October 11, 2023 8:00 AM
Rising interest rate expectations and a lack of readily available accretive debt made South East office investors cautious in Q3. With inflation data over and undershooting the Bank of England’s predictions, the spread of opinion on future interest rate movements was broad, with uncertainty peaking in early July when interest rates were anticipated to reach as high as 6.5% in early 2024. As such, it has been a quiet summer of transactions across the South East office market, with the total transaction volume in Q3 2023 £198m across 16 transactions. Whilst Q3 transaction volume represents a 50% decrease on Q2 2023 (£398m), the consensus is that we are at the peak of the current rate cycle, albeit for a sustained period, and the market is set to benefit from these more stable interest rate expectations.
Low investment volumes have been coupled with a slowed occupational market, with record low take-up in H1 across South East markets. Continued economic uncertainty deterred occupiers from committing to new space, and there remains a backlog of requirements from 2022 that are yet to be fulfilled.
There have been two key areas of liquidity this quarter, with the first being repositioning plays for office refurbishments, residential conversions and alternative use. One example is McAleer & Rushe’s £48m purchase of Liberty House in Kensington Olympia as part of a mixed-use regeneration. Repositioning is becoming the norm as an increasing number of offices become obsolete. For offices to function as alternative assets, though, entry prices will need to better reflect the risk and the end value of such uses.
The second notable trend has been increased activity from overseas income-focused buyers. Soor Capital’s recent purchase of 22 Market Street in Maidenhead (for £9.6m) and a private client of Citi Bank’s purchase of the Kia HQ in Walton-on-Thames (for £12.13m) are two recent examples. The increase in overseas buyers has also been replicated through regional markets as the pricing on income-led deals becomes more attractive.
Institutions continued to be the most active vendors, accounting for £181m (or 91%) of the overall transacted volume. Furthermore, they continue to introduce assets to the market, representing around £470m of the £760m added to the market in 2023. Currently, over £1.2bn of office stock is available in the market, and vendor aspirations for this product will need to change if market liquidity is to improve.
Guy Freeman, Partner at Gerald Eve, said: “We have yet to see private equity become an active investor in the sector as the headwinds facing the UK office market are evident on an even greater scale in America, where many are domiciled. However, there are expectations that we will see the return of private equity investors in the first half of next year.”
There is currently £416m of stock under offer, reflecting a 23% increase on Q2 2023 and suggesting an improvement in transactional activity in Q4.
Chloe Sweetland, Surveyor at Gerald Eve, anticipates,” We expect some of the larger occupational deals that have been on the boil throughout the South East, including Lonza, Wood Group and Black and Decker, to complete this quarter, as well as prime rents potentially surpassing £50 sq ft for the best of the best schemes. Such activity will hopefully act as a catalyst for investors to re-enter the office sector at a time when yields are running at a cycle high.”
About Gerald Eve, a Newmark company
Gerald Eve, a Newmark company, is an award-winning firm of property consultants based in the UK with 600 professionals working from nine offices. Gerald Eve, which counts many of the FTSE100 as clients, offers services including occupational and investment agency, planning and development, rating, building consultancy, rent review and lease renewal instructions, compulsory purchase and compensation, valuation and business rates. Gerald Eve, chartered surveyors and property consultants, advises 40% of the FTSE100 on all aspects of property including planning, asset management, agency and professional. The firm has 620 people, working from nine offices across the UK. www.geraldeve.com