Thames Valley Office Market Pulse Q1 2017
Q1 has signalled a confusing start to 2017 for the Thames Valley office market, according to the Lambert Smith Hampton office market pulse. On the face of it, the market has rallied post referendum uncertainty, with take-up and enquiries returning to near five year average levels. Against a back-drop of diminishing supply, asking rents have remained on their upward trajectory.
However, looking beneath the surface shows what is possibly a worrying trend - the total number of enquiries is being bolstered by requirements for small units and we are seeing a distinct lack of requirements for over 10,000 sq ft. Whether this is a blip remains to be seen, but it is certain to have an effect on take-up throughout 2017.
In this issue:
Enquiry total rallies but large requirements remain suppressed
126 enquiries (over 5,000 sq ft) were received for Thames Valley offices in Q1 2017, an increase of 31% compared with the 96 received in the previous quarter.
Looking at the longer term trend, this is 9% above the five year Q1 average of 115 – a rebalancing following the low level seen in H2 2016, where referendum uncertainty caused a sharp drop of 58% compared with H2 2015.
Notably, however, although the total has rallied, this has been made up of smaller enquiries and requirements for units of over 30,000 sq ft are running well below the long term average (Q3 2016 -48%, Q4 2016 -53%, Q1 2017 -43%). Similarly, enquiries of between 10 and 20,000 sq ft have also fallen by a significant amount (Q3 2016 -28%, Q4 2016 -15% and Q1 2017 -20%).
Given that the enquiry level usually acts as a barometer for the market, logic dictates that we might see a similar moderation in total take-up over the coming quarters.
Take-up falters in many Thames Valley markets
Take-up in Q1 2017 was 425,352 sq ft, a fall of 3 % from the 439,331 sq ft transacted in the previous quarter and 18.6% below Q1 2016’s total of 522,770 sq ft.
It is also running well below the five-year average take-up of 482,169 sq ft and given the drop in large enquiries we are seeing, is likely to reach lower levels over the next year while the current market uncertainty readjusts itself.
The active sectors in Q1 2017 were professional (31%), technology, media and communications (25%) and pharmaceuticals (14%).
74% of all office take up in Q1 2017 was centred on just five of the 14 centres - Blackwater Valley, Bracknell, Maidenhead, Oxford and Reading.
Supply continues its long-term fall
Standing at 8.738m sq ft at the end of Q1 2017, supply has fallen by 2.34% since the previous quarter.
Compared with the same quarter in 2016, this represents a year-on-year fall of 4.91%.
The supply chain is heavily reliant on new development and we may see an accelerated fall as investors respond to an expected reduced letting velocity and volume that we can reasonably expect in the short to medium term. Although there may be a short term over supply in some locations, an under-supply will follow as new development is delayed in an over-reaction to an uncertain market.
Grade A supply is now 52% of the total, compared with 48% in Q1 2016. High end grade B supply continues to diminish as buildings are acquired by occupiers but not replaced in the supply chain.
Significant occupational transactions
|Size (sq ft)
||Rent (per sq ft)
|4 - 10 The Quadrant, Abingdon Business Park, Oxford
|Beaver House, Oxford
|Sybase Court, Maidenhead
|Thames Tower, Reading
||M&G Real Estate
|Marlow International, Marlow
|Ditton Park, Slough
Investment market review
The value of office investments transacted in the Thames Valley during Q1 2017 totalled £102.72m, an increase on the Q1 2016 level of £421m (if you exclude the £325m purchase of AEW’s onBath Road) and, as is customary, a large fall on the £300m transacted in Q4 2016.
The total comprised 14 deals, with an average lot size of £7.37m. The two largest deals of the quarter were purchased by local authorities (Reading and Woking) who remain active buyers in the Thames Valley and wider South East market.
There are currently 15 properties being actively marketed across the Thames Valley region, totalling over £195.5m and with £108.3m currently under offer, Q2 looks set to deliver an increased total on Q1, despite the continuing uncertainty surrounding the UK’s on-going negotiations to leave the EU.
However, significantly more stock is required before the year end to see transaction volumes match the level achieved in recent years. At present, it is likely this stock shortage will be plugged by investors seeking to crystalise returns in a market where pricing for core income remains very strong.
Key investment deals
Woking Borough Council has bought Orion Gate, a 51,000 sq ft multi-let office building in Woking for £21.7m, from Connolly, Crowther & Hofbauer. The building benefitted from an AWULT of approximately 6.5 years and the price paid equated to a net initial yield of 5.95%.
Reading Borough Council purchased Adelphi House from BMO for £11.442m, equating to a net initial yield of 6.08%. Adelphi House is situated on Friar Street in Reading and is single let to the Secretary of State (trading as Jobcentre) for a further seven years.
Hermes has sold 40 Caversham Road, a 21,000 sq ft part vacant office building on Friar Street in Reading to the Topland Group for £5m. Topland is retaining its existing use to provide serviced offices.
LFD Group has purchased Clarion House on Norreys Drive, Maidenhead for £7.3m, equating to a net initial yield of 7.33%. The building comprises 33,000 sq ft of multi-let offices and benefits from an AWULT of five years to expiry and 3.58 years to tenant breaks.
Out of the 14 office buildings transacted in Q1, there were five office buildings sold with short income or vacant possession to the value of approximately £32m to be converted to residential use through Permitted Development rights, highlighting the continued appetite from the house builders for vacant office stock in the Thames Valley.
Encouragingly, there were four vacant possession transactions with a combined value of approximately £20m which will be refurbished to retain their office use to capture the demand for quality grade A stock in the Thames Valley, which mirrors the activity in the occupational market as investors are comfortable taking speculative risk on small, more flexible buildings.
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