At Knight Frank’s well-attended M25 breakfast earlier this week, the firm’s head of South East Investment said demand for offices in the South East of England and the M25 region is arguably as strong now as at any time over the past six years. But the lack of available stock in the region could be its biggest challenge – new development is needed now, or some occupiers could be forced to look elsewhere.
Tim Smithers says the South East office property market is attracting buyers from around the world, and expects a continued healthy appetite during the next 12 months, with opportunity funds and Middle Eastern private funds under pressure to invest. “We are also seeing increased interest from the US, Australia, Far East and Israel,” he noted.
In order to achieve the best return, investors in office property in the South East and M25 region need to re-think and re-position their assets, Knight Frank says. Emma Goodford, head of National Offices, says the desire for new office space in the M25 region “is creating rental growth as new buildings are being snapped up”.
Smithers says that whereas a year ago only the very best stock attracted buyers, now there are buyers for most stock – but not enough products. He predicts that prime and good secondary yields will continue to harden for the rest of the year, as UK funds and overseas private funds are priced out of London. He also says secondary buildings in core markets will continue to offer good value, particularly where the rents are sustainable. “The occupier market is improving and investors will take on letting risk in search of higher returns,” he added.
Looking at the M4 corridor, Knight Frank says demand for office space in this area is running 10% ahead of its 10-year average – a strong performance in contrast to most other UK office markets, including the M3 and the M25 region as a whole, with all but the markets for Aberdeen offices and office space in Leeds showing take-up running below annual average. The firm says speculative development is becoming increasingly justified in key locations such as Reading, Guildford and Brighton, which all have less than four years’ supply of new Grade A space, while Staines has just 2.5 years’ supply, despite four new schemes under way. Rents of £30 per sq ft have already been achieved in Reading and Maidenhead, Goodford says, “and figures above this are predicated in a handful of towns including Staines on Thames and Uxbridge”. She feels this rise looks justifiable and sustainable, as the West London offices market is now in the mid £40s.
“We’re finding it hard to identify new schemes which will provide quality space in 2016 and onwards, just at the time many large occupiers will be able to upgrade. I can forecast a situation where lack of new space will collide with rising take-up – a perfect cocktail to stimulate speculative development,” she added.