South East office investment reached £559m in Q1 2018, 22.3% up on the same period last year and 73% up on the 10-year Q1 average, according to new research published by BNP Paribas Real Estate. Hammersmith accounted for 56.5% of total volumes, with five transactions during the period.
Significant deals included Spelthorne Council’s purchase of 12 Hammersmith Grove for £170m, a net initial yield of 5.25%, demonstrating the continuing appetite from local authorities, as well as First Property Group’s acquisition of Imperial Place in Borehamwood for £62.5m, reflecting a NIY of 6.39%. Mayfair Capital acquired British Gas’ office at Oxford Business Park for £35m, achieving a record 4.9% NIY and showing the continuing appetite for income in a low return environment.
The profile of investors pursuing opportunities in the South East remains diverse, with Middle Eastern and Asia Pacific investors alongside US Private Equity firms and domestic investors all retaining a keen interest in the market. The region remains key for inward investment due to its strong market fundamentals, vibrant economy, and thriving technology sector.
Hugh White, Head of Office Investment at BNP Paribas Real Estate said: “We anticipate further yield compression for prime town centre assets following the trend witnessed in Manchester, Birmingham and Bristol in Q4 2017.
“The challenge looking ahead will be finding value in a stock-starved market. However, we believe rewards will be reaped by investors who, with the right property advice, are willing to focus on short income town centre offices and tier two towns that are only just witnessing rental jumps. With the UK population’s continuing towards the trend of urbanisation, Tier 2 London locations as well as Crossrail towns should present above-average rental growth opportunities in 2019 and beyond.”
Take-up for Q1 2018 reached 627,962 sq ft, 12.9% down on the same period last year, but just 6.8% down on the 10-year quarterly average.
The largest deal of the quarter was Black & Decker’s lease of 48,000 sq ft at 270 Bath Road, Slough. However, smaller size bands continued to dominate the demand profile over the quarter, with 63.6% of overall take-up from lettings within the 5,000 – 20,000 sq ft size band.
The trend towards shorter lease lengths also continued, with 61.8% of leases agreed within the below 10 years term certain and below category. Both these trends highlight occupiers’ increasing desire for flexibility and optimisation of their occupied space.
Despite the fall in demand, there has been a concerted move towards higher quality space with all demand over Q1 2018 targeting Grade A and new prime schemes. This increased competition for limited high quality stock has helped drive further prime rental growth with Maidenhead seeing prime rental levels rise to a new market peak of £39 psf.
Speculative development levels are, however, scheduled to fall back over 2018 with just 480,500 sq ft completing across nine schemes. Q1 2018 saw only one speculative completion, Aviva Investors’ Victoria Gate in Woking, which totals 63,000 sq ft. Further upwards pressure will likely start building on prime rental levels in a number of markets over the course of the year.
Ed Smith, Head of National Markets Office Agency at BNP Paribas Real Estate, said: “Looking ahead, identified demand levels have risen to 4.6m sq ft from 4.25m sq ft in Q4 2017. This, coupled with the circa 600,000 sq ft currently under offer, suggests we are in line for a stronger Q2 and overall positive outlook for the remainder of the year.”
