Offices South East 18th September 2014

The West London and Thames Valley office markets are set for lift off in the latter part of 2014 driven by a significant upturn in occupier demand, a raft of fresh investors, rising rents and improved performance from business parks.

James Finnis, head of JLL South East office agency, said the well documented disappointing take-up figures in the first half of the year were set to be put to bed by year end with H2 take-up likely to be above the five-year average.

On the investment side Mark Wilson, director, South East office investment, said the South East was now the best value proposition for UK office investors with prime yields in the big six regional office markets and central London both significantly tighter than South East markets.

Finnis said: “Whilst take-up levels in the year to date have been disappointing, the pool of named tenant demand continues to grow and now stands at just under 5 m sq ft. “We are forecasting that the exceptionally high level of demand will overflow into deals in Q4 this year and into 2015, which will lead to a sizeable increase in take-up. Occupiers want the best space, so the new stock being delivered through redevelopment or refurbishment will be targeted. “

This take-up, coupled with the impact of Permitted Development Rights to Residential, will see the limited pool of supply reduce. Even in a low take-up environment, rents have continued to grow, driven by activity in West London, but the growth is now permeating the wider region.

JLL is forecasting that prime Grade A rents will average £40 per sq ft by 2017, as the Western Corridor occupational market sees the growth anticipated for a number of years.” Finnis said that while take up was down 50% year on year in the first half of 2014, thanks in part to occupiers seeking efficiency from their real estate as well as a trend towards urbanisation, there were good reasons to expect significant take up particularly in Q4 to push figures eventually past the five-year average at up to 2.75m sq ft of deals.

Finnis said that more than 1m sq ft of lettings were in solicitor’s hands. Named demand is 60% up year on year Finnis said and around 30% of the requirements were expansion led. Equally Finnis said that the government’s Permitted Development Rights legislation had led to over 1.5m sq ft of offices being converted to residential, something that was crucially taking an overhang of space out of the market and putting pressure on supply.
In addition Finnis said that there were clear reasons for the slow realisation of deals in 2014. Around 55% of current major requirements involve US headquartered companies JLL said and they tend to make decisions to sign for space in H2 of their financial year which is aligned to the calendar year. In addition a growing theme is what JLL terms “strategic dispersal” with Hammerson’s recent decision to move some of its staff to 8,000 sq ft in Reading an example of this growing appetite for companies to spread staff between a central London base alongside a South East home, something that is being aided by significant investment infrastructure and in particular the looming arrival of Crossrail Finnis said the development pipeline in the South East is up 70% year-on-year to 1.6m sq ft. JLL expects significant rental growth across the Western Corridor over the next four years with Prime Grade A rents averaging £50 per sq ft across the principal West London centres and £33.50 per sq ft across the Thames Valley by 2017.

Mark Wilson, director, South East office investment at JLL said the outlook remains sunny for investment in the region: “The level of interest in the western corridor market is truly global. We are predicting a raft of further entrants to the market as its unique value proposition compared to other office geographies becomes more pronounced.

“With record high occupational demand and rental growth becoming more widespread into 2015, we forecast yields to move into 5.00%.” Wilson said 2014 was set to be another stellar year for South East offices investment wise. Yields have come down 50 to 70 bps over 2014 with investor demand up significantly. Wilson is predicting around £2.5bn of assets to trade in 2014, a record since the downturn. Wilson said bank lending had improved with double the number of active lenders year on year at around 65. There are also 10 institutions actively funding speculative development and refurbishment. 2014 will stand out from 2013 and 2011 – also strong years – as it has not been defined by what Wilson called “guerrilla” deals. “This year there have been 100 separate deals at an average lot size of £17.5m.”

Wilson said prime yields in the Western Corridor at circa 5.5% represented the best value proposition in the UK for offices in contrast to 5% for prime in the big six regional markets and closer to 4% in central London. Wilson predicts in 2015 that demand will grow in the Western Corridor, spreading from central London and the regions. There will be further yield compression and a greater mix of global equity entering the market. Wilson added that the improved performance of business parks also means investors cannot ignore them as such acquisitions for portfolios will be accretive going forward.

Ben Burston, head of UK offices research at JLL said: “The South East continues to benefit from solid economic growth and a rapid expansion in employment, and this underpins our strong outlook for West London and the Thames Valley in 2015 and beyond. “The market will be further buoyed by substantial investment in infrastructure over coming years, including the redevelopment of Reading station, M4 congestion measures and Western rail access to Heathrow and Crossrail. The cumulative effect of these measures will be to reinforce to occupiers the importance and attractiveness of these vital office markets.”