Development activity in the South East of England office market has fallen to 840,000 square feet of speculative space delivered to market in 2018, down from 2.4 million in the previous year.

A new analysis from global property adviser Knight Frank says that there is strong demand from occupiers but supply is drying up and five town centres now have less than two years’ supply including Watford, Croydon, Brighton, Cambridge and Oxford and they will be most impacted by decreased development and lower vacancy rates.

In the M4 corridor, the vacancy rate will fall to 5.3% by 2021, and 3.8% in the M25, for new and grade A space which occupiers are targeting. These rates are well below the long-term trend.

The M25 Report 2019 identifies four sectors of demand in the region, which due to forecast growth will add 14,000 jobs over the next five years and generate occupational demand. These are life sciences, media, computing and professional services.

These sectors are dominant in the 21 active enquiries currently demanding 1.65 million square feet in buildings over 50,000 square feet. This demand will be unable to be met in the Thames Valley as only six self-contained buildings over 50,000 square feet remain available.

‘Deal numbers in the South East have been steadily rising, although we have seen a reduction in deal size, largely due to the increase in efficiency and technology shifting workplace trends,’ said Emma Goodford, head of national offices at Knight Frank.

‘We’re seeing strong demand in the region with 5.2 million square feet of active enquiries and we expect to see some big deals. We’re also now in a cycle where we are seeing the highest rents ever paid in 15 of the top 18 towns, meaning that the market can justify speculative development,’ she explained.

‘Against this strong demand pipeline we are heading for a supply crunch. We are essentially seeing a perfect storm of falling vacancy rates, decent demand but challenging delivery, so we must address how we navigate the market over the next five years,’ she added.

She also pointed out that the threat to supply is not demand or rental value, it is a lack of speculative funding availability and rising build costs influencing viability. ‘Our prediction is that in order to combat this the market will need to focus on refurbishments,’ she said.

The reports also says that flexible office offers continue to be a major trend in the South East offices market. Operator take-up accounted for 16% of the South East in total in 2018, up 4% from 2016.

However, investment volumes in the South East have slowed to £2.7 billion, 25% less than in 2017, however, the 2018 total is 16% above the long-term average. The first quarter of 2019 has seen volumes reach £428 million, below levels seen 12 months earlier, however still also on par with the average. Funds and Councils have been the most active, accounting for 55% of all volumes last year and 70% in the first three months of the year.

‘Whilst Brexit has impacted deal volumes, demand from cross-border investors is still prevalent, with significant amounts of capital waiting in the wings. Market foundations are robust, and with a sensible resolution to Brexit, we expect a marked increase in both global and domestic investor demand,’ said Tim Smither, partner at Knight Frank.

‘Prime town centre assets remain top of the buy list for many investors and we anticipate pricing could harden in this area, with a competitive playing field. Opportunities lie in good quality secondary markets where pricing may have softened,’ he explained.

‘Markets including St Albans, Woking, Redhill and Brentwood are witnessing similar supply constraints to those we are seeing in the more celebrated markets, but arguably at an attractive discount,’ he added.

Author: Propertywire.com