Western Corridor Office Market Report. West London & Thames Valley regions UK Office Research September 2014

Transcription

1 Western Corridor Office Market Report West London & Thames Valley regions UK Office Research September 2014

2 Contents 4 West London and Thames Valley market update and outlook 8 Key infrastructure improvements 10 Headline transactions 12 Market conditions a balancing act? 14 Map & definitions 16 Contacts Front page image - 12 Hammersmith Grove 2 Western Corridor Office Market Report September 2014

3 Strengthening Demand The first six months of 2014 have seen take-up volumes fall short of the momentum seen in H but in stark contrast the level of named active demand is up 60% since end The strengthening volume of demand points to a strong H and H as occupiers commit to space and we expect year-end take-up to be in the region of 2.75 million sq ft. The shortage of Grade A space in many locations is a pressure point in the West London market, albeit speculative activity is beginning to address this. Western Corridor prime average rents are expected to rise by around 4% per annum compound to end The investment market out-performed the leasing market during H with a strong appetite for investment product set to continue throughout the year. Prime yields are expected to harden further over the latter half of 2014 and into 2015 due to the sheer weight of money targeting the Western Corridor and real evidence of rental growth.

4 Western Corridor Office Market update and outlook West London & Thames Valley regions Occupier activity set to gain momentum in H2 The Western Corridor saw 3 million sq ft of space transacted by occupiers in 2013, the highest level achieved since The first half of 2014 has not maintained this momentum with 805,000 sq ft taken-up and a noticeable lack of larger deals completing. Only one transaction over 50,000 sq ft completed, namely VM Ware s acquisition of Flow One and Flow Two in Staines (62,000 sq ft). Other key transactions included Avnet at The Capitol Building, Bracknell (42,544 sq ft), Pernod Ricard at Building 12 Chiswick Park (42,000 sq ft) and UK TV at 10 Hammersmith Grove (32,536 sq ft). Over 60% of the current named demand is US-led who traditionally run to a calendar financial year. Real estate decisions are often delayed until the back end of the year which helps to explain the bubble of takeup seen in Q3 and Q4 in this geography. Grade A space is the preferred choice The Thames Valley accounted for 54% of Western Corridor market share during H1 2014, with Bracknell attracting 12% of all take-up. The most active market by floorspace during H1 was Hammersmith, with 14% of total take-up. However, West London continues to see the greatest share of Grade A take-up (53%) with Chiswick seeing the most activity (19%) at town level. Grade A take-up comprised 56% of total take-up during H1 although the latent demand for Grade A space in some towns is not being satisfied due to a shortage of suitable stock. Figure 1: Take-up by market share, H sq ft 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 Activity continues to be driven by the Western Corridor s core sectors: services and manufacturing, although the balance has changed during H The services sector dominated activity with 58% of all floorspace taken-up attributed to this industry (compared to a 5-year average of 38%) while a reduction in activity by pharmaceuticals and oil & gas saw the manufacturing share reduce to 23% (compared to a 5-year average of 37%). Figure 2: Western Corridor take-up by sector, H % 1% 9% 2% 7% 58% Banking & finance Professional services Service industries Manufacturing Public admin & institutions Other There are a number of major requirements which are forecast to transact in H2 including Pepsi, Amadeus and IMG. This take-up is geographically and sectorally diverse but the focus is on Grade A space which will impact on the overall Grade A supply. Demand up 60% since end-2013 The subdued take-up levels of H reflect the spaceless growth and push for property efficiency that many corporates are striving to achieve. However, the volume of named active demand continues to increase as occupiers with lease events, occupy tired stock, or are experiencing real growth are forced to consider their real estate options; this is explored in more detail in the Market Conditions section of this report Thames Valley West London H2-14 forecast 10 year average 4 Western Corridor Office Market Report September 2014

5 At mid-2014 there was 4.8 million sq ft of named active demand seeking space in the Western Corridor. The services and manufacturing sectors account for 90% of named demand by floorspace. The banking & finance and professional services sectors are less active in the Western Corridor than in the major regional markets where the legal sub-sector in particular has been a key driver of demand. Figure 3: Western Corridor named active demand 000 sq ft 6,000 5,000 4,000 3,000 2,000 1, Large scale significant requirements include those listed below and demonstrate the diversity of occupier in the wider Western Corridor market: Named active demand There is growing corporate awareness that Grade A supply is constrained and choice is being eroded. This should encourage tenants to accelerate their relocation strategy, underlying our view on increased leasing activity in H2. Cost driven move from Central London There is increasing cost-driven pressure on occupiers to consider property solutions outside of Central London by keeping a presence in London and moving a large proportion of staff out of town, typically east or west of London, in order to substantially reduce property costs. We expect to see this trend expand as Central London costs are forecast to reach 130 sq ft in the West End by 2018 where there are limited options for larger occupiers. The smaller (head) office in Central London enables the occupier to window dress ; retaining the benefits of Central London, in terms of profile and a strong corporate identity, while keeping overall costs down. Taking into account Business Rates and service charge / running costs, the Western Corridor looks cheap with total occupational costs less than 50% of those seen in core Central London. Confident outlook Despite the relatively subdued first six months of the year when market activity was constrained by a lack of larger deals, we expect the strengthening level of demand to translate into strong occupier activity during H with year-end take-up in the region of 2.75 million sq ft, below the volume transacted in Boden up to 100,000 sq ft UCB Pharma up to 200,000 sq ft Thales UK up to 100,000 sq ft Dixons Carphone up to 150,000 sq ft Ocado up to 200,000 sq ft Pepsi up to 100,000 sq ft Western Corridor Office Market Report September

