An in-depth overview
Take-up in the South East office market reached 616,748 sq ft in Q3 2019, down on Q2 2019 but up on Q1’s total of 505,914 sq ft. This brings 2019 take-up to end September to 1.8m sq ft, which is 18% below the same period last year and 13% below average take-up in the first nine months of the year.
Following a lack of deals in the >100,000 sq ft size bracket in H1 2019, Samsung Electronics’ 100,000 sq ft acquisition at 2000 Hillswood Business Park, Chertsey provided a significant boost to figures. Another notable letting was Xerox taking 31,000 sq ft at Uxbridge Business Park, Building 4 whereby BNP Paribas Real Estate acted on behalf of the landlord.
The Financial & Business Services sector have been the most active sector accounting for 34% of take-up so far this year. The Technology sector accounts for a 30% share, up on 12% last year. The proportion of take-up in out of town locations has seen a rise to 60% in 2019, up from 45% in 2018.
BNP Paribas Real Estate advised on 150,000 sq ft of deals in Q3 2019, 4 of which were over 10,000 sq ft. This includes 31,000 sq ft to Xerox at Uxbridge Business Park, Building 4 and 22,230 sq ft to Perspectum Diagnostics
Despite the boost from larger deals, the main volume of activity has been in the 5,000 - 20,000 sq ft size bracket, accounting for 45% of South East Office transactions in 2019.
With occupier bias continuing for the best quality stock, New and Grade A deals accounted for 90% of annual take-up. This reflects occupier’s flight to quality for which they are having to look further and further ahead of their lease expiries to secure the best space. This however, is being hindered by below average levels of development activity, which is limiting occupier choice.
The M4 corridor remains the most active market, taking a 32% share of take-up so far this year. This is followed closely by West London accounting for a 29% share. Both markets are set to feel the benefits of the Elizabeth Line very soon. This will underpin the case for many occupiers to choose these locations as their headquarters going forward.
We expect 460,000 sq ft of speculative schemes to complete this year in 8 schemes, well below the 5-year average of 1.0m sq ft of developments delivered per annum. The only significant development to complete in Q4 is Lamron Estates and Royal London’s Space Woking totalling 80,000 sq ft.
The South East vacancy rate stood at 7.8%, unchanged from the last quarter and down on the same period last year (8.5%). This leaves the vacancy rate considerably below the 10-year peak of 14.2% in Q3 2013. The Grade A vacancy rate continues to decline standing at 1.7%.
Encouragingly, investment activity in the South East picked up in Q3 by 87% to £834m. 19% up on Q3 2018 which brings year to date investment levels to £1.7bn however, this was driven by two factors. Firstly, that £400m comprised the sale of Croxley Business Park by way of an income strip to Goldman Sachs and secondly that Q2 was a particularly low quarter as investors paused on transactional activity in April.
Over Q3 we have seen UK Institutions and Funds dominate, accounting for 55% of total inv. A notable deal in this investor category was Royal London's acquisition of Renaissance in Croydon for £60m. This places UK Institutions and Funds as the largest investors into South East offices in 2019 to date deploying £550m (33%). Local Authorities follow with £427m and a share of 25%.
A number of deals which were agreed over the summer have already completed in October which will help maintain turnover in Q4.
Offices remain an attractive sector due to the supply / demand balance and yield relative to other sectors and asset classes. As such there is a significant amount of cash building up waiting for a resolution on Brexit.
The exception to the rule remain income buyers, either cash on cash or liability matching led investors, for whom the wider uncertainty and ultra low bond rates are only seeking to further compress yields. The challenge is not a lack of investor confidence but that the availability of this type of stock is limited.
Prime assets such as Renaissance, Croydon have continued to command strong yields reflecting the rental story at the building and the liquidity of the asset. Royal London purchased the asset reflecting a NIY of 4.93% although as we are enveloped by the shadow of our departure date these investors are now pausing while pricing on secondary assets with occupational risk continues to drift. Prime South East yields currently stand at 5.00%, unchanged from the last quarter.