SOUTH EAST OFFICE INVESTMENT BULLETIN Q2 2020 geraldeve.com Q2 2020 BY NUMBERS South East Office Quarterly Investment Volumes Source: Gerald Eve £ million £231m total volume of south east offices transacted in Q2 2020 2,500 2,000 Fraser Property Potfolio 13 5.00% 1,500 deals completed south east offices throughout Q2 2020 prime yields (Q2 2020) £1,552m m hiswick Park C m m 1,000 m m £1254 £1,166 £1,146m £733m £1,117 Green Park £1,097 £988m m £1,037 £1,024m m m m £876m over £861m £873m £867m Croxley Park m £793 m 3 £367m £770m 500 £718 £713 £725 m Local Authorities m of south east offices were m £632 m £615m £600 £559m accounted for the under offer or exchanged m m m £909 m £476 £470m £452 £438 largest number of at the end of Q2 2020 £89m £220 £193 £328m £327m £231 £295 0 acquisitions in Q2 2020 across 22 deals Q1 2017 Q1 2013 Q1 2012 Q1 2019 Q1 2015 Q1 2016 Q1 2018 Q1 2014 Q3 2017 Q3 2013 Q2 2017 Q3 2012 Q2 2013 Q3 2019 Q3 2015 Q2 2012 Q4 2017 Q3 2016 Q2 2019 Q3 2018 Q2 2015 Q4 2013 Q3 2014 Q2 2016 Q2 2018 Q4 2012 Q2 2014 Q1 2020 Q4 2019 Q4 2015 Q4 2016 Q4 2018 Q4 2014 Q2 2020 Average quarterly transaction volume Q2 2020 key investment transactions Harwell Science 1 The Gate, Cowley 5 Campus, Oxford Business Park, Uxbridge Price £112.5m Price £9.87m (£298 psf) NIY 4.75% Luton NIY 8.00% Purchaser Brookfield Purchaser Monster Energy M1 A1(M) Stansted Vendor U&I M11 (Occupier) Oxford Hemel Hempstead Vendor BA Pension Fund 21 22 20 23 24 25 26 27 UNDER High Wycombe 19 Honeywell House, 18 M25 4 Building 3000, Hillswood OFFER 2 1 17 6 Arlington Square, Bracknell M40 Watford 28 Drive, Chertsey 16 29 Price £33m (£455 psf) Size 66,562 sq ft 5 30 15 Reading 3 31 NIY 5.30% M4 14 Price £21.68m (£325 psf) 1 13 Heathrow Purchaser Runnymede 2 NIY 7.50% 12 M2 Borough Council 2 3 Vendor Aviva Newbury 11 M20 4 Vendor L&G 10 7 9 6 5 8 7 6 UNDER M3 Guildford 145-155 King Street, 3 M23 Meadows Business 7 OFFER Hammersmith Gatwick Park, Camberley Price £18.6m (£650 psf) Size 155,244 sq ft NIY 4.60% Royal Tunbridge Wells Price £26.8m (£173 psf) Purchaser Hammersmith & NIY 6.50% Fulham Council (Occupier) Vendor Seven Capital Vendor Canada Life Brighton Jubilee House, Warley Hill 4 Business Park, Brentwood Price £17m (£412 psf) NIY 5.75% Purchaser Brentwood Borough Council Vendor EIDA Group 2 SOUTH EAST OFFICE BULLETIN SOUTH EAST OFFICE INVESTMENT MARKET REVIEW – Q2 2020 Outlook and Market Insight At the end of Q1 2020 the unabated spread of Covid-19 meant In Q1 2020 29 properties were brought to market, 7 of which are unprecedented action had to be taken on a global scale. currently under offer, whilst 2 have since completed. Q2 was in Lockdowns were enforced in over 100 countries by the end of stark contrast to this as only 7 properties were brought to market, March 2020 affecting billions of people and severely impacting highlighting the clear change in vendor confidence. Overall the the global economy. The global pandemic sent shockwaves total number of offices currently under offer in the south east across the entire real estate spectrum. Q2 2020 will indeed go market has reduced to approximately £367m across 22 deals. down in history as a quarter dominated by uncertainty and a government-enforced lockdown like never before seen. The most notable transaction to have exchanged in Q2 was Tristan / Alchemy buying Reading International for c£120m, As a result, the south east office investment market in Q2 was which is viewed as a big positive for the market. Despite the characterised by investor caution. Government restrictions and prevailing conditions, an investor being able to complete lockdown measures prevented physical inspections and resulted a business plan underwrite on an asset where there is in material uncertainty clauses being inserted into valuations, occupational risk illustrates buyer commitment to the sector. and in turn, most retail funds had to be gated. Stock markets Whilst there is a delayed completion and a NDA to hide any tumbled as everyone tried to second-guess just how big the discount, it highlights underlying investor confidence in the impact on the markets and consumer behaviour would be. occupational market, supported by historically low vacancy rates pre-Covid-19. Towards the end of Q1 there were circa £775m of transactions under offer and around 2/3rds of these went on hold with Rent collection statistics for the office market as evidenced transaction volumes for Q2 only totalling £231m across 13 deals, a in Remit Consulting’s survey demonstrated that offices were 77% decrease on Q1 2020 and a 62% decrease on Q2 2019. This is the strongest performing