South east office update 10th July 2012

M25 take-up totalled 433,839 sq ft in Q2 2012, 33% higher than the same quarter last year but 33% down on the 10-year quarterly average, reports Knight Frank. KF’s figures for the quarter reveal that the figures were skewed by oil group Aker’s 215,755 sq ft prelet at Building 6, Chiswick Park in west London, which accounted for 50% of M25 take-up in Q2.

It also propelled M4 take-up to 450,956 sq ft in Q2, more than three times the Q2 2011 level and 11% above the 10-year average. KF said Q2 was “a tale of extremes”. Aker’s deal was the largest seen in the M25 for nine years but if prelets are discounted, both take-up and average transaction size were the lowest on record in Q2 2012, going back to 1998. The resilient markets in the Thames Valley once again provided the main focus of activity in Q2, KF writes. Hammersmith saw five deals in Q2, including a 60,000 sq ft prelet to Winton Capital at 27 Hammersmith Grove, while Reading also saw seven deals during the quarter. Supply continues to edge down reflecting a lack of development completions in recent years. In the M25, the vacancy rate fell to 8.1%, its third successive fall and its lowest level in over two years, while the vacancy rate in the M4 corridor held steady at 10.7%, unchanged for three quarters.

Construction activity in the M25 increased to 822,000 sq ft in Q2, its highest level in more than three years. However, the market saw just a single development completion in Q2, Barratt Homes’ Orion Gate development in Woking, comprising 51,340 sq ft of offices. Emma Goodford, head of South East Offices, said: “This solid, if unspectacular, level of take-up in Q2 owes much to one of the largest deals ever seen in the South East market.

While conditions have undoubtedly been tough during the first half of the year, I am confident because of inspection levels and new enquiries that we can forecast a notable improvement in transactional activity in the second half of 2012, albeit focused in the key towns in the Thames Valley and to the West of London. “There is circa 950,000 sq ft of space under offer across the South East, and active named requirements remain steady at a total of 6.6m sq ft, its highest level in four years. The pent-up demand will result in a much stronger second half of the year. “We therefore stand by our forecast of 2.1m sq ft of take-up in the M25 in 2012, which is just 10% below the 10 year average. Aker’s deal in Chiswick has driven prime west London rents to a new peak and this will support growth in prime centres which have limited Grade A supply or where pre-lets are a necessary to satisfy demand.” Investment-wise activity in the South East increased substantially on the first quarter, with total volumes reaching £390m for Q2, more than three times the previous quarter and 19% higher than the five-year quarterly average. Of the 16 deals in Q2, the largest was BioMed Reality Trust’s purchase of Granta Park, Cambridge from MEPC for £126.8m, reflecting a net initial yield of 8.00%.

Two other substantial deals in Q2 were Harbert’s £90.1m purchase of IQ Farnborough from SEGRO and London & Stamford’s £61.15m purchase of Unilever House, Leatherhead from SWIP/ Orchard Street. As has been the case with previous quarters, KF repors that the market has been dominated by one or two substantial transactions, typically acquired by overseas investors Yields for prime, 15 year income were unchanged for the second successive quarter in Q2, standing at 6%.

However, KF wirtes: “Such opportunities are extremely rare, with owners reluctant to sell this sort of product. Yields for prime, five-year income also held steady at 7%, albeit sentiment has softened slightly in light of the ongoing situation in the Eurozone. “Conversely, yields for secondary and tertiary assets drifted further in Q2, reflecting both investors’ lack of appetite for risky product and banks’ unwillingness to provide debt to prospective purchasers.” Tim Smither, partner in investments, said: “The large deals we saw in Q2 are part of a continuing trend in our market, whereby overseas investors are picking up large lot sizes which offer attractive income and potential for enhancing value through active asset management. While prime product remains sought after and pricing has stabilised, the secondary market continues to deteriorate.”