DTRE: South East offices firmly in vogue for investors

By Paul Norman - Wednesday, May 16, 2018 8:37

The South East office investment market has started the year well, with over £1bn of deals transacted in the first three months of the year, 26% ahead of the rolling five-year quarterly average and 132% up on the volume of deals (£436m) transacted by the same period last year.

According to research from DTRE investors "remained wedded to the region and for long-dated income and good-quality assets in core locations, there is still a large pool of investors willing to take the plunge, particularly overseas and local authorities".

Simon Glenn, Partner, said; “There are still opportunities in the ‘value-add’ arena and strong competition for such buildings in town centre locations. When these opportunities have arisen there has been firm pricing as investors try to capture the reversionary rental growth story. In other secondary locations, such as Business Parks, investors should tread more carefully as capturing the uplift in any reversionary rents on offer will be much tougher; the cost of a Cat A refurbishment on top will mean investors and developers having to tie themselves in for the long haul before they start to see positive returns.”

In contrast, prime buildings in prime towns will continue to see sustained rental growth and it would not be a surprise to see Reading or Maidenhead break the £40 per sq ft barrier over the next 12-18 months, DTRE predicts. It anticipates that these more ‘dry’ assets will continue to see a large pool of investor interest when they come to market.

This is reflected in the transactions completed so far this year. Larger lot sizes have traded particularly well, with six deals over £50m transacted in Q1, the third highest number of deals recorded over £50m in any one quarter since 2009.

Notable trades include Capital & Counties' sale of the 451,000 sq ft Empress State Building in Earls Court to The Mayor's Office for Policing and Crime for £250m (6.21% NIY). Other deals over £50m have included Spelthorne Borough Council’s purchase of 12 Hammersmith Grove (£170m/5.25% NIY), CLS's purchase of Harman House, Uxbridge (£50.25m/6.4% NIY) and First Property Groups purchase of Imperial Place, Borehamwood for £62.5m (6.39% NIY).

Robert Taylor, Associate Partner, said; “Perhaps the most encouraging aspect of the market, post-referendum, has been that overseas purchasers have not been dissuaded from investing in the South East, with 4 The Square at Stockley Park recently going under offer to an overseas investor. Moving throughout 2018, there is no doubt that Brexit will weigh on investors minds the closer it comes into sight. Pan-global and Pan-European investors may start to look elsewhere for security of income, but for the right product, in the right location, the South East office market will continue to attract investors and therefore we do not forsee a decline in values, albeit the best of the capital growth curve may be behind us for the time being.”

pnorman@costar.co.uk

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