Wave of new stock offers buyers growing options
September witnessed a slowdown in transactional activity, recording volumes of £174m across five deals. Year-to-date volumes stand at £5.16bn which is in line with the ten-year average and 32% ahead of the five-year average; however, analysis on a quarterly basis illustrates that both the volume and quantity of Q3 transactions were each down 25% on the ten-year averages. Such dampened activity is easily explained by the growing cost of finance, following the Bank of England’s seventh base rate increase so far this year, coupled with a volatile SONIA swap rate. Perhaps unsurprisingly, the five deals to exchange in September were acquired by private investors who possess the ability to transact with existing cash reserves and arguably had different motivations.
The largest transaction was Lothbury’s fourth successful disposal of the year; 1–2 Stanhope Gate, W1. The 34,000 sq ft headquarters office building is single-let to Evercore Partners International LLP for a further 4.5 years at a passing rent reflecting £91.60 psf, with consent in place for the extension of the upper floors. A deal was agreed with a private investor who subsequently withdrew their offer, before the underbidder acquired the freehold interest for c.£75m, 3.88% and £2,213 psf, reflecting a 17% discount to the quoting price.
Following a year of open marketing, Brockton Everlast’s freehold interest in The Foyles Building, 107–109 Charing Cross Road, WC2 was acquired by a private German investor. The 40,000 sq ft retail building (used as a flagship bookstore) is single-let to W&G Foyle Ltd for a further 15.5 years, benefitting from annual CPI indexation (2–4%) from 2024. Pricing reflected approximately £53m, 4.20% and £1,300 psf.
A large proportion of the remaining deals agreed are undergoing or are expected to see price renegotiations, in response to the ongoing macroeconomic and geopolitical headwinds
Victoria Bajela, Associate Director, Commercial Research
Savills is tracking £1.73 bn of deals under offer, of which only 12% (by volume) were agreed over the month, including 19-21 Old Bond Street, W1 (Q. £113m, 2.75% and £4,354 psf), 55 Tottenham Court Road, W1 (Q. £52m and £1,032 psf) and Sidney Smith Building, 36–42 King’s Road, SW3 (Q. £35m, 4.21% and £1,200 psf). A large proportion of the remaining deals agreed are undergoing or are expected to see price renegotiations, in response to the ongoing macroeconomic and geopolitical headwinds.
In spite of the change in sentiment and in keeping with the September trend of a busy marketing period, 21 buildings with a combined guide price of £770m were marketed during the month. There is now a burgeoning supply of potential options for brave buyers, with we estimate some 70% of 2022 sales unsold. However, a significant amount of current stock is lingering; 39% of openly available assets were marketed pre-H2.
The largest asset to be marketed in September was Westbrook’s freehold interest in 60 Charlotte Street and Scala House, W1 (Q.£140m, 3.66% and £2,031 psf). The prominent mixed-use asset comprises 69,000 sq ft, including c.40,000 sq ft of comprehensively refurbished multi-let offices, a 34-unit residential tower pre-let to a serviced apartment provider and a restaurant let to Gaucho. The average office passing rent reflects £96 psf (topped up) and the property generates a WAULT of 6.8 years to expiry.
On behalf of Bourne Capital, Savills is marketing the virtual freehold interest in 28–34 Queensway and 1–6 Olympia Mews, W2. The c.30,000 sq ft retail and office building benefits from a valuable planning consent to develop a luxury residential-led scheme of 32 apartments with prime retail frontage and new self-contained office accommodation (Q.£32m and £1,066 psf).
Due to the weakened sterling and consequential currency discount for overseas investors, it will be interesting to monitor how overseas interest develops in Q4 and beyond, especially now owners are compromising on pricing. Over the last decade, Hong Kong investors have contributed 9% of West End turnover. However, in 2017, the last sustained period of sterling depreciation in response to the Brexit vote, Hong Kong buyers represented 21% of volumes (£1.52bn).
Savills prime West End yield has increased 25 bps and stands at 3.50%, whilst the Bank of England base rate has risen 50 bps to 2.25% and the SONIA five-year swap rate has also increased to 4.8% at the start of October.