Take-up grows and rents continue to rise in the region, meanwhile investor interest remains strong
After a slow start to the year, take-up across the South East has rebounded significantly in the second quarter, with leasing activity standing at 766,335 sq ft, a 63.5 per cent increase quarter-on-quarter and only five percent below the five-year quarterly average of 808,326 sq ft.
Of this take up, 28% of deals were for space between 20,000 and 50,000 sq ft, comprising of six deals.
The South East continues to see strong demand from the serviced office and co-working operators, many of whom are looking to extend their reach beyond London to regional hubs. Q2 2018 saw the greatest leasing activity from this sector at 138,800 sq ft. Regus’s new “Spaces” concept has been the most prevalent operator, making up 48 per cent of leasing in this sector this quarter. Total take-up from the serviced office and co-working sector since Q1 2017 now stands at 495,852 sq ft and this looks likely to continue to grow.
Annual rental growth can currently be found in key centres like Windsor (11%), Slough (9%) and St Albans (9%), where occupier demand is high and supply low.
“We anticipate further rental growth in key towns against a backdrop of diminishing supply. That said, occupiers are not compromising on the quality of space, which many landlords and developers have embraced by delivering new or refurbished buildings that provide unique and more desirable space” explained Alys Holland, National Offices at Colliers International.
Rental growth prospects continue to attract a diverse spread of capital
Q2 2018 witnessed 38 South East office transactions, totalling approximately £690 million. This is a 15% decrease on Q1, which saw 37 transactions totalling £810 million. However, transaction volumes and number of deals in Q2 2017 were very similar, which witnessed 40 deals and £700 million transacted.
“We are seeing fewer sales being openly marketed; which has led to suppressed levels of transaction volumes for Q2. It is clear that where transactions have taken place, yields are remaining resilient, with prime net initial yields remaining strongest for town centre multi let opportunities.” explains Rob Cregeen, National Capital Markets at Colliers International.
Financial institutions were busiest investors in the South East office market this quarter, responsible for 29% of all acquisitions. Councils also remain one of the key buyers of South East offices in the market, accounting for 13 per cent and showing a strong appetite for long income single-let assets.
While the secondary out of town office market has struggled in Q2 as investors question the strength of the occupier market, Collier’s outlook for the South East office market remains positive; “Investor sentiment towards South East offices has positively shifted, driven by the increased returns, the impending delivery of CrossRail; and the continued reduction of office stock through lack of new development and conversion to residential via permitted development rights, pushing rental growth in some markets.
“Furthermore, we have seen a trend develop over the past two years, where overall transaction volumes have been weighted to the second half of each year. This was particularly evident in 2017, when almost 70 per cent of stock by value transacted in the second half of the year. We are therefore confident that these positive trends will continue into H2 2018, as long as we see the stock come through,” concludes Cregeen.