6 Development pipeline begins to address Grade A shortage Overall supply levels in the Western Corridor have fallen to the lowest level recorded since mid This is a direct result of office space being converted to alternative uses; particularly through the impact of Permitted Development Rights (PDR) to residential. The overall vacancy rate has fallen by 110 basis points over 12 months to stand at 13.1% at mid-2014 with the Grade A equivalent coming in at 4.2%. However, the supply shortage is felt most keenly in the West London sub market where the Grade A vacancy rate stands at just 2.3%; occupiers are now competing for good quality Grade A space. Rising confidence in the market combined with the lack of Grade A space in many core markets has led to a marked increase in speculative development activity. As at mid-2014 there was 1.6 million sq ft of space under construction in the Western Corridor and due to complete by end-2016, an increase of 70% year-on-year. During Q alone 550,000 sq ft of space started on site. Figure 4: Speculative development pipeline 000 sq ft 1,800 1,600 1,400 1,200 1, The largest speculative scheme on site is Building 7 Chiswick Park which, at 334,000 sq ft, is the final phase of the park and is due for completion in Q The market with the greatest volume of activity is Reading town centre where four schemes total 380,000 sq ft and include Forbury Place (185,000 sq ft) and R+ (103,000 sq ft). Prime rents increase as supply tightens Despite the subdued take-up figures in H1 2014, the tight supply of Grade A space has continued to put upward pressure on rents, with the Western Corridor prime average increasing by 6.0% year-on-year during Q2 to reach per sq ft. The West London market is driving this growth with rental increases witnessed in Chiswick, Brentford and Ealing. Looking ahead, the strength of employment growth and named demand will underpin further growth over the medium term; Western Corridor rents are expected to rise by around 4% per annum compound to end The town forecast to see the strongest rental growth over the next five years is Bracknell, albeit off a low base, at 5.4% per annum on average; followed by Slough (5.2% pa) and Reading (4.9% pa). Hammersmith and Chiswick are both forecast to see rents reach late 50s by end-2018 although both markets will continue to offer high quality accommodation at a discount to central London occupational costs. Completed U/C Likely Spec Start Likely Spec Start JLL has 1.4 million sq ft recorded as likely to start on site on a speculative basis in the Western Corridor by end Western Corridor Office Market Report September 2014

7 Figure 5: Current and forecast prime rents High Wycombe Key: Mid 2014 End Maidenhead Slough M25 Uxbridge Ealing Chiswick Reading M4 Windsor M4 M25 M4 Heathrow Brentford Hammersmith Richmond Central London Wokingham Bracknell Chertsey Staines Basingstoke Strong appetite for investment product The investment market remains buoyant and has recovered significantly ahead of the occupational market with demand outstripping supply. The increasing pool of capital chasing investment product shows no signs of abating. Investment volumes in the wider South East market totalled 1.1 billion during H and we predict total volumes for 2014 to be circa 2.5 billion. Over the past 18 months the Western Corridor has been buoyed up by two exceptional transactions, the sale of Chiswick Park and the 245m sale of IQ Winnersh. The contrast of 2014 is that volumes traded are greater but without the need for large signature deals. The average lot size in 2014 to date has been 17.5 million. Figure 6: Western Corridor Investment Volumes m 2,500 2,000 1,500 Prime yields have moved in by 100 basis points over the 12 months to September-2014 to stand at 5.25% and are trending keener. There is some differential between the West London (5.25%) and Thames Valley (5.50%) averages but there is strong competition for the right product. Figure 7: Prime yield profile 8% 7% 6% 5% 4% 3% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q West End West London City of London Thames Valley 1, (H1) The Western Corridor market is attractively priced at a discount to both Central London and the Big 6 regional office centres. m H2-14 forecasat We expect a strong H and 2015 as investors look to move up the risk curve by investing in properties outside of London, with the Western Corridor proving to be a particularly attractive market. The sheer weight of both UK and international money will continue to drive yields inwards and we expect prices to harden further before end Western Corridor Office Market Report September

