7m exchanged. The total year-to-date City investment volume stands at £2.14bn across 33 deals, representing a year-on-year decrease of 53% by investment volume and a year-on-year decrease of 42% by number of deals.
As at the end of May, there were 12 deals under offer totalling £459m, of which approximately 45% of this volume is attributed to one deal, Lion Plaza, 5–10 Old Broad Street, EC2. Following abortive negotiations with a European investor, the headquarters of global law firm White & Case has recently gone back under offer at a price reflecting a circa 6.00% yield. Initially marketed in November 2022 for £262.5 million / 4.75%, the circa 25% reduction in value from the quoting price highlights the pricing adjustments that are underway throughout the City office investment market.
In May, six assets were brought to market totalling £180m, representing an average deal size of just £30m. In total, just £950m has been launched to market in 2023 YTD across 29 deals. This represents just 17% of the volume launched by June 2022, highlighting the lack of newly available stock that has openly come to market in 2023 to date.
The macroeconomic themes and pressures that we have discussed over the past 12 months remain the same and contribute to inflationary pressures affecting all aspects of the market. The Bank of England raised the interest rate by another 0.25 basis points to 4.50%, the twelfth consecutive rise in a row. Five-year SONIA at the time of writing stands at 4.80% and, as a result of the rising cost of financing and the continued inflationary environment, investors remain cautious. Anecdotally, there appears to be limited conviction in those opportunities that do come to market, unless there is a compelling story or reason to deploy capital and, more recently, there are a number of market forecasts which indicate interest rates may be higher for longer.
Whilst investors remain cautious to deploy capital into the office sector, the City of London’s ‘Destination City’ initiatives appear to be drawing increasing interest from change of use or opportunistic investors from the hotel & serviced apartment sectors. This is illustrated by the process underway on 5–10 Great Tower Street, EC3, which received in excess of 40 inspections, and the off-market acquisition of 45 Beech Street, EC2 – both assets provide change of use potential. 45 Beech Street was acquired by HubCap & Bridges Fund Management and comprises 44,946 sq ft of vacant office accommodation with a pre-app for a change of use to provide 315 serviced apartments. This acquisition, which requires planning consent, is a good indicator of the strength of the alternative use sector within the City of London with investors increasingly willing to take on this planning risk themselves.
Another notable transaction in May was the acquisition of Bramah House, 65–71 Bermondsey Street, SE1, by GPE. Coupled with its acquisition of 141 Wardour Street, W1, GPE continues to seek new opportunities for its serviced office offering, seen most recently with the acquisition of Bramah House for £14m, reflecting a net initial yield of 5.90% and capital value of £892 per sq ft. The asset is multi-let to three tenants with a WAULT of 2.25 years to break.
Savills City prime yield has moved outwards to 5.00% this month, a 125 basis point move over the last 12 months. The West End prime yield remains at 4.00%, a 75 basis point move over the same period. The MSCI City average equivalent yield currently stands at 6.69%, while the net initial yield is 4.40%.