THE OXBRIDGE economy is continuing to provide optimism for south east’s leasing activity despite a challenging economic outlook, which saw a decline elsewhere.
Real estate firm Knight Frank says more than a million square footage of space was under offer by the end of the second quarter of the year, led by Oxford and Cambridge and demand for life sciences.
The firm says occupier take-up across the South East finished just above 671,000 sq ft, with 72 occupier transactions. This marks a 33% increase compared to the previous quarter.
Knight Frank says the rise was led by the university towns – they accounted for 44% of space let, and a third of deals.
With these two removed, activity in the broader South East market saw take-up 51% below the 10-year quarterly average for the region.
The company’s experts think there is scope for optimism though as the amount of space under offer was above 1m sq ft for the first time since 2018, and a further 5m sq ft of active named demand was present in the market at quarter end, the highest level since January 2022.
For investors, the continued rise of borrowing costs and the gap between buyer and seller expectations proved a hurdle to the completion of deals. The second quarter registered transactions worth £354 million, a total 35% below the volumes for Q1.
UK Funds remain the biggest seller of South East offices in 2023, accounting for over 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. Prime office yields stood at 6.50% in Q2, but 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 10%+ in Q2.
Roddy Abram, head of national offices at Knight Frank, said: “A more positive quarter than Q1 has been bolstered by strong activity in Cambridge and Oxford.
“The wider South East markets have been quieter in a challenging climate, with occupiers unwilling to rush into transactions.
“Nonetheless, a strengthening level of pent-up occupier demand is evident, with circa one million sq ft of space under offer that we’re confident will transact in H2 and a healthy level of named demand at viewing or RFP stage.”
And colleague Simon Rickards, who heads up the capital markets department said there was still significant interest from investors.
“Thes are for income deals and prime assets in the right locations, whereas secondary assets in weaker markets are proving increasingly challenging,” he said.
“We don’t expect this to change for the foreseeable future, with leveraged vendors under increasing pressure from their lenders.”
