South East office investment volumes reached £1.3 billion in Q3, the highest quarter on record since 2013. Despite a slow H1, this takes total office investment in the South East in 2017 to 2.3 billion, 60% higher than the 10-year average for the Q1–Q3 period.
Overseas buyers were the source of the majority of investment in Q3, with foreign equity accounting for 67% of volumes. Underpinning this was TPG Real Estate’s purchase of the Arlington portfolio, Blue Horizon Investor’s acquisition of 10 Hammersmith Grove for £112m and the Canada Pension Plan Investment Board’s (CPPIB) purchase of a 50% share of Milton Park from Hermes Investment Management (Hermes).
Prime yields remained at 5.25% in Q3 although; there are now examples of institutions paying below this, particularly for prime reversionary assets.
Given the impending sale of four of Oaktree Capital Management’s UK business parks to Frasers Property International, combined with a number of other deals expected to be brought to market in Q4, volumes are forecast to exceed £3.25bn for the year – the second highest on record, albeit skewed by a number of very large transactions.
Simon Rickards, Partner in Knight Frank’s Capital Markets team commented:
“We are seeing the investor base broaden in the South East office market, with far Eastern investors increasingly active alongside US private equity, Middle Eastern families and domestic investors. Trading volumes remain held back only by lack of stock being brought to the market.”
Occupier activity in the South East has by contrast, not been as brisk. Take-up reached 544,400 sq ft in Q3, bringing the 2017 total so far this year to 2.1m sq ft, 11% short of the 10-year average for the period. Tellingly, average deal size has been lower in 2017, with only three deals over 50,000 sq ft completed in comparison to nine by the Q3 mark last year.
Nonetheless, the M4 corridor, which has been the subject of significant development activity in the past 12-18 months, has held its respective long-term take-up trend with 1.2m sq ft transacted in 2017.
Demand from the Telecoms, Media and Technology (TMT) sector has been particularly strong this year, with the sector accounting for 37% of take-up. Of the office space under offer in the South East, 54% is located along the M4 corridor; suggesting a strong end to the year.
Emma Goodford, Head of National Offices at Knight Frank commented:
Transactions are taking more time to execute and, bar the M4, take-up has been lower than the 10 year average in Q3. Take-up levels along the M4 corridor in 2017 remain on target to align with the long-term annual average. This is encouraging news for both developers and landlords, with the M4 market seeing around 3m sq ft of development complete over the past 24 months.
Notably, despite this scale of development activity, vacancy in the M4 has only risen to a level consistent with market norm. With the peak of the development cycle now passed, market vacancy should again begin decrease in the coming months.
