South East Office Stock Shortage 30th January 2012

The total turnover for South East offices for 2011 was £2,034m, more than double 2010’s figure thanks in particular to the two major sales of Chiswick Park and Green Park in Reading totalling £880m. CBRE said the result, from a total 66 transactions, was 108% higher than 2010’s £980m but sounded a note of caution about a slowdown in available stock at the beginning of 2012. The agent, reported that at the end of last year there was a large volume of stock with 8-10 year income which came to the market. However, waning investor appetite for this type of product combined with the amount of this stock available led to a slight softening in pricing. For 2012 year to date it said “there have been very few new investment opportunities that have come to the market and as such the stock that is currently out (£363m in 23 investment opportunities), largely tends to be that which did not sell last year”. In particular there continues to be a lack of “absolute prime stock in the region coming to the market”. CBRE attributes this partly to vendors “continuing to be nervous about achieving current valuations, lack of alternative opportunities to replace assets once sold and a real reluctance to part with stock that could have potential for future performance”. At the prime end of the market, overseas investors and select UK institutions continue to dominate, specifically in the South East. But they are “largely seeking stock with excellent property fundamentals, specifically in town centres, where potential voids can be kept to a minimum”. CBRE reports that pricing for this type of stock remained keen throughout the year and when these assets came to the market they were competitively bid. It forecasts the trend will continue in to 2012. On the secondary side, CBRE reports that there is appetite from investors who are looking for stock with slightly higher risk profiles. But assets need to be “priced realistically and provide the purchaser with genuine asset management angles or redevelopment potential to a higher value use”. Pricing remains stable for the prime assets, CBRE says, “specifically those in town centre locations, with sound property fundamentals as well as good secondary stock with asset management potential”. Buildings like Bechtel House (pictured), Hammersmith and Energis House, Reading (both of which are under offer) are typical of this trend. There does however the agent warns remain a dearth of this type of stock and little sign of significantly more to come, at least for the first quarter. A number of trophy assets were traded in the market last year and even with income streams of less than 10 years, yields were achieved at sub 6.5%. There is currently £252m of stock under offer in nine deals at an average lot size of £28m, according to CBRE.