RESEARCH. LONDON office market Q2 2009

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1 RESEARCH LONDON office market Q2 29

2 Contacts Leasing Central London Dan Bayley Tel: +44 () daniel.bayley@bnpparibas.com West End Keith Harris Tel: +44 () keith.harris@bnpparibas.com City Fred Hargreaves Tel: +44 () fred.hargreaves@bnpparibas.com Tim Davies Tel: +44 () tim.davies@bnpparibas.com Jeremy Trice Tel: +44 () jeremy.trice@bnpparibas.com Midtown Chris Williams-Ellis Tel: +44 () chris.williams-ellis@bnpparibas.com Docklands Chris Williams-Ellis Tel: +44 () chris.williams-ellis@bnpparibas.com Investment West End Mike Pope Tel: +44 () mike.pope@bnpparibas.com City Paul Henwood Tel: +44 () paul. henwood@bnpparibas.com Shaun Gorvin Tel: +44 () shaun.gorvin@bnpparibas.com Research Neil Chegwidden Tel: +44() neil.chegwidden@bnpparibas.com BNP Paribas Real Estate 3 Charles II Street London SW1Y 4AE BNP Paribas Real Estate 9 Chancery Lane London WC2A 1EU This report is provided for general information only. While every care is taken to ensure its accuracy, Atisreal Ltd accepts no liability for any loss or damage arising from its contents. Copyright BNP Paribas Real Estate 29 London Office Market Quarter 2 29

3 West End Take-up has risen this quarter, rental value falls are easing as are the increases in incentive packages. Available supply, however, continues to rise. Take-up in the West End increased to 681,99 sq ft (63,358 sq m) during Q2, up 67% on s low total. The largest letting of the quarter was 34,5 sq ft (3,25 sq m) at 1 Drummond Gate where the Youth Justice Board for England & Wales sublet from the Office for National Statistics paying 38 per sq ft ( 49 per sq m) on a new lease. There is now 6. million sq ft (557,414 sq m) of office space available. This is the highest total since Q3 5 but still well below the early 199s peak of just over 11 million sq ft (1.2 million sq m). The total has increased by 18% in the last quarter alone and by 116% from a year ago. The vacancy rate remains relatively low at 7.4%. W1, SW1, W2, W8, SW3 & SW7 Supply & take-up Sq ft ( s) Sq m ( s) Available 5, Under offer Total available 5, Take-up Vacancy % of stock Vacancy rate 7.4% Prime rents per sq ft per sq m Mayfair/St James s Victoria Soho North of Oxford Street (East) North of Oxford Street (West) Five speculative schemes totalling just over 236, sq ft (21,925 sq m) completed during Q2. The two largest schemes to complete were 86, sq ft (7,99 sq m) at the Delancey and Shearer Property Group s Iona development at 4 Argyll Street, and 53, sq ft (4,925 sq m) at Standard Life s 12 Charles II Street. We estimate that prime rents fell from 8. per sq ft ( 861 per sq m) in to 75. per sq ft ( 87 per sq m) during Q2 and are still falling. This remains a relatively theoretical exercise as no prime rent deals have occurred this quarter. A typical rent-free period on a ten year lease is now 2-24 months, up from 18-2 last quarter. Top floors in buildings can still attract premium rents. Fox Davies Capital has signed on the 9, sq ft (836 sq m) top floor at D2 Private s 23 Savile Row paying 93. per sq ft (1,1 per sq m). However, it now looks as though this space will be released back onto the market following the failed corporate takeover of Fox Davies. Quarterly West End take-up and vacancy rate Take-up (million sq ft) Vacancy Rate (%) A feature of the current market is that several planned developments have been shelved as a result of the weak market conditions. Instead landlords are offering short-term lets at greatly reduced rents. Amongst these are Land Securities Arundel Great Court quoting 19.5 per sq ft ( 21 per sq m) and Scottish Widow s Wigmore Street where only 9.5 per sq ft ( 12 per sq m) is being quoted I3I

