In CBRE’s first half review of the Southampton office market, leasing activity has remained stable, with around 26,000 sq ft taken by occupiers in the city centre. The largest transaction saw Norwegian Cruise Line (NCL) lease 17,263 sq ft at Mountbatten House, and outside the city centre Shoosmiths acquired 12,894 sq ft at Forum 5, Solent Business Park.
There are a number of larger enquiries in the market, however, the choice is restricted and evidence shows that businesses are taking a longer time to commit to a decision. Uncertainty about Brexit, particularly in the manner it may impact a port city such as Southampton, may also be a contributory factor to this delay.
Commenting on the market sentiment, CBRE South Central Regional Managing Director said:
“Occupiers are increasingly cautious with their decision making. With availability continuing to decrease we may see occupiers remaining in their existing space, rather than relocating to a building that doesn’t fulfil all their criteria.
“More positively, we believe this limited supply has resulted in there being an appetite for letting risk and an anticipation that rents will continue to improve. Yields could well move in for specific office opportunities although they have probably reached a peak from an industrial perspective.”
SUPPLY
The volume of available ready-to-occupy space has continued to decline for the last eight years, accelerated by the sale of buildings for conversion to other uses.
At the end of H1 2018, available space was 287,596 sq ft, split 50/50 between secondary and Grade A stock. This represents a decline of 8% since the start of the year, albeit there has been an increase in secondhand space over this period. The largest single contiguous space is 2 Grosvenor Square, where requirements of up to 29,460 sq ft can be accommodated. Only three other city centre properties, Mountbatten House, Charlotte Place and Oceana House have similar space available.
Prime rents are currently around £21.00 per sq ft and unlikely to move substantially in the near future for existing stock. However, with limited supply of good quality space there is now an increasing opportunity for pre-lettings which could demonstrate a reasonably substantial uplift.
As there is no speculative development underway in the city, there is a genuine opportunity for high quality refurbishment. The most obvious site to come forward with an element of new office space is the former HSBC building opposite Southampton Central Station. If this went ahead it would be the first new build in the city centre since 2006.
INVESTMENT
Demand has remained relatively stable across the region. There is a broad range of investment interest, with local and regional buyers focused on lot sizes up to £10m and Local Authorities, property funds and private equity looking at opportunities above £5m.
The only significant office transaction in Southampton to date saw Chelsea Estates purchase 20,571 sq ft at One London Road for £5.3m, representing a yield of 5.91%. A variety of deals did complete in Fareham including two at Solent Business Park: Craigard acquired units 1450, 1490, 1570, 1580 & 1590 for £7.7m, at a yield of 10.17% and Wesleyan Assurance acquired unit 4600 for £7.36m at a yield of 9.62%. In Bournemouth Lewis Property Group purchased Loewy House & Winchester House totalling 43,495 sq ft for £5.3m at a yield of 9.38%.
Buyers looking for value continue to find it in the region, particularly when compared with the office market in the M25 area. However, the lack of stock continues to prevent investors from gaining a good local foothold.
The Industrial Sector is also being actively targeted given the higher short term returns that it now offers. There is strong competition for multi-let industrial estates but once again limited availability, although there is some speculative build taking place in the region.
