Cambridge and Oxford drove a rise in South East office take-up in Q2, but the region as a whole struggled and saw take-up drop 51% below the 10-year quarterly average.
Occupier take-up across the South East finished just above 671,000 sq ft across 72 occupier transactions, marking a 33% increase compared with the previous quarter, according to Knight Frank. Cambridge and Oxford accounted for 44% of space let and a third of deals completed during the quarter.
The next six months may show a slightly more positive picture. Roddy Abram, head of national offices at Knight Frank, said there was a strengthening level of pent-up occupier demand at the end of Q2, with more than 1m sq ft under offer for the first time since 2018. A further 5m sq ft of active named demand was present in the market at quarter end, the highest level since January 2022.
Lease events continue to dictate market interest across the broader market, but key markets for life sciences such as west London, Cambridge and Oxford continue to benefit from an expansion of the sector.
For investors, the continued rise of borrowing costs and the gap between buyer and seller expectations proved a hurdle to deals completing. Transactions totalled £354m, down 35% on Q1 volumes. UK funds remain the biggest seller of South East offices in 2023, accounting for more than 66% of sales as they continued to exit non-core assets and capitalise on demand from value-added and core-plus buyers.
Pricing remains under pressure in response to rising swap rates and the erosion of the gap between UK gilts and office yields, Knight Frank said. Prime office yields stood at 6.5% in Q2, but there has been little transactional evidence to confirm pricing at this level. Shorter income and prime multi-let stock yields are also loosening, with pricing for secondary assets drifting to yields of more than 10% in Q2.
Simon Rickards, head of national offices capital markets at Knight Frank, said: “There remains significant interest from investors for income deals and prime assets in the right locations, whereas secondary assets in weaker markets are proving increasingly challenging. We don’t expect this to change for the foreseeable future, with leveraged vendors under increasing pressure from their lenders.”
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