Investment, Development & Occupational Markets M25 Offices Q1 2020 knightfrank.co.uk/research M25 OFFICES, Q1 2020 EXECUTIVE SUMMARY Covid 19 impedes occupier to 6.3% today. Between 2009 and 2010, and confidence in South East offices at activity in Q1 2.6m sq ft of space was delivered through the start of 2020. the pipeline which, coupled with some With political unrest seemingly behind tenant release space, fuelled a rise in UK Councils spending us and a solid Conservative majority vacancy to 10%. Today, completions continues in place, 2020 was meant to herald scheduled for 2020 and 2021 amount a period of relative calm meaning to 1.4m sq ft, of which just 1m sq ft is UK council spending continued in Q1, reassured firms would be able to enact speculative. This means that although with £47m committed across three both short and longer term occupational vacancy is expected to breach 7% in deals. Although this represented only strategies. However, the global spread 2021, because demand has slowed at 5% of turnover for the quarter, these of Covid-19 and containment measures the same time as supply, any market latest acquisitions meant that total imposed, has quickly reversed imbalance may not be as pronounced. spending between 2017 and 2020 by optimism, altered business focus and Inevitably, the supply side provides some local authorities rose to £2bn. The hindered transactional ability – albeit reassurance, but identifiable occupier subsector now represents 21% of in the closing stage of Q1. demand will be key for developers. investment volumes, meaning councils are the largest buyer group over this Subsequently, take-up in the first Financial terms largely period. Whilst there remains some quarter was low at 508,000 sq ft, 37% unaffected for now concern that this spending will be below the 10 year average and 26% less curbed in the mid-term, we believe than recorded during the same period Headline rents were unmoved or ease of access to cheap debt may mean in 2019. This is the lowest quarterly marginally up in some key centres, that local authorities are best placed to take-up since Q2 2011, a period which with rent free concessions also take advantage of opportunities that 1 2 3 coincided with fears of a double dip unchanged at 12-15 months for each will arise in the short term. recession in the UK and debt default 5 years committed. Expectations are Take-up in the SE was 37% The vacancy rate is low Headline rents were in the Eurozone. During the quarter, that Q2 could see this position shift Pricing to polarise? below the 10-year average indicating oversupply unaffected in Q1, but will 36 deals completed, 16 fewer when however, as pressure on landlords compared with the 10-year quarterly to aid cost reduction intensifies and Prime yields were unchanged at 5.00% and 26% less than at the post crisis is less likely. soften in the coming months. average. Notably, the number of deals lease flexibility is in greater demand. in Q1, although some outward yield same point in 2019. below 10,000 sq ft was 50% down, shift is anticipated over the next three reflective of smaller businesses Strong Q1 results mask months. Even so, previous market withdrawing requirements from the difficult investment downturns have resulted in a flight market or preferring shorter term, conditions ahead. to quality, both in terms of income flexible solutions. and property fundamentals. As a Investment volumes for the South East in result, we expect to see the best assets Oversupply less of a risk Q1 2020 totalled £997m, 55% ahead of the seeing the least outward movement. 4 5 post Covid 19 long term average and the strongest Q1 for Secondary or higher risk assets, where 15 years. Three business park transactions there is a need for refurbishment Q1 Investment volumes Prime yields were unchanged A comparison with the last economic exceeding £100m bolstered numbers, with and re-letting could see the largest shock, the Global Financial Crisis the largest being the sale of Building 7, correction, although the size of were 55% ahead of the long at 5.00% although sentiment (GFC), identifies a very different supply Chiswick Park for £312m. Interestingly, any shift maybe mitigated by the term average. weakened before the end picture currently in South East. In this sale attracted over £1.5bn of bids scale of interest from opportunistic 2008, vacancy in the South East was from a number of overseas investors, thus buyers, particularly for buyers in of the quarter. 