Nick Coote, head of Thames Valley for Lambert Smith Hampton, explains: “A shock referendum fallout. The triggering of Article 50 to start our exit of the European Union. A change of leader. An election. A minority government. 12 months of uncertainty, surprises and upheavals at home, not to mention abroad.
“Within this context, the Thames Valley office market has remained remarkably resilient in both the occupational and investment markets. However, there are some fundamental changes to occupier demand that we must heed and react to.
“Never has it been more critical to analyse markets in forensic detail and accurately predict the future.”
Charlie Lake, Lambert Smith Hampton's capital markets director for South East offices, adds: "The relative stability of the Thames Valley as one of the premier centres outside of Central London has ensured it continues to attract a breadth of both national and global demand.
"This report identifies a number of significant opportunities and emerging trends, which if combined, afford an educated investor the opportunity to capture attractive returns in a market with fundamentally strong dynamics."
TAKE-UP BELOW PAR IN MOST THAMES VALLEY MARKETS
At 1,702m sq ft, 2016 take-up across the Thames Valley was 19% below 2015’s total and 13% below the 10-year average.
2014 and 2015 both included peak quarters of over 700,000 sq ft and 800,000 sq ft respectively, whereas 2016 saw four average or under-par quarters.
Oxford, Reading and Staines all out-performed their long-term averages in 2016, however, Oxford is the only market to have performed strongly in both 2016 and Q1 2017. Despite a poor year in 2016, Bracknell has had a very strong start to 2017, transacting over 40% of its annual average in just one quarter.
STEP-CHANGE REDUCTION IN LARGE REQUIREMENTS
A notable trend has been a step-change in the size of space sought since 2015. With an increase in occupiers looking for small and flexible space (up from 40% to 50% for 5,000 – 10,000 sq ft requirements) and a fall of 61% in the number of 30,000 sq ft plus enquiries, this is having a demonstrable impact on the market.
AVERAGE TRANSACTION SIZE IS FALLING
Looking at transactions, we can see that enquiry levels have been a good barometer for a real change in the market.
This is a trend that began well before the referendum uncertainty and is reflective of a desire for large organisations to consolidate, create shared work spaces and save costs, and a momentum in the growth of SMEs, particularly in the TMT and pharmaceutical sectors.
Average transaction sizes (over 5,000 sq ft) have fallen since early 2015 – we are now seeing a lack of peak quarters caused by major sporadic deals of over 100,000 sq ft. Instead, the average quarterly total has flattened and is moving consistently downwards. Looking at the rolling quarterly average transaction size, it has fallen steadily – by 25% from 16,900 sq ft in Q3 2015 to 12,700 sq ft in Q1 2017.
SUPPLY CONTINUES ITS LONG-TERM FALL
Total supply in the Thames Valley has fallen consistently from 2011 to stand at 8.8m sq ft at the end of Q1 2017 – 4.5 years’ supply.
Grade C space has been almost entirely taken out of the market, while the share of supply made up of grade B space has fallen from 57% in 2012 to 45% in 2017. These falls have been hastened by buildings leaving the market for conversion to residential, along with development increasing the amount of grade A space available.
STRONG RENTAL PERFORMANCE ACROSS THE REGION
Rents have either been static or increased in every market in the Thames Valley between 2016 and H1 2017.
Maidenhead and Oxford are not expecting any further increases in H2 2017, however prime rents in all other Thames Valley markets are expected to rise during this time.
Take-up is likely to remain under pressure during 2017 and 2018 due to on-going political and economic uncertainty on a macro-economic scale, alongside a lack of big lease events across the market and a desire from occupiers to consolidate and use space more efficiently.
However, there is a notable increase in demand from small and growing companies that can fill the void left by a fall in large requirements. Those buildings that are suitable for multi-let occupation and those landlords who are prepared to be flexible with lease terms to support company plans for growth will be able to outperform the rest of the market.
In the longer term, Crossrail should provide a boost to Thames Valley take-up. At present, Reading town centre has access to a working population of 2.4m within a one hour public transport commute. This will increase to over 6m when Crossrail is running, having a significant impact on the attractiveness of Reading, Maidenhead and Slough, particularly to occupiers. In effect, these towns will become sub-markets of London.
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