Our latest quarterly South East update alongside a year-end review, focussing on the performance of 10 key office markets in the south east of the UK throughout 2020, and predictions for 2021.

Occupier market

Overall Q4 2020 saw a much-needed uptick in take up, totalling 398,340 sq ft, up 23.5% on Q3 2020 and outperforming Q4 2019 by 10.2%. Q4 was the second strongest quarter of the year behind Q1. However, only Watford and Oxford outperformed their 2019 full year take up levels with Cambridge also proving resilient. The rest of the ten South East markets suffered the effects of the global pandemic, with total take up for the year down 49.5% on the 5-year annual average.

Key office occupational transactions in Q4 included Mathworks taking a 10-year straight lease on a 93,000 sq ft pre-let at Cambridge Science park; Native Antigen Company taking a 15-year lease at Oxford Technology Park totalling 45,000 sq ft; and CGI’s deal of 44,850 sq ft at 350 Brook Drive in Reading on a 9-year lease.

Investment market

While Q4 2020 represents the second most active quarter of 2020 in terms of volume, this is in part due to Cadillac Fairview’s acquisition of the Broadcast Centre in White City, which accounted for approximately 35% of the quarter’s volume. Overall, Q4 volumes were down on the five-year annual average by approximately 33% and 49% down on Q4 2019. Considering the market challenges, the annual volume for 2020 totalled a respectable £2.46bn, down 28% on the five-year annual average for the South East.

Despite the challenges of COVID-19, investment volumes have significantly increased in the latter half of the year, with a notable £1.18bn of new sales launched into the market since September. A number of UK institutions have sought to exit South East offices, accounting for approximately 77% of total Q4 new sales, as retail funds seek to raise cash and re-balance weighting. The absence of UK institutional buying requirements has created opportunity for property companies and overseas investors, the most prominent example being Corum’s £164.75m splurge on five South East offices.

Whilst pricing for prime stock held up, the market has become increasingly two-tiered with a growing disparity between valuations and investor appetite for non-core product. Core-plus opportunities requiring intensive asset management have continued to attract private equity capital but, in several instances, have failed to meet the desired vendor pricing aspirations. This trend has led to a significant proportion of the year’s investment stock remaining available on the market, with exceptions in core locations such as Oxford and Cambridge.

Piers Leigh, Principal, South East Offices at Avison Young, said:
“Oxford was the out-performer of 2020 setting a new headline rent and outperforming 2019’s take up. The Investment market in Q4 saw an unprecedented amount of stock coming to the market but not all led to transactions, as investors became more selective in their approach. Overall, 2020 was a year to forget for the office market with take up 50% below the 5-year average and investment volumes down 27.5%.”

2021 Forecast

2021 will continue to see a downward pressure on headline rents particularly in locations where supply is high, and incentives are likely to remain generous for any non-prime properties. However constrained markets with good levels of demand such as Oxford and Cambridge will continue to see prime rents rise and incentives remain low.

It is likely 2021 will see increased demand from occupiers for flex space as a key part of their portfolios, particularly in the sub 10,000 sq ft range with fully fitted flex space proving popular in the larger markets in the sub 3,000 sq ft range.

The materialisation of hub and spoke offices or occupiers leaving Central London in favour of the suburban markets may take longer to play out, as occupiers adjust to employees new working patterns. Many occupiers have spent recent years consolidating their portfolios, so adopting a hub and spoke approach would represent a complete reversal of this.

Piers added:
“With the vaccine program in the UK picking up pace going into 2021, light is at the end of the tunnel. The big question is when and how quickly people will return to the office.

The office still has a significant role to play and 2021 could see the start of a whole new chapter in the history of our workplaces. More flex, more creative fit outs, more collaboration and most importantly more purpose.”

Avison Young’s quarterly South East office update focuses on 10 key markets, made up of in town and out of town markets, covering the whole of the south east geographical area (Cambridge; Milton Keynes; Oxford; Basingstoke; Reading; Maidenhead; Slough; Crawley; Guildford, Woking & Weybridge; and Watford).

To read the full research update on South East offices, click here.