Quiet summer continues but City sees signs of life in larger lot size range
The annual summer lull added to an already quiet City investment market, with only one deal exchanging during the month of July, albeit of a substantial £208m lot size. Despite the lack of activity elsewhere, this one deal in isolation provides a valuable data point for a market that has not seen a deal in excess of £40m exchange since April. Transaction volumes for the year to date are £2.42bn across 38 deals, reflecting a 57% decrease in turnover from this time last year and a 46% drop in number of transactions and, on a five-year average, reflects a reduction in turnover and number of deals of 45% and 34% respectively.
The only deal in July saw a private Vietnamese investor, Dragon Capital, purchase the freehold interest in Lion Plaza, 5–10 Old Broad Street, EC2, which comprises 264,697 sq ft of office and retail accommodation located in the core of the City in close proximity to the Bank of England. The property is multi-let at a total passing rent of £13.32m per annum, reflecting £50.35 per sq ft overall, and 86% of the rental income is secured to the international law firm, White & Case, on co-terminus leases expiring in January 2030. The reported price was £208m, reflecting a net initial yield of 6.00% and a capital value of £786 per sq ft overall. This reflects a 125 basis point and 21% discount from the original quoting price of 4.75% when the property launched to market in November 2022.
This transaction, which was the first deal in excess of £40m since Sancroft, 15 Newgate Street, EC4, traded in April, is notable not only for the lot size but also for the buyer profile which saw a new entrant to the market in the form of Dragon Capital, a Vietnamese high-net-worth family. This purchase highlights the trend of investment from Asia Pacific capital into Central London offices, especially in the larger lot size range of the market. In 2023, the City has now seen six transactions in excess of £100m, all of which have been purchased with capital originating from the Asia Pacific region.
At the end of July, the total stock under offer stood at approximately £419 million across 12 deals, and with several notable deals going under offer during the last month. These include Watling House, 33 Cannon Street EC4, a core freehold comprising 94,489 sq ft, multi-let at a low passing rent of £48.86 per sq ft overall with a WAULT of 4.4 years to expiries and 2.8 years to breaks. With a number of Core+ assets currently available in the market, the deals at Watling House and Lion Plaza offer much-needed price discovery in a market searching for reliable data points.
Elsewhere, 8 Bleeding Heart Yard, EC1, is rumoured to be under offer at a price reflecting a 4.35% net initial yield, which is 65 basis points lower than the current City prime yield of 5.00% and would be a key data point for long let core income. Located within 100 metres of Farringdon station, the property is a newly refurbished, liquid lot size freehold asset comprising 28,874 sq ft of office accommodation single-let to Julius Baer on a new 10-year lease. Meanwhile, in the value-add market, 2 Hosier Lane, EC1, in Farringdon, which is a 41,713 sq ft freehold with 2.2 years of remaining income, has gone under offer at an approximate discount of 30% of the quoting price.
With just one property coming to market in July, there continues to be a lack of new stock to reinvigorate investor interest, a trend that is unlikely to change before September. Meanwhile, the challenging macroeconomic climate which has provided a challenging backdrop for the 2023 investment market, has seen some signs of positive news ahead. Although the Bank of England base rate rose a further 25 basis points to 5.25%, the CPI inflation rate fell to 6.8%, reflecting a fall of 330 basis points since the start of the year and 430 basis points from peak inflation in October 2022. Similarly, SONIA swap rates also fell during July, falling from 5.16% to 4.81%. Savills’ City prime yield currently stands at 5.00%, and the West End prime yield is 4.00%. The MSCI City average equivalent yield currently stands at 6.90%, while the net initial yield is 4.30%.