Office take-up in the South East of England reached 778,300 sq ft, in Q3 2016 defying the post Brexit predictions of a sharp fall in occupier activity – according to Knight Frank’s new M25 research.
The higher than expected total in Q3 meant that South East office take-up for the year increased to 2.6m sq ft, on par with the long-term average for a nine-month period. Most notably, two further lettings above 50,000 sq ft completed during the third quarter. This brings the total above this threshold for 2016 to nine, just one short of full-year total for 2015.
With take-up remaining above trend, availability stayed at a low level, despite an additional 300,000 sq ft of space coming to market in Q3. Total available space in the M25, M3 and M4 areas is now between 19% and 32% below the ten-year average. Markedly, the vacancy rate for the M25 region specifically has dropped to 4.8%, the lowest level since 2001.
Emma Goodford, Head of National Offices at Knight Frank, commented: “Q3 take-up has been better than sentiment would suggest with demand for space sub 20,000 sq ft particularly strong. This has meant that rents and incentives have held firm for this size bracket, positive news for landlords.
In addition, the low level of supply remained a significant factor in Q3, especially in the North and South M25 regions, with vacancy rates unlikely to change significantly for either of these areas in the next 12 months. However, we will see an increase in supply in the Thames Valley, with the first wave of new speculative developments due to come to market in Q4 2016. This though, will be a short lived expansion of supply, due to the limited number of speculative starts in 2016.”
In the investment market, the immediate aftermath from Brexit led to a rapid softening of sentiment. However, as Q3 progressed, confidence gradually returned with deals threatened by Brexit completing, albeit often at a slightly reduced ticket price.
Investment volumes for the quarter proved encouraging with £719m of stock transacting, albeit almost half of this was Spelthorne Council’s acquisition of the BP HQ in Sunbury for £340M. Prime yields now stand at 5.25%, 25 basis points softer than Q2. Encouragingly, total investment for 2016 has now reached £2.2bn, the second highest total at the Q3 mark since 2006.
Tim Smither, Head of National Offices at Knight Frank, commented:
“After a difficult start to the quarter, sentiment has improved, with a number of headline transactions completing. As the UK funds remain largely neutral, we have seen an inflow of overseas capital, residential developers and Council investors fill their void. We anticipate a reasonably active finish to the year, with a significant amount of equity looking to be deployed, albeit deliverable stock remains limited.”