BNP Paribas Real Estate, part of the BNP Paribas Group, a global leader in financial services, has announced that the South East office market demonstrated encouraging signs of stability in Q3 2024.
- South East office take-up totalled 494,000 sq ft, with year-end projections suggesting it will exceed the five-year average of 2.2 million sq ft.
- Multiple towns including Reading, Guildford and Watford have seen headline rental growth exceeding 10%- during 2024, as scarcity bites.
- Investment volumes totalled £311m, which represents a 136% increase against Q3 2023 levels.
- Prime yield discounts remain considerable, with Q3 2024 figures showing a 150-basis point reduction compared to the long-term average (7.25% vs 5.75%).
- Secondary stock is finding a price point with initial yields between 15-10% and capital values as low as £100-£125 psf, below replacement cost.
On the South East office leasing market, Will Foster, National Office Agency at BNP Paribas Real Estate commented: “With few speculative starts in the decentralised office market, today’s discerning occupiers are increasingly focused on a shrinking group of superior, standing buildings in prime pitch locations, which are seeing continued healthy rental growth. This is especially the case where ESG-led building design meets corporate and statutory requirements.
“Although the Q3 data is dominated by business park take up, on a longer term basis we see the market as nicely balanced between in and out of town locations. Business parks can offer security, parking, stand-alone brandable buildings – and often more scope for procuring bespoke premises, especially in the fields of science and technology. However suburban and regional town centres continue to offer the actual end users, staff, a compelling mix of public transport access, and a range of amenities and entertainment, which for many are a fundamental part of the working day.
“At the smaller end of the market up to c.7,000 sq ft,, we are seeing landlords increasingly respond to strong tenant demand for fitted suites. Fast moving businesses are seeking immediate occupation and the cashflow advantages of amortised fitout cost through deal terms, whilst avoiding the hassle of procuring fitout direct. We expect this trend to continue into 2025 and beyond as landlord seek to broaden market appeal through offering a variety of products to customers.
On the South East office investment market, Hugh White, head of National Investment commented: “The market remains challenging but interesting. There are a number of factors that are piquing investors’ interest and beginning to hint of better times to come; continuing rental growth due to a dearth of best in class accommodation, a limited development pipeline due to high build costs and soft exit yields and in many instances realistic sellers. This realism means a clearing price is emerging as intelligent vendors understand the reprice is not a moment in time but a structural shift for secondary offices.
“At the prime end of the market a few core institutional investors are on the hunt again and we expect yields for ‘perfect’ best in class Big 6 City offices to go sub 7% as and when they become available. This pricing sentiment will have a positive impact on the South East market too. Parkview House in Oxford recently traded for 6.75% NIY reflecting £19m.
“The secondary market has witnessed the greatest correction and is seeing initial yields between 15-20% and capital values as low as £100-£125 psf, comfortably below replacement value.
Hugh concluded, “The key to the health of the market and a return to ‘normality’ will be the re-emergence of core long term investors using real estate as a diversifier in a balanced portfolio. This will be driven by the pooled government pension funds and the capturing of the DC pension money. To add another source the UK would do well to emulate the SCPI model in France as an alternative to the OEIC’s. In the meantime opportunistic investors are going to do very well over the next couple of years.”
