The national commercial property consultancy, Lambert Smith Hampton, reports that in Q3 2014, office take up remained above the quarterly average, overall supply levels remained static, the proportion of grade A space available reduced, incentives diminished and prime rents experienced upward pressure.
Andrew Hodgkinson, Associate Director for Lambert Smith Hampton, explains how this situation is developing: “This year, we have seen a number of larger office requirements enter the M27 market. Several of these have completed in the past two quarters, resulting in stronger take up figures, but there are still enquiries outstanding for over 10,000 sq ft that are yet to find a home. With office supply, particularly Grade A space, continuing to fall and with no new developments in the pipeline, occupiers may face a property challenge as we move into 2015.”
Office take-up remains above quarterly average
Take-up for the South Coast region totalled 86,540 sq ft during Q3 2014; the majority of which was in out of town locations. While this is a fall from last quarter’s high (179,249 sq ft), it is still above the quarterly average.
A number of significant grade A lettings were completed where companies upgraded to better quality accommodation, highlighting growing confidence in the occupational market.
Prime rents maintained
Grade A space has fallen to 11% of the total supply. With occupier demand continuing to improve, prime rents will come under some pressure, although currently they are being maintained at £19.00 per sq ft (city centre) and £18.75 per sq ft (out of town).
Continued shortage of grade A space
Office supply remains static at 1.508m, however, the share of space has moved away from grade A to grade B and C.
Occupiers are taking the opportunity to move into better quality accommodation as the market improves.
There is strong demand for office to residential conversion with prices rising and we have witnessed a number of suitable buildings for conversion coming to the market.
There continues to be severe shortage of prime office buildings available in the region. Only 11% of all current supply is considered grade A, some of which is refurbished older stock.
Grade A supply in city centre locations is now less than 2%, pointing to an opportunity for speculative development.
South Coast office investment performance constrained
As with the rest of the South-East, the South Coast office market continues to see a good level of activity, but has not experienced the same level of yield compression as in other areas, such as in the Thames Valley. This indicates that better returns could be received and that there are wider opportunities for acquisition on the South Coast.
It has been widely reported in the press recently that Southampton City Centre is experiencing a lack of good quality office accommodation and we are finding this worsened by a number of buildings being lost to residential use.
Investors still have a degree of caution when it comes to business parks in the region. This was highlighted recently when the Zurich Centre at Solent Business Park was withdrawn from the market when the parties involved were unable to agree terms.
The most notable deals that have occurred for Lambert Smith Hampton in Southampton City Centre were the acquisition of Brunswick Gate, let to NatWest for Fidelity, and the off-market purchase for Forelle Estates of Arcadia House, let to BDO, in Ocean Village.
Key investment deals in Q3 2014
Brunswick Gate, Southampton was sold by AVIVA to Fidelity for circa £11.25m, reflecting a NIY of 7.83%. Brunswick Gate has a floor area of 50,136 sq ft and was fully let to Natwest with unexpired term 6.17 years.
Highfield Court, Tollgate, Chandlers Ford was sold by Perbury Group to a private investor for circa £3.5m, reflecting a NIY of 7.56%. The building amounts to 21,000 sq ft and was fully let to Baker Tilly for a rent of £305,000 pa.
Arcadia House, Ocean Village, Southampton was sold by Latinus Ltd to Forelle Estates for circa £4.9m, reflecting a NIY of 7.5%. Arcadia House has a floor area of 20,823 sq ft and is let to BDO for approximately 6 years to expiry.
