Latest figures from Knight Frank reveal that investment in the South East office market broke through the £1bn mark in the first half 2014, as investor appetite for stock shows no sign of abating.
Investment volume reached a total of £690m in Q2, which is 59% above the five-year quarterly average, and took the total volume for the first half of 2014 to £1.17bn. Reflecting the on-going depth of demand, turnover in H1 2014 was comprised of 57 deals, the second highest half-year total since H2 2007.
Q2’s largest deal by some distance was AEP Investment Management’s £136m purchase of Trident Place, Hatfield from Goodmans reflecting a net initial yield of 6.60%. The Singaporean-based buyer is a new entrant to the market, and this reflects the increasingly global attraction of the South East office market to overseas buyers looking to secure stock at a discount to central London.
Investment activity was nevertheless dominated by domestic funds and property companies in Q2, which together accounted for 27 of Q2’s 30 deals. While institutional demand is robust for all types of stock, £20m+ lot-sizes are particularly sought after. One notable example was Threadneedle’s £60.6m purchase of Breakspear Park, Hemel Hempstead from Catalyst Capital, reflecting 7.70% NIY.
Yields remain under pressure, reflecting the substantial weight of money seeking South East office stock and a limited pipeline of buying opportunities. Yields for prime 15 year income stand at 5.25%, albeit there has been little transactional evidence to confirm pricing at this level. Interest in shorter income and prime multi-let stock is also competitive, with prices for prime five-year income hardening by 25bps to c. 5.75% in Q2.
Tim Smither, Partner National Offices Investment team, Knight Frank, said; “The substantial weight of money seeking South East office stock is expected to put further pressure on pricing over the remainder of 2014, with prime yields likely to harden to 5.00% by the year end, as domestic and overseas investors chase a very limited pipeline of stock at the prime end”
“With clear evidence of rental growth coming forward in the tightly supplied markets of the Thames Valley and West London, we also expect investors to increasingly consider high yielding opportunities where there is scope to reposition buildings through refurbishment and re-letting”
