News

KF delivers upbeat report on M25 office market prospects

News

Paul Norman

01 May 2007

Offices

South East

Prime office yields in the South East outside of central London are set to sharpen from 4.75% to 4.25% by the year end, driven by a lack of stock and strong rental growth in the key centres.

According to Knight Frank’s latest M25 South East office market report, prime office yields in the region will dip beneath those seen in the City of London, which will widen to 4.5% by the end of 2007, and will fall further beneath those achieved in “peaking” key regional centres such as Birmingham and Glasgow.

Peter MacColl, head of investment at Knight Frank, added that renewed expectation of rental growth was driving investors to target more peripheral office locations in the region such as St Albans and key M1 towns.

“There remains considerable interest in the traditional key locations, for example Hammersmith, Guildford and Maidenhead. Equally, the Thames Gateway continues to be undervalued,” he said.

In contrast, MacColl warned that key regional centres such as Leeds, Edinburgh, Glasgow and Birmingham had peaked for multilet buildings.

MacColl also warned that funds had lost their appetite for very secondary stock in poor locations and advised investors to prepare such assets for sale.

Take-up in the first quarter of 2007 of 837,037 sq ft was the highest first quarter total since 2001, bolstered in particular by O2’s prelet of 110,000 sq ft at SEGRO’s 264 Bath Road in Slough.

The take-up total of 4.1m sq ft for 2006 marked the highest annual level since 2000, up on the long-term average of 3.6m sq ft.

Emma Goodford, head of national offices, said the year ahead would continue to be lifted by the “return of the significant prelet”.

However, there are major concerns at the amount of poorer quality older stock being brought to market as long-term occupants use lease expiries and breaks to move into the new generation of buildings.

With take-up (76%) focused mainly on Grade A space, the vacancy rate increased marginally from 8.1% in the fourth quarter to 8.2% in the first quarter of 2007, but broadly remained constant over the last 12 months.

In response, development activity is increasing with five new speculative schemes commencing construction during the first quarter of 2007, the largest of which is 23 Kings Hill Avenue, West Malling, totalling 18,676 sq ft.

Jeremy Edge, head of planning at KF, said that development was being held up by the failure of councils to make progress on producing Local Development Frameworks.

He added that the lack of updated national guidance on employment strategy, uncertainty over when or if Planning Gain Supplement (PGS) would be introduced, and the complex nature of the proposed Planning White Paper, was contributing to inertia.

Prime office yields in the South East outside of central London are set to sharpen from 4.75% to 4.25% by the year end, driven by a lack of stock and strong rental growth in the key centres. According to Knight Frank’s latest M25 South East office market report, prime office yields in the region will dip beneath those seen in the City of London, which will widen to 4.5% by the end of 2007, and will fall further beneath those achieved in “peaking” key regional centres such as Birmingham and Glasgow. Peter MacColl, head of investment at Knight Frank, added that renewed expectation of rental growth was driving investors to target more peripheral office locations in the region such as St Albans and key M1 towns. “There remains considerable interest in the traditional key locations, for example Hammersmith, Guildford and Maidenhead. Equally, the Thames Gateway continues to be undervalued,” he said. In contrast, MacColl warned that key regional centres such as Leeds, Edinburgh, Glasgow and Birmingham had peaked for multilet buildings. MacColl also warned that funds had lost their appetite for very secondary stock in poor locations and advised investors to prepare such assets for sale. Take-up in the first quarter of 2007 of 837,037 sq ft was the highest first quarter total since 2001, bolstered in particular by O2’s prelet of 110,000 sq ft at SEGRO’s 264 Bath Road in Slough. The take-up total of 4.1m sq ft for 2006 marked the highest annual level since 2000, up on the long-term average of 3.6m sq ft. Emma Goodford, head of national offices, said the year ahead would continue to be lifted by the “return of the significant prelet”. However, there are major concerns at the amount of poorer quality older stock being brought to market as long-term occupants use lease expiries and breaks to move into the new generation of buildings. With take-up (76%) focused mainly on Grade A space, the vacancy rate increased marginally from 8.1% in the fourth quarter to 8.2% in the first quarter of 2007, but broadly remained constant over the last 12 months. In response, development activity is increasing with five new speculative schemes commencing construction during the first quarter of 2007, the largest of which is 23 Kings Hill Avenue, West Malling, totalling 18,676 sq ft. Jeremy Edge, head of planning at KF, said that development was being held up by the failure of councils to make progress on producing Local Development Frameworks. He added that the lack of updated national guidance on employment strategy, uncertainty over when or if Planning Gain Supplement (PGS) would be introduced, and the complex nature of the proposed Planning White Paper, was contributing to inertia.