South east offices 10th April 2013

The M25 occupier market saw take-up of 646,517 sq ft in the first quarter of 2013, the highest since Q4 2011 and 20% above the five year quarterly average, reports Knight Frank.

KF said Q1 activity also comprised 40 deals, the most seen in any quarter since Q3 2008. Q1 take-up in the M4 corridor was 426,377 sq ft, rebounding 46% on Q4 2012’s subdued level and the sixth strongest quarterly total seen over the last five years.

In contrast, activity in the M3 region remains relatively subdued. Take-up in Q1 was 179,616 sq ft, 7% down on the five year quarterly average and 20% below the 10 year quarterly average.

The largest deal in Q1 saw energy giant BP take 135,000 sq ft at 2 New Square, Bedfont Lakes, Heathrow. Weybridge was also home to a number of deals, with 92,000 sq ft leased across three buildings at The Heights Business Park to Cameron Oil, AB Initio and Dentspy.

New and Grade A buildings accounted for 83% of the total space leased in Q1. Of Q1’s deals, the highest agreed headline rent was Virgin Media’s 44,175 sq ft lease at Griffin House, Hammersmith, at £35.00 per sq ft. In the M25, the vacancy rate was 7.7% in Q1 2013, its lowest level since Q1 2009.

The M4 vacancy rate now stands at 9.8%, down from a peak of 12% just two years ago. In addition to take-up, Q1 saw circa 150,000 sq ft of second hand office space transact for change of use, tightening supply in the process. A key development in Q1 was the start of construction on Blackstone’s Building 7, Chiswick Park. At 334,000 sq ft, this is the largest single speculative development in over 20 years and by itself increased the amount of speculative development in the M25 by 63%.

Emma Goodford, head of South East offices, said: “While commentators debate the potential for a triple-dip recession, it is encouraging to see M25 take-up significantly above the average in the first quarter. This isn't the result of just one or two supersize deals.

The range of activity has improved to cover all size brackets - Q1 saw 40 deals, the highest number in almost five years, before the credit crunch in 2008. “Occupiers have more confidence and more cash - but increasingly less choice. This is an interesting cocktail in prime markets with limited stock. They continue to focus on the best quality space, encouraging landlords to reposition buildings in those markets where a shortfall of supply is now putting upward pressure on rents. “The West London markets of Hammersmith, Richmond and Chiswick, are performing fantastically, with prime rents reaching record highs in 2012.

With New and Grade A supply set to tighten further along the Western corridor, evidence suggests that concrete rental growth will spread to other key markets, such as Staines, Maidenhead and Uxbridge in 2013". Knight Frank added that there is healthy sentiment returning across most sectors of the South East investment market, with a lack of buying opportunities, rather than a lack of demand, holding back volumes.

Q1 2013 saw 18 deals in the South East market, with a total volume of £290m, almost exactly in line with the five year quarterly average. KF added that overseas investors are increasingly seeking income generating assets in the region. Q1 saw Middle Eastern investor Peninvest purchase 5 Longwalk, Stockley Park, Heathrow for £42.45m from Schroders, reflecting 6.32% NIY.

Improving sentiment has also spurred a revival in interest for good quality secondary assets, albeit focused in the more resilient town centre markets. UK Funds and a number of overseas investors are actively seeking asset management and refurbishment opportunities in core occupier markets.

Examples include Harman House, Uxbridge, which Mercer bought for £17.3m reflecting 9.36% NIY, and 45 Grosvenor Road, St Albans which Threadneedle bought for £10.15m reflecting 8.76% NIY. According to Knight Frank, yields for prime 15 year-income held at circa 6.00% in Q1 2013, unchanged since 2011.

With demand exceeding supply the agent expects yields for both prime and good secondary assets to come under downward pressure in 2013.

Tim Smither, partner, South East Investments, said: “The market has hardened over the last six months, with more buyers for both prime and increasingly good quality secondary stock. "Significantly, UK institutions are once again aggressively seeking prime and good quality secondary, but they are frustrated by a lack of opportunities. We expect this pattern to hold throughout 2013, and this will put yields under a degree of downward pressure."