SOUTH EAST OFFICE INVESTMENT MARKET REVIEW
The UK economy is enduring a soft patch, reflecting the recent slowdown in world trade and ongoing Brexit-related uncertainty. But provided that Brexit is ‘orderly’, we expect strengthening household spending power and looser fiscal policy to underpin a modest acceleration in GDP growth through 2019 and into next year, with GDP growth forecast at 1.4% this year and 1.9% in 2020.
Undoubtedly Brexit uncertainty is continuing to be a key headwind to the UK economy as negotiations have remained at the forefront of the headlines. This has led investors to exert a higher level of caution on key decisions in the near term, until the UK’s relationship with the EU becomes clearer. However, if Brexit proceeds in an ‘orderly’ fashion we would expect the market to gather momentum in the second half of 2019.
Despite the challenging macro-economic and political environment, the resilience of the South East office investment market has been evidenced by total transaction volumes for Q1 2019 of £387 million.
This is low in the context of the five year average (£575 million) but perhaps more than what would have been expected given the caution in the market. There were a total of 31 deals in Q1 2019, which reflects a significant amount of activity for lot sizes of sub-£20 million. Furthermore, there is over £400m on the market. Our analysis shows that the majority of deals were located in the Thames Valley and South of the M25, which is reflective of the liquidity and attractiveness of the core town centre locations such as
Brighton, Reading and Windsor.
In Q1 2019 the prime and secondary yield gap widened further for South East offices, highlighting that investors are becoming increasingly polarised. Investors will typically target either prime core assets to capitalise on secure income, or, less frequently, value-add opportunities to drive capital and rental growth. Prime yields in Q1 2019 remained stable at 5.25%.
The South East occupational market remains resilient, with growth in headline and net effective rents evidenced across most South East markets in Q1. This was driven by buoyant occupational demand and lack of good quality grade A availability, which has been further exacerbated by residential permitted development, and, the scarcity of speculative office development.
Following substantial redemptions in December 2018 and January 2019 a number of retail funds’ cash positions were reduced to levels that triggered an element of forced selling. Whilst this was nationwide and across sectors, the window for purchasers to take advantage was limited and following selective disposals, normality has returned.