SOUTH EAST OFFICE INVESTMENT MARKET REVIEW
Overview
The ongoing uncertainty surrounding Brexit continues to weigh on both the UK economy and the commercial property market. This impact has been particularly evident in the investment market and transaction volumes remain subdued, with the deployment of capital largely focused on core town centre assets providing secure income. Despite the delicate economic outlook, the labour market has remained robust, with the UK unemployment rate down to its lowest level since 1974, and real wage growth at an 11-year high. This has helped bolster the overall strength of the south east occupational market and continues to be key driver in investment performance.
Q3 was underpinned by several high-profile transactions which supported a consecutive positive quarterly increase in activity. The total transaction volume for the quarter was £908m,
reflecting a 67% increase on Q2 2019.
Off-market and restricted marketing campaigns continued to characterise new investment opportunities in Q3. Significant off-market transactions included Columbia Threadneedle’s sale of Croxley Park for £400m to Goldman Sachs. This quarter also saw the sale by Northwood Investors (advised by Gerald Eve) of Lakeside North office campus for £138m to Portsmouth Council. Collectively these two deals accounted for 59% of the total volume this quarter.
Prime yields have come in to 5% as demand for core prime opportunities remains robust and the number of transactions that have occurred at or around this level has been elevated. This was evidenced by the M&G sale of Renaissance, Croydon to RLAM for £58m, reflecting a NIY of 4.96%. The yield spread between prime and secondary assets continued to widen, creating an attractive opportunity for private equity and propco investors to take advantage of pricing for good quality secondary assets.
The current south east office occupational market remains robust amid the challenging economic climate. Healthy levels of take-up have been focused on the submarkets offering new town centre
Grade A space, depth in amenities and good connections to central London and the wider south east. A constrained development pipeline across the south east and the loss of grade B stock to residential has contributed towards a fall in vacancy rates.
ACTIVITY BY INVESTOR TYPE
Ignoring the £400m sale of Croxley Park, local authorities re-established themselves as the most active investor this quarter, following a drop in activity in Q2.
UK institutions were net vendors this quarter as they experienced volatility from redemptions on their open-ended retail funds which in turn has placed increasing pressure on their liquidity positions
Property companies established themselves as the most active investor in Q2 and have continued their activity into Q3, investing a total of £120m across seven deals.
Overseas investors continue to be attracted to the UK market by a favourable exchange rate and their longer-term view on how Brexit volatility is distorting the current market.
Outlook and Market Insight
- At the end of Q3 c. £651 million of south east offices were under offer, across 34 deals.
- We anticipate investment volumes are likely to remain subdued until there is some clarity over Brexit.
- We expect private equity and propco investors to take advantage of pricing for secondary assets in good locations.
- Off-market deals are expected to underpin Q4 investment transactions, although strategies need to be reflective of the target investor audience.
- The underlying fundamentals in the occupational market are expected to continue to drive rental growth.
- Prime yields are likely to remain firm at 5.00%.
- We expect a softening in yields on secondary assets throughout 2019 which could create buying opportunities.
- Institutions will continue to buy selectively in core markets.
- Fluctuations in sterling will continue to make the UK attractive to overseas investors.
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