4 Midtown Take-up during Q2, at 24,58 sq ft (22,344 sq m), increased by 12% from but remains around 7% below the five-year average. There were just three deals in excess of 15, sq ft (1,395 sq m) this quarter as the market was again dominated by smaller deals. The largest deal of the quarter saw lawyers Russell Jones & Walker take the entire 28,5 sq ft (2,648 sq m) at 5-52 Chancery Lane at 27.5 per sq ft ( 296 per sq m) on a ten year term. The highest rent of the quarter was achieved at Brettenham House, Lancaster Place where private equity group ECI Ventures Limited has taken 9,5 sq ft on a 1 year lease thought to be at a rent of 6. per sq ft ( 646 per sq m) with 23 months rent-free. As in other markets, available supply continues to escalate. There is now around 1.9 million sq ft (176,514 sq m) of office space available, up from 1.5 million sq ft (139,353 sq m) in. The vacancy rate is now 8.3%, the highest rate since Q3 5. There was only one development completion during Q2, Englander s 1 Southampton Row. Of the 97,3 sq ft (9,39 sq m) of office space at the property around 76, sq ft (7,61 sq m) remains available following the pre-let of 21, sq ft (1,951 sq m) by Metro Bank in 9. WC1 & WC2 Supply & take-up Sq ft ( s) Sq m ( s) Available 1, Under offer Total available 1, Take-up Vacancy % of stock Vacancy rate 8.3% Prime rents per sq ft per sq m Holborn Covent Garden Quarterly Midtown take-up and vacancy rate Take-up (million sq ft) Vacancy Rate (%) Prime rental levels in Holborn have fallen to around 43. per sq ft ( 463 per sq m) but significantly the rate of decline has eased considerably this quarter. In the prime rent was 45. ( 484 per sq m) and in Q4 8 it was 55. ( 592 per sq m). A year ago the prime Holborn rent was approximately 6. per sq ft ( 646 per sq m)..5 5 The sharp drop in rental levels as well as the more attractive incentive packages has tempted a number of law firms such as Russell Jones & Walker to upgrade their offices and relocate to the Midtown core from the area s more fringe locations London Office Market Quarter 2 29

5 City Encouragingly for the general health of the City office market, Q2 has seen the fall in rental levels diminish, the rise in incentives halted and take-up increase significantly. Take-up in the City during Q2, at million sq ft (15,816 sq m), was 79% higher than in. Even excluding Bank of Toyko-Mitsubishi s 18,5 sq ft (16,769 sq m) pre-let at British Land s Ropemaker Place, 25 Ropemaker Street EC2, the remaining 958,8 sq ft (89,75 sq m) of take-up in Q2 represented a notable improvement from the 635, sq ft (58,993 sq m) in and halted the downward trend in take-up that began in mid-26 (see chart). EC1, EC2, EC3, EC4, & E1 Supply & take-up Sq ft ( s) Sq m ( s) Available 9, Under offer Total available 1,824 1,6 Take-up 1, Vacancy % of stock Vacancy rate 12.6% Prime rents per sq ft per sq m Non-towers Towers On a positive note for the City, Nomura are in talks to move their ex-lehman Brother s staff out of 25 Bank Street E14 and to move into the City at Watermark Place, 9 Upper Thames Street EC4. Disappointingly, however, AstraZeneca looks to have abandoned plans to move from the West End into Broadgate Tower EC2 and move to Paddington instead. Quarterly City take-up and vacancy rate Take-up (million sq ft) Vacancy Rate (%) Business centre operators have been active this quarter with MWB taking 32, sq ft (2,973 sq m), Landmark signing up for 26,5 sq ft (2,462 sq m) at 125 Old Broad Street and Regus letting 26, sq ft (2,415 sq m) at Broadgate Tower. The insurance sector remains quite active with Talbot Underwriting signing for 42,1 sq ft (3,911 sq m) at 6 Threadneedle Street, Robert Fleming Insurance letting 39,7 sq ft (3,688 sq m) at 2 Gracechurch Street and SCOR taking 21,3 sq ft (1,979 sq m) at 1 Lime Street. Available supply increased again this quarter as around 744, sq ft (69,199 sq m) of speculative space was completed in new or refurbished schemes. There is now 1.8 million sq ft (1. million sq m) of office space available in the City, a rise of 9.9% on. The vacancy rate is now 12.6%. Whilst we expect these to rise further, they are still significantly lower than the 16 million sq ft (1.5 million sq m) available in the early 199s and the corresponding 21% vacancy rate Supply and demand dynamics have meant that headline prime rents have fallen again this quarter, down to around 43. per sq ft ( 463 per sq m) from 45. per sq ft ( 484 per sq m) in. The typical rent-free period of 3-36 months on a ten year term has not changed since last quarter. I5I

