City Investment Watch

Turnover inflated by Citigroup deal, as April sees only five buildings trade

Market comment and notable deals

Investment turnover for April saw £179.35m transact across five deals. Overall investment for the year (up to the end of April) is now £2.5bn, 34% up on 2018 (£1.86bn), however 8% down on the five-year average up to April of £2.71bn.

Graph 1

Graph 1 | Historic City turnover to end of April 
Source: Savills Research

As noted in previous monthly updates, 2019 has seen a continuing trend of a lower number of deals, with only five transactions in April, the lowest volume in the month of April since 2009. The number of deals for 2019 now stands at 32, 35% down on the five-year average (to April) of 49.

The largest transaction of the month saw a private investor acquire 15 Fetter Lane, EC4 for £92.6m, reflecting a net initial yield of 5.0% and a capital value of £1,085 per sq ft. The freehold corner building was substantially refurbished in 2017 to provide 85,323 sq ft of office and ancillary accommodation. The property is multi-let to Sharia compliant tenants with two floors currently vacant. The topped-up passing rent of £4,939,872.55 per annum reflects a rent of £57.90 per sq ft overall. The weighted average unexpired term on the let accommodation is 9.1 years to expiry and 7.0 years to breaks. Savills advised the purchaser.

April also saw Aberdeen Standard Investments sell the freehold interest in 28-30 Cornhill, EC3 for £32.4m, reflecting a net initial yield of 4.25% and a capital value of £1,051 per sq ft. The freehold Grade II listed building is located 100 metres from the Bank of England and opposite The Royal Exchange. The property comprises 30,816 sq ft of office, retail and ancillary accommodation and is multi-let to five office tenants and one retail tenant with one floor currently vacant. The topped up passing rent is £1,470,660 per annum which reflects £47.72 per sq ft overall, with a weighted average unexpired term certain of 3.8 years. The property was acquired by Cheung & Sons and marks their first City of London acquisition.

Table 1

TABLE 1 | Key deals in April 2019 
Source: Savills Research

The relatively high levels of turnover contradict actual market sentiment, with total volume figures being inflated by the £1.1bn acquisition of 25 Canada Square by Citigroup which accounts for 44% of volume. Market sentiment is perhaps more clearly shown by the number of deals exchanged and the volume of assets under offer.

There is currently only £810m across 18 properties known to be formally under offer in the City market, 50% of which is made up of three transactions including 81 Newgate Street (BT Centre) and ITV Studios. At this stage in 2018 there was £3.01bn under offer across 18 deals. So far in 2019, the most active demand continues to be for value add/development opportunities, with 15 properties under this classification trading in 2019. The level of continued appetite for such stock will be tested with the recent launch of 280 Bishopsgate, EC2, by RBS. The asset marks the third property sale from the banking group in the City market since 2015. The long leasehold interest is being marketed for £173m, which reflects a capital value of £633 per sq ft.

US investors account for the largest share of investment to date in 2019, accounting for 50% of total investment, however, this only constitutes two transactions. UK investors continue to lead the way in terms of number of deals having acquired 17 buildings totalling £633m (25% of total volume).

Graph 2

GRAPH 2 | City turnover by Nationality (2019)
Source: Savills Research

Savills Prime City yield remains at 4.25%, which compares with the West End prime yield of 3.75%. The MSCI average equivalent yield has remained at 5.4% for the seventh consecutive month while the net initial yield continues to soften, and now is at 4.17%, the highest since March 2015 (4.21%).

Graph 3

GRAPH 3 | City yields
Source: Savills Research, MSCI