Investment volumes in the South East of England office market reached £1.3 billion in the third quarter of 2017, the highest quarter on record since 2013, the latest index shows.
Despite a slow first half of the year, this takes total office investment in the South East in 2017 to 2.3 billion, some 60% higher than the 10 year average for the period from the first to the third quarters.
Overseas buyers were the source of the majority of investment in the third quarter, with foreign equity accounting for 67% of volumes, according to the index report from real estate firm Knight Frank.
It points this that underpinning the trend was TPG Real Estate’s purchase of the Arlington portfolio, Blue Horizon Investor’s acquisition of 10 Hammersmith Grove for £112 million and the Canada Pension Plan Investment Board’s (CPPIB) purchase of a 50% share of Milton Park from Hermes Investment Management.
Prime yields remained at 5.25% in the third quarter although; there are now examples of institutions paying below this, particularly for prime reversionary assets. Volumes are forecast to exceed £3.25 billion for the year, the second highest on record, albeit skewed by a number of very large transactions.
‘We are seeing the investor base broaden in the South East office market, with far Eastern investors increasingly active alongside US private equity, Middle Eastern families and domestic investors. Trading volumes remain held back only by lack of stock being brought to the market,’ said Simon Rickards, partner in Knight Frank’s Capital Markets team.
The report shows, however, that occupier activity in the South East has by contrast, not been as brisk. Take-up reached 544,400 square feet in the third quarter, bringing the 2017 total so far this year to 2.1 million square feet, some 11% short of the 10 year average for the period.
It also shows that average deal size has been lower in 2017, with only three deals over 50,000 square feet completed in comparison to nine by the third quarter of last year. Nonetheless, the M4 corridor, which has been the subject of significant development activity in the past 12 to 18 months, has held its respective long term take-up trend with 1.2 million square feet transacted in 2017.
Demand from the Telecoms, Media and Technology (TMT) sector has been particularly strong this year, with the sector accounting for 37% of take-up. Of the office space under offer in the South East, 54% is located along the M4 corridor; suggesting a strong end to the year.
‘Transactions are taking more time to execute and, bar the M4, take-up has been lower than the 10 year average in quarter three. Take-up levels along the M4 corridor in 2017 remain on target to align with the long term annual average,’ said Emma Goodford, head of National Offices at Knight Frank.
She explained that this is encouraging news for both developers and landlords, with the M4 market seeing around three million square feet of development complete over the past 24 months. ‘Notably, despite this scale of development activity, vacancy in the M4 has only risen to a level consistent with market norm. With the peak of the development cycle now passed, market vacancy should again begin decrease in the coming months,’ she added.
