A key theme of this year's report is a warning that a fall off in development comes at the same time as major transport infrastructure changes, regional consolidation, advances in technology and the region’s increasingly sophisticated skills base are all working together to alter the conventional market dynamics.
2018 has proven resilient so far LSH said across the Thames Valley but the agent reports that there is also “a pattern of profound structural change and this is arguably the most important long-term consideration for landlords and investors”.
2018 has continued on from the relatively steady performance of 2017, with take-up of 342,000 sq ft in total, LSH reports. That said, the number of deals in Q1 was down notably on the same quarter in 2017.
Nick Coote, Head of Thames Valley at LSH comments: “Our main call is that developers and investors need to get on with it in a number of markets as there is a supply shortage looming and tenants will have to consider alternative locations. The challenge is to ensure the capex incurred is focused on providing a product that will meet the changing occupier demand and not just conform with traditions.”
Grade A take-up has been the main focus of activity, making up almost 90% of activity. There has been above average take-up levels in the Reading, Slough, Staines and Uxbridge markets.
TMT has been the major driver of activity, accounting for one third of total take-up across the Thames Valley over the past year. Pharmaceuticals, Medical and Healthcare and Professional Services have been the next most active sectors over the last year, with 14% and 13% of total take-up respectively.
Overall supply in the Thames Valley fell once again in 2017, a sixth successive year-on-year reduction since 2011.
The report adds: “Total supply was approximately 7.2m sq ft in 2017, down from 9m sq ft in 2016 and far removed from the peak level of 11.5m sq ft in 2011. This is equivalent to four years supply based on the long-term average take-up rate for the Thames Valley.
“Meanwhile, the share of grade A space as a proportion of total supply has steadily increased. In the early part of the decade grade A supply was less than 30% of total supply. By 2017 this figure had increased to over 50%.”
LSH reports that the improved quality of supply has helped ensure the market is delivering space to meet the needs of occupiers but issues a warning that the reduction in office supply is creating shortage issues for a number of locations with Newbury, Oxford, Blackwater Valley, Bracknell and Staines all facing less than three years supply based upon LSH’s measurement of long-term take-up rates.
Alternatively LSH points out that this is not true of all locations with notably Slough and Uxbridge having potentially more than seven years supply. As a caveat LSH reports that these headline figures often “mask the nature of the supply position in these two centres, with Slough, for example, seeing investor confidence driving supply delivery based on expectations associated with the Elizabeth Line”.
LSH predicts that take-up in 2018 is likely to be “at least as strong as in 2017”.
But it warns that after a period of better quality deliveries in 2017 and 2018 this tapers off and writes: “The level of new good quality office development needs to be maintained if the economic success of the region is to be reinforced. The risk from having only a limited amount of new development, particularly in locations directly affected by the Elizabeth Line, is that new occupiers may be pushed out to other locations. In fact, the lack of pipeline is likely to lead to stronger rental growth in a number of locations, as it has over the last year.”
LSH said the markets of Reading and Oxford saw further upward movement in prime headline rents in the first quarter of 2018, with the latter recording growth of over 21% year-on-year. While rising from a lower base,
Slough has also recorded a 21% year-on-year uplift in its prime headline rent, with the soon to open Elizabeth Line clearly having an impact, LSH reports.
It expects Heathrow and Oxford to see relatively strong increases in prime headline rents. Bracknell, Reading, Slough, Staines and Uxbridge are also expecting to see increases in prime headline rents.
Charlie Lake, Capital Markets, said: “The South East is currently experiencing an exceptional breadth and depth of office demand from both domestic and international investors. We are seeing strong demand for income and relative to other sectors, South East offices look attractive with yield compression forecast to return in the short term.”
Ryan Dean, National Head of Office Agency, concludes: “This is the 2nd of 6 LSH patchwork reports for 2018 that cover the UK and Ireland office markets and the 10th year we have produced the Thames Valley Report. We are uniquely positioned to provide a regional view on the office market which is changing rapidly from a development, occupational and investment perspective.”
The LSH report provides an in depth analysis on this occasion of which types of companies are most prevalent in which market as well as of the likely impact of a range of transport and infrastructure programmes being pushed through.
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