Figures released by Knight Frank reveal the diverging fortunes across the South East office market in 2012, with the Thames Valley expected to continue to outperform the rest of the region in 2013.
Occupier market
Amid challenging conditions for the UK economy, the Thames Valley markets proved particularly resilient in 2012. Take-up in the M4 corridor was 1.67m sq ft for the year, 6% above 2011’s total and almost exactly on par with the ten-year annual average.
In contrast, activity in the M25 region and M3 corridor was more subdued in 2012. M25 take-up was 2.01m sq ft, 20% below the ten year annual average and closely in line with Knight Frank’s forecast of 2.1m sq ft.
The M3 corridor remains the most difficult market, with take-up of 0.65m sq ft in 2012, down 14% on 2011 and 29% below the ten year annual average. This was largely anticipated with the supply of poor quality space in the core mid-part of the M3 corridor constraining activity.
Named active demand has held up over the past 12 months; albeit with a particular focus on the core Thames Valley/West London markets. At the end of Q4 2012, active named demand stood at 6.32m sq ft, broadly unchanged from Q3 2012 and a marginal 3% improvement from Q4 2011.
A lack of speculative development in recent years has prompted a steady fall in supply. In the M25, the vacancy rate was 8.8% in Q4 2012, down from up from 8.3% in Q4 2011 while, in the M4, the vacancy rate stood at 10.1% in Q4 2012, down from 10.7% a year before.
Speculative development, which is already limited, shrank in Q4 following the completion of a number of schemes. These included The Stanza Building, Uxbridge (81,000 sq ft) and Velocity 1 & 2 at Brooklands, Weybridge (106,400 sq ft), all developed by Rockspring.
However, four new schemes saw construction commence in Q4 2012, three of which are in Staines, including Exton & Rockspring’s Flow at The Causeway (60,000 sq ft) and Lasalle Investment Management and Bell Hammer’s Strata Building (89,000 sq ft).
Emma Goodford, head of South East offices, comments; “We expect 2013 activity to improve on 2012’s level in each of the main markets, albeit this will be driven by an anticipated rise in lease events as opposed to business expansion.
“Knight Frank forecast M25 take-up of 2.1m sq ft in 2013, which is circa 15% below the annual average. However, we predict another solid year for the M4, with take-up of 1.75m sq ft which is marginally ahead of average.
“Knight Frank’s transaction analysis shows that a spike in lease event-driven demand is forthcoming in 2013-15 with the expiry of a raft of historic leases. Developers who have recently committed to construction in the key Thames Valley locations should seek to deliver their schemes to coincide with this demand.”
“Encouragingly, 2012 saw a continued improvement of rental levels in tightly supplied markets with good fundamentals, with the West London markets of Chiswick and Hammersmith reaching record highs. In 2013, we anticipate headline rental growth to spread to other Thames Valley markets, with £30 per sq ft being more widely achieved”.
“The key drivers for occupiers – access to the best pool of talent, quality space and good infrastructure remain. Projects such as Crossrail will boost accessibility to Slough and Maidenhead and may well influence locational decisions and fuel rental growth”.
Investment market
Knight Frank expects a greater depth to the market in 2013, as investors increasingly target opportunities higher up the risk curve.
While Q4 activity was limited to just c. £175m across the South East, it took the annual total for 2012 to just over £1.0bn, closely in line with the 2010’s total.
Notable deals in Q4 2012 included PRUPIM’s £47.5m purchase of Chiswick Green, West London and Threadneedle’s £15.1m purchase of 1 Furzeground, Stockley Park, leased to Regus for 15 years.
Elsewhere, a Middle Eastern private investor acquired Proctor & Gamble’s HQ at The Heights, Weybridge for £33.68M, reflecting 7.49% NIY. These three deals reflect the current appetite for good quality office stock in robust locations, with yields ranging between 6.00% and 7.5% NIY.
Investor activity is strengthening for good quality secondary stock, with buyers seeking to take advantage of historically high yields. However, interest is concentrated on robust occupier markets and ability to re-let is absolutely key.
Knight Frank expects 2013 turnover to remain broadly in line with 2012, although if Chiswick Park sells 2013 may exceed the £2b level of 2011.
Yields for prime 15 year-income held at c.6.00% in Q4, a level unchanged throughout 2012. The agent forecasts prime yields to hold at c. 6.00% throughout 2013.
Tim Smither, partner, South East investments; “While demand for prime stock will remain buoyant, we expect to see increased demand for good quality secondary assets in 2013. There are a number of institutions who now have both the capital and the appetite to invest shorter income stock in the South East, albeit their focus will be on well-located assets, at a price which reflects sensible re-letting prospects”
