The Thames Valley office market experienced an impressive Q2, with take up increasing by 157%. Several acquisitions are in the pipeline, suggesting an equally robust Q3 and 4.
However, it must be noted that a slow down in enquiries is ringing a faint but consistent warning bell and whilst we are in the throes of completing 400,000 sq ft of corporate real estate acquisitions in the Thames Valley, that will be feeding into the 2015 take-up numbers, the underlying letting velocity is weaker than perceived.
Nick Coote, head of the Thames Valley for Lambert Smith Hampton comments: “We expect the Thames Valley office market to accumulate a healthy level of total take-up in 2015, but this will probably be due to a few larger transactions than an increased volume of transactions”.
Enquiries down across every size band
· There were 94 new office enquiries (over 5,000 sq ft) in Q2 2015 – 32% down on the same quarter last year
· Looking at 2015 as a whole, the running total to the end of Q2 is 216 – a fall of 5% to the same point in 2014
The reduction in enquiries seen so far this year across all size bands may be an indicator of a slowing of the market and we await Q3’s enquiry tally as confirmation or otherwise of this. On a more positive note, active acquisitions are underway so we aren’t expecting take up figures to fall at any point in 2015.
Take up takes off with an impressive increase of 157%
· Total take up of offices (over 5,000 sq ft) in Q2 2015 was 540,411 sq ft, compared with 210,348 sq ft in the same period in 2014
· Total take up in 2015 so far is 896,419 sq ft, compared with just 506,787 sq ft at the end of Q2 2014 – an increase of 77% year on year
Given this impressive start, and with active acquisitions of over 400,000 sq ft underway at present, Lambert Smith Hampton is predicting a bumper year for Thames Valley office take up in 2015, with a forecast of a total year end take up level of circa 1.8/2m sq ft.
54% of all the take up in Q2 2015 was grade A and 46% grade B. We expect the proportion of grade A take up to continue to climb through the rest of the year, due to the removal of the quality end of the grade B supply chain leaving occupiers, who all want quality, to focus increasingly upon the newly built options.
Supply profile continues to move towards grade A space
Total office supply in the Thames Valley market at the end of Q2 2015 stands at 9.6m sq ft, compared with 10m sq ft at the end of Q2 2014. This represents a fall of 4%.
Grade A supply has increased from 30% of the total at the end of Q2 in 2014 to 46% of total supply to the end of Q2 2015, largely due to the new speculative development pipeline boosting the figures, particularly in Reading.
Investment market sees record quarterly volume
· The value of investments transacted in the Thames Valley during Q2 2015 totalled a market cycle quarterly peak of £572.058m
· This took total investment in 2015 to date to over £1bn, putting the market well on track to exceed last year’s annual total of £1.35bn
Performance is strong as investors continue to be attracted to the Thames Valley due to the superior returns on offer compared to London. A buoyant occupier market is underpinning an expectation of rental growth which will boost total returns and this is encouraging yield compression across both prime and secondary assets.
With demand out-weighing supply, a further £112m currently under contract and over £560m worth of assets currently available, Q3 looks set to continue the strong performance of the year to date with yields set to contract further in the second half of 2015.
Key investment deals
M&G’s purchase of Bedfont Lakes Business Park for £167,000,000 reflected a yield of 5.44% and a price more than 17% above asking. The park has an AWULT of 5.5 years and has a number of lease events approaching, giving opportunities to increase its income.
L&G’s purchase of M&G’s long-held Apex Plaza opposite the station in Reading for £91,500,000 reflected an initial yield of 5.5% – 100 basis points keener than the initial quoting price. The building has an AWULT of 3.2 years, again reflecting the anticipation of a strong reversion.
Eastpoint Business Park in Oxford was purchased by AEW for £8,200,000, reflecting a capital value of £116 per sq ft. The park comprises 75,000 sq ft across four buildings (one vacant) with an AWULT of 6.25 years.
Aviva has brought to market The Atrium in Uxbridge town centre at a quoting price of £50.8m. This reflects an initial yield of 6.25% and a capital value of £365 per sq ft. The property has an AWULT of 4.3 years to break option, with 60% of the contracted income reviewable this year off an average rent of £24.95 per sq ft. The building was originally developed by Land Securities and occupancy has never fallen below 80%.