asset class by a wide margin (71%) the lowest quarterly volume that we have recorded as the south in terms of March rent collection when compared with the east office market has suffered from increased buyer caution and industrial (62%) and retail (47%) sectors. Despite this, investors a lack of forced vendors willing to accept price reductions. remain cautious on the longer-term impact of Covid-19 and rent collection at the June quarter day will be an important barometer of the health of UK plc, especially given the ongoing removal of landlords’ rights to enforce payment. UNDER OFFER UNDER OFFER Reading International Business Park, Reading RG2 6DH SOUTH EAST OFFICE BULLETIN 3 ACTIVITY BY INVESTOR TYPE (quarter on quarter) Local Authorities Institutions Property Companies Local authorities accounted for £68.6m Following a strong performance in Q4 2019, Property companies accounted for of the total quarterly transaction volume institutions remained quiet in Q1 2020, 1.4% of the total transaction volume in in Q2 2020 across 3 deals, equating to with this trend continuing into Q2 with no Q2 marking a significant 95% decrease 19.7% of total volume. These deals include purchases recorded. Instead, we have seen from Q1 2020, and a 98% fall from the Runnymede Borough Council’s purchase institutions act as net sellers in Q2 although volumes achieved in Q2 2019. Despite the of Honeywell House (£33m/5.30%) and with most retail funds remaining gated for figures showing a downturn for property Brentwood Borough Council’s purchase of most of the quarter, this has prevented company activity, we expect this to Jubilee House (£17m/5.75%). This marks a any forced activity, unlike what was increase over Q3 as property companies quarter-on-quarter decrease of 8.2%. It is experienced in the immediate aftermath view this period as a buying opportunity likely the latest government consultation of the Brexit vote. It is expected that this due to the potential to acquire on using the PWLB for commercial trend will continue throughout H2 of 2020. institutional quality assets at a discount. property investment will affect council Aviva are the dominant institutional vendor activity this year. However, with the need with seven properties either on the market to replace income not going away, we or under offer, including Eton House in expect alternative sources of funding to Richmond, which is receiving good interest, be utilised so local authority spending and, Building 3000, Hillswood Drive in could increase again later this year. Chertsey which is currently under offer. Overseas Investors Private Equity Occupiers Overseas investors accounted for 2.2% Private equity accounted for 48.6% Following no occupier-purchaser deals of the total transaction volume in Q2 of the total transaction volume in Q2 in Q1 2020, Q2 2020 saw occupiers 2020 through Cew Capital’s purchases 2020, with Brookfield’s acquisition of involved in 3 deals, which whilst a low of Regent House in Cheltenham U&I’s 50% stake in the Harwell Science figure, is the same number of occupier (£4m/5.60%), and Queen Square House Campus development the single largest deals recorded in all of 2019. This includes in Bath (£3.8m/5.00%), which Gerald transaction of Q2 2020. Although this Hammersmith and Fulham Council’s Eve advised on. Although this marks suggests a high level of activity, these acquisition of their head office at 145-155 a significant decrease on the activity statistics are distorted as it all comes from King Street in Hammersmith, and notably, seen in Q1 2020, overseas investors are this one major deal. In general, private Monster Energy also purchased their likely to continue to selectively take equity houses have significant dry powder head office at The Gate, Cowley Business advantage of the favourable exchange waiting to enter the market, but in order Park, Uxbridge at 8.00% NIY. rate as we move through 2020. to hit high double-digit returns vendor pricing aspirations will have to shift. 4 SOUTH EAST OFFICE BULLETIN Key deals, left to right: The Gate, Cowley Business Park, Uxbridge & Meadows Business Park, Camberley Outlook Prime yields remain at 5.00% but there is a lack of transactional activity to support this. Yields on secondary assets have softened as investors price in risk on tenant covenants and vacancy. However, yields for 10 year + income deals remain firm and continue to attract overseas and cash-on-cash focused interest. Much has been written since the outbreak of Covid-19 about the future of the office and what affect the working from home revolution will have on occupier markets going forward.