Knight Frank calls for investors to re-think and re-position assets in the South East office market for best returns. Investors are urged to rethink their commitment to the real estate market throughout the M25 region according the Knight Frank, the global property advisory firm, which today hosted its annual M25 Market Review at London’s Dorchester Hotel.
An audience of over 500 of the great and the good of the UK property industry heard that demand from companies requiring space is running 10% ahead of average and with a looming supply squeeze of best quality space, rental levels are set to rise in prime M25 towns, predominantly in the Thames Valley area, close to Heathrow and the Crossrail connection now under construction.
Emma Goodford, Head of National Offices said: “Savvy investors will look to the M25 over the next 24 months to secure good returns. Encouragingly, the demand drivers have changed – it’s now about growth and expansion. The desire for new space is creating rental growth as new buildings are being snapped up.” She added “We’ve already seen the £30psf level achieved in Reading and Maidenhead and figures above this are predicated in a handful of towns including Staines on Thames and Uxbridge. The West London market is now at mid £40’s so this rise looks justifiable and sustainable,” adding “we’re finding it hard to identify new schemes which will provide quality space in 2016 and onwards, just at the time many large occupiers will be able to upgrade.”
The range and diversity of companies looking for new offices, reflects strong growth in business services, the oil and gas industry and the tech sector- Emma Goodford added “ we’ve seen the highest number of tech deals since 2001- the last internet bubble, so it’s not just the City of London picking up on this global trend in this sector. I can forecast a situation where lack of new space will collide with take up rising – a perfect cocktail to stimulate speculative development. Reading, Staines, Guildford, Brighton all have less than 4 year supply- Staines has just 2.5 years supply even with 4 news schemes under way. Occupiers can be more mobile and if the SE region doesn’t step up and start development now, some of these occupiers could be forced turn their attention elsewhere, to London or Europe.
A rush to convert derelict office buildings to flats won’t materialise Goodford predicts “most house builders want to develop houses not flats but we could see some prime town centre sites going down this route if planning or permitted development Rights support this- leading to a tightening on the supply of offices and hastening the climb in office rents.
Investment market
For the right type of product, investment demand for South East offices is arguably as strong now as at any time over the last six years. With limited stock available, yields for both prime, long income product and good quality secondary stock are expected to come under downward pressure as the year progresses.
Tim Smither, head of South East investment, commented: “A lack of stock in the region will continue to be the biggest challenge. 12 months ago there were really only buyers for the very best stock, now there are buyers for most stock, but there is simply not enough product. Prime and good secondary yields will continue to harden for the rest of the year, as UK funds and overseas privates are priced out of London. Secondary buildings in core markets will continue to look good value, particularly where the rents are sustainable. The occupier market is improving and investors will take on letting risk in search of higher returns.
“Buyers from around the world are attracted to the South East, looking to secure well let assets at a discount to London. In the coming 12 months, overseas buyers will continue to show a healthy appetite for the South East, with both Opportunity funds and Middle Eastern privates under pressure to invest. We are also seeing increased interest from the US, Australia, Far East and Israel. With a continued improvement to the occupier market, the right product in the right location will produce healthy returns and should be a very attractive prospect.”
