Source: Savills Research
Brexit shock but income-focused product predicted to remain resilient
Market comment and notable deals
■ June saw volumes of £245m over 14 transactions pushing turnover to £3.58bn to the end of H1. Whilst the total Q2 turnover of £1.2bn was the lowest since 2009, the strong start the year meant H1 was 14% and 32% in excess of the 5 and 10 year averages respectively (see Graph 1 below).
■ In a landmark pre Brexit transaction a private UK investor has purchased 169 New Bond Street for £65m reflecting a net initial yield of 1.55% and a incredible capital value of £18,830 per sq ft. The property is let to Richemont (t/a Piaget) on a lease expiring March 2035 at a current passing rent of £1.073m per annum, equating to £1,390 ZA. From our records this sale represents the highest value transaction on a capital value per sq ft basis of any asset including residential in London.
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GRAPH 1West End H1 Turnover
■ Acting on behalf of Standard Life Investments, Savills sold the long leasehold interest (119.5 years / 10% gearing) of 20 King Street for £50.2m reflecting a net initial yield of 3.59% and a capital value of £1,704 per sq ft. The property totals 22,450 sq ft of office and 7,018 sq ft of retail / gallery accommodation. The property offered the potential for vacant possession, with the sole office tenant, GAM (UK) Ltd, having expressed an intention to negotiate a surrender of its lease although we understand its occupational requirement is being reviewed following the outcome of the referendum.
■ Acting on behalf of a Private European Investor, Savills has acquired the freehold interest in two public houses from TH Real Estate for a combined price of £13.5m, reflecting a net initial yield of 3.50%. Both the Goat Tavern and the Two Chairmen are let to Spirit Pub Company (Managed) Ltd on leases expiring in 2044. The leases are subject to fixed increases and offer the prospect of re-basing to upward only open market reviews every five years from March 2022, at the Landlords discretion.
■ The outcome of the June referendum has caused much uncertainty in the property market, with many UK funds downgrading their portfolio unit prices and moving to weekly valuations to enable them to react to price changes. A run of outflows on a number of open ended funds over the past two weeks has also culminated in the suspension of redemptions in some funds. We expect to see a downward adjustment in values across the board, with larger lot sizes likely to be hit hardest. We predict income-focused assets will fare better with investors seeking a flight to safety. The recent 13.5% weakening of the pound will undoubtedly see some overseas private investors viewing London as a buying opportunity.
■ The IPD average equivalent and initial yields now stand at 4.70% and 3.08%, respectively (see Graph 2). Considering recent events we envisage some outward movement in yields over the following months.
■ Savills was involved in over 27% of all West End transactions by turnover during H1, and both of the transactions over £200m.
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GRAPH 2Yields
Source: Savills Research, IPD
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TABLE 1Key Deals In June 2016