M25 take-up was a relatively robust 522,152 sq ft in Q3, up 17% on Q2 and only 12% below the ten-year quarterly average.
While Q2 take-up was heavily skewed by Aker’s major pre-let at Chiswick Park, the M25 market was more active in Q3, with 35 transactions following just 20 in Q2.
M4 take-up was boosted by several large deals, including Huawei’s 139,239 sq ft lease at 300 South Oak Way, Green Park, Reading and IMG’s 107,459 sq ft lease at 5 Longwalk, Stockley Park, Heathrow.
Availability continues to edge down, reflecting a lack of speculative development since 2007 and the relatively limited release of quality secondhand space to the market.
In the M25, the vacancy rate fell from 8.1% to 7.9% during Q3, its fourth successive fall and its lowest level in over two years.
Meanwhile, strong activity in the M4 saw the vacancy rate fall sharply during Q3, from 10.7% to 9.6%, its lowest level in four years.
Occupiers’ preference for high quality accommodation was also clearly evident in Q3’s activity, with New and Second hand Grade A space accounting for 95% of M4 take-up.
Reflecting this, the amount of brand new space available in the M4 has fallen to its lowest level in four years.
Following a flurry of new-build development starts in the first half of 2012, construction activity stood unchanged in Q3, with no new development starts or completions in Q3.
However, M25 development may break the 1m sq ft mark during Q4, as Blackstone are expected to proceed with the speculative construction of Building 7 Chiswick Park, the last undeveloped plot, totalling 315,000 sq ft.
Emma Goodford, head of south east offices, commented;
“As forecast, transactional activity improved following a relatively subdued first half of the year, backed by a sizeable pipeline of requirements from a broad range of occupier sectors.
M25 take-up is now on track to reach our forecast of 2.1m sq ft for 2012, or c.15% below the 10-year annual average.
Although we anticipated a relatively resilient performance in the Thames Valley, activity here has surpassed our expectations.
Consequently, we have revised our take-up forecast for 2012 for the M4 corridor from 1.5m sq ft up to 1.65m sq ft, which is closely in line with the 10-year average.
Huawei’s recent expansion at Green Park demonstrates the South East’s on going attractiveness as a base for ambitious global companies, across a diverse range of sectors.
The technology sector has been bucking the global economic headwinds for the last 24 months, and both established and emerging companies continue to make long-term commitments to our market.
The tightening of New and Grade A supply is likely to put upward pressure on headline rents within the key Thames Valley and West London markets over the next three years.
Developers would be well-advised to position themselves for refurbishment opportunities with ample car parking in the most active locations”.
South East investment turnover was a robust £340m in Q3, 13% below Q2’s level but nonetheless 7% above the five-year quarterly average.
However, in contrast with previous quarters, Q3 turnover was not heavily skewed by one or two major transactions, suggesting increasing depth of demand is returning to the market.
Investor appetite for prime, long-income assets remains buoyant with particular interest being seen from overseas investors.
The £34.25m purchase of Market House in Maidenhead by Middle Eastern investor Gatehouse was arguably Q3’s headline deal, confirming pricing for prime, long income assets at c. 6.00%, a level unchanged for four successive quarters.
Blackstone’s decision to put Chiswick Park, West London on the market for c.£775m underlines the growing appetite for large, trophy lot sizes among overseas investors outside Central London.
The UK funds remain reasonably active, particularly for shorter income, high quality assets where there is potential to add value through active asset management.
However, they are highly selective, focusing on well-located buildings in tight markets with strong re-letting prospects. Yields for prime, five-year income softened by 25bps during Q3 to stand at 7.25%.
Q3 saw some indication of a revival of interest in good quality secondary assets.
With yields for this type of stock ranging between 10% and 14%, vendors’ aspirations are finally softening to a level which is proving attractive to those parties looking to invest in asset management plays, including UK Funds and overseas opportunity funds.
Tim Smither, partner in Knight Frank investment team, commented;
“Q3’s solid, if unspectacular level of turnover disguises the fact that our market has gained increasing depth over the last few months.
Alongside continuing strong demand for prime long-income assets, we are starting to see more investor appetite for good quality secondary assets, albeit in tight markets where there is scope for asset management.
This growing depth of demand bodes well for further improvement to transactional activity in the final quarter of 2012”.
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