It has been an active first half of the year in the City investment market with £4.4 billion already transacted, which is a 19% increase on the same period last year which totalled £3.7 billion. Last year produced a City record in turnover amounting an impressive £12.2 billion. However, even though turnover is up on this point last year, it would be surprising if this figure was beaten again this year, as it was achieved by a massive £6 billion being transacted in the last quarter alone, of which £3.4 billion was from Blackstone acquiring a 50% stake in Broadgate and St Martins acquiring the More London Estate.

The largest deal of the first half of the year was the purchase by China Life of 10 Upper Bank Street, E14 in Canary Wharf for £795 million, 5.27% and £775 per sq ft. The property is predominantly let to Clifford Chance until July 2028 at a rent of £43.21 
per sq ft.

Another significantly large deal was the purchase by Tishman Speyer of 33 Holborn, EC1 for £311 million, 4.78% and £948 per sq ft. The property is let in its entirety to Sainsbury’s on a lease until 2025 at a passing rent of £52.50 per sq ft.

30 St Mary Axe, EC3, one of the City's most iconic towers, has come to the market. The building fell into Receivership earlier this year and is now on the market through Savills at a price in excess of £650 million. We expect there to be a considerable amount of demand from all types of investor for this substantial piece of central London real estate.

In contrast to last year, which saw a dominance from non-domestic purchasers within the City, this year we have seen UK investors account for 57% of acquisitions. It appears we are seeing the results of increased pressure placed upon UK purchasers from last year to place equity, brought about through increased competition from private and international investors. Rising net inflows to the property funds are driving a sharp increase in UK institutional activity across the UK, with the comparatively narrow gap between yields in the City of London and those in the prime regional cities driving strong investor interest in this market.

Asian investors were the second most active group of buyers this period, followed by European purchasers in third, at 17% and 11% respectively. Going forward, we see the UK funds continuing to be the main purchasers with North America and Asia predominantly focusing on the larger lot sizes of over £200 million.

Yields

Savills prime City yield remains at 4.5% at the end of the half, this is the fourth month at this level, hardening from 4.75% at the start of the year. This hardening has been supported by rising rents and a low base rate. The primary cause of this appears to be the combination of strong demand with restrained supply of prime stock in the City core. The spread between the City and West End still remains wide but has reduced this half from 150 bps to 125 bps.

The IPD indices are showing a continuing steady hardening in average office yields in the City, with the average initial yield hardening from 4.93% in December 2013 to 4.63% in June 2014. IPD estimate that the average capital value growth on City of London offices over the last 12 months has been 16%, a factor which may cause holders of City office investments to consider profit-taking.

Outlook

The outlook for the City investment market appears to be a positive one as we foresee investors start to continue to widen their focus beyond safe, income protection type assets to more value-add type investments where they can profit from the forecast rental growth. The City occupational market is performing above average and across the next four years we predict prime rental growth to average 3.7% p.a., which will in turn attract investors to the City. For the second half of the year, we expect the dominance from UK purchasers to remain, with a bias towards core plus and value-add investment opportunities, particularly in the City fringe markets where the rental growth prospects look strong. This increased demand for value-add assets in fringe locations will result in a hardening of their yields.

Taken from
Review and Outlook: Central London Offices - September 2014