Market snapshot

South Coast Office Market Pulse Q1 2016

A healthy Q1 for the office market in the South Coast region saw enquiry levels bounce back after a quiet Q4 and take-up was maintained at the quarterly average, albeit dominated by the letting of Hutwood Court in Chandlers Ford.
Supply continues to fall though, and with a continued desire from developers to remove space from the market for conversion to residential use, we expect the supply available to fall to below 1m sq ft by the end of 2016.

Andy Hodgkinson, director of office agency for Lambert Smith Hampton’s South Coast team, comments: "The diminishing availability of office space, in particular Grade A space, along the South Coast is driving rents up, but it is worth noting that these are still only back to levels that were being achieved 25 years ago! 

"The region is in dire need of new offices to meet the changing demands of today’s occupier market and to deliver this, rents will have to rise further. There will be a recalibration in the market and prime rents for new build offices in the best locations will inevitably have to set a new benchmark for the region. 

"Given that the fall in available supply looks set to continue and demand is being maintained, the scenario where this becomes reality is getting closer, following a trend that is already evident in other regional office centres in the UK."

In this issue:

Enquiries bounce back

• Following a fall in Q4, the number of enquiries has recovered in Q1, increasing by 42%, and returning to what would be considered a normal level.
The most significant increase has been in the 5,000 – 10,000 sq ft range, which suffered in the final quarter of last year. This may signify a recovery in confidence for SME’s in the market and in their growth plans.

Take-up rebalances after 2015's high level

• Take-up in Q1 2016 was 93,848 sq ft, close to the 10 year quarterly average of 94,709 sq ft. This was dominated by the 53,872 sq ft letting of Hutwood Court in Chandlers Ford to Utilita Energy Ltd completed by LSH on behalf of TIAA Henderson Real Estate.

• The majority of take-up comprised new letting activity, although there has been a sale for owner occupation at Compass House in Portsmouth of 8,900 sq ft.
The take-up for Q1 suggests Q4 was a market re-balancer after high levels of take-up throughout 2015.
With a relatively small number of transactions in Q1 2016, the average deal size increased from 7,823 sq ft to 18,769 sq ft, owing to the large transaction at Hutwood Court. We expect the average deal size to return to more normal market levels in Q2, following the rise in enquiries of between 5,000 and 10,000 sq ft this quarter, although there are a number of significant enquiries above 10,000 sq ft also in the market which continues to suggest strong take-up again for 2016.
Generally, activity has spread along the South Coast in the first quarter with significant transactions taking place both at the eastern (Portsmouth) and western (Southampton) ends of the M27 corridor. 

Significant occupational transactions


Size (sq ft)

Hutwood Court, Chandlers Ford, Southampton

TIAA Henderson Real Estate
Utilita Energy
10 year lease
Mountbatten House, Grosvenor Square, Southampton
Prowting Family Trust
Prestige Cruises
10 year lease
Ground floor, Shore House, Portsmouth
Forelle Estates
10 year lease
Compass House, Portsmouth
Private Loadbalancer
Owner occupier  N/A
Mountbatten House, Grosvenor Square, Southampton
Prowting Family Trust
Rockfire Capital
10 year lease

Supply continues to fall

• Supply decreased by 8.6% from 1.316m sq ft in Q4 2015 to 1.202m sq ft in Q1 2016. 

• Based on current take-up levels, this reflects circa three years’ supply.
With the availability of supply falling further, options for occupiers are reducing along the South Coast and this could lead to a downward trend in enquiry volumes. However, we anticipate above average transaction sizes to continue in 2016. 
There is still appetite from developers to purchase office buildings for conversion to alternative uses, including residential, under permitted development. This is likely to further reduce supply and it is expected that less than 1,000,000 sq ft will be available by the end of 2016.

Rents on the rise across the region

Rents continue to rise across the region. Mountbatten House in Southampton, having been comprehensively refurbished, is now quoting £20.00 - setting a new prime rent for the city centre. Lakeside 1000, Portsmouth, continues to prove attractive to occupiers at the eastern end of the corridor and is now quoting between £19.00 and £21.50 on selected available space.  

Investment market overview

The first quarter of 2016 saw limited investment opportunities along the South Coast, a trend seen across the UK. This has been driven by economic uncertainty and the upcoming EU referendum. Consequently, this has prompted a number of off-market transactions, with vendors approaching select investors to consider assets. 

The majority of funds remain acquisitive, with a number of local authorities looking nationwide for core opportunities. 

Whilst there has been a softening in yields for secondary assets, prime yields have remained stable.
Sales due to complete and new opportunities being brought to market include...
• 3-7 Town Quay, Southampton – a prime waterfront scheme that is multi-let, with 72% of income secured against excellent covenants. Quoting £6,500,000. 
• Fusion, Solent Business Park – prime out of town office scheme that is multi-let.

Key investment deals

Linea House, Ancells Business Park, Fleet, was acquired by a Sussex based property company from Craigard Investments for £3.75m, reflecting a net initial yield of 7.62%. The property, which amounts to 22,062 sq ft, is multi-let to 4 tenants at a rent of £303,339 per annum.

New Barn, Petersfield, was acquired by East Hampshire District Council from Craigard Investments for £2.4m, reflecting a net initial yield of 7.68%. The property, amounting to 20,924 sq ft, is fully let to Moneybarn Plc, with 5.17 years term certain at a passing rent of £195,000 per annum.

• Brunel House, 21 Brunswick Place, was acquired by a private investor for £1.9m, reflecting a net initial yield of 8.50%. The property, amounting to 13,360 sq ft over 5 floors, was let to Irwin Mitchell LLP for a term of 5 years from December 2015 at a rent of £170,000 per annum.

• Frizzle House, Bournemouth, was acquired by Canada Life Assurance from Deerbrook Group for £23.15m, reflecting a net initial yield of 4.96%. The property, amounting to 113,983 sq ft, was let to Frizzell Financial Services Ltd, guaranteed by Liverpool Victoria with 25 years term certain at a passing rent of £1,213,675 per annum.

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023 8071 3075

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Andy Hodgkinson
Director - Office Advisory

023 8071 3075

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