South Coast: Lack of new office builds worrying property sector

Last year proved to be another steady year for the South Coast’s office market with total take-up topping 152,000 sq ft for the second year in a row.  While the final quarter was a little quieter than normal the majority of enquiries are actively progressing their interest, according to CBRE.

Occupier preferences continue to be focused around edge-of-town locations, particularly those close to motorway junctions, with Eastleigh and Chandler's Ford benefitting from greater demand. 22,000 sq ft of space is currently under offer at NatWest House, and Dutton Gregory has recently exchanged on 6,640 sq ft at Concept House.

During the second half of 2016 take up was dominated by professional and business services. In particular, almost 40% accounting for over 50,000 sq ft of space let, was transacted to professional services firms including PwC, Smith & Williamson and Moore Blatch.

Commenting on the year as a whole, CBRE South Central managing director James Brounger said: “Despite the economic uncertainty during 2016, the Southampton office market performed well. Demand from both accountancy and law companies was particularly strong and this trend seems to be carrying through to 2017.”

City-centre supply

Ready-to-occupy supply continues to fall in Southampton city centre as space lets and poorer quality offices are acquired for alternative uses, such as residential. In total supply fell by 32% in 2016 on top of a 22% fall in 2015. There is now just 311,300 sq ft of space available, but by mid-2017 a further 65,000 sq ft will be released to the market at Skandia Point, The Quay and 1 Dorset Street. In addition, major refurbishment programmes taking place at Kings Park House and 2 Grosvenor Square are due to complete in the coming months giving occupiers a much greater choice for 2017.

A key issue for Southampton is the lack of development activity. City-centre regeneration in the past year has been focused on increasing leisure provision, with the opening of the WestQuay Watermark scheme just before Christmas. Across the whole of the South Coast the only office new-build is in Bournemouth which also suffers a severe lack of Grade A & B space.

Rents

Prime rental levels achieved reached £19.50 per sq ft and the continued lack of space is resulting in the growth of secondary rents, with a parallel reduction in incentives. Secondary rents have now reached £19.00 per sq ft at the White Building. Looking forward rental growth is likely to continue with £20 per sq ft is expected to be achieved in the first quarter of 2017 on Grade A space and buildings such as 2 Grosvenor Square and Skandia Point likely to be quoting £21.50 per sq ft once marketing commences.

Investment

There are still good value opportunities for office investors in the South Central region. While sourcing stock to meets buyers’ requirements can prove challenging, demand remains relatively unchanged, with no measurable impact from the EU referendum.

More than £140m of office stock traded during 2016 in the South Coast’s office markets, although the bulk of this activity took place during the first half of the year. The most recent deal took place in November, with Emerson Power’s Southampton Airport offices being sold, off-market, for £4.2m to local developer, Troika.

Overall investor demand continues to come from a wide mixture of buyers including institutional investors, property companies, local authorities, and high net-worth individuals. Local authorities, in particular, emerged as a dominant sector nationwide in 2016, able to borrow at exceptionally low rates.

Like other markets across the country, pricing in the South has remained relatively stable. Despite a lack of deals, prime yields currently lie at around 6.25% in the Southampton area, a level largely unchanged since the middle of 2016, but some 25 bps higher than the position at the start of the year.