The Thames Valley office market is well-placed to withstand the considerable challenges of the year ahead, according to the 2016 edition of Lambert Smith Hampton’s annual Thames Valley Office Market report.
Across the Thames Valley as a whole, despite Brexit uncertainty, LSH predicts occupier demand will remain steady against a backdrop of falling supply, leading to increasing rents in ten out of eleven centres and solid investor interest. Speculative development will continue across the region, centred in Elizabeth Line locations and town centres.
Nick Coote, head of the Thames Valley for Lambert Smith Hampton, explains: “Relocation is driving demand and supply in the Thames Valley and this is set to continue, albeit at a slower pace than if the UK had not voted to leave the European Union. We are seeing an increasing amount of relocation and consolidation within the region already and expect inward movement to add to this as major occupiers look to move out of London. Those areas of the Thames Valley with high quality supply and access to good labour markets and transport hubs will thrive.”
Charlie Lake, capital markets director, Lambert Smith Hampton, adds: “The diversity of the existing occupier base and current demand in the Thames Valley is a positive, however, it is inevitable that medium term business decisions will now be put on hold until the future becomes more predictable. The region benefits from global investment demand and with the backdrop of a weaker pound, the characteristics of securely let prime buildings at sensible rental levels will still prove popular.
“Particular attention to the fundamentals of micro-location and property specification will be key to ensuring investment opportunities are secured in these challenging but opportunistic conditions.”
Demand
Total take-up (over 5,000 sq ft) in the Thames Valley 2015 was 2.08m sq ft, a 20% improvement on 1.73m sq ft in 2014 and 6% above the 10-year average. However, grade A take-up increased significantly to 1.1m sq ft, some 75% more than that seen in 2014 and 53% more than that seen in 2013’s record take-up year.
Quality grade B office space has been removed from the supply chain and not replaced, so has fallen year-on-year. Conversely, grade A supply has been increasing since 2013 as new speculative development has sought to fill the void and meet the quality demanded by today’s occupier.
There are significant transport (mainly rail) infrastructure improvements underway in the Thames Valley, which will make for structural changes to the pattern of office demand. Some locations, Bracknell being a prime example, have had to address this by discounting rents in comparison to locations like Slough, Maidenhead and Reading which will gain the most benefit from the rail improvements.
Supply
Total Thames Valley office supply stands at 8.96m sq ft as of the end of Q1 2016, equating to 4.5 years of supply, compared with 5.6 years in 2014. Approximately half of this is grade A space, giving 3.83 years of supply, a sharp drop when compared with 5.81 years in 2014.
The take-up figures are notably skewed by specific centres, such as Reading, and each centre is telling a different story. Read our forensic detail into the Thames Valley micro-markets to find out more about each one.
Development and refurbishment
Speculative development is occurring in the Thames Valley, centred in Elizabeth Line locations and in town centres, with a particular focus in Reading, where five schemes (607,268 sq ft) are being built in the town centre and one (60, 483 sq ft) out-of-town. Investors and developers are clearly expecting an increase in demand for Reading office space as occupiers look to relocate from London.
Market rental values and yields
The office market in the Thames Valley has enjoyed yet another year of sustained demand from both occupiers and investors, driving the market forward on both fronts. The delivery of new and fully refurbished stock has helped to push rents up in a number of towns, proving that occupiers are willing to pay a premium for the best quality accommodation.
Town centre locations with the best connectivity have remained the top performers for prime rents, although business parks offering good amenities and car parking have proven a significant market remains for out-of-town locations. The best performing markets have been Slough and Maidenhead, where the town centres have seen a significant step change in their prime rental levels.
Almost all locations have positive forecasts for the next 12 months as demand shows little sign of dissipating and the supply of good quality buildings is beginning to come through.
Prime yield movement has been limited over the last 12 months, with the best towns in the Thames Valley now standing at 5.00%, a 25 basis point inward shift from this time last year. There has been a lack of truly prime stock to test the market but there has been competitive demand for almost all available assets, whether offering long term income or asset management opportunities.
Investors continue to be attracted to the long term stability of the market in the South East and have been willing to accept greater risk as they pursue exposure to forecast rental growth. Further significant yield compression is likely in some markets but the main driver of capital growth overall is now expected to be positive movement in rents.
Forecast
Rents are forecast to increase in ten of eleven Thames Valley markets in 2016/17, with Maidenhead the only market not to experience growth, having just experienced a significant increase resulting in a period of stability. Total rental growth across the Thames Valley is forecast to be 7.4% in 2016.
