Q1 2019 take-up levels for South East offices were up by 72 per cent year on year, and only 2 per cent below the five-year quarterly average of 827,176 sq ft, according to the South East Offices Q1 2019 Snapshot, released today by global real estate advisor Colliers International.
Mark Emburey, Director, Head of South East Offices, Colliers International, explains that this sharp uptake is a result of recent demand for larger floor plates, with 544,153 sq ft leased in Q1, of which 14 transactions were over 20,000 sq ft – accounting for 65 per cent of total Q1 take-up, up from 55 per cent this time last year.
The largest deal of Q1 was Sovereign Housing Association’s lease of 61,000 sq ft at Florence Building, Basingstoke. Elsewhere, other notable lettings included Bottomline Technologies taking 58,000 sq ft at Hive 3, Theale and Starbucks who took 54,000 sq ft in Building 7, Chiswick Park.
At the smaller end of the scale, take-up for office space between 5,000 - 10,000 sq ft remained buoyant, with 153,972 sq ft let in 21 deals in Q1 2019 ,which mirrored Q1 2018. Q1 take-up in the 10,000 - 20,000 sq ft bracket reduced more significantly accounting for 16 per cent versus 25 per cent this time last year.
Emburey believes a contributing factor to the increased demand for larger floorplates in the South East is driven in part by the ever reducing options for larger Grade A buildings that can meet tenant’s evolving occupational needs.
“Tightening supply dynamics in the South East will continue to keep rents strong, although in some locations there has been more pressure on landlord’s to offer greater lease incentives to secure occupiers’’.
Tech & Media occupiers were the most active across the South East in Q1 2019, accounting for 21 per cent (169,555 sq ft) of total take-up. Government and Business Services occupiers were the other most prevalent sectors in Q1 2019, with take-up representing 16 per cent and 12 per cent respectively. Serviced Office occupiers were fourth most active across the South East, representing 11 per cent of take-up.
Lisa Dean, Associate Director, Research & Forecasting, Colliers International, says: “Serviced Office take-up has slowed since the end of 2018, however Q1 2019 take-up is still 4 per cent higher than levels for the same quarter in 2018. Regus and Spaces were the only serviced operators taking space this quarter, although anecdotal evidence indicates that leasing activity in this sector will continue to slow for the rest of this year.”
Occupiers continue to seek the best space available, with 76 per cent of total take-up being in prime locations. Strong Grade A demand was buoyed by 28 deals equating 614,879 sq ft – up 115 per cent on Q1 2018.
On the supply side, levels in the South East continue to be eroded, with vacancy levels now sitting at just 7.8 per cent, compared with 8.6 per cent in Q1 2018.
“With very few new build office spaces coming through to the market, those occupiers looking for space will need to seriously consider pre-committing to units in speculative development schemes in order to meet their needs,” Dean continues. “The constricted supply means high-quality space is not always readily available, forcing occupiers to plan ahead’’.
Some key centres have already seen strong annual rental increases, such as Bracknell, Stockley Park and Weybridge.
South East office investment
Investment activity in the South East office market saw a significant reduction in Q1 2019.
“With the continued economic and political uncertainty and a lack of any clear decision over the UK’s exit from the EU, this comes as no surprise,” says Rob Cregeen, Director, National Capital Markets. “The quarter witnessed 27 transactions totalling approximately £333 million – a notable decrease compared to Q1 2018, which saw 42 South East office transactions totally £964 million.”
Q1 2019 saw very few openly marketed office assets and limited investor depth given the ‘wait and see’ approach being taken by many. Councils continue to invest with borrowings from the Public Works Loan Board, however this has also slowed as many have now fulfilled their strategy and are preoccupied with upcoming local elections.
Nevertheless, Councils, alongside Propcos, jointly accounted for the greatest number of total transactions in Q1 2019, with 22 per cent, followed by financial institutions (15 per cent), private investors (11 per cent) and owner occupiers (11 per cent).
Cregeen continues: “Notable by their absence are the private equity buyers who are struggling to find assets that can their return criteria in the current market.”