Thames Valley & South East Office Market Report

Research - 19/06/2024

South-East office market surges as occupier confidence rebounds

Activity has increased significantly across the South East office market, reflecting improving occupier confidence to expand or relocate, according to research by Lambert Smith Hampton.

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Take-up has improved significantly in the South East region, reflecting improved economic conditions and fuelled by the arrival of high quality space into the market. Following two strong quarters of take-up in Q4 2023 and Q1 2024, Q2 is on course to deliver a third successive quarter of above trend take-up for the first time since 2017.

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The return of large deals has been key to the revival, although the market is also busier, reflecting improving occupier sentiment and a healthier depth to the demand profile. The number deals in Q4 2023 and Q1 2024 was approximately 25% above that seen over the first three quarters of 2023 and moved closely back into line with the long-term average.

While consolidations make up an important part of the demand profile, expansion has played a much larger role. Over half (56%) of deals in the past year have involved an expansion of existing space, while consolidatory moves accounted for only 28% of deals.

A strong showing from the Pharmaceuticals & Health sector was key to above-trend take-up in several markets over the year to Q1 2024. Guildford saw take-up surge 69% ahead of average, spurred by LGC Group’s 48,750 sq ft pre-let at The Priestley Building in Q2 2023, Maidenhead’s take-up was 62% above the trend, fuelled by Johnson and Johnson’s move for Tempo, while the renowned life-sciences cluster of Oxford saw take-up at 21% above average. However, Woking was the South East’s standout performer with take-up over the year at well over twice its trend level, underpinned by Surrey County Council’s 66,415 sq ft freehold acquisition at Victoria Gate in Q1.

The best performing markets over the past six months have been stimulated by an injection of prime space, driving strong rates of rental growth. 17 of the region’s 25 key markets saw prime headline rents tick-up to some degree over the year to Q1, equating to strong average growth of 6.9%. Maidenhead was the standout performer, recording substantial growth of 28% over the period, while Basingstoke and Guildford also saw growth in excess of 20%. More recently, during Q2, One Station Hill, Reading has achieved £56 per sq ft, equating to a colossal 40% increase in Reading’s rental benchmark.

While significant variation exists between markets, overall supply across the region has trended consistently upwards over the past five years. Total supply increased by 11% y-on-y to 18.3m sq ft, standing 44% above the low point of Q1 2019 and the highest since 2012. However, prime space, which is the most highly coveted by corporate occupiers, accounts for only 11% of total availability and equates to only 1.5% of stock.

At the end of Q1 2024, 2.6m sq ft of speculative development net of pre-lets was under construction across the region (including both new builds and comprehensive refurbishments), down only 19% from the start of 2023. However, reflecting a wave of capital targeting the life-sciences sector, Oxford and Cambridge account for almost half of the region-wide total. Development is expected to slow by the end of this year, as a raft of schemes complete and few additional schemes commence construction. Circa 550,000 sq ft of fresh speculative development starts are anticipated across the region over the remainder of 2024, albeit this is heavily skewed by a single scheme, Botanic Place in Cambridge (304,000 sq ft).

Investor activity in the region is showing signs of stabilising after a severe correction. Sentiment indicates that prime yields (reflecting 15-year, secure income) have plateaued at a 15-year high of circa 6.75% during 2024, a level that compares favourably with other property asset classes. However, better transaction evidence exists for grade A multi-let assets offering shorter income. Here, recent transactional evidence even hints at a degree of recovery in pricing levels from the back end of 2023, with yields currently in the range of 7.00% to 8.00%.

Following very subdued volume of only £264m in Q1, volume in Q2 is expected to rebound to circa £450m in Q2, of which some £250m of stock is earmarked for conversion to residential uses.

Ryan Dean, Head of Transaction Services at LSH, commented: “Despite ongoing caution from investors, the South East offices market is performing well, reflected in a tangible improvement in activity and strong rental growth for the very best space. Given the very limited pipeline of anticipated development starts, occupiers will need to move quickly to capture what remains of the prime space or risk missing out. Meanwhile, developers that can commit to plans early will benefit from strong latent demand for prime space in two years’ time.”

Charlie Lake, capital markets director at LSH, added: “The continued sell down by UK institutions, reducing their exposure to the South East offices, has unleashed considerable opportunity for active opportunity buyers. Pricing at the prime end of the market is starting to look extremely attractive relative to other sectors and, while secondary prices may have further to fall there are clear signs this period of pricing discovery is drawing to a conclusion. The recent increase in volumes will also provide a greater level of comparable evidence to inform valuations”.

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