Q1 2019 South East Office Investment Market Snapshot

By April 2019 Insight
  • In Q1 2019, the south east office market achieved transaction volumes of £291 million, across 21 transactions. This represents a sizeable contraction in quarterly volumes seen throughout recent years and versus Q1 2018, when a total of £469 million was achieved over 28 transactions.
  • This is almost entirely explained by the UK’s current economic and political environment. This has resulted in very little stock openly coming to the market as potential Vendor’s have taken extremely cautious stances. Vendors are keen to avoid either being seen as a distressed seller, facing a lack of  demand for their assets or selling into a “BREXIT discount”.
  • A growing trend is for assets to be offered ‘off-market’ to a select audience. Typically this is made up of Local Authorities and a select list of active UK funds.  It is unsurprising that Local Authorities were responsible for 35% of the total transaction volumes in Q1-their continued spending in spite of the significant pressure from the UK press and Central Government to curtail this spending, suggests that it will continue for some time yet, but it is likely to be more restricted to in borough.
  • The average lot size for Q1 was low at only £13.8 million versus the 5-year average of £22.92 million. The largest transaction was Reading Borough Council’s acquisition of Four10, Thames Valley Park for £38,000,000.
  • On market sales are taking longer to execute, extending from an average 126 days during H1 2018 to 140 days during Q1 2019 (from launch date to exchange), an 11% increase.
  • Local Authorities were the dominant buyer type at 35% of volumes, followed by the UK Funds at 23%.
  • Owner occupiers were notably busy during the quarter completing 4 transactions, representing 13% of volumes. By contrast Private Equity Managers were quiet, not completing a deal, despite keeping a close eye on opportunities and having considerable “dry powder” to deploy .
  • Prime yields currently stand at 5.25% NIY, however there are several notable examples where buyers have paid premiums to secure the very best product, namely in Brighton and Ealing both at sub 5.00% NIY. This has been driven by a recent flight to quality alongside a contraction in what is considered ‘prime’, resulting in strong competition for these assets.
  • Pricing for secondary and tertiary assets is slipping, as is pricing for single-asset out of town offices, unless in either case a Local Authority buyer can be secured.  Established business parks offering significant scale and yields ranging from 6.25% – 7.00% are attracting overseas interest which may result in a number of high profile deals occurring within this sub-sector during 2019.
  • The occupational markets are performing well with corporates willing to invest in acquiring new space. We expect this trend to continue, which will support the sector’s fundamentals and keep investors’ attention focused on the office sector.
  • Once political and economic certainty returns, we expect a significant amount of stock to come to the market. Many agents are reporting strong sales pipelines. There are (as ever) a large number of buyers with significant cash to deploy, which combined with more stock, should result in transactions volumes bouncing back strongly.