Q2 2019 South East Office Investment Market Commentary

Overview

Despite the challenging macro-economic environment and ongoing uncertainty as a result of Brexit being extended until October, there is a positive underlying sentiment for South East offices. However, the subdued trend in investment volume from Q1 2019 has continued into Q2 2019 and the statistics remain behind their respective quarters last year.

Following a period of relative inactivity during the build up to the original Brexit deadline, we have however seen a positive increase in quarterly activity in Q2, as frustrated investors selectively returned to the market for the right opportunities. As a result, the transaction volume in Q2 increased by 40%, reaching £543m (average lot size £15m), which, whilst improved, is low in the context of the five-year average (£867m). Whilst transaction volumes (by value) may appear low in comparison to previous years, a total of 36 deals exceeds those recorded in Q1.

Q2 has seen a return of property companies and private equity to the market, representing 22% and 17% of total acquisitions (by value) respectively. Two significant deals this quarter included the acquisitions of Gresham House and Portland House Crawley (CLS Holdings), and Ditton Park Slough (Kennedy Wilson). Conversely, local authorities have significantly reduced their activity, accounting for just 16% of acquisitions (37% less than Q1).

H1 2019 has seen a notable increase in off-market and restricted marketing transactions to a bespoke target list, typically consisting of local authorities and institutions, as vendors have been seeking premium pricing through exclusive campaigns. Whilst completion timescales are becoming prolonged, we have also noted a contraction in the number of underbidders compared to those on similar assets a year ago, as there remains a standoff between vendors and purchasers on pricing.

Prime yields have held stable at 5.25% since the end of last year, offering a competitive return in comparison to the central London and industrial markets. Whilst prime liquid assets underpinned by robust fundamentals remain keenly sought after, investors have become more discerning with their investment criteria. Secondary assets, which carry an increased level of perceived risk, have softened by around 50-75 bps in the last 12 months as the yield arbitrage between prime and secondary assets has widened.

Investors will take comfort in the robustness of the South East occupational market as income continues to be a key driver in investment performance at this stage of the cycle. The underlying fundamentals in the South East include; acute pressures on availability, increasing take up of Grade A space, scarcity of speculative development, strong demographic compositions and improving infrastructure connections, which will likely translate into continued rental growth.