_South-East Offices set for 2020 bounce

2019 was a year of unprecedented macro headwinds, but in a challenging climate what were the trends driving the South East office market? And what could greater political certainty following the general election result mean in 2020?  

Now that a decisive general election result is known, focus has returned to the M25 and South East region’s commercial property opportunities given steady job growth, infrastructure investment and dynamo sectors, which are all driving demand. Investors and occupiers both realise that these attractive fundamentals won’t change regardless of what happens with Brexit, as all signs point to continued rental growth and supply levels facing a crunch. 

Although 2019 ended on an overall subdued note, and reluctance from vendors to exit due of lack of opportunities to recycle their capital will remain a challenge, we expect a more buoyant year in terms of deal volume and sentiment. Currently, office leasing data mirrors levels seen following the global financial crisis in 2009. However, even if market cycles have become increasingly difficult to predict, we can have confidence in the fact that occupier take-up trends aren’t having the negative reaction as in 2009 and that the election result has also provided more stability in addition to a positive incentive for the market. 

Our current forecast shows a total expected return of close to 6% from South-East offices in 2020, which reflects well compared to other asset classes in the UK as well as European cities. As investors anticipate further rental growth, particularly at the prime end of the market, a significant amount of capital will compete for income-generating assets in this region.

Occupier activity hasn’t exactly been subdued in recent quarters. For instance, in Q3 our level of space “under offer” was 43% higher than the ten-year average, suggesting that occupiers were reserving their space but waiting for further clarity before completing the acquisition. Hence, although end of year take-up figures did not paint an overly positive picture, this isn’t reflective of the South-East market’s overall quality and resilience. 

In terms of other factors that will drive activity in this region, we know that 2021 will see the highest level of lease events for five years; which will release tenants to sign up for either new or expanded spaces.

This will happen at a time when vacancy rates are at a virtual all time low in some markets, limiting choice. So, there is good reason to expect higher levels of pre-commitment with pre-lets and lettings ahead of project completions and increased interest for best-in-class spaces. 

The robust outlook for the South East is also supported by its youthful demographics, which are favourable for businesses in the region.

This, together with the proximity to London at significantly lower occupational costs, makes many centres in the South East a credible alternative. This is in addition to the planned opening of the Elizabeth Line in 2021, several towns such as Reading, Croydon, Maidenhead and Slough enhancing their placemaking profile as well as various business parks reinventing themselves to provide services and amenities for their younger workforce.

The Crossrail route will remain a significant draw factor, with activity in Reading and Maidenhead expected to be the busiest amongst the region’s commercial hotspots.

The South East has many favourable factors to suggest a robust performance in 2020 as these underlying fundamentals will continue to attract interest from both investors and occupiers.

Rent Forecast Top towns (5 years to 2024)

£ per sq ft       2019   2024    Growth %

Hammersmith   58.00   66.50   14%

Croydon           35.50   40.50   14%

Richmond         49.50   56.25   13%

St Albans          34.00   38.25   12%

Staines             35.00   39.25   12%

Watford            35.00   39.00   11%

Source: Knight Frank, Realfor/Experian

Projected take-up in 2020

 SE – 3.2m sq ft (-2% below the 10 yr trend)

 M25 – 1.9m sq ft (-14% below the 10yr trend)

 M4 – 1.6m sq ft (-5% below the 10yr trend)

 M3 – 0.7m sq ft (on par with the 10yr trend)

Projected vacancy by end of 2020

 M25 – 5.3% (150bp below 10-yr trend)

 M4 – 7.6% (170bp below 10-yr trend)

 M3 – 6.0% (130 bp below 10-yr trend)