South east office news 30th June 2016

Rents have risen to record levels this cycle in many of the key office locations in the South East as take-up has held up in the face of EU Referendum uncertainty and supply has remained low, according to Colliers International’s second quarter figures.

In its Q2 figures for South East offices: “The combination of secondary office stock levels continuing to be depleted by a change of use to residential under Permitted Development Rights and increasing occupier demand for Grade A in key centres continues to fuel speculative development.

“Several newly completed schemes are announcing new quoting rents such as R+ Reading (104,000 sq ft) quoting £39.50 per sq ft and 12 Hammersmith Grove, Hammersmith (167,000 sq ft) guiding £60.00 per sq ft for the upper floors. In addition, other major Thames Valley locations such as Uxbridge, Stockley Park and Slough, will see quoting rents on new developments exceed £35 per sq ft.”

Colliers reports that Q2 2016 has seen an encouraging 138,000 sq ft of pre-commitment transactions. This includes Amadeus (UK) Ltd taking 85,000 sq ft at the World Business Centre 4, Heathrow and Superdrug taking 52,000 sq ft at 8 Bedford Park, and East Croydon achieving a new record rent of £26.50 per sq ft.

Total take-up for Q2 2016 reached 706,691 sq ft, 9% down on Q1 2016 and 16% down on the five year average caused mostly by a number of major relocations close to completion, which will fall into Q3.

Major movers include HMRC, which is reportedly close to taking 183,597 sq ft at Building 1, Ruskin Square, East Croydon and Ocado, which is committing to 148,500 sq ft at Trident Place, Hatfield Business Park.

Croydon in particular has had an exceptional period, recording some of the highest take-up levels at 116,000 sq ft.

A number of other key offices centres are witnessing record rents, such as Maidenhead at £37.50 per sq ft, Staines at £34.50 per sq ft, and Hammersmith at £59 per sq ft.

Availability across the South East continues its downward trend, with overall availability down 3% quarter on quarter.

Whilst the typical demand profile over the last three quarters has been sub 25,000 sq ft, there are “encouraging levels of live occupier requirements between the 50-80,000 sq ft range, most of which is attributable to consolidation”, something that Colliers reports should cushion the region against the impact of the Brexit vote.

Key live requirements ranging between 40-150,000 sq ft include L’Oreal, EY, Veritas, Future Electronics, Virgin Media, INC Research, Black & Decker and Rank Leisure.

Whilst the long awaited decision on BREXIT is now known, in the run up to the vote over the last two quarters, there has been limited evidence BREXIT has effected or influenced occupiers’ move strategy.

Investment wise Q2 2016 saw a significant increase in transaction volumes, which totalled £905m across 26 key deals.

However, drilling into these figures the total was skewed by Oxford Properties’ sale of Green Park in Reading for £560m to Mapletree Investments.

If this transaction is removed from the quarter’s total, the result is transaction volumes of £345m, which is down on the £400m seen in Q1 2016.

“This reduced figure concurs with the general sentiment in the market, which has witnessed a real loss of momentum leading up to the EU Referendum on 23rd June. In addition, there is significantly less stock being offered for sale on the open market.”

Colliers adds that despite this, there have been some notable transactions this quarter which demonstrate that the “appetite remains strong for both the smaller, drier assets offering a secure income flow in the medium to long term, as well as assets requiring some active management in order to enhance the underlying value.”

The latter category of deals tends to be in markets where the occupational market is strong, Colliers writes citing as an example of this being the sale of Sterling House in Wimbledon at an initial yield of 4.76%, where the rents were reversionary and the value underpinned by residential conversion”.

“there is no shortage of capital in the market, coming from a variety of sources. The private investors continue to be dominant, taking advantage of the market, while the majority of financial institutions, both UK and overseas based, are currently inactive.

The quarter saw two speculative fundings in Slough and Woking.

Ashby Capital funded U&I on Brunel Place in central Slough measuring 98,862 sq ft, whilst Royal London funded Anglo Lamron on Kings Court in Woking measuring 81,954 sq ft.

Colliers said it was not “witnessing any softening of prices as the majority of sellers are under no pressure to sell, and therefore, opting to withdraw the property from the market rather than sell to the highest bidder. There have been plenty of examples of this, mainly from institutional vendors”.