7.9% at the onset of the crisis compared demonstrating the breadth of interest core markets. 2 KNIGHTFRANK.COM/RESEARCH 3 M25 OFFICES, Q1 2020 M25 OFFICES, Q1 2020 M25 take-up OCCUPIER MARKET Sq ft 500k 400k Emma Goodford 300k Leasing volumes in the South East fell well short of the 10-year quarterly .m The end of the quarter witnessed 200k sq ft under offer occupiers reconsidering planned average as Covid 19 forced firms to a defensive position. Business will now commitments as Covid-19 impacted. 100k take time to evaluate what the pandemic will mean and how this will Despite the disruption ahead, the 0 broad diversity of business located impact real estate strategies. Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 in the South East will be important, Source: Knight Frank Research as some sectors will be less affected or even continue to show growth. M25 supply Sq ft 8m 7m 6m 5m % 508k sq ft 4m below the Roddy Abram 10-year average in 3m Q1 2020 West London has performed strongly, 2m -29% 1m with connectivity and sense of place 0 key to this. The region now has a Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 mature co-working offer, one which Source: Knight Frank Research will assist business post Covid-19 who 40 Clarendon Road, Watford – part let PWC to are looking for flexible arrangements. Take-up and supply Key leasing transactions Q1 2020 Q1 2020 TAKE-UP TAKE-UP SUPPLY SUPPLY VACANCY ADDRESS SIZE SQ FT OCCUPIER RENT £ PER SQ FT (SQ FT) (VS Q4 2019) (SQ FT) (VS Q4 2019) RATE 11% 5.7% 8 Arlington Square West, Bracknell 42,480 Eli Lilly £29.00 M25 255,621 -39% 6.9m New and Grade A New and Grade A space: 78% space: 4.5% Brook House, Woking 38,645 Asahi £36.00 3% 6.5% 216, Cambridge Science Park, Cambridge 34,778 Amgen £34.00 M3 175,214 37% 2.5m New and Grade A New and Grade A space: 82% space: 5.3% (Spec – Serviced Metro Building (6th, 7th & 8th floors), Hammersmith 34,320 n/a Offices) – Mindspace 5% 8.9% M4 268,996 -37% 5.9m New and Grade A New and Grade A space: 81% space: 7.2% 40 Clarendon Ave (2nd, 3rd & 4th floors), Watford 28,448 PWC £36.50 Source: Knight Frank Research Source: Knight Frank Research KNIGHTFRANK.COM/RESEARCH 4 5 M25 OFFICES, Q1 2020 M25 OFFICES, Q1 2020 Cambridge P KEY 42.00 45.50 7% Q1 2019 Growth Q1 2020 (pa) M1 R A1 (M) St Albans Watford 34.00 Oxford 33.00 34.50 1% I 36.50 11% M11 35.00 21 22 20 36.00 3% 23 24 Brentwood 19 25 26 27 28.50 M40 18 29.00 0% M Maidenhead M25 Slough 17 Uxbridge Hammersmith 37.50 38.50 3% 37.50 35.00 58.00 28 37.00 -1% 35.00 0% 58.00 0% 29 E Reading 16 38.00 £ PER SQ FT 37.50 -1% 30 15 Chiswick 31 14 M4 Staines 55.00 1 13 55.00 0% 2 35.00 35.00 R Bracknell 0% Dartford 12 Heathrow/ Stockley Park 3 26.50 25.00 29.00 9% 11 M3 39.25 24.00 -4% E 38.50 -2% 4 10 9 M20 Basingstoke 5 8 6 7 25.00 Guildford N 26.00 4% Croydon 35.00 36.00 3% 34.50 36.50 6% West Malling Crawley/ M23 Gatwick 25.00 T 26.00 2% 27.00 28.00 4% Headline rent assumes a new building let on a 10-year lease. Headline rent assumes a transaction over 10,000 sq ft new office space. S Rents are stated per sq ft per annum NIA. Source: Knight Frank Research KNIGHTFRANK.COM/RESEARCH 6 7 M25 OFFICES, Q1 2020 M25 OFFICES, Q1 2020 Investment volumes Stock Transacted (£m) No. of deals 1,600 80 1,400 70 1,200 60 1,000 50 Simon Rickards 800 40 600 30 We are facing unprecedented times 400 20 and the stark slowdown in activity 200 10 since early March reflects this. Whilst the magnitude and depth 0 0 of Covid-19 remains unknown, we 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 believe that the South East office Source: Knight Frank Research market is well positioned to weather the storm relatively well. Prime net initial yield and finance Prime net yield (%), LHS Five-year SWAP (%), RHS 6 3.0 2.5 Chiswick Park 5 2.0 1.5 Tim Smither 4 1.0 With historically low vacancy rates, INVESTMENT MARKET 0.5 limited development, and assuming reasonable tenant demand, we believe Although the Q1 numbers are positive, Covid-19 has quickly presented 3 0 the market is well placed to bounce an immediate impediment to transactional activity. A ‘wait-and-see’ 2012 2013 2014 2015 2016 2017 2018 2019 2020 back in the coming months, and are Source: Knight Frank Research aware of significant amounts of equity approach will now dominate the market as investors take stock on looking to invest into the South East.