6 Docklands Take-up in the Docklands market more than doubled between and Q2 but is still less than half the average quarterly take-up of the last five years. Q2 take-up was 119,66 sq ft (11,112 sq m). There were three notable deals this quarter. The largest was the 4, sq ft (3,716 sq m) letting to Mastercard at 1 Upper Bank Street where they will pay 38. per sq ft ( 49 per sq m). The other lettings were to the Financial Ombudsman Service who took 3,6 sq ft (2,843 sq m) at CIT s South Quay 3 on Marsh Wall at a rent of 3. per sq ft ( 323 per sq m) and 18, sq ft (1,672 sq m) taken by the Home Office at 1 Churchill Place at a rent of 35. per sq ft ( 377 per sq m). E14 & E16 Supply & take-up Sq ft ( s) Sq m ( s) Available 1, Under offer 88 8 Total available 1, Take-up Vacancy % of stock Vacancy rate 6.5% Prime rents per sq ft per sq m Canary Wharf Rest of Docklands There was, however, bad news for the Docklands market as Nomura announced that, following its take-over of Lehman Brother s staff at 25 Bank Street, it has decided to move to the City and take around 477, sq ft (44,314 sq m) at the soon to be completed Watermark Place on Upper Thames Street. Encouragingly the amount of available space has only risen by 8% during the past quarter and now stands at 1.28 million sq ft (118,915 sq m), still significantly below the past five year average of 1.6 million sq ft (148,644 sq m). The vacancy rate has risen from 6.1% to 6.5% during Q2. However, it is widely accepted that there is a large supply of grey space available that would, if officially released, significantly boost the publicly available supply and vacancy rate. The largest amounts of space available are at 25 Canada Square where a total of around 156, sq ft (14,493 sq m) is available and at 1 Canada Square where approximately 117, sq ft (1,87 sq m) are vacant. Quarterly Docklands take-up and vacancy rate Take-up (million sq ft) Vacancy Rate (%) Prime rents in Canary Wharf have remained static at 37.5 per sq ft ( 44 per sq m) during Q2, down from its peak of 46.5 per sq ft ( 51 per sq m) in mid-7. However, few deals have been completed and although rents may have stabilised, rent-free incentives have increased significantly. Outside of Canary Wharf the typical prime rent also remained static at 25. per sq ft ( 269 per sq m) London Office Market Quarter 2 29

7 LOCATION, LOCATION, LOCATION? There has been a marked increase in the number of West End occupiers actively viewing office space in the City and associated markets over the last 12 months. Midtown has been a classic barometer for the market. In the strong market leading up to 27, the dramatic modern architecture and corporate feel of Land Securities New Street Square attracted not just local players such as Deloitte but also consultants such as OC&C. At the same time Derwent London s modern refurbishment of the Johnson Building in Hatton Garden managed to tempt Grey Advertising from Great Portland Street. A number of West End occupiers have also shown serious interest in Castlemore Securities 4 Holborn Viaduct and Standard Life s 22 Chancery Lane developments. The Southbank also remains popular with West End tenants such as Redbull who recently acquired 18, sq ft (1,672 sq m) at The Terrace, Tooley Street while Winkworth Sherwood relocated from Great Peter Street in Westminster to 4, sq ft (3,716 sq m) in Minerva House in SE1 late last year. West End occupiers are perceived to be attracted by high quality space available on cheaper rents with more efficient floor plates. However, it is naïve to think that price and floor layout are the only drivers. It is not all a shift to the east however. Omnicom, Aegis and QVC have all recently cast their eyes over schemes in Central London and beyond. Aegis have taken short-term space in W1 for a division moving from Clerkenwell and are rumoured to be looking at a consolidation which would move part of their business from Covent Garden to NW1. Jupiter Financial, JO Hambros and Rathbone Brothers also looked at the City, but have since decided to stay in the West End. In addition there is speculation that the acquisition by AstraZeneca of 6, sq ft (5,574 sq m) at British Land s Broadgate Tower may no longer be going ahead. Instead it is now reported that they are in talks with Development Securities regarding Two Kingdom Street, Paddington. Over the last 2 years net effective rents have halved in the City, but West End net rents have also adjusted by over 4%. Hence, relative pricing has not changed dramatically. The impact of the 21 rating revaluation may also be impacting on the decisions of the more risk-averse occupiers. Whilst the general expectation is that the Government will introduce some phasing of increases, the fact that rents typically doubled between 23 and 28 in the West End (the relevant valuation dates for the revaluation) means that over the next 5 year cycle business rates in the West End may double, compared to increases of more like 5% in the City and other locations. What does all this mean? Principally that the well-advised occupier is showing signs of throwing the net increasingly wide to find the best-structured deal in the right type of building; location may no longer be the absolute determinant. For landlords this means that whilst the overall demand profile is likely to remain weak for the foreseeable future, there is a wider geographical target for the landlords and their agents to cover. Lisa Moran Director, Office Agency BNP Paribas Real Estate 4 Holborn Viaduct

