Q2 saw £1.3BN of investment transactions in the South East, the largest quarter ever, with the exception of Q4 2013, which saw the sale of Chiswick Park. This is a 135% increase on the previous quarter, and 154% above the 10 year average.
The quarter was characterised by a number of particularly large lot sizes, with the largest four transactions totalling £586M, or 45% of turnover, with investors focussing on larger, deliverable lot sizes in core markets. Major transactions include M&G’s acquisition of Bedfont Lakes for £167M, and L&G’s acquisitions of Apex Plaza in Reading (circa £90M) and The Compass Portfolio for £135M.
UK Institutions continue to account for the majority of acquisitions, but increasing levels of US equity is looking to buy into ‘value add’ opportunities, with rental growth being factored in to most acquisitions.
The substantial weight of money seeking South East office stock continues to put pricing under pressure. Yields for prime 15 year income stand at 5.00%, while strong interest in prime five-year income has seen yields harden to 5.50% NIY. We expect yields across the board to continue to harden for the remainder of the year, as investor demand for South East offices continues to significantly outweigh available product.
Tim Smither, Partner, National Offices Capital Markets team, Knight Frank, commented; ‘After a relatively quiet first quarter, we have seen an increase in volumes being marketed in the South East, almost all of which has been very well received in the market, as the expectation of rental growth really begins to take off. We expect the market to continue to stay buoyant for the remainder of the year, as investor demand significantly outstrips supply, both at the prime and secondary ends of the market’.