South East: Office development dries up but Oxford likely to remain a draw

New development in the M25 and South East offices market has all but stopped. In the past six months only three office schemes have begun – one a ground-up development and two substantial refurbishments – according to Knight Frank’s latest research The M25 Report.

In the past 15 years there has been 17 million sq ft of space either newly constructed or substantially refurbished (ie grade A quality) in the market. In 18 key markets in the M25 and South East 82% of stock on average is more than 15 years old.  

Five towns - Heathrow, Woking, Watford, Croydon, Uxbridge and Farnborough - have more than 90% of stock which is pre-2003.

Emma Goodford, head of national offices, Knight Frank, commented: “The quality of the workplace is affected by age - and with stock in the M25 centres now showing signs of obsolescence caused by age, there is a case for selective new development. We have seen the recent completion of the speculative development wave, which started in 2016. From mid-2018 supply will peak and then reduce.

“Age in itself isn’t enough of a factor to instigate a decision to develop, other factors such as vacancy rates and a forecast of sustained rental growth must also be considered. However, today’s occupiers are not attracted to old space and new development is needed to ensure that the market does not stagnate and continues to attract new tenants.”

The five hot locations in the M25 and South East office markets to watch:

Watford’s available Grade A supply equates to approximately one year’s worth of average take-up, at a time when occupiers are seeking high quality real estate. With significant regeneration underway within the town centre and being only 16 minutes from London, the Watford market has strengthened its appeal to the occupier while presenting a positive rental growth story to the investor.

Croydon has the lowest vacancy rate in the M25, sub 1% and 90% of its stock is more than 15 years old. With London out-migration, fast transport links to Heathrow and the capital, a hugely improved cultural scene and streetscape, a growing tech sector and 30% rental growth in the last five years.

The development pipeline of offices in Brighton is naturally constrained by the sea to the south and the South Downs to the north. This concentrates an already tight office supply dynamic in a town where too few sites can be identified. A cool culture, dynamic workforce, big business and entrepreneurial start-ups, creates perfect conditions for rental growth. Prime headline rents currently sit at around £31.00 per sq ft, and new quality stock coming to the market will support further rental growth.

Oxford and Cambridge are both global hubs of innovation in the life sciences and technology sectors and have suffered new development issues due to their constraining historic city centres. However, this trend is starting to reverse with redevelopment of the area around the main railway station (Cambridge) drawing large occupiers such as Microsoft and Amazon.

Ongoing investment in infrastructure, has resulted in greater connectivity into London from the science and business parks. The global draw of Cambridge and Oxford, their position as two of the UK’s fastest growing cities, coupled with the current supply and demand imbalance, will push headline rents to record levels in 2018. Proposals announced for the Cambridge-Milton Keynes-Oxford corridor road link would further reinforce the strength of the two cities.