8 Key infrastructure improvements The Western Corridor is set to benefit from substantial investment in its infrastructure over the next decade. The key schemes are presented in the adjoining infographic and we set out below some of the key improvements to the region s connectivity and competitiveness. London Airports Review A UK government commission is considering the future of London s airports and how to address increasing capacity issues. The final report is due in Heathrow is already operating at full capacity and Gatwick at 85%. A new airport in the Thames Estuary has been ruled out, putting the focus back on the expansion of Heathrow or Gatwick. The addition of a third runway at Heathrow is a contentious issue but it appears likely that the airport will remain the largest airport in the UK, providing an essential global gateway for many Western Corridor occupiers. Heathrow Southern Rail Access Study This study considers improving rail access between Heathrow and south west London. The route is yet to be confirmed but will concentrate on locations which do not currently have a direct rail link to the airport. Report due to be delivered in If this scheme goes ahead, towns such as Staines and Richmond would see their connectivity to Heathrow improve significantly. Reading Station Redevelopment Due to complete in 2015; five new platforms and an improved track layout will see a greater number of trains operating. Network Rail estimates that it will improve service performance by 38%. A boost for Reading offices, in particular those in the town centre. Electrification of the Great Western mainline The line between London and Bristol is due to be completed in Diesel stock will be replaced by new electric trains that will provide longer trains (increased capacity) and faster services. Towns along the London to Reading mainline will benefit from reduced travel times. Western Rail Access to Heathrow (WRATH) This proposed new rail link between Langley and Iver stations would provide a direct link from Reading to Heathrow, via Maidenhead and Slough. Network Rail is assessing a number of alternative routes with WRATH being the preferred option. Shortened journey times to Heathrow from Reading, Maidenhead and Slough. The Thames Valley Berkshire and Local Enterprise Partnership estimate that better access to Heathrow could generate 800m of economic activity and create 42,000 new jobs. M4 Congestion Measures The Highways Agency has proposed making the M4 a smart motorway between junctions 3 and 12. Smart Motorways allow the use of the hard shoulder and utilise technology to vary speed limits with the intention of relieving congestion. The scheme is supported by the Government National Infrastructure Plan and should start after the next spending review in Based on this timetable the scheme would be operational in Alleviating congestion during peak periods around Heathrow is a key objective for many Western Corridor businesses. Local M4 markets close to the airport such as Hounslow, West Drayton, Langley and the Heathrow office market itself, will all benefit from shorter and more reliable travel times. Crossrail Crossrail will provide a high frequency, high capacity service to 40 stations running from Reading and Heathrow in the west to Shenfield and Abbey Wood in the east. It is estimated that 200 million passengers will travel on the service each year and the route will provide a 10% increase in rail capacity in London when Crossrail 1 opens in Key journey times will also be reduced, for example Heathrow to Liverpool Street will fall from 55 to 32 minutes. Western Corridor markets such as Maidenhead, Slough, Stockley Park (via West Drayton) and Hayes are on the Crossrail route, improving accessibility to these areas, in addition to Heathrow and across Central London. For example Hayes & Harlington will have 10 Crossrail services per hour into Central London, allowing employees to travel easily between central and outer office locations. 8 Western Corridor Office Market Report September 2014

9 High Speed 2 (HS2) HS2 will be the second high speed rail route in the UK, with phase one linking London to Birmingham. HS2 will then see Birmingham linked to Manchester in the North West and Sheffield and Leeds to the North East. The HS2 line will run through the Western Corridor, with a proposed hub station either situated on the Great Western main line or at Heathrow. The anticipated completion date is Improved connectivity between locations in the Western Corridor, Heathrow and cities to the Midlands and the North. Heathrow: capacity Gatwick: capacity 85% 100% London airports review Reading Station Redevelopment 35% service performance London 15/20 minutes Bristol Cardiff Western Rail Access to Heathrow (WRATH) journey times Heathrow Southern Rail Access Study Slough Windsor Maidenhead London Heathrow Airport Richmond Staines M4 congestion measures journey times 55 to 32 minutes capacity High Speed 2 London Heathrow Airport London Liverpool Street Birmingham Estimated completion / major review date Western Corridor Office Market Report September

