In the midst of the recent decision for the UK to leave the European Union, the Thames Valley office market has experienced a quiet Q3 in terms of transactions. However, enquiry numbers are high, the investment market is still moving and the fundamentals indicate a return to more normal transactional levels by the end of the year.
Nick Coote, head of the Thames Valley for Lambert Smith Hampton, comments: “Take-up in Q3 has been very disappointing and reflects the reality that the market seemed to hit the pause button during the Referendum. We now will see how much of a bow wave has been created to occupier demand as post- vote we are faced with a new reality but one still tinged with uncertainty. Q4 will demonstrate how much the uncertainty as to future Brexit arrangements will impact office demand”.
Charlie Lake, director of capital markets for Lambert Smith Hampton, adds: “Given the UK’s decision to leave the EU and the resulting period of uncertainty, we expected investment activity in Q3 to be more subdued than in previous quarters. However, it will come as a surprise to many that total transactional volumes in 2016 have already exceeded 2014 levels and we forecast to be within 10% of the record 2015 total by the end of the year.”
Enquiries maintain their long-term average level
•Thames Valley office enquiries (over 5,000 sq ft) totalled 109, down against a spike of 175 in the same quarter last year but broadly in line with the long-term quarterly average.
•Anecdotally, viewing activity has increased moderately since the Brexit vote.
Demand falls post-Brexit vote
•Take-up in Q3 2016 was 294,520 sq ft, 34% below the 444,976 sq ft transacted in the previous quarter and 65% down in comparison to Q3 2015
•52% of take-up in Q3 2016 was grade A, compared with 45% in Q2 2016
At the end of the third quarter point of the year, total take-up stands at 1.26m sq ft. We are maintaining our previous forecast (end of Q2) of 1.5m – 1.8m sq ft of total take-up for 2016, significantly below the 2.08m sq ft recorded in 2015.
There are now improved activity levels, in so far as agreed new transactions are concerned, so it is likely that Q4 take-up will show a significant improvement.
So far in 2016, there has been 330,273 sq ft of activity in Reading, representing 26% of all take-up in the Thames Valley this year. With known ongoing interest and transactions, we expect this position to strengthen in Q4.
Supply remains steady at 9.13 m sq ft
•Total office supply in the Thames Valley at the end of Q3 2016 stands at 9.13m sq ft, 4% down against the end of Q3 2015.
•The proportion of grade A supply is now 50% of the total, compared with 45% in Q3 2015.
Supply has increased to 7.23 years of supply overall, compared with 4.5 years of supply at the end of 2015. Grade A years of supply has slightly risen from 3.16 years to 5.83 years between Q1 and Q3 2016 – a consequence of the poor take-up levels seen in Q3.
Investment market review
The value of investments transacted in the Thames Valley during Q3 2016 totalled £452.25m across 11 transactions. The most notable of the quarter was the sale of the BP Campus in Sunbury to Spelthorne Council for £360m, which makes up 65% of the total volume. This represents a decrease on the Q2 total of £761.83m, albeit 70% of this was attributable to the £526m sale of Green Park in Reading. There was a noticeable decrease in the availability of office investments, as well as transaction activity, in July and August after the UK Referendum, a period in which investors had to adjust to a more uncertain market landscape. However, post the summer break, September alone saw over £121m worth of office investments being launched in the Thames Valley, a significant increase in market activity from the months prior.
The total transaction volume in the Thames Valley for 2015 was £2.065bn, compared to a 2014 total of £1.225bn. Total transaction volume for the 2016 year to date stands at £1.44bn, with approximately £120m of property under offer and a further £333.5m of current availability. Based on these figures, we forecast the total 2016 transactional volume to reach close to £2bn, which may come as a surprise given the challenges the market has experienced in the year to date. Albeit this volume has largely been maintained due to a few notably large transactions, as we have currently only witnessed 50% of the usual trend in terms of the number of transactions to have occurred.
Key investment deals
The key transactions below highlight the current investor appetite for lower risk assets that benefit from defensive property fundamentals. There is on-going evidence that values are being upheld for secure income in well-established office locations. Value is also being upheld for buildings that benefit from change of use potential such as the New Century Place transaction below, although developers are more cautious on void risk than prior to the EU Referendum.
British Petroleum completed the sale and leaseback of part of their Sunbury Campus in a £360m transaction to the Spelthorne Borough Council. The buildings will be leased back to BP for a further 20 years. The site comprises 11 office buildings which provide 620,000 sq ft of accommodation, with surrounding land and car parks.
Columbia Threadneedle completed the sale of Wey House, a single-let office building in the Guildford Town Centre to the Guildford Borough Council. The building was purchased for £22.65m, equating to a net initial yield of 5.10%. The building is leased to the strong legal covenant of Stevens & Bolton LLP for a further 10.5 years.
High Wycombe Borough Council has purchased Sword House in High Wycombe for £6.6m equating to a net initial yield of 5.88%. Oaktree Capital sold the building which is currently let to the Energizer group for 83 years.
Schroders has successfully completed the sale of One & Two New Century Place in Reading. The building was sold to a private purchaser for £10m at a net initial yield of 8.50%. The buildings benefit from change of use potential subject to planning consent.
