Market snapshot

Office Market Pulse South Coast Q3 2017

Take-up for the South Coast office market increased in Q3 2017 but remained below the quarterly average, which replicates the trend of all quarterly take-up figures for this year. Enquiry levels were less than 50% of the Q2 figures but were consistent with Q3 2016. 

Supply continued its downward trend this quarter, driven primarily by the conversion of office space to alternative use. With almost no new development in the pipeline, prime rents are continuing to rise. 


In this issue:

Enquiries fall across size ranges

Given that the summer 'recess' coincides with Q3, it is perhaps unsurprising that enquiry levels (30) fell during this period when compared to Q2 (64), yet were consistent with Q3 2016 (32). 

The fall was reasonably uniform across all size ranges when compared to the second quarter of the year. 

However, it was notable that there were no new enquiries over 20,000 sq ft in quarter three, which perhaps supports the premise that occupiers are increasingly embracing agile working and occupying space more efficiently. In turn, this is translating into a reduction in the “staff:space” ratio as employees take advantage of improved technology to adopt mobile working practices.



Take-up up nearly a fifth in third quarter

Take-up in Q3 2017 was 71,051 sq ft, an increase of 19% from the 59,570 sq ft transacted in the previous quarter but a 33% fall from Q3 2016’s total of 105,470 sq ft. The average take-up on a quarterly and annual basis over the past five years (2013 – 2017) equates to 94,107 sq ft and 376,429 sq ft respectively. 

With all three quarters in 2017 being below the quarterly average and total take-up to date this year being only 194,514 sq ft, 2017 will almost certainly result in take-up being significantly below average.

The two most active business sectors in Q3 2017 were construction and engineering (33%) and pharmaceutical, medical and healthcare (25%), the latter as a single transaction to Promega UK, which has purchased land at Southampton Science Park to build a new 18,000 sq ft UK headquarters. This will feature office space, labs and training facilities. 

The split between city centre and out of town take-up was fairly even, both in terms of transaction numbers and size, with six deals totalling 35,342 sq ft (50%) in the city centre and four deals totalling 35,709 sq ft (50%) occurring out of town.

Significant occupational transactions


Property 

Size (sq ft) 

Vendor/ Landlord

Tenant/ Purchaser

Rent

Term 
Plot 2, Benham Campus, Southampton Science Park 18,000 Southampton Science Park Promega UK 
N/A
LLH
Trafalgar House, Winchester 15,114 Gentian Skanska
£29.50 20
Tollbar House, Hedge End 8,256 Horatio Properties Jewson £18.50  10
Building S, Lakeside North Harbour, Portsmouth  6,770 Northwood UK  Virgin Media £14.00 10
White Building, Southampton 6,489 Linkhouse Investments  Foot Anstey £22.00 10

Source: Lambert Smith Hampton

Conversion of stock driving fall in supply

Supply of South Coast office space for Q3 totals 1,159,644 sq ft, which is 8.3% lower than the previous quarter and a 12% fall from Q3 2016. 
  

With technology and agile working encouraging a reduction in take-up volumes, the falling supply continues to be driven by conversion of secondary stock to alternative uses including residential, student and hotel accommodation. The PRS / Build to Rent sectors are growing on the South Coast as office conversions to student accommodation are slowing. 

Grade A supply for Q3 2017 is now 24.5% of the total, compared with 14.0% in Q3 2016. This increase has been driven primarily by refurbished “Grade A” space coming to the market in Southampton city centre along with the removal of secondary stock to alternative uses.

Prime rents continuing to rise

The only new build offices in the South Coast region are located at Southampton Science Park and Chilcomb Park in Winchester, which are both quoting £25 per sq ft. Rent for the best quality refurbishments of existing buildings (including new VRF systems) are achieving £20 per sq ft or more. The highest rent in Southampton's city centre is currently £22 per sq ft achieved at the White Building. 

For the out of town office market, 1000 Lakeside at North Harbour, Portsmouth is achieving £21.50 per sq ft.

Trafalgar House in Winchester city centre has recently set a new headline rent for the city achieving £29.50 per sq ft, subject to a comprehensive refurbishment.



City centre opportunities attracting investor interest

Local Authorities remain a key source of demand; however there is still, amongst all categories of investors, a cautious approach to out of town opportunities – despite the strength of a number of these locations i.e. Chandlers Ford and Eastleigh. Opportunities within the city centre, where there is a more notable demand and supply imbalance, still attract strong interest particularly amongst property companies where there are some clear asset management opportunities. The majority within this area have been bought with a view to upgrading and refurbishment, reflecting the improving confidence in the occupier market.

Following on from Q2, activity along the South Coast remained subdued over the Q3 period. One of the key highlights was the remarketing of Hutwood Court, a prime out of town office building let to energy firm Utilita, at a quoting level of £15,350,000 (6% NIY). The asset now offers over 10 years term certain with two indexed linked rent reviews. Furthermore, as previously highlighted, 1490, 1570, 1580 and 1590 Solent Business Park were brought to market over the course of Q2. However, the assets have since been withdrawn and are likely to be included in a portfolio sale which will include other assets within the park.

There are clear opportunities to buy good quality office assets in a market where the focus is on the ultra-competitive south coast industrial market, where prime yields now stand at sub 5%.

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Andy Hodgkinson

01489 663534

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Andy Hodgkinson
Director - Office Advisory

01489 663534

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