South East: Office investment market surges 32% ahead of last year

The South East office investment market has seen an encouraging start to 2017, with £423 million of transactions across the first quarter - 32% ahead of the £321m transaction volumes seen during the same period last year, reports Gerald Eve.

Real-estate adviser Gerald Eve expects transaction activity to increase considerably in the second quarter, as there are over £426m of South East offices under offer or exchanged.

The agent reports that the start of 2017 has been characterised by a lack of stock on the market and frustration from investors with active requirements.

"The major difference between Q1 2016 and Q1 2017 is the number of deals completed, with 22 transactions in Q1 2017 compared with 31 transactions in Q1 2016. This meant that the average lot size transacted in Q1 2017 was £19.3m, 86% larger than the same period last year (£10.4m)."

The slowdown in deal flow at the start of 2017 has been largely due to caution, as "investors pause for breath to assess market conditions before deciding whether to buy or sell".

Gerald Eve said the triggering of Article 50 caused little to no impact on investor sentiment. Subsequently investor demand had started to pick up, with the return of institutions to the market including BMO, Threadneedle and CCLA.

Although the institutions were net sellers of South East offices during Q1 2017 they were still the largest purchaser in terms of acquisitions, representing 33% of transaction volumes. Institutions committed to fewer acquisitions but focused on larger lot sizes, an example being L&G’s acquisition of Legal & General House, Kingswood for £65m.

One of the most active purchasers by number of transactions during Q1 2017 were local authorities, accounting for 22% of acquisitions. Local authority interest in South East offices continues to gain momentum with a number of councils acquiring outside of their local jurisdictions including Runnymede, Sutton, Southampton and Bromley. Councils continue to outbid investors for core income producing assets, Gerald Eve said, as they remain under pressure to spend to help finance their local services following government funding cuts.

The largest transaction during Q1 2017 was Runnymede council’s acquisition of Chiswick Green for £63.85m. Gerald Eve said it is worth noting that "pricing levels being set by the councils is tempting more vendors into the market".

Property companies continued to acquire assets selectively in the early part of the year, Gerald Eve writes.

It added: "Property companies are still able to take advantage of larger core-plus/value-add lot sizes at attractive prices while institutional funds and local authorities tend to focus on core assets. Notable property company transactions include CLS’s £30.5m acquisition of the Jamaica Portfolio, comprising six offices, five of which were located in the South East, as well as Topland’s acquisition of Reading Bridge House for £36m."

Source: CoStar