South East: Office market resilient but availability deteriorating

Occupier activity across the South East office market in Q1 was in line with the long-term trend, with 53 transactions completing compared with the 10-year average of 50 per quarter.

With 43 of the 53 deals below 20,000 sq ft however, office take-up fell 13% below the 10-year average at 692,143 sq ft.

Accounting for 63% of the total take up in Q1, the M4 market remained the key focus of occupier activity, with take-up reaching 439,557 sq ft. In fact, Reading recorded 11 deals in Q1 totalling 138,800 sq ft, which although less than recorded in Q4 2018, is 44% above the 10-year average.

In addition, supported by two of the quarter’s largest deals, take-up in the M3 market reached 221,444 sq ft, 27% above the 10-year quarterly average.

Availability remained a restraining factor to occupier activity. At the end of Q1, vacancy in all markets (M25, M3, and M4) finished around one fifth below their respective 10-year averages. The development pipeline offers little respite, with just 849,000 sq ft of speculative space set for delivery over the next 24 months.

Emma Goodford, head of national offices at Knight Frank, commented: “For the majority of Q1, the data suggested a reduction year-on-year of up to 40% in occupier take up. Late March however recorded additional take up demonstrating that, despite Brexit, occupiers continue to focus on their key requirement of creating a workplace to attract and retain people. Interestingly, 80% of the quarter’s deals were sub 20,000 sq ft meaning larger corporates continue to show that they will play a waiting game if they can. The quarter closed just short of the 10-year average, with new or grade A space accounting for 90% of take-up.

“The western section of the region continues to dominate, with West London and key towns along the M4 seeing the highest levels of activity. With development well below the 10-year average, an impending supply crunch is likely in some markets within the next 18 months.”

Investment volumes in Q1 2019 reached £428 million, 38% below last year's, however similar to the 10-year average of £426m. Interestingly, 75% of purchasers were made up of funds and councils, highlighting the dominance of the domestic market. Whilst the volumes are down on Q1 2018, the number of deals has increased from 22 to 24, meaning the average deal size has reduced considerably to £17.80m. 72% of deals were below £20m, with only one over £50m.

Simon Rickards, partner at Knight Frank, commented: “2019 has started relatively slowly from an investment perspective, although total volumes of £428m are broadly in line with the Q1 10-year average. Volumes are almost exclusively being held back by the uncertain political sphere, with neither buyers nor sellers under particular pressure.

“What is clear, however, is that once some political clarity returns, we expect to see a re-emergence of the overseas buyers who have been quiet to date in 2019. In addition, we anticipate increased appetite from UK investors, attracted by low vacancy levels in the M25, ever improving infrastructure and attractive returns relative to other sectors.”