Knight Frank – M25 offices face tough times ahead

• Reflecting the increasing length of rent free by period by landlords, net effective rents decreased by -25% over the same period 

• There is variation between the key towns. Uxbridge experienced a fall of circa -35%, Maidenhead and Slough -30%. Conversely, Hammersmith, Reading and Watford have experiencing shallower declines of circa -10%

• However, according to Knight Frank, the severity with which net effective rents have already been affected means the M25 office market has experienced the brunt of the decrease in rental values 

• Consequently, the forecast for the decline in rents is to be more muted. Knight Frank predicts net effective rents across the M25 office market will only fall a further -9% on average by mid 2010. 

• Those towns which have the greatest supply are forecast to be those which will see the most transactional activity during the next 18 months, such as Heathrow, Hammersmith, Bracknell, Reading, Crawley and Maidenhead

• Knight Frank believes that the M25 market is more stable this cycle and has forecast less speculative development. Therefore, it is forecast that the vacancy rate will remain below 10% during this downturn, with recovery forecast for 2011/2

Emma Goodford, head of south east offices, commented: “I believe occupiers’ aggressive negotiating stance, in this downturn, will mean they are attracted to those towns, and buildings, which offer the most competitive rental and concessionary packages. Therefore, in my view, it will be the oversupplied towns which will see most deal activity because more competition will sharpen terms. The impact on net effective rents has and will be catastrophic this year – a net effective -25% fall from peak, but it will be more muted next year as we’ve reached the bottom fast and have already established a new benchmark low for rents. By this time next year we’ll be through the worst.” 

• The M25 investment market has seen an increase in activity, with 17 key deals completed since the start of 2009 with a volume of more than £155 million; in addition there are currently £110 million of deals under offer






• Similarly, it has also seen a notable increase in viewings, with the majority of interest coming from UK property companies, UK funds and UK private investors. Little interest has yet been received from overseas investors

• Investors remain largely defensive with fundamentals of long income, sound covenant and location remaining key. Consequently, with more active buyers in the market, yields for this kind of product have stabilised

Jeremy Waters, partner, investment, Knight Frank said: “There will be more investment activity in the M25 office market with buyers and sellers willing to commit. At the prime end, there will continue to be a strong requirement for income but in my view, the opportunity lies with multi-let prime. This type of product is now priced correctly and, although requiring more detailed analysis, will provide the most potential.”

Claire Higgins, head of commercial research, Knight Frank said: ”The worst of the pricing impact is behind us, particularly for more prime stock, and the investment market is slowly making its way towards recovery. However, occupationally we’ve really only just started – we are less than a year into this downturn. In the 90s, rental values took six years to recover. Although I’m more optimistic for this cycle, I do expect it to take another three years for rental values to recover on the IPD measure.”

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