Investors to benefit from sharpening yields and rental growth
Date: 1 May 2007 | 
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London, UK – Investors in prime South East offices outside Central London, will benefit from a further sharpening in yields which are forecast to fall below those expected to be seen in the City of London by the end of 2007, according to Knight Frank which today hosted its 15th annual M25 South East office market Research breakfast at The Dorchester, London.
Knight Frank’s Q1 2007 South East office market report incorporates the investment, development, and occupier markets across all planning boroughs either side of the M25, along the M4 corridor to Reading, and south west
to Basingstoke on the M3. The region currently holds a total of 127 million sq ft of office stock.
The report’s highlights revealed:
South East Office Investment: Q1 07
• Over £2.5 billion of transactions completed over the last 12 months
• Prime office yields stood at 4.75% in Q1 07
• Prime office yields forecast to move in to 4.25% by year end 2007; compared to prime City of London yields forecast to move out to 4.5% by year end 2007
• Performance for investors and developers will be due to: a marked reduction in stock which has kept significant pressure on yields for prime well-let opportunities; and anticipated strong rental growth prospects in key centres South East Office Leasing: Q1 07
• Prime office rents ranged between £23.50 to £35.00 per sq ft across the South East, a 12 month increase of between 5.5% to 12%
• Take-up remained strong totalling 837,037 sq ft, although it represented a 14% decrease on Q4 06’s very strong performance, it was the best Q1 level since 2001
• Take-up was again bolstered by a significant pre-let, with O2 acquiring 100,000 sq ft in Slough
• Occupiers remained selective in terms of accommodation with take-up heavily focused on new and Grade A
space, which accounted for 76% of total take-up
• Vacancy rate increased marginally from 8.1% in Q4 to 8.2% in Q1 2007, but broadly remained constant over
the last 12 months due to the release of Grade B stock to the market. Availability of new accommodation remains constrained which has stimulated speculative development in key centres
• Development activity increased with five new speculative schemes commencing construction during Q1 07, the largest of which is 23 Kings Hill Avenue, West Malling totalling 18,676 sq ft, reflecting the average deal
size within the M25 market during Q1
• Accommodation under offer increased by 13% to 850,000 sq ft, (Q4 06: 750,000 sq ft) reflecting the substantial strength of demand from occupiers
• Active named demand within the M25 remained strong and diverse totalling 5.7 million sq ft. Research by Knight Frank indicated that the conversion rate of generic requirements into actual acquisitions in 2006 was at
its highest level in over a decade Peter MacColl, head of investment, Knight Frank said: “We believe by the end of the year South East office
yields will have sharpened to 4.25% in certain key locations, aided by anticipated strong rental growth prospects. With renewed expectation of rental growth, investors are now considering more peripheral office locations across the South East in search of better value investment product, for example St Albans and key M1 towns. There remains considerable interest in the traditional key locations for example Hammersmith, Guildford, and Maidenhead. Equally, the Thames Gateway continues to be undervalued, principally because of the lack of market knowledge and investors not appreciating the amount of Government investment and infrastructure that is going to be introduced before 2012. We believe the Funds being set up to buy in to this market place will perform very well. Similarly, we will see an increase in investors acquiring vacant land for speculative development.”
Emma Goodford, head of national offices, Knight Frank, said: “Last year saw strong letting activity and the South East market has started the year positively with healthy take-up recorded from a diverse range of sectors.
The resurgence of the substantial pre-let is a trend expected to continue through the year and developers will seek to secure sites to satisfy the growing demand in the market for large, well located, good quality
accommodation. Currently there is no new accommodation over 100,000 sq ft in the whole of the M25 which has led occupiers to consider best quality second-hand and refurbished accommodation and this has stimulated
quality refurbishment projects with some limited smaller scale speculative development. Looking at historic supply and demand across the region and considering future pipeline supply, we are forecasting that Uxbridge,
Crawley, Hemel Hempstead, and Woking may benefit the most from future speculative development activity.”
Claire Higgins, head of commercial research concluded: “Strong service sector growth, particularly within financial and business services, continues to be a major driver of demand for office space within the M25.
However, overall demand is now spread across a broader and more sustainable range of occupiers including the IT, manufacturing and electronics sectors. Already we have seen a rebound in take-up with 2006 seeing a
healthy total of 4.1 million sq ft, its highest annual level since 2000 and well above the long-term average of 3.6 million sq ft. Headline rents are gradually picking up across the board. The continued release of poorer quality
space has kept the vacancy rate virtually flat, despite secondhand Grade A space having seen much activity and the provision of new space being steadily eroded.”
For further information, please contact:
Olivia Gallimore, Commercial PR Manager, Knight Frank, +4 (0)20 7861 1035
Notes to Editors
For a copy of Knight Frank’s Q1 07 M25 offices report, please email olivia.gallimore@knightfrank.com
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner Newmark Knight Frank operate from over 165 offices, in 36
countries, in six continents. For further information about the Company, please visit www.knightfrank.com