ACRE Says Many Players in the Office Sector Think Price Reductions Have Stopped
South East office investment volumes and numbers of transactions fell to record lows for 2023, with £1.52 billion across 90 transactions, reports ACRE Capital Real Estate.
The national adviser’s figures tally up to less than 50% of the 5-year average volumes of £3.07 billion, and less than 33% of the 5-year average number of transactions of 134.
ACRE suggests the more pronounced reduction in volumes versus number of transactions is due to falling asset values, with the year seeing a very low average transaction size of £16.3 million.
The analysis shows that achieved market pricing for 2023 sales reflected a 42% reduction in value compared with when the same asset last traded (on those traded within the last eight years).
Deals with five-plus-years of income left changed hands at a 20% discount to the previous headline prices on the same assets, whereas sub five-year income deals saw discounts of 50% to prices for the same assets. Achieved prices in 2023 were an average of 26% below quoted prices, notably with the discount increasing every quarter of the year.
But ACRE says there is evidence that this period of market pricing correction has run its course, with a number of players now calling the bottom of the market.
Typical entry points to buy South East offices are 7.50% to 8.50% net initial yields for long-income deals and £75 to 125 per square feet for value-add and opportunistic plays.
Fran Debney at ACRE says active buyer groups are generally limited to 10-plus year investors, long income investors or private property companies and high net worth individuals targeting less than £12 million-valued assets with value add or alternative use strategies.
The year saw more creativity in deal structures with evidence of a number of delayed deal completions, as well as conditional deals in the final quarter.
ACRE says it was notable that acquisitions for owner-occupation increased, representing 31% for final-quarter 2023 deals, or 9% excluding the sale of 1 Ruskin Square in east Croydon to government department HMRC, which is still ahead of the five-year annual average of 3%.
The average time to sell, from launch to exchange, is now 6.6 months, but liquidity and time to sell is significantly improved where an alternative use gives an office what ACRE terms a “future relevance”.
ACRE expects this theme will be more widespread in 2024, particularly for vacant possession town centre offices with residential potential.
Funds were the biggest sellers for 2023 accounting for 61% of total deal volumes, versus 34% on average for 2020-2022, the greatest proportion ACRE has recorded.
The largest acquisitions across the South East last year both occurred in Croydon with 1 and 2 Ruskin Square in East Croydon selling for £382.6 million combined to HMRC and PIC respectively, with Schroders Capital and Stanhope the vendors for both.
In terms of the financing markets debt adviser, Brotherton said lending for offices became increasingly difficult throughout 2023 and the second half of 2023 saw some lenders withdrawing entirely from the sector, particularly lenders with US headquarters.
Refinance options for offices with a significant leasing risk or poor Energy Performance Certificate rating and secondary locations remains “difficult”.
Max Wild at Brotherton expects sentiment for office finance will remain “bifurcated” with difficulties financing secondary assets and locations, while strong liquidity and financing options will remain for best in class, well-let, high ESG specification space with a strong sponsorship.
In terms of the occupier market, tenant rep specialist COREP reports that there is a two tier market emerging. Regeneration and infrastructure projects have helped locations such as Reading and Maidenhead remain “tier 1”, but many locations, previously considered prime, such as Slough, Uxbridge, Staines and Stockley Park, are now considered secondary and their outlook is “uncertain”.
COREP reports most occupiers are now pushing hard for a return to the office but typically to occupy 30% to 40% less space. Quality is the priority for occupiers and COREP say this means most locations only have one or two buildings to consider.
There has been a notable lack of smaller, flexible offices, particularly in the North M25 Markets, which means now is good time to refurbish.
There has been an improvement in occupier sentiment in the final quarter, and with interest rates due to decrease throughout 2024, demand is expected to come back to many markets.
By Paul Norman
January 17, 2024 | 8.35 A.M.
To view article please click following link: CoStar Article, South East Office Investment Hit Record Low Last Year As Bottom of Market Nears