South East office deals hit record £1bn in Q1

By James Buckley - Wednesday, April 11, 2018 14:48

South East office transaction volumes for Q1 2018 were £1bn, a record high for Q1 transactions representing a 55% rise on recorded volumes for the same period in 2017 and 40% ahead of the five year average, according to Gerald Eve.

The year-on-year increase was largely attributable to the completion of two notable deals amounting to 34% of total transaction volumes. The first being Frasers Property’s acquisition of Farnborough Business Park (£174.6m) and secondly Spelthorne Council’s acquisition of 12 Hammersmith Grove (£170m).

A large proportion of sales that were launched towards the latter part of Q4 2017 completed during Q1 2018, which significantly boosted the transaction volume for the quarter. Other notable completions in January included First Property’s acquisition of Imperial Place, Borehamwood (£62.5m) and Addington Capital’s (JV with Europa Capital) acquisition of The Hounslow Centre, Hounslow (£21m) both of which were sold by Gerald Eve.

Guy Freeman, partner at Gerald Eve, said: “Although Q1 2018 transaction volumes were skewed by some larger deals, the number of transactions remained in line with the five year average, which saw 30 deals complete throughout the quarter.  In terms of new sales, Q1 saw a slow start to the year with only 18 new sales coming to the market.”

Local Authorities

Local authorities were the most active buyer group of South East offices during Q1 continuing on from a strong 2017. They acquired a total of £217m across four deals accounting for 21% of the total transaction volume. Three of the four deals transacted during Q1 were completed ‘in borough’ with only Spelthorne Council’s acquisition of 12 Hammersmith Grove (£170m) completed outside of the purchaser’s borough.

Guy Freeman added: “Following the proposed introduction of new regulations, we anticipate local authorities will become less competitive out of borough and begin to account for a smaller proportion of total transaction volumes going forwards as opportunities become scarcer.”

Overseas Investors

Overseas investors were the second largest purchaser of South East offices during Q1, accounting for 20% of total transactions, ahead of property companies and managed funds. Other than Fraser Property’s acquisition of Farnborough Business Park, notable transactions include Royal UK Properties acquisition of 1 Longwalk Road, Stockley Park for £30m.

Jason Nearchou, senior associate at Gerald Eve, said: “Overseas Investors remain active in the South East, with demand typically coming from the Far East and Middle East. They have typically targeted larger, defensive, income-led deals providing strong cash-on-cash returns over an extended hold period.”

Property Companies

Following a strong end to 2017 property companies had another solid quarter accounting for 16% of total acquisition volumes and would be considered the most active buyer in Q1 2018 in terms of number of acquisitions, having acquired seven offices. Property companies continue to look for core-plus/value-add opportunities in secondary or peripheral South East markets, where yields remain attractive at 6.50% - 7.50%, rental growth is evident and institutions tend to be more cautious.


During Q1 2018 institutions returned to acquiring South East offices after having been a net seller for the past 12 months. Institutions acquired £123m of South East offices, with key transactions including Mayfair Capital’s acquisition of the Centrica Building on Oxford Business Park (£35m) and M&G’s acquisition of 1-7 Stoke Road, Guildford (£14.7m).

Despite this, institutions continued to selectively dispose of assets launching £88m of sales during Q1 2018 including Aviva’s sale of Pinnacle House, Wimbledon ( £44.25m) and M&G’s sale of 401 King Street, Hammersmith (£14.35m).

Town Centre vs Out-of-Town

Average prime South East office yields currently stand at 5.25% and have remained stable over the course of the last 12 months following continued demand from institutions for core town centre offices. The yield arbitrage between town centre and out-of-town South East offices has continued to grow over the course of the last 6 months with the spread in yield profiles now at its widest point in the last 5 years (300 bps on average).  A key example of this trend is Wesleyan’s acquisition of Leander House, Solent Business Park which traded at a 162bps discount to asking (£7.36m / 9.62% NIY). 

Charles Boyes, senior associate at Gerald Eve, said: “Pricing for secondary out-of-town South East offices has averaged 8.00% - 9.00% with pricing having drifted out by 100 bps over the last 12 months. The attractive yield spread between out-of-town and town centre offices has led to property companies taking advantage of attractive high yielding opportunities, let off low rents in markets where supply levels are constrained due to a lack of development.  Returns are being driven in the main by rental growth. Examples of this trend have been seen in a number of peripheral markets including Luton, Crawley, Northampton and Stevenage.”


Ross Cuthbert, senior surveyor at Gerald Eve, said: “Given the low level of new sales launched during Q1 2018 we expect to see a fall in transaction volumes in Q2, however activity is likely to increase again in Q3 and Q4, with a number of investors preparing to launch sales later this year.”

Jason Nearchou added: “We expect to see institutions increase their exposure to South East offices throughout the year and expect market conditions to remain stable. Returns are likely to be driven by income and rental growth, which continues to be evidenced in the majority of South East office markets, as investors remain cautious on new build development and demand for permitted development opportunities continues to increase.”

Charles Boyes continued: “Pessimism has been replaced by optimism in many camps as to how the Brexit process may now unfold. This is especially so given the government’s recent progress with agreeing to a transition period and a perceived softening of the EU’s negotiating stance. We expect that this will translate into more large occupiers making leasing commitments as the year unfolds.”

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