South East: Knight Frank offers roundup of commercial office market and outlook to 2016

The South East office investment market has witnessed record levels of transactional activity during 2015, with volumes for the year currently standing at £3.3 billion, eclipsing the previous peak of £3.1b in 2006, says Knight Frank in its roundup of the South East commercial office market.

With a number of large deals currently under offer and expected to transact before the year end, volumes could be ahead of £3.5b, demonstrating the depth of demand for South East offices.

Prime rack rented yields stand at 5.00% NIY, stable for the past four quarters, with both UK funds and overseas investors keen to secure the very best income, let to strong covenants.

While the larger UK funds have slowed their rate of acquisition during the second half of the year, they have been replaced by significant inflows of overseas money, attracted by the strong underlying fundamentals of the wider South East market and the relatively high returns on offer in a low interest rate environment.

Large lot sizes are proving particularly attractive, with numerous larger sales going well, to include the Foster Wheeler building in Reading (ARC), Kings Hill (Harbert), NATS on Solent Business Park (Greenridge), the Bath Road portfolio in Slough (AEW) and Apollo & Lunar House in Croydon (Ho Bee), all of which have either sold or are under offer to overseas investors.

Analysts predict the South East will be the best-performing asset class in 2015, with returns of circa19% against an average of 15%. 2016 is expected to perform in a similar vein, with South East offices among the best performing, albeit this time less down to capital returns than income returns. Vacancy levels now stand at 5.4%, the lowest they’ve been since 2001, and look set to reduce further as occupier demand outstrips supply.

With such low vacancy levels and genuine steps forward in infrastructure throughout the region, rents are expected to keep moving forward, often well beyond the previous peaks in 1990 and 2000.

As a result, investors are increasingly looking at equivalent yields when buying and will pay sub 5.00% for the right asset, particularly in growth markets in the expectation of future rental growth. Markets such as Croydon and Reading, which are benefiting from significantly improved infrastructure are expected to continue to out-perform, as are the exceptional markets around Zones three to four, to include Hammersmith, Richmond and Wimbledon, where rents continue to move forward apace.

Tim Smither, partner, Knight Frank Capital Markets, commented: "2015 has been a bumper year, with a number of large assets transacting that have helped break all records for our market. Looking forward, there is plenty of money looking to invest into the South East, attracted by a buoyant occupational market, provable rental growth and increasingly-impressive infrastructure, and as such we expect next year to be very exciting, with the South East market set to out-perform once again."