The South Coast office market is healthy and delivering consistent returns on investment, according to quarterly research released by commercial property consultancy, Lambert Smith Hampton.
2014 saw a 24% increase in take up, which combined with a static level of supply (and grade A space falling to just 11%), saw prime rents coming under pressure, tenant incentives reducing and continued investment market activity.
We expect this to continue, although recent significant events in the Eurozone could have an impact, especially with firms exporting to that region. Continuing uncertainty around the general election is also likely have an effect on demand, although we expect it to stall, rather than significantly reduce it.
Andrew Hodgkinson, Associate Director of Office Agency for Lambert Smith Hampton, comments: “2014 was a good year in terms of occupier activity, especially for larger enquiries, with significant deals along the M27 corridor. Supply was reduced further with the continued take-up of secondary stock for change of use.
In 2015, a continuing squeeze on supply, and in particular grade A space, will see rents rising and tenant incentives reducing, with rental values of £20 per sq ft in Southampton city centre now inevitable. Capital values are also continuing to climb as demand out-strips supply.”
A surge in take up in Q4 concluded a strong 2014
Take-up figures of 115,725 sq ft for Q4 topped the 10 year quarterly average for the second time in 2014 and concluded a strong year with overall take-up increasing 24% from 2013 to 419,157 sq ft.
This annual figure also beat the 10 year average for the South Coast region (358,000 sq ft for the period 2004 to 2013) for the first time since 2011.
The number of transactions above 2,500 sq ft strengthened in Q4, recovering from a slight fall in Q3 but continuing the general upward trend that was seen after a slow start to the year.
Overall, transaction levels showed a 14% fall from 2013 (62 down from 71), although the average transaction size increased from 4,751 sq ft in 2013 to 6,760 sq ft in 2014, which mirrored the increase in average requirement size identified at the start of the year.
Only one letting of grade A office space occurred in Q4, at Chilworth Science Park, and overall for 2014, only 5.5% of all deals were for grade A space. This reflected a lack of availability rather than a lack of occupier demand, with a number of companies upgrading to better quality accommodation, albeit refurbished grade B buildings.
Prime rents maintained – but not for long…
Grade A space has fallen further to 11% of the total supply. With occupier demand continuing to improve, we anticipate prime rents increasing to £20 per sq ft in the city centre and £19.50 per sq ft out of town by the end of 2015. This will be the first increase since 2006.
Overall office supply maintained, but grade A supply is falling
Office supply stabilised in Q4 at 1.507 million sq ft, averaging out to around 1.51 million sq ft for the year. This is perhaps somewhat surprising given the strong take-up for the quarter, but when analysing supply by grade, this highlights an interesting change in supply dynamics.
It is evident that there has been a flight towards quality, with supply of grade A and B office space falling whilst grade C space has increased. Much of the vacated space no longer meets the demands of the modern office occupier. However, an increasing demand from both developers and owner occupiers to buy office buildings and a resulting recovery in capital values may encourage vendors to sell these buildings where previously they were reluctant to do so.
We anticipate that the majority of this space will be sold to developers looking to take advantage of permitted development rights allowing office conversions to residential dwellings without the need for S.106 contributions. This allowance is set to end on 30th May 2016 (although subject to potential change).
We anticipate that the trend of falling grade A space will continue into 2015 and for overall supply to follow suit throughout the year.
Investment activity
The final quarter of 2014 saw an increased level of investment activity, especially from UK institutions keen to secure transactions prior to the year end. The South Coast continues to see a good level of activity from property companies and more institutions are becoming acquisitive. We envisage that the activity will continue through 2015, with investors keen to secure opportunities in central locations – particularly Southampton City Centre – where there is a lack of grade A office accommodation and in the industrial sector along the M3/M27 corridor.
Investors remain apprehensive with regards to business park locations, but with occupier activity returning and a number of transactions reported to be taking place at Solent Business Park, we anticipate that there could be more activity in these locations, particularly with investors looking for higher yields.
Key investment deals in Q4 2014
· Hampshire Corporate Park, Chandlers Ford was bought by London and Scottish for circa £14m, reflecting a net investment yield of 9.15%.
· Brunswick Gate has a floor area of 87,205 sq ft and is let to Aviva and RBS at a current passing rent of £1,355,000 with an unexpired term of 4.4 years.
· The Pavilion, Botley Grange Office Campus, Hedge End was sold by Skelton Group to Helical Bar for £4.526m, reflecting a net investment yield of 8%. There is an overriding lease to Trethowans LLP for a term of 10 years at a current passing rent of £383,113.50 per annum.
· Cumberland House, Southampton was sold to Kingsbridge Estates by Helical Bar for £3.46m, reflecting a low net investment yield of 6.19% due to 16,682 sq ft of vacant space within the property. The remainder of the space is multi-let to Coffin Mew LLP and Lucite International UK Limited.
