thames valley: global leader
What has all this positive momentum meant for rents in the region? Rental growth turned positive in the Thames Valley around five years ago, after several years of decline post-crisis. Rental growth has ticked along at about 5.5% per year since 2013, peaking at 7.9% in 2016 but remaining healthy at around 3.4% over the past year. The Thames Valley is currently outperforming the aggregate growth of the Big Six regional cities as well as London, with office rents in the capital currently in decline.
Oxford has been the strongest performer of late, with rents up by 6% over the past year. The likes of Reading, Wokingham, Slough and Bracknell Forest have also posted growth above the Thames Valley average. Restricted supply and rising demand have supported rental growth over this period, with many landlords choosing to refurbish buildings in order to capitalise on growing demand for better quality space. Rents in newly delivered or refurbished buildings command rents around £12/sq ft higher than poorer-quality, Grade B assets.
What about investment? Such positivity in the occupier market has attracted growing investor interest. Sales picked up sharply last year to total £1.5 billion, the third highest annual volume this cycle and an increase of around 50% year-over-year from 2017. Trading has cooled so far this year, with the £160 million spent in Q1 2019 representing a drop of around 35% on the region’s 10- year quarterly average (see Exhibit 3). But this was due more to wider political uncertainty than to any local factors, and reflects the national picture.
Investment has been driven by a range of buyers over recent years, but one particular buyer type has stood out: local authorities. South East local authorities have been among the most acquisitive since the Public Works Loan Board made it easier for councils to borrow at low rates and invest in income-producing assets in 2016. And the trend shows little sign of slowing down. Over the 12 months to May 2019, five of the top 10 investors in the region were local authorities, with investments totalling just shy of £500m. The most acquisitive were two councils from Surrey, Spelthorne and Runnymede, who have spent £950m and £300m, respectively, in the past three years. The former significantly bolstered these volumes with the standout deal from the past year or so: its acquisition of the Landid/Brockland portfolio. The portfolio consisted of
THE BUSINESS MAGAZINE – JULY/AUGUST 2019
three prime assets, Thames Tower (Reading), The Porter Building (Slough) and The Charter Building (Uxbridge), and sold for £285m in August 2018, representing a net initial yield of 6.14%.
Crossrail locations have been a key target for investors. CoStar’s latest data shows that investment in a three- mile diameter corridor along its route has seen investment volumes top
£700m in the 12 months to May (see Exhibit 4). This is more than double the historical average for the route, which has historically seen around £310m in a rolling 12-month period. Buildings along the route will likely remain in demand in the near term, and not just for core investors. Positive demand, low vacancy and continued rent growth are likely to attract more opportunistic investors seeking higher returns through refurbishment or repositioning.
Exhibit 3: Thames Valley quarterly office investment and price/SF
Exhibit 4
Exhibit 4: Office investment on Crossrail/Elizabeth Line route in Thames Valley (12 months)
For more information on any of the topics covered in this piece, or for more news, analytics and data, get in touch with CoStar or visit the website:
0203 205 4500
costar.co.uk
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