The ever dwindling supply of office space within London’s M25 could push up rents by as much as 15 per cent, a leading property consultancy has warned.
There were 57 commercial deals worth £500m in the M25 catchment area during the first three months of this year, making it the busiest single quarter for transactions since 2007. And this year’s first quarter take-up of almost three-million square feet was the highest for six years.
Vacancies within new builds and Grade A space has fallen to a ten year low of just five per cent yet supply levels in the M25 region, claims Knight Frank, are increasingly coming under pressure. “While demand remains as competitive as ever, transactional activity is being constrained by a lack of stock coming to the market,” it adds.
Tim Smither is head of national office investment at Knight Frank. “The imbalance between supply and demand is such that we expect prime yields to hit sub five per cent by the year end,” he said. “In the South East, for the first time in a very long time, we expect rental growth in our core markets and this is generating heightened investor interest for secondary stock.”
While funds dominate, the South East of England is becoming an increasingly global playing field, with overseas investors accounting for over a quarter of the market over the past 12 months, including new entrants from Australasia and South America.
“Rental levels in the M25 market have head room in prime towns with low supply,” added Emma Goodford, in charge of the firm’s national offices department. “Areas that will achieve the best growth are the West London boroughs, Reading, Uxbridge, Heathrow and, with a rippling effect that could last as long as the first quarter of 2015, moving on to areas beyond these towns.”
In addition to the improving occupier market, the new Permitted Development Rights regulations have stimulated developer appetite for conversion of offices to residential use, says David Jones, a residential development land partner. Prior approval notices for conversion within the M25 now stand at just over three-million square feet — equivalent to the entire Slough office market.
“Now has got to be the time to explore the continued opportunity for change of use from office to residential to meet the increasing demand for suitable residential development sites,” he advised.
