UK buyers accounted for 87% of investment turnover in the South East office market in Q1 of 2017.
This figure is in stark contrast with 2016, when overseas buyers accounted for the majority of investment turnover, at 51%. The start to 2017 has seen investment volumes reached £540m, 7.5% above the 10-year quarterly average for the region. With limited new stock on the market, much of this has been made up of hangover deals from Q4 and off market transactions.
Q1 2017 has seen three UK investor pools account for the majority of volumes in the market. UK councils continue to be among the most active for income deals, in a lot of cases pricing out the overseas market due to their comparatively low cost of capital. Permitted Development buyers have continued their dominance in certain markets and UK Funds have made a return with a focus on prime multi-let assets with reversionary potential in established markets such as Brighton, Watford and Maidenhead.
Overseas buyers are expected to remain active across the South East office market through the year. Private Equity buyers continue to seek attractive returns, however remain frustrated with limited opportunities in the market.
Tim Smither, Head of South East Investment at Knight Frank commented: “2016 ultimately surpassed expectations in terms of volumes traded. We expected 2017 to start slowly, however once again volumes exceeded forecasts. Moving forward, the biggest concern for sellers this year will be where to re-invest money with significant levels of capital chasing limited stock.”
In the occupier market, letting activity in the first quarter of this year was steady, with overall office take-up in the South East just short of the 10-year average for a first quarter. There has been a revival in mid-range deals across the South East market, the likes of which has not been seen since 2014, accounting for 44% of the take-up in the M4 region.
The Retail, Distribution and Transport sector has become particularly prominent in Q1 2017. The sector accounted for 24% of all Q1 office take up in the South East, supported by a large letting of 73,600 sq ft to ASOS at Leavesden Park. Retail occupiers have only started to become more prominent within the South East office market since 2015, and this trend looks set to continue with active office demand in the South East at 5.3m sq ft, of which 24% is from retailers.
Emma Goodford, Head of National Offices at Knight Frank commented: “Although smaller requirements predominate in the South East, an interesting feature of Q1 was that eleven mid-range deals (20,000 – 50,000 sq ft) completed. This is the highest quarterly total within this size band since 2014. Development completions in the M25 will peak in 2017 increasing the vacancy rate. Despite this, vacancy levels are not anticipated to reach the long-term average and will begin to decrease by the turn of the year.”