South East office transactions at second highest level in five years

By Paul Norman - Tuesday, October 10, 2017 11:38

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South East office transaction volumes in the third quarter hit £1.69bn, the second highest quarterly transaction volume in the last five years, reports Gerald Eve in figures exclusively revealed by CoStar News.

Gerald Eve said Q3 2017 volumes are over triple Q2 2017 volumes and more than double the volume seen over the same period last year. Total transaction activity for the year stands at £2.68bn as at Q3, which is 21% ahead of the same period in 2016.

The increase in quarterly investment activity was led by the completion of two major business park portfolio deals, the first being TPG’s acquisition of the Arlington Portfolio, which included Hammersmith Embankment, Uxbridge Business Park, Oxford Business Park and 2 &3 Arlington Square, Bracknell.

This was followed by Frasers Property acquiring a portfolio including three major South East business Parks including: Watchmoor Park, Camberley (£42m); Chineham Park, Basingstoke (£142m); and Winnersh Triangle, Reading (£365m). In addition to this Frasers Property has conditionally agreed to acquire Maxis in Bracknell, however this deal is yet to complete.

Although Q3 was buoyed by two significant portfolio deals, if these are removed from the quarterly figures the quarter is still up on Q2 2017 by 51%, representing £791m.

The number of transactions across Q3 2017 was 41, representing a substantial increase on the previous quarter which saw 23 deals complete.

Gerald Eve said that Q3 is typically a subdued quarter but his year saw a number of high profile, and large deals transact off-market throughout the summer period.

It added: "Post-election and referendum tensions have faded and the South East occupational market is performing healthily below 20,000 sq ft."

Overseas Investors

Gerald Eve said overseas investors continue to increase their exposure to the South East office market.

"This is driven by the attractive yield arbitrage over South East industrial and retail markets, as well as the weaker pound. Overseas investors tend to focus on larger, single-let, lot sizes where leverage can have a positive impact on income distribution and were the most acquisitive investor type throughout Q3.

"Overseas investors accounted for 44% of all acquisitions throughout the quarter, with the Frasers Property boosting the figures. Other notable acquisitions by overseas investors include Blue Horizon’s acquisition of 10 Hammersmith Grove (£112m) and Darin Partners acquisition of The Rivers Office Park for £33.5m. Each quarter we are seeing a number of new entrants to the market that are attracted by UK commercial property fundamentals."

Private Equity

Private equity investors had a particularly strong quarter, accounting for 23% of total acquisition volume across Q3 2017. However, these figures are partly skewed due to the Arlington Portfolio acquisition mentioned above.

Gerald Eve explains: "Given the rise in demand from institutions and local authorities private equity interest for South East offices has been slightly muted. This is also partly due to the average deal size falling below the minimum lot size limit for the larger private equity funds. Notwithstanding this, some of the larger multi-let assets that have come to the market, such as the recent sale of The Blade in Reading (£42.3m), attracted bids from a number of private equity houses."

For the most part private equity has been selling South East offices over Q2 and Q3 2017, as business plans on offices acquired in portfolios over the last four years have been met and market conditions have improved. Private equity funds have launched over £240m to the market throughout the last two quarters, accounting for 10 sales and are the second largest seller of South East offices behind institutions.

Local Authorities

Local Authorities have returned to the market after a quiet Q2 2017 following the general election and accounted for over 14% of total acquisitions across Q3 2017. Councils have increased acquisitions ahead of the November budget, given the speculation that local authorities are likely to come under pressure for spending outside of borough, Gerald Eve writes.

Although a number of local authorises have a remit to spend outside of their local borough, the majority of council acquisitions seen throughout Q3 have been within their respective local constituencies.

Noteworthy council purchases include Woking Council’s acquisition of Dukes Court for £70m and Kingston Councils acquisition of Kings and Conquest House for £42.5m.

Gerald Eve writes: "It is worth noting that both of these deals transacted at prices in excess of valuation and the councils were seen as special purchasers as both assets occupy large, prominent town centre sites capable of long term redevelopment."

Institutions

Institutions accounted for 9% of total purchasers, behind overseas investors, private equity and local authorities. For the most part institutions targeted core, town centre offices. Notable transactions include BMO’s acquisition of Onslow Hall, Richmond (£6m) and Fidelity’s acquisition of Phoenix House, Reading (£20.5m).

Gerald Eve adds: "It should also be noted that high transactional costs have meant that many institutional funds have been static in terms of acquisition activity, where there is no pressure to spend.

"Although institutions have increased exposure to South East offices in the last six months, they are also the largest seller of South East offices. This has mainly been driven by Aviva who have sold £120.7m of South East offices so far in 2017 and have a further £57.6m either under offer or on the market. High profile institutional sales launched throughout Q3 include The Blade in Reading (£42.3m) from Aviva and 255 Hammersmith Grove (£57.4m) from Standard Life, both of which are currently under offer or exchanged."

Town Centre vs Out of Town

Average prime South East office yields are 5.25% and have remained stable since Q2 2017.

Gerald Eve adds: "The yield arbitrage between town centre and out of town South East offices remains attractive, with little or no inwards movement in yield for business park assets over the last 12 months, which has attracted property companies and yield driven overseas investors for business park assets."

Institutional investment demand has been focused on town centre offices as it remains risk adverse. Take-up across the South East is being led by corporates in the Technology, Media and Telecoms (TMT) sector, the majority of which have a preference towards town centre locations in order to attract young professionals. Q3 2017 saw a number of business park assets remain unsold including Farnborough Business Park (£175m) and Wavendon Business Park (£30m).

Outlook

There is over £600m of South East offices either under offer or exchanged, Gerald Eve reports, and says that should all of the transactions complete it would mean that transaction volumes for 2017 will be comfortably ahead of the £3.07bn transacted last year.

It adds: "Going forward into Q4 local authorities will be paying close attention to the November budget, which may restrict spending outside of borough. We anticipate demand will remain robust across all investor types with institutions and overseas investors leading the acquisition drive. We expect Q4 to be extremely busy with the highest number of quarterly deals completed throughout 2017."

pnorman@costar.co.uk

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