New data from BNP Paribas Real Estate shows that South East office take-up reached 980,497 sq ft in Q3 2018, representing the best performing quarter for five years. This also represents an improvement on Q2, where take-up reached 631,789 sq ft.
This was driven by a number of 50,000 sq ft-plus deals, something which had been lacking over the first half of the year. In the largest deal of the year to date, Publicis agreed terms for c. 211,000 sq ft at 2 Television Centre, White City.
Meanwhile, in a deal brokered by BNP Paribas Real Estate, the sale of the 115,000 sq ft 25 Windsor Road, Slough, to Slough Borough Council also provided a significant boost. Other notable deals include the 82,000 sq ft letting to Pernod Ricard at Building 7 Chiswick Park, and the 71,000 sq ft letting to Sanofi at 410 Thames Valley Park, Reading.
Although these larger deals have provided a significant boost to take-up, the main volume of deals still took place in the 5-20,000 sq ft size bracket, accounting for 70% transactions in Q3.
Looking ahead, it is anticipated that demand in the South East will continue, with c. 226,000 sq ft already let in Q4, including 121,000 sq ft at Leavesden Park, Watford to ASOS and c. 42,000 sq ft to serviced office provider Spaces at Foundry in Hammersmith. Current identified demand also stands at 4.68m sq ft with 710,000 sq ft under offer.
Ed Smith, Head of Office Agency at BNP Paribas Real Estate, commented: “After a slightly below average H1 2018, strong take-up in Q3 and significant demand means we are likely to end the year in excess of the 10-year average per annum of 3m sq ft, and also likely to be the highest level of take-up for five years. Occupiers are continuing to use lease events, such as break clauses, to upgrade the quality of their accommodation as the ability to attract and retain the best staff continues to be more important than property costs.
“It is also pleasing to note the return of large movers that have been missing from the market; with no deals over 80,000 sq ft last year we have seen three such deals in the last quarter alone. It is apparent that with the majority of occupiers focusing on best-in-class assets, and limited further speculative completions for 2019 and 2020, that new Grade-A offices will be in extremely short supply.”
Meanwhile, investment activity in the South East remains buoyant, totalling £703m during Q3 and bringing year-to-date investment to just over £2bn. While this represents a fall in activity year-on-year, Q3 2017 was significantly boosted by the sale of several key business park assets. With that in mind, 2018 annual volumes should still be set to comfortably surpass the 10-year average.
Over Q3, Local Authority investment has dominated, accounting for 46% of total investment. This was significantly boosted by Spelthorne Borough Council’s £285m acquisition of Landid/Brockton’s Western Corridor Portfolio. Local Authorities have transacted just under £730m since the beginning of the year, making them the largest investor in South East offices, ahead of UK Institutions and Funds on c. £615m.
Over the rest of the year, there are a number of notable business park opportunities coming to the market, which should support transaction volumes. In Q4, we have already seen the sale of Microsoft’s three-building campus at Thames Valley Park, Ready for £100m, in a deal brokered by BNP Paribas Real Estate.
In addition, prime South East yields are now showing signs of dipping below 5% NIY, as predicted, but still offer value relative to the Big Six Cities, with Leeds and Edinburgh recording investment transactions touching 4.43% and 4.5% NIY respectively. Bristol is also now sat at 4.75% NIY.
Hugh White, Head of National Office Investment, said: “It is reassuring to see a number of large deals for prime assets coming through over the rest of the year. The market has been dominated by Local Authorities and UK investors, but there is also keen interest from US and Asian investors as well. Indeed, the sale of Microsoft’s campus in Reading was to Valesco Group and South Korean Asset Manager, AIP Asset Management. In addition, we are now seeing Korean investors focusing on smaller lots, for example Future House, Staines. This is due to these investors becoming more familiar with the UK investment market.
“We anticipate that the dip in yields will create a two tier market, further compressing yields on well-let stock while reversing yields on part-let or short income yields. This yield compression in strongly-tenanted assets is driven by investors’ desire for income, aided by gearing rather than being supported by market fundamentals. Therefore, we remain convinced that well-selected assets with part-vacancy or short leases remain the ‘opportunity’ in the current market for savvy property investors.”
