Q1 2020 South East Office Investment Market Snapshot

• The market began to feel the effects of Corona on Monday 9th March which accelerated with Boris’ announcement to work from home commencing Tuesday 17th March (with lockdown announced on Monday 23rd March).
• The previous two months had been the strongest for the office market and ACRE since we launched in April 2017. This followed a renewed optimism from investors continuing on from the end of last year post the Conservative Party being reelected in December 2019. The increased confidence and activity in January to
  early March meant Q1, despite a turbulent last few weeks, ended on a par with Q4 2019.
• Q4 was comfortably the best quarter in 2019 (63% higher than the next best). To put this in context investment turnover in Q1 2019 was a miserable £317 million.
• Whilst the market is digesting the effects of Corona and has slowed, deals are still happening, and we are confident in the near future investors will remember the market’s strong fundamentals.  These are:

• In terms of live deals, we are very pleased to report a number of deals going under offer (see ‘Investment Opportunities – Watch This Space’ Section) / trading since. Notable examples of the latter include ACRE’s Apollo Court Hatfield, as well as 300 Capability Green Luton, Jubilee House Brentwood, and Imperial Park
  Newport.
• This shows just how resilient the market is. Whilst this is encouraging, it is important to provide a balanced view and whilst some deals have failed more have paused for breath, a large proportion of which we think can be rekindled.
• Looking back at Q1, transaction volumes totalled £1.11 billion across 34 deals – this is 123% greater than the 5-year Q1 average – £497 million.
• Q1 also saw three £100m+ deals including the £312 million Chiswick Park, £135 million Bedfont Lakes, and £129.25 million Arlington Business Park deals. This is notable when looking back at 2019 and 2018 where there were just four £100m+ deals across the entire year for both years.
• At this stage it is hard to distinguish any strong trend between buyers wanting to continue and those wishing to pause, however deals with more defensive characteristics are more resilient. Bidding prior remained highly competitive for the very best stock demonstrating a willingness among investors to pay premiums to secure opportunities that display strong property fundamentals, secure income, alternative development and/or repositioning angles.
• It would be naive to think the sector will not face challenges given its performance is so strongly correlated to the service sector and GDP. However, a consensus amongst Economists is that the impact/correction will be sharp but not prolonged.  The situation remains fluid but this should be a comfort for all.

• At the start of 2020, there was strong competition amongst lenders to lend on assets in the South East office market. This was evident both on assets with long term income and transitional assets with shorter leases/higher vacancy with credible business plans and competent asset managers in place.
• Post the onset of Coronavirus, the lending market has become more challenging as lenders manage the issues in their existing loan books. The office sector though is still considered one of the more attractive sectors for real estate lenders and whilst pricing on margins/fees has widened and leverage has come in slightly, there are still lenders selectively keen to deploy capital in this space for the right asset/sponsor. We fully expect this appetite to increase as more certainty emerges on the wider global picture over the coming weeks and months.
• Lenders in the short term are however focused on their wider existing loan books particularly around their March quarter date and rent payments.

For further information please contact:

T: +44 (0) 20 7353 7500
E: t.vaughan@brothertonre.com
www.brothertonre.com

• The South East is relatively unexposed to the serviced office sector, which is suffering given its flexible contracts, compared to London.
• Working at home provides balance to the working life but we are fundamentally social creatures and enjoy others’ company. Positive office working environments, of which there are many, should therefore profit.
• We are going to press on the March quarter day which is a significant milestone for rent payment. These are clearly significant headwinds in the economy which are leading certain business sectors to seek rent holidays / delays; this is particularly the case in the F&B, retail and leisure areas. However, whilst not
  immune, we think the office sector is more resilient than other sectors. Time will tell.
• The epidemic has forced us to upscale our technology skills (e.g. video conferencing). Whilst this could be construed as a threat to office demand, I think social habits negate this and technology is complimentary and not a threat.
• Space – The South East is significantly less dense than London. Will businesses put a premium on space and reconsider where they want to be located? It is no coincidence that the banks and financial institutions based in Central London have their disaster centres here and are currently working out of them. There is a strong argument for business parks here given the resilience they offer for a business than needs to continue to operate! Interestingly, 76% of Q1 deals were out of town and this remains high at 52% even excluding the three largest deals which were all on business parks.
• Construction – A stall in construction will exacerbate supply shortage.