South East office investment grew 22.3% to £559m in the first quarter of 2018, compared to the same period last year, and was 73% up on the 10-year first quarter average, according to new research from BNP Paribas Real Estate.

Investment in Hammersmith accounted for over 56% of total volumes with five transactions during the period, including Spelthorne Council’s purchase of 12 Hammersmith Grove for £170m, a net initial yield of 5.25%.

Hugh White, head of office investment at BNP Paribas Real Estate, said: “We anticipate further yield compression for prime town centre assets following the trend witnessed in Manchester, Birmingham and Bristol in Q4 2017.

“However, we believe rewards will be reaped by investors who […] who are willing to focus on short income town centre offices and tier two towns that are only just witnessing rental jumps.

“The challenge looking ahead will be finding value in a stock-starved market.”

This growth in the South East demonstrated the ongoing appetite for income in a low return environment and the diverse range of investors with US private equity firms, Middle Eastern and Asia Pacific investors, as well as domestic investors all retaining a keen interest in the market, BNP Paribas Real Estate said.

However, take-up in the first three months of the year was down 12.9% to 627,962 sq ft on the same period last year and 6.8% down on the 10-year quarterly average, BNP Paribas Real Estate reported.

The firm added that the region remains key for inward investment due to its strong market fundamentals, vibrant economy, and thriving technology sector.

Smaller size bands dominated the market making up 63.6% of overall take up within the 5,000 – 20,000 sq ft size band. Black & Decker’s lease deal for 48,000 sq ft at 270 Bath Road in Slough was the largest in the first quarter of 2018.

The trend towards shorter lease lengths also continued, with 61.8% of leases agreed at ten years or below adding weight to occupiers’ increasing desire for flexibility and optimisation of their occupied space.

Competition, despite the fall in demand, also increased for high quality stock driving prime rental growth. In Maidenhead prime rental levels rose to a new market peak of £39 per sq ft, the firm said.

The low number of speculative development starts has been helping keep prime rental levels up and with just one scheme beginning in the first quarter – Aviva Investors’ 63,000 sq ft Victoria Gate project in Woking – it looks set to continue. Over the course of 2018, 480,500 sq ft across nine schemes is expected to complete.

Ed Smith, head of Nnational markets office agency at BNP Paribas Real Estate, said: “Looking ahead, identified demand levels have risen to 4.6m sq ft from 4.25m sq ft in Q4 2017. This, coupled with the circa 600,000 sq ft currently under offer, suggests we are in line for a stronger Q2 and overall positive outlook for the remainder of the year.”