LSH Thames Valley Office Market Pulse – Brexit? What Brexit?!

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Nick Coote, Lambert Smith Hampton’s Head of the Thames Valley

Proving it is worthy of its credentials as a resilient and robust office market, the Thames Valley is weathering 2016’s Brexit uncertainty storm remarkably well, according to Lambert Smith Hampton’s quarterly office market pulse.

As the year drew to a close, enquiries were only just below 2015’s high total, take-up rebounded by 49%, many major transactions took place in the occupational market and investment volumes exceeded those reported in 2015.

Nick Coote, head of the Thames Valley for Lambert Smith Hampton, explains: “Given the referendum ghost quarter that we experienced, the Thames Valley office market has coped well. Not only was Q4 2016 transactional activity up by 49% compared to Q3, it was also 37% higher than that seen in Q4 2015, indicating increasing market velocity and supporting our expectations for a healthy 2017”.

Enquiries down as a result of Brexit uncertainty

  • 96 Thames Valley office enquiries (over 5,000 sq ft) were received in Q4 2016, down compared with both 109 in the previous quarter and with the 124 received in Q4 2015.
  • Showing a similar long term trend, 472 office enquiries (over 5,000 sq ft) were received during 2016 – a fall of 8% compared to 2015’s total of 515.

Demonstrating the impact that the Brexit vote had on the market, in H1 2016, enquiries were running at 50% higher than in the previous year, but following the vote, they ran at 58% lower than 2015 in H2.

Demand resiliently bounces back in Q4

  • Take-up in Q4 2016 was 439,331 sq ft, 49% more than the 294,250 sq ft transacted in the previous quarter and 36.5% up in comparison to Q4 2015 (321,783 sq ft).
  • Total take-up for 2016 was 1.7m sq ft, representing a fall of 18% from the 2.08m sq ft recorded in 2015. Reading was responsible for 25% of all take-up.

A strong quarter for the Thames Valley redeemed a year in which the uncertainty around the EU Referendum effectively removed a quarter’s activity, while businesses put occupational decisions on hold. With this lost quarter in mind, to end the year with a take-up of just 18% below 2015’s demand is impressive and shows the resilience of the Thames Valley market.

60% of take-up in Q4 2016 was grade A, compared with 52% in Q3. Only three of the Thames Valley centres saw take-up of more than the long-term average. Two of these were Reading and Staines, where new built grade A stock was available. Occupiers want grade A space and we will see increased activity where this exists.

Supply continues its long-term fall

  • Standing at 8.947m sq ft at the end of Q4 2016, supply has fallen by just 2% since the previous quarter.
  • Compared with the same point in 2015, this represents a fall of 4.75%.

Overall supply is falling year on year – as a long term comparison, supply at the end of Q4 2012 was 11.76m sq ft (grade A 30%). As available grade A is occupied, there are likely to be some patches of very limited grade A supply, unless developers start to build.

The proportion of grade A supply is 53% of the total, compared with 48% in Q4 2015. High end grade B supply continues to diminish as buildings are acquired by occupiers but not replaced in the supply chain.

Total years supply available, according to the long term average take-up in the Thames Valley is 4.64 years, with grade A supply being 5.53 years. Looking at the years of supply available according to the take-up seen in 2016, however, is shows a role reversal at 5.23 years of availability, an increase of 4.5 years at the end of 2015. On this basis, grade A supply has also increased – from 3.83 years to 4.47.

2016 Thames Valley investment volumes exceed 2015

Investment into office assets in the Thames Valley continued unabated during Q4 2016. While total volume for the quarter was the lowest of the year at £300m, the previous three quarters each had the welcome boost of a stellar £300m plus deal – the Bath Road frontage in Q1, Green Park in Reading in Q2 and the BP Campus in Sunbury in Q3. Stripping these deals out of the numbers, Q4 recorded the highest volume of the year and with over £300m of assets under offer, these levels of activity appear to be sustainable.

Total volume for 2016 was £2.3bn, which exceeds the total for 2015 by 10%. This is an excellent vote of confidence into the vitality of the Thames Valley economy, considering that total investment into UK real estate fell by approximately 30% during this same period. Against a backdrop of political and economic uncertainty, investors have migrated to core locations, and consider the Thames Valley well placed to weather the potential storm.

There were a total of 26 transactions in Q4, with an average lot size of £11.5m, which reflects the current ‘sweet-spot’ for many investors between £5 and £15m. As with the wider office market, competitive activity is almost exclusively limited to prime stock and buildings suitable for conversion to residential use. The average WAULT for transactions during the quarter was 7.92 years, which, when compared with 3.68 years in Q4 2015, clearly demonstrates the shift in the market’s appetite for risk.

Key investment deals

There were a number of key transactions during the quarter, with keen yields paid for the best stock:

Hitachi House, Staines
Runnymede Council completed their fourth acquisition of the year with their £10.1m purchase of Hitachi House in Staines, reflecting a record yield of 5.06% for 10.25 years income. Bidding was extremely competitive, with number of other local authorities also vying to secure the asset.

Braywick Gate, Maidenhead
One of a number of town centre multi-lets which came to the market in Q4, BP Pension Fund’s Braywick Gate received keen institutional interest on the back of strong rental growth in Maidenhead and future infrastructure improvements. Pricing exceeded the quote level of £18.65m, which reflected 6.00%.

Waterside House, Bracknell
Palmer Capital beat off the competition to secure the larger of two adjacent Cable & Wireless buildings sold in Bracknell during Q4. The inflation linked income over an unexpired term of 22.5 years drove pricing down to 5.65%, from a quote of 6.00%.

40 Oxford Road, High Wycombe
Being sold by Aberdeen Asset Management, 40 Oxford Road in High Wycombe offered medium-term income with longer term asset management and a requirement for capital expenditure.  Canmoor paid £9.9m, which reflected 7.43% and £208.00 per sq ft.