8 CENTRAL LONDON SUBMARKETS Kings Cross St. Pancras Northern Fringe Regents Park Midtown Covent Garden Royal Courts of Justice City Bank of England Mayfair Hyde Park West End Buckingham Palace St. James s Green Park Park Houses of Parliament Waterloo Southbank Canary Wharf Docklands Thames The map above shows the boundaries of the submarkets used for all of Atisreal s research on the London office market. The submarkets are defined using cluster of London postal districts, as follows: West End: W1, SW1, W2, SW3, SW7 and W8 Midtown: WC1 and WC2 City: EC1, EC2, EC3, EC4 and E1 Docklands: E14 and E16 Northern Fringe: NW1 and N1 Southbank: SE1 and SE11 Key definitions Take-up represents the total floorspace known to have been let or prelet, sold or pre-sold to tenants or owner-occupiers during the survey period. It does not include space that is under offer. A property is deemed to be taken-up only when contracts are signed or a binding agreement exists. All deals (including pre-lets) are recorded in the period in which they are signed. Lease renewals are not included. Sale and leasebacks are not included as there is no change in occupation. Quoted take-up volumes are not definitive and are consequently subject to change. Total supply represents floorspace which is on the market and available for occupation. We distinguish between space that is under offer and other available space. Speculative developments that are under construction are not included. Space available for subletting or assignment is included. Under offer is where an offer for a property has been made and accepted in principle, but the where the transaction is still subject to contract. Vacancy rate represents the total supply divided by the total stock at the survey date. Prime rent is an opinion of the highest headline rent achievable at the quarter end of a hypothetical 5, sq ft unit of the best quality office space in the best location in each submarket. Prime yield is an opinion of the net initial yield which would be appropriate for a freehold prime office investment let to a tenant with a strong covenant. Investment volume represents the total capital value of freehold and long leasehold purchases during the survey period. Quoted investment volumes are not definitive and are consequently subject to change. Only office transactions are included in this report. I8I

9 INVESTMENT The prime market reached a floor in the Spring and yields have subsequently hardened by.5%. Overseas investors are now buying well let property at circa 4% discount to their peak, encouraged by cheaper prices and favourable exchange rates. The improvement in investment activity is shown in the figures from Property Data where the value of London investment transactions in Q2 9 rose by 58% over. Investment in Q2 grew to 1.2 billion, still well below the 2.2 billion transacted in 8. Overseas investors have been particularly active, accounting for.9 billion of the transactions this quarter. Sovereign wealth funds have now been tempted back to the market. In Q2 9, Hammerson sold a 75% stake in 1-1 Bishops Square to the Oman Investment Authority for 333m. There have also been reports that the strategists behind the Saudi fund, Jadwa Investment, are actively seeking to invest in UK commercial property. The Libyan Investment Authority is also circling the London market, and has just bought Land Securities Portman House, Portman Street for circa 16m. There has also been a boost in activity from German and Spanish investors, in both sales and purchases. In May, Banco Santander purchased 2-3 Triton Square, Regent s Park in an owner occupier deal for 115m. German fund manager Union Real Estate is said to be in talks with Standard Life to purchase 1 Gresham Street for 15m. IVG, the German property company, sold 131 Finsbury Pavement in EC2 to US investor Orion Capital Managers for 45.5m. Deutsche Bank s property division RREEF bought Grosvenor s 25 Moorgate in EC2 for 46m. Even though the uplift in Q2 investment was boosted by the 1-1 Bishops Square transaction, we are expecting the volume of investment transactions in London to continue to rise. We are also expecting yields to harden further. With yields so high compared to recent times, and the perception that they are now past their peak, investor demand is already increasing. On the flip side, there is less necessity for vendors to sell, as redemptions have been met, thereby restricting potential investment supply. This demand and supply shift is likely to force yields lower and, on balance, should lead to greater activity as prices increase. Central London investment volumes billion West End Midtown Source: Property Data City Docklands 1 24 Q2 Q3 Q4 25 Q2 Q3 Q4 26 Q2 Q3 Q4 27 Q2 Q3 Q4 28 Q2 Q3 Q4 29 Q2 Central London capital value changes % change pa City Midtown and West End Source: IPD Monthly Digest May 27 Aug 27 Nov 27 Feb 28 May 28 Aug 28 Nov 28 Feb 29 May 29 I9I

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