M25 take-up was a healthy 623,000 sq ft in Q2, 17% above the five-year quarterly average but 4% down on Q1’s total.
M25 Take-up for the first half of 2013 now stands at 1.3m sq ft, the strongest seen for the first half of a year since H1 2008. Likewise, the first half of 2013 saw 79 office deals in the M25, the most in seen in any half year period since H2 2008, which is just before the economic downturn impacted on the market.
The most significant up-turn in activity has been seen in the M3 corridor, arguably the most negatively affected sub-market in the years following of the downturn. M3 take-up was 304,000 sq ft in Q2, the 61% above its 5-year quarterly average.
In contrast, the M4 corridor was more subdued, having been remarkably resilient during 2012, M4 take-up was 373,047 sq ft in Q2, exactly in line with its 5-year quarterly average.
Overall, take-up for Q2 was all the more impressive given it lacked the one or two ‘super-size’ deals which have characterised activity in most quarters in recent years.
Reading was particularly active in Q2, accounting for almost half of M4 take-up. It was also home to Q2’s largest deal, Reading Council’s acquisition of 85,000 sq ft at Plaza West.
Q2 saw two pre-lets, one prior to construction and one during construction. In Croydon, the Pension Protection Fund leased 39,396 sq ft at Abstract’s Renaissance, while Henkel agreed to pre-let 35,890 sq ft in Hemel Hempstead.
Emma Goodford, Head of National Offices, comments; “Robust activity in the first half of 2013 is a clear indication that occupier confidence has improved reflecting better news on the economy. We are tracking 850,000 sq ft of deals that are under offer and feel confident that the market is getting back on track. 2013 is set to be the strongest year since 2008”
By mid-2014, I expect the biggest challenge facing occupiers will be the lack of choice, with New and Grade A availability shrinking to sub-5% of vacancy in the M25 overall. Consequently, rents will rise in the key markets to the West of London, in the Thames Valley and the prime Surrey towns”
Investment market
Investor sentiment for South East Offices continued to improve during Q2, with turnover standing at £402m, the highest since Q4 2011 and 36% above the five year quarterly average. The figure is all the more encouraging given the quarter lacked any major deals to boost the total. Indeed, the 31 deals transacted was the highest number for a quarter since Q3 2007.
This improved sentiment coupled with a lack of available stock has inevitably resulted in a hardening of yields throughout the first half of the year. Yields for prime 15-year income moved in from 6.00% to 5.75% during Q2, with yields for prime mid-term income also moving down 25bps to c.7.00%. Although the market for poorer quality secondary and tertiary assets remains thin, there are signs that pricing has now at least found its floor, with yields in this sector unchanged during Q2.
Key deals in the quarter included Charles Street’s £29.10M purchase of the Centrica building on Oxford Business Park reflecting 5.95% NIY, and AXA’s purchase of Abbott House, Vanwall Business Park, Maidenhead, reflecting 6.64% NIY.
Tim Smither, Partner, Investment team, Knight Frank; “Sentiment has improved month on month so far this year, with increasing pressure to spend backed by an improving outlook for occupier market. The quantity of buying opportunities in the South East has improved somewhat, but it remains out of kilter with demand. This dynamic has put downward pressure on pricing for both long income and shorter income prime stock, where the UK Funds are looking for higher yielding opportunities”
