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South: Thames Valley office market re-energised for 2015, says LSH report

16 January 2015
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The last quarter of 2014 saw a surge in activity in the Thames Valley office market, according to a report issued by national property consultancy Lambert Smith Hampton (LSH).

Following a steadying of the volatility of the office market in Q3 of 2014, Q4 built on this with significant growth in demand in both the occupier and investment markets. A shortage of supply, particularly high-end grade B space, has become apparent and we expect a resulting increase in competition and rental values in 2015.

Nick Coote, head of the Thames Valley for LSH, commented: “The surge in office take-up during Q3 and Q4 of 2014 has re-energised the Thames Valley occupational market. As a result, we enter 2015 with renewed confidence, forecasting a robust market with continued upward pressure on office rental values.”

Report in full

Enquiries
·         The Thames Valley enquiries total for 2014 was 459, an increase of 5% on 2013
·         Q4 2014 saw a record level of enquiries – 137, compared with 107 in Q4 2013.
This suggests a marked pick up in market activity at the end of 2014 after an unexpectedly slow start to the year.

Take up
·         Total office take up over 5,000 sq ft in the Thames Valley in 2014 was 1.73m sq ft
·         Compared with the total of 2.46m sq ft in 2013, this is a 30% drop
·         However, Q4 2014 accounted for 41% of all 2014 Thames Valley take up, suggesting the market rallied strongly.
This reduction in take up, combined with an increase in grade A space, has led to the grade A years’ supply measure increasing from 3.96 at the end of 2013 to 5.76 at the end of 2014.

Supply
·         Grade A supply now accounts for 40% of the total, compared with 27% in 2013
·         Grade B supply is diminishing – 2012 total = 6,368,000 sq ft, 2013 total = 5,474,000 sq ft and 2014 total = 4,740,000 sq ft.
This polarisation towards grade A space is largely due to speculative development activity on the supply side and take up of quality grade B space on the demand side. Occupiers have taken the available high-end grade B space out of the market, leaving only the lower-end grade B space available. This cannot be replaced unless businesses give up space, which is not happening at present.

Therefore, new occupiers are increasingly faced with a choice between poor-end grade B or new grade A space. Grade A facilities are being built, but occupiers will have to be prepared to pay higher rental values.

Investment
·         The value of investments sold in the Thames Valley during Q4 2014 totalled over £452.9 million, compared with £372.5m in Q4 2013.
·         Total investment for 2014 was in excess of £1.225 billion, compared with £1.16b in 2013.
·         In addition, there is a further £312.76m of investment transactions remaining in solicitors’ hands, which will add considerably to the level of transactions recorded.

The most significant change in the market is an increased appetite across the board. This has been chiefly witnessed by a reduction in the average transaction vale to £11.6m from circa £16m in the preceding two years. It is also demonstrated by the number of deals transacted in 2014 – 105, compared with 72 in 2013. This comes from demand for both short and long let opportunities at each end of the risk spectrum.

From a capital markets perspective, 2014 has witnessed a significant yield shift with prime yields in the Thames Valley hardening into 5.25% across a number of centres.
 
Key investment deals

One Reading Central, a 220,000 sq ft town centre multi let office building in Reading was sold by Aberdeen Asset Management to M&G Investments in November for £94.5m, equating to a net initial yield of 6.30% and a capital value per sq ft of £430.

In September, M&G Investments also purchased the R+ development site in Reading from Consi Investments, which has consent for seven floors, for £33m.

Midas House in Woking, a multi let office in the town centre with a WAULT of 3.4 years, was sold in December by DTZIM to Standard Life Investments for £19.05m, equating to a net initial yield of 6.45% and a capital value per sq ft of £339.

Chatsworth House in Maidenhead, a multi-let town centre office with a WAULT of 4.8 years, was sold in December by the receiver to Christ’s Hospital Foundation for £6.42m, representing a net initial yield of 6.25% and a capital value per sq ft of £366.

Aberdeen Asset Management acquired Walton Green, Walton upon Thames, from Capital Trust Group in October for £16.33m, reflecting a net initial yield of 5.35% and a capital value per sq ft of £5.27. The property is one mile out of the town centre and is let to Kia Motors UK for 13 years.

Thames Valley office forecast for 2015
·         Take up will increase
·         Rental values will move upward
·         There will be further polarisation of supply towards grade A
·         Investment yields will harden.


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