Market snapshot

South Coast Office Market Pulse Q2 2016

Despite faltering take-up caused by Brexit uncertainty in the short term and an ongoing lack of supply, occupier enquiries are increasing, particularly among SMEs, rents are expected to hold their position and demand for prime and good quality secondary assets has remained steady in the investment market. We hope to see the current high level of enquiries start to translate into a healthier level of take-up by the end of the year.

Andy Hodgkinson, office agency director, explains: "It can be no coincidence that the period leading up to the EU Referendum vote saw limited market activity. The long-term impact of the UK voting to leave and whether this will slow economic growth in the region or act as a catalyst is difficult to forecast. The reality is it is likely to benefit some and not others. For example, weakened Sterling against both the dollar and the euro may have a positive effect on export businesses. However the financial services sector may be adversely affected. 

“What is clear is that enquiry levels have improved and this is likely to result in take-up recovering in the second half of the year. With the South Coast continuing to suffer from a limited supply of office space and, in particular, grade A offices, those occupiers who are expanding and looking to relocate to better quality space will have limited choice and lease terms will reflect this."

Jerry Vigus, capital markets director, adds: "The investment market is currently in a period of uncertainty following the result of the EU Referendum. Leading up to the vote, values remained fairly consistent but have since plateaud on prime offices and reduced in the secondary market. The most active sellers currently are retail funds. On the buying side, due to the drop in values, we are seeing more property companies coming back into the market looking to secures opportunities".

In this issue:

Enquiries high despite uncertainty

• 51 enquiries over 2,500 sq ft were received in Q2 2016, a 28% increase on the 40 received in Q1 and just one below the 52 seen in the same quarter last year
Increased activity was particularly evident for enquiries between 2,500 sq ft and 5,000 sq ft (>100% from Q1) and for enquires between 10,000 sq ft and 20,000 sq ft (>86% from Q1). 
Despite Brexit uncertainty, occupiers are still looking to move and early indications are that the Q3 enquiry level will remain high.

Take-up falters due to short-term uncertainty and long-term lack of supply

• Take-up in Q2 2016 fell to just 39,138 sq ft, well below the 10-year quarterly average of 107,000 sq ft

• This represents a fall of 58% from the Q1 take-up of 93,848 sq ft and a fall of 52% on the same quarter in 2015
Take-up transactions have been falling steadily over the past three years, albeit with the average transaction size increasing as business expansion has been very much on the agenda. However, with only 9 transactions above 2,500 sq ft being recorded for the first half of 2016 (5 in Q1 and 4 in Q2) this downward trend has taken a significant turn for the worse in 2016.
Take-up in Q2 was dominated by the sale of Flexus, a 25,500 sq ft detached office/research and development facility in Segensworth, which was bought by a local owner occupier to expand its business operations.
We anticipate that the second half of 2016 will improve owing to the increased level of enquiries and with heads of terms in solicitors hands on a number of deals in excess of 10,000 sq ft, however, it is almost certain that total take-up for 2016 will be lower than in recent years.

Supply increases slightly due to reduced take-up, but remains on its long-term downward trend

• South Coast supply stood at 1.288m sq ft at the end of Q2 2016, an increase of 7% from 1.202m sq ft in Q1

• However, this is still lower than the 1.374m sq ft available at the end of Q2 2015 and part of a long-term downward trend

The majority of available supply continues to be grade B space. Any grade A space coming into the market is in existing buildings that have been refurbished to meet demand for a better quality specification. 
Following a decade in which no new offices have been built on the South Coast, 5 Benham Campus at Southampton Science Park is the only building being developed in 2016, offering 23,720 sq ft split into small suites over three floors.
There is still appetite from developers to purchase office buildings for conversion to alternative uses including residential and student accommodation under permitted development rights. This has further reduced supply of grade C space.

Significant occupational transactions


Size (sq ft)
Flexus, 16 - 18 Barnes Wallis Road, Segensworth

Craigard Investments

Just Develop IT 

Sale to owner occupier

4th and 5th floors, Cumberland House, Southampton


Kingsbridge Estates

Smith & Williamson

10 year lease

Rents expected to hold up, despite a fall in take-up

With transaction numbers falling significantly, there may be a pause in any further growth in prime rents, although a lack of supply continues to drive this aspect of the office market.
Grade A 5 Benham Campus at Southampton Science Park is being marketed at £25.00 per sq ft and prime rents elsewhere are in the region of £20.00 per sq ft.

Investment market review

The South Coast saw limited stock coming to the market during the second quarter, prompting a number of off-market transactions in a similar fashion to Q1. 
When the UK voted to leave the EU, sterling fell to a 31 year low and the markets reacted. Secondary assets that have been brought forward will no doubt be subject to price adjustments, although prime and well-located properties let on long leases are likely to hold up. 
In terms of active buyers, local authorities continue to look nationwide for quality opportunities. Institutional investors will likely be net sellers for the remainder of the year.
Sales due to complete and new opportunities being brought to market include...
• Blocks A & B, One Portway, Port Solent, Portsmouth: The freehold of two self contained buildings totaling 62,379 sq ft and providing 328 car parking spaces. Block A is vacant and Block B is let to Ageas for a term certain of 5 years. Quoting £11,000,000.

• Hutwood Court, Chandlers Ford: The property, amounting to 53,425 sq ft is fully let to Utilita Energy with 5 years term certain. Quoting £11,300,000.

• 1650 Parkway, Solent Business Park: Under offer at slightly in excess of the quoting level of £3,150,000. The property, comprising 29,591 sq ft, is multi-let to 5 tenants with an AWULT of 2.5 years and a parking ratio of 1:185 sq ft.

• Forum, Solent Business Park: Under offer at a figure in excess of the £42,000,000 quoting level. The property comprises 5 HQ buildings developed between 2001 and 2007 with and AWULT of 5.60 years at a passing rent of £3,339,537 per annum.

Key investment deals

3-7 Town Quay, Southampton was acquired by RO Group from TIAA Henderson for circa £7.5m. The property, which amounts to 48,441 sq ft over three buildings, is multi-let, with 72% of the income secured against excellent covenants at a rent of £587,000 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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