An in-depth overview
South East office investment volumes continued to see q-o-q increases with Q4 2019 reaching £865m, the highest quarterly level recorded this year. This brings total 2019 volumes to £2.54bn, just 9% down on 2018. Activity very much picked up throughout the year with 66% of activity recorded in H2.
Across the South East, US private equity and overseas dominated larger lot sizes in Q4 with Kennedy Wilson buying the Heights, Weybridge for £136m, reflecting and NIY of 7% and Rostamani buying the ASOS HQ, Watford for £86m, reflecting a NIY of 5.4%. As at end 2019 investment volumes has been driven by UK Institutions (31%) and Local Authorities (17%) accounting for half of all purchases. Overseas investors have remained relatively active accounting for 17% of transactions.
Looking forward to 2020 offices will remain an attractive sector and with the large weight of capital waiting to enter the market we anticipate an uptick in activity especially with larger transactions. Conversely, transaction activity has been restricted by the political and Brexit uncertainty and lack of willing sellers. Investors are generally waiting for further clarity and certainty on the Brextit negotiations before they commit.
Offices offer an attractive proposition as the income return is generous and stable compared to other core sectors. Appetite remains strong across the risk spectrum for assets with good fundamentals, except for core plus which in turn offers an opportunity for investors who have raised money in this space.
Prime yields remained stable throughout 2019 at 5.00% in the South East. In Q4 there are several notable examples where buyers have paid premiums to meet their demands. Namely in Chertsey where KFIM purchased 2000 Hillswood, let to Samsung reflecting a 5.07% NIY and LSHIM's acquisition in Winchester reflecting a 4.80% NIY. Although increased competition for well-located offices may attract a sharper yield in the future.