Latest figures from Knight Frank reveal South East occupier demand has reached its highest level since 2008, pointing to a recovery in rates of take-up in the final quarter of 2014.
Despite subdued take-up in Q3, levels of active named office demand increased by 16% during the quarter to reach 6.7m sq ft, its highest level since Q2 2008. Demand increased in the majority of sectors, although TMT recently replaced FBS as the most active, with 1.4m sq ft of demand, its highest level since 2006.
While Q3 take-up in the M25 was 22% below the 5-year quarterly average, at 418,000 sq ft, the M4 corridor fared much better with Q3 take-up of 410,000 sq ft, almost exactly in line with the average.
New space featured more prominently than usual, accounting for 34% of M25 take-up. The largest transactions involving new space were VMware’s lease of 61,854 sq ft at Flow 1 & 2, Staines, followed by Paribis Law’s acquisition of 37,233 sq ft at Renaissance, Croydon.
In the absence of a development boom, levels of existing supply are now under real scrutiny. In the M25, the vacancy rate held steady in Q3 at a 12-year low of 6.4% while, in the M4, the vacancy rate fell to 7.5%, its lowest level on record. These rates fall further still when only new & grade A space is considered, to 6.1% in the M4 and just 4.1% in the M25. Given that over 80% of take-up involves this sort of space, there is clearly growing friction in the market.
Emma Goodford, Head of National Offices at Knight Frank commented; “With demand at a six year high, the statistics paint a very positive picture of occupier sentiment. However, a key challenge is converting this demand into transactions. With levels of Grade A supply dwindling, occupiers will have to act quickly to secure space in some markets. Positively, headline rental growth is now coming through which is providing an opportunity for investors to target development opportunities in the tightly supplied markets”.
Knight Frank’s figures also reveal that investment in the South East office market remains strong, with Q3 turnover reaching £619m in Q3, 37% above the 5-year quarterly average. Q3 activity also comprised of 32 deals, taking the total for the first nine months of 2014 to 89, the highest seen since 2007.
Q3’s largest deal by some distance was Oaktree & Patrizia’s £160m purchase of Chineham Park, Basingstoke from MEPC (of which circa 85% was offices by value). Six other assets in excess of £20m also changed hands in Q3, including Aerium’s £61.5m purchase of Dukes Court, Woking from IMV Immobilien reflecting 6.83% NIY and Tesco Pension Fund’s £39.0m purchase of Market House, Maidenhead, from Gatehouse, reflecting a 5.35% NIY.
While overseas investors are increasingly seeking to acquire South East office stock, the market remains dominated by domestic investors and institutions, which together accounted for 26 of Q3’s 32 deals.
The substantial weight of money seeking South East office stock continues to put pricing under pressure. Yields for prime 15 year income stand at 5.25%, while strong interest prime five-year income has seen the discount to long income reduce to 50bps, at c. 5.75%.
Tim Smither, Partner at Knight Frank said: “As anticipated, Q3 was a busier than normal summer period and all signs point towards a flurry of activity during Q4. Buyers are keen to spend before the year end and this will be assisted by increasing levels of stock becoming available, as a number of vendors sense an opportune time to exit”.
