No collapse in the M25 occupational market


 Date: 13th May 2008  | PDF version

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London, UK – Hammersmith is forecast to continue to be the most expensive centre in which to rent prime office space in the South East outside London’s West End and City; and Reading will see the greatest increase in prime office rents by the end of 2008, according to Knight Frank which today hosted its 16th annual M25 Offices research breakfast at The Dorchester, London.

A study of 12 key office centres in the M25 and Thames Valley region showed that by the end of Q1 08, Hammersmith topped the office rents table with prime rents having increased by 10% to £42.50 per sq ft, (Q1 07: £38.50). Knight Frank has forecast that by the end of the year, Hammersmith will see a further increase in prime office rents by 12% to £47.50 per sq ft, keeping it firmly in pole position.

Maidenhead is the second most expensive place in the study to rent office space at £32.00 per sq ft and despite experiencing 0% increase in rents in the last 12 months, is forecast to see 6% increase in rents to Q4 08 to £34.00 per sq ft.

In third place is Staines which saw the highest increase in rents of 17% to £31.50 per sq ft (Q1 07: £27.00) and is forecast to close the year up 5% to £33.00 per sq ft. Reading, which is ranked fourth, is expected to experience the highest increase in rents to close 2008 up by 14% to £32.50 per sq ft (Q1 08: £28.50).

Heathrow and Guildford which are ranked fifth and sixth respectively, saw continued rental growth of 10% and are forecast to see between 4-5% increase by the end of the year. Gatwick, Maidstone (Kings Hill), and Watford saw the second lowest increase in rents of 2%. Despite St Albans seeing rents increase by 6% to £25.00, it is not forecast to experience further rental growth in the year’s remainder. Bracknell is the only centre forecast to see a reduction in rents by -4% to £25.00 per sq ft (Q1 08: £26.00). Watford remains in twelfth place with prime rents having increased by 2% to £22.00 (Q1 07: £21.50) and forecast to end the year up 7% to £23.50 per sq ft.

Emma Goodford, head of national offices, Knight Frank commented on the leasing market: “The reality is that demand is more robust than sentiment suggests. We have seen and are forecasting continued rental growth and take-up, which remain strong combined with substantial pre-lets. We do not predict a collapse in the M25 occupational market. Given the lack of supply of new and Grade A stock, the best buildings in prime centres, will see rental growth, in particular Hammersmith and Reading which by the end of the year, will see an increase in prime rents in excess of 10%.

“The M25 region, particularly the Thames Valley, experienced its version of the credit crunch in 2001 when the internet bubble burst, and has since shown improving signs of recovery and diverse sector activity, which has mostly been fuelled by upgrading of accommodation rather than underlying growth. Occupationally, the banking and finance sectors have little occupational impact on the M25 leasing market.

“In the last 12 months, as predicted, we have seen a strong speculative development market, however, this may now be hampered by the lack of access to funds and project viability rather than lack of demand. Bracknell and Maidenhead will be most challenged in the next six months due to the potential oversupply of standing and pipeline stock.”


Table 1: Key M25 & Thames Valley centres prime office rents (ranked by forecast rents)

In the M25 office investment market, Knight Frank forecasts that prime yields will remain unchanged by the end of the year at 6.25%; secondary yields are predicted to move out towards 9.00%.

Jeremy Waters, partner, investment, Knight Frank said: “There is £800 million of stock which remains on the market unsold, and at Q1 08 end, transaction volumes were down 60% from the previous year. However, there is interest in asset management type stock, but buyers will only strike at the right price. The pricing mismatch continues.

“We will see overseas activity from German and Middle Eastern investors who last appeared in 2003/04 and have experience in buying south east offices because of the discount in prime yields. They will be attracted to secure quality core assets in well known traditional core markets. There continues to be a flight to quality in centres such as Windsor, Maidenhead, Staines, and Heathrow.

“There will be a slowdown in forced selling caused by redemptions, however, the great unknown will be the impact of the banking sector and whether they force investors to sell.”

Claire Higgins, partner, head of commercial research, Knight Frank said: “The actual statistics show that while we may no longer be living in such straightforward times, both economically and occupationally we are in a period that remains benign. There is a place for cautious optimism and we should not allow ourselves to be talked into a more serious downturn than is actually supported by the facts.

“On the investment side, UK bank lending on property not only rose in Q1 08 by nearly 5% but in actual monetary terms was the second highest quarterly level of new lending that has been seen in the last six years. More than £9.0 billion of real estate loans were provided in the quarter which was nearly double the average. This doesn’t mean this money is being spent in the UK, or indeed actively spent at all, but this does run contrary to the sentiment that there simply isn’t any money out there.

“In the M25 leasing market, last year was another healthy year for take-up. At just over 3.6 million sq ft, it was exactly in line with the market’s long term average and the second best year since the slump in the early part of this decade. Meanwhile total availability has continued to fall, dropping below 9 million sq ft in Q1 for the first time since the start of 2002. The market is not only healthy, but has been very steady for the last four years and has rebounded to positive sustainable levels.”

Knight Frank’s key M25 office market Q1 2008 highlights

For further information, please contact:
Emma Goodford, head of national offices, Knight Frank, +44 (0)20 7861 1144
Jeremy Waters, partner, investment, Knight Frank, +44 (0)20 7861 1228
Claire Higgins, partner, head of commercial research, +44 (0)20 7861 1246
Olivia Gallimore, commercial pr manager, Knight Frank, +44 (0)20 7861 1035

For a copy of Knight Frank’s M25 offices Q1 2008 report which covers the investment, development and occupier markets, please email: Maija Knox.



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