10 Headline transactions Key leasing transactions Property Address Size (sq ft) Tenant Reported rent ( psf) Building status Flow One & Two, Staines 63,000 VM Ware Refurbished Building 12, Chiswick Park 42,000 Pernod Ricard Second hand The Capitol Building, Bracknell 42,544 Avnet Refurbished Phoenix One, Farnham Road, Slough 34,770 Arvato New 10 Hammersmith Grove, Hammersmith 32,536 UK TV Confidential New Key investment transactions Property Address Size (sq ft) Purchaser Reported price ( m) Estimated initial yield MEPC portfolio of 3 business parks*.. Oaktree & Patrizia Immobilien 430m total.. Quantum 1 & 2, Maidenhead 123,217 M&G Real Estate 46.75m 6.70% Gateway House, Richmond 43,803 (plus 14,500 of retail) Private investor 44.1m 5.00% Reading Bridge House 34,770 Arvato % Cambridge House, Hammersmith 77,245 Westbrook 29.5m 2.3% 1 Queen Caroline Street, Hammersmith 81,750 Brockton Capital & Landid 30.75m Vacant * The portfolio comprises 3 UK business parks, one of which (Chineham Park, Basingstoke) is located in the Western Corridor low res 10 Western Corridor Office Market Report September 2014

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12 Market conditions a balancing act? Contrast in strength of demand versus take-up Although named demand is clearly active, take-up levels in the Western Corridor have been subdued since the start of the year. The market is demand rich but take-up poor. Western Corridor take up in H has represented just over 25% of the total UK figures whereas in comparison in 2013, the Western Corridor accounted for 40% of total UK take up. In addition, the average share over the past 10 years has been 36%, highlighting the current easing in activity. Figure 8: UK Take up % London and the South East regions. Furthermore, over the same period both London and the South East have outperformed the UK. These positive figures from the PMI data indicate that businesses within both regions remain confident regarding their current growth prospects. Figure 9: Regional PMI ( )* % 50 60% 40% 45 Nov 10 Mar 11 Jul 11 Nov 11 Dec 11 Apr 12 London Aug 12 Dec 12 Apr 13 Aug 13 South East Dec 13 Apr 14 20% 0% However, the Western Corridor has seen demand levels hold firm and as at the end of H1 2014, there was 4.8 million sq.ft of named active demand, a 60% increase on end Bristol Edinburgh Glasgow Leeds Manchester Birmingham Western Corridor 2014 * Readings of 50 or above signal an increase or improvement with scores below 50 indicating deteriotation or a decline Source: Markit Economics and Lloyds Bank 2014 Following the downturn in 2009, GDP growth in both London and the South East has recovered quicker than the rest of the UK and both regions are anticipated to continue this level of outperformance. Looking ahead and both regions are anticipated to see solid growth in the years ahead and will remain ahead of the UK average. Figure 10: GDP Growth Forecast % So how will current and forecast market conditions impact on activity levels in the Western Corridor? A see-saw of push and pull factors will influence the market but our overall view is that the pull factors are strong enough to balance the market in favour of strong sustainable occupier growth. 3.0% 2.5% 2.0% 1.5% Higher Confidence in London and the South East The regional PMI (Purchasing Managers Index) show that business confidence has continued to grow throughout 2013 and into 2014 in both 1.0% 0.5% 0% London Source: Oxford Economics and JLL 2014 South East UK 12 Western Corridor Office Market Report September 2014

13 Therefore, with business confidence remaining robust and GDP growth anticipated to hold firm over the next few years, the business environment prospects for the region remain favourable from both a regional and national perspective. Lease events and expansion will drive demand By examining the key factors behind the requirements within the Western Corridor, it has been possible to ascertain the key trends that are driving demand. The dominant decision factor behind named demand in the Western Corridor is either as a result of obsolescence coupled to a forthcoming lease event or an expansion of current operations. In line with strong economic and employment growth, one third of enquiries are driven by expansion which demonstrates business confidence which will translate into increased leasing activity later in 2014 and 2015 as occupiers implement their property strategies which have been on hold during the recession. Figure 9: Current Requirements(Q2 2014) Possible Market Constraints There may be a number of individual reasons why occupiers are not undertaking space moves in the Western Corridor at the current time. Below are a few wider trends that could be contributing to holding back take up at the current time. Utilising Efficiency Improvements Many tenants and occupiers are increasingly using their space more efficiently and effectively. A clear benefit of better utilisation of space is to minimize the cost of the space being occupied and to lessen the pressure on existing space. For example, this may include changing the workstation footprint to allow more desks, or increasing the amount of hot desking and agile working through the implementation of new technology. Through the redevelopment and refurbishment process we have seen the specification of buildings improve with occupational densities falling from 1:12 m 2 to 1:8 m 2 in a number of new developments. More efficient space requires less space for the tenant. 38% 31% 15% 13% 4% Lease Event (Break or End) and Trade Up Expansion Consolidation Strategic Relocation M&A Spaceless Growth can refer to tenants looking to contain growth of their organisation within an existing building by utilising strategies highlighted above. Alternatively, it can result in companies consolidating their operations as a result of space