Growing signs of pressure on prime yields
We recorded seven trades in August totalling £279m, bringing cumulative annual volumes to £2.65bn across 82 deals. Transactional activity so far this year is 30% down on the 10-year average (by volume) however the number of transactions reflects the increasing liquidity in smaller lot sizes as the market cycle improves.
Investor demand remains focussed on core submarkets, with 70% of transactions (by volume) taking place in Mayfair, Fitzrovia and Soho. Mayfair alone, accounting for a combined £1.2bn, reflects the same deal volume witnessed in the City of London so far this year. The occupational theme of a ‘flight to quality’ is mirrored in the capital markets with a strong focus from buyers on growth stocks or repositioning opportunities. Increasingly this demand is already starting to translate into competition and early signs of downward pressure on yields.
We have witnessed a dearth of large-scale trades so far this year; only 4 above £100m (compared to the 10-year average of 10), however in August we recorded the first incomeproducing office deal within this size band. Chinese Estates sold the freehold interest in 14 St George Street, W1 to Oval Real Estate / Elliott at a headline price of £133m, 3.91% (topped up) & £2,565 psf. The 52,000 sq ft office building is multi-let with a WAULT of 6 years, passing off a blended rent of c.£90 per sq ft. The process witnessed competitive bidding amongst US-based private equity investors, attracted by the asset’s prime position near Elizabeth line services at Hanover Square and significant reversionary potential subject to capital investment. This evidence marks a key data-point as we enter Q4 and allows owners of similar assets to review their options with greater clarity.
In another bellwether transaction, USS sold its freehold interest in Grafton House, 2-3 Golden Square, W1 to ACAI (£41.5m, 4.44% & £1,789 psf). The 23,000 sq ft office building is multi-let with vacant possession achievable in 2026, providing the opportunity to comprehensively refurbish, improve the building amenity and re-let thereafter.
The quantum of available assets under offer remains relatively scarce, totalling £841m across 24 buildings, of which one quarter (by both volume and number of deals) was agreed in August. Q3 volumes (to date) stand at £574m, against a 5 year and 10-year average of £1.1bn and £1.5bn, respectively. As such, all deals currently under offer would need to exchange in September to reach parity with historic average volumes; the result of which we will reflect on in next month’s publication.
H1 witnessed the marketing of a cumulative £3.1bn of assets, of which 46% has now exchanged with a further 18% under offer. We are tracking £2.1bn of buyable assets (75), however only one building was marketed in the last month; 14, 15-16 Brooks Mews, W1 (Q. £45m, 3.36% & £2,240 psf). August is traditionally a lull in terms of new marketing. We are however tracking a number of sales scheduled to commence marketing in September, with vendors hopeful that the improving market sentiment will translate into a wider investor audience and stronger pricing.
Savills prime yield stands at 4.0% and faces downward revision. The Bank of England base rate remains at 5.0%, with some commentators predicting a further decrease by the end of the year. The SONIA five-year swap rate has reduced by 13 bps in the month to 3.52%, which is likely to have a positive bearing on sales as we enter Q4.