The South East office market saw a record £4.02 billion of investment turnover in 2021, more than double the 2020 figure of £1.93bn and 45% above the 10-yr annual average for the region. The year also witnessed a record Q4, which saw £1.54 billion of office stock traded.
Overseas capital accounted for 59% of investment volumes in 2021, driven by the UK’s relatively attractive pricing and growth of the domestic life sciences sector fuelling demand for high quality office space. Investor confidence in the life sciences sector continuing its growth trajectory saw over £1.5bn invested into offices in the Golden Triangle (Oxford, London and Cambridge) during the year, led mainly by global private equity houses.
UK Funds were the biggest seller of South East offices in 2021, accounting for over a third of all sales as they continued to exit non-core assets and capitalise on increased demand from alternative investors in certain locations. A growing number of investors targeted office assets for repurposing opportunities into industrial space or data centres, with £600 million allocated in the final quarter with this intention.
TMT companies and out of town offices drive leasing activity
Heightened investor sentiment was supported by robust leasing activity, as take up of office space in the key South East markets reached 2.6 million sq ft in 2021 across 171 deals. This represented a 24% increase when compared to 2020. The TMT sector accounted for 29% of this take up, its highest representation for 20 years. Interestingly, the majority of take-up was out of town, which accounted for 54% of the South East total. This is the highest percentage since 2015.
With relocations and office upgrades materialising, particularly among larger corporates, 2021 saw nine deals completed for offices larger than 50,000 sq ft, the highest total since 2018. Despite fears of a rise in supply, vacancy in the South East was 6.9 % at the end of 2021, unchanged from the close of 2020 and still below the 10-yr average of 7.0%.
Demand was particularly strong in the M4 corridor, with take up totalling 1.4 million sq ft. This is three times higher than the total volume registered in 2020, with the average deal size 18,500 sq ft being the highest since 2012. TMT companies were once again dominant, accounting for 40% of take up in the M4.
Simon Rickards, Head of South East Capital Markets at Knight Frank, commented: “We expect the level of equity primed for investment into South East offices to remain high and potentially increase, as confidence in the sector continues to gather momentum. There will undoubtedly be a focus on prime fundamentals, ESG credentials and the ability to provide a best in class offering for occupiers, albeit with greater attention given to escalating refurbishment costs.
The best multi-let offices will perform well going forward, but this will be to the detriment of secondary stock so further polarisation of the market will be evident in 2022. Interest in assets targeting the life sciences sector will be strong, with substantial levels of equity yet to be deployed. However, the biggest barrier to this sub-sector will continue to be a lack of suitable stock in the Golden Triangle.”
Emma Goodford, Head of National Offices at Knight Frank, added: “The ESG and Sustainability agenda will continue to drive office relocations in 2022, as major corporates seek to meet ESG commitments to both employees and shareholders. At the same time, rising build costs and the lack of supply for new grade-A space will be key drivers of rental growth. The delayed development pipeline and limited availability has meant that larger occupiers are increasingly evaluating office requirements and turning to pre-letting opportunities.
With life science workplace requirements expected to grow substantially, landlords and developers in Oxford and Cambridge must deliver schemes with offices and laboratory capability as well as incubation facilities to accommodate rapidly expanding businesses. The long-awaited arrival of the Crossrail will also create additional demand in key connected towns, with Maidenhead and Reading expected to benefit considerably in terms of office requirements.”