City Investment Watch: A lack of availability stalls the market, as Savills predict H1 turnover of only £3.6bn

Savills has released its latest monthly report looking at the City investment markets:

May saw only £176.15m transact across four deals, taking overall investment for the year to £2.68bn, 4.0% up on this point in 2018, but 27% down on the five-year average of £3.65bn for volumes up to May. Total number of transactions for 2019 is now at 36 which is low in a historical context, with the five-year average (up to May) of 61 deals.

Despite 2019 continuing to see a lower number of deals, the demand and weight of money focussing on London real estate remains high, with investment volumes being constrained by a lack of available opportunities. At the beginning of June there are only 20 properties being openly marketed, totalling £750m, at this point last year availability was £3.7bn across 35 deals. The lack of availability is leading to competitive bidding for the majority of on market stock, and meaning investors are looking to make more off market/speculative approaches on buildings.

An example of an off-market transaction, is the acquisition of Alder Castle, 10 Noble Street, EC2 by the Mormon Church for £100m reflecting a net initial yield of 4.40% and a capital value of £1,070 per sq ft. Located in a core City of London location 150m from St Paul’s Cathedral, the freehold building was originally developed in 1999 by Argent Group Plc. The property comprises c.93,500 sq ft of office accommodation arranged over lower ground, ground and six upper floors. Multi let to four tenants with one floor vacant, the topped up passing rent is £4,710,490 per annum which reflects a rent of £50.40 per sq ft overall. The property was sold by M&G, and represents the twelth disposal in the City, from a UK fund in 2019.

Another notable off market deal for May saw Helical plc and Ashby Capital (in a 50:50 joint venture) acquire a major development site in Farringdon from private clients of Nuveen Real Estate. The site is situated on the corner of Charterhouse Street and Farringdon Road, 100 yards from Farringdon Station. The site has an existing planning consent for a Lifschutz Davidson Sandilands designed scheme of 192,000 sq ft. The existing buildings on the site have already been demolished with completion of the scheme anticipated for early 2022.

Although this month has been muted in terms of deals done, May has been a busy month of bidding, with approximately £620m worth of opportunities formally going under offer, these have included high-profile transactions such as 8 Salisbury Square, EC4 (c.£240m), and 15 Bonhill Street, EC2 (c.£112m). Against this back drop, Savills predict Q2 2019 turnover to reach £1.3bn, the lowest figure for Q2 since 2009, and significantly below the record Q2 2018, where £4.25bn transacted. This prediction would mean H1 2019 volumes would be £3.6bn, 28% down on the five-year average H1 figure of £4.97bn, and the lowest H1 volume since 2011.

US investors still account for the largest share of investment so far in 2019, representing 50% of total investment, having acquired three buildings in the City market to date. UK investors continue to lead by way of number of deals having acquired 21 buildings totalling £724.3m (27% of total volume).

Savills Prime City yield remains at 4.25%, which compares with the West End prime yield of 3.75%. The MSCI average equivalent yield softened very slightly last month to 5.45% while the net initial yield continues to soften further, and now is at 4.43%, the highest since August 2014 (4.55%).