Q3 2020 South East Office Investment Market Snapshot

• Q3 2020 has seen a significant improvement in sentiment with investors and vendors learning to live with COVID19 and navigating the uncertainty and volatility brought to the market since its effects were felt in early March.

• Whilst investment volumes remain down on the 5-year Q3 average of £936m, at £401m for Q3 2020, this reflects an improvement on Q2 (£359m). In addition, YTD investment volumes total £1.88bn which is ahead of the YTD total at the same point in the year for 2019 which was £1.76bn. This demonstrates the resilience of the sector and reminds us of the difficulties faced in 2019.

• Most notably Q3 has seen an encouraging £626m of new stock launched to the market (£535 million / 86% in September) and at the end of Q3 there was £328m of stock under offer. A note of caution is that significant levels of stock are being prepared for market and this could imbalance the market if all were to land pre year end.

• A significant proportion (over 60%) of Q3 2020 transactions reflect opportunities that were launched pre-COVID19. Despite a return of some lockdown measures and increasing COVID19 cases, ACRE continue to see an encouraging week-by-week improvement in market activity and investor confidence. This is principally due occupational markets in the best centres holding up. Nonetheless, we expect navigating the potential for an increase in COVID19 cases and the economic fall-out this will generate, allied with the potential for a ‘hard’ Brexit, will remain an ongoing conundrum in coming months.

• The largest Q3 2020 deal was Singaporean investor Straits Real Estate’s acquisition of Bourne Business Park (c.£80 million).

• Overall the buyer type was very mixed with no buyer group accounting for more than 30% – crucially we continue to see new overseas parties enter the market and expect private equity and property companies’ activity will increase to take advantage of potential pricing adjustments in the market.

• The gap between prime and tertiary to widen considerably (and potentially to levels not seen before).
• Significant divergence in pricing as clear losers and winners emerge from COVID19.

• Senior lenders continue to cautiously offer terms on South East offices, tending to cap out at 50% LTV unless there is a particularly strong story around the length of lease or strength of tenant. All-in pricing remains similar to pre COVID19 levels – whilst margins have increased 40-50bps, swap rates have reduced by similar amounts.

• The most likely lender, where an office WAULT is sub-5 years, will be a debt fund, especially if the sponsor is looking for leverage above 50-55% or if there is some form of repositioning/reletting risk that needs taking.

• The removal of the material uncertainty clause from valuations has improved activity among lenders but there still remains caution around where values sit in the sector.

• Brotherton has closed 3 regional office deals in the last quarter with 3 different types of lender, showing there continues to be liquidity in this space, but these are increasingly not from the traditional sources of debt.