The M25 occupier market was buoyant in the first quarter, with take-up of 646,517 sq ft, the highest since Q4 2011 and 20% above the five year quarterly average. Q1 activity also comprised 40 deals, the most seen in any quarter since Q3 2008.
Q1 take-up in the M4 corridor was 426,377 sq ft, rebounding 46% on Q4 2012’s subdued level and the sixth strongest quarterly total seen over the last five years.
In contrast, activity in the M3 region remains relatively subdued. Take-up in Q1 was 179,616 sq ft, 7% down on the five year quarterly average and 20% below the 10 year quarterly average.
The largest deal in Q1 saw energy giant BP acquire 135,000 sq ft at 2 New Square, Bedfont Lakes, Heathrow. Weybridge was also home to a flurry of notable deals, with 92,000 sq ft of space leased across three buildings at The Heights Business Park to Cameron Oil, AB Initio and Dentspy.
Underlining occupiers’ continuing preference for high quality office accommodation, New and Grade A buildings accounted for 83% of the total space leased in Q1. Of Q1’s deals, the highest agreed headline rent was Virgin Media’s 44,175 sq ft lease at Griffin House, Hammersmith, at £35.00 per sq ft.
A lack of speculative development in recent years has prompted a steady fall in supply. In the M25, the vacancy rate was 7.7% in Q1 2013, its lowest level in since Q1 2009. The M4 vacancy rate now stands at 9.8%, down from a peak of 12% just two years ago.
In addition to take-up, Q1 saw c.150,000 sq ft of second hand office space transact for change of use, tightening supply in the process.
A key development in Q1 was the start of construction on Blackstone’s Building 7, Chiswick Park. At 334,000 sq ft, this is the largest single speculative development in over twenty years and by itself increased the amount of speculative development in the M25 by 63%.
Emma Goodford, Head of South East Offices, comments; “While commentators debate the potential for a triple-dip recession, it is encouraging to see M25 take-up significantly above the average in the first quarter. This isn’t the result of just one or two supersize deals. The range of activity has improved to cover all size brackets – Q1 saw 40 deals, the highest number in almost five years, before the credit crunch in 2008.
“Occupiers have more confidence and more cash – but increasingly less choice. This is an interesting cocktail in prime markets with limited stock. They continue to focus on the best quality space, encouraging landlords to reposition buildings in those markets where a shortfall of supply is now putting upward pressure on rents.
“The West London markets of Hammersmith, Richmond and Chiswick, are performing fantastically, with prime rents reaching record highs in 2012. With New and Grade A supply set to tighten further along the Western corridor, evidence suggests that concrete rental growth will spread to other key markets, such as Staines, Maidenhead and Uxbridge in 2013″.
Investment market
Knight Frank also reveals that healthy sentiment is returning across most sectors of the South East investment market, with a lack of buying opportunities, rather than a lack of demand, holding back volumes.
Q1 2013 saw 18 deals in the South East market, with a total volume of £290m, almost exactly in line with the five year quarterly average.
With a growing perception that the South East market represents good value outside the capital, overseas investors are increasingly seeking income generating assets. Q1 saw Middle Eastern investor Peninvest purchase 5 Longwalk, Stockley Park, Heathrow for £42.45m from Schroders, reflecting 6.32% NIY.
Improving sentiment has also spurred a revival in interest for good quality secondary assets, albeit focused in the more resilient town centre markets. UK Funds and a number of overseas investors are actively seeking asset management and refurbishment opportunities in core occupier markets. Examples include Harman House, Uxbridge, which Mercer bought for £17.3m reflecting 9.36% NIY, and 45 Grosvenor Road, St Albans which Threadneedle bought for £10.15m reflecting 8.76% NIY.
According to Knight Frank, yields for prime 15 year-income held at c.6.00% in Q1 2013, unchanged since 2011. With demand exceeding supply the agent expects yields for both prime and good secondary assets to come under downward pressure in 2013.
Tim Smither, partner, South East Investments commented; “The market has hardened over the last six months, with more buyers for both prime and increasingly good quality secondary stock. Significantly, UK institutions are once again aggressively seeking prime and good quality secondary, but they are frustrated by a lack of opportunities. We expect this pattern to hold throughout 2013, and this will put yields under a degree of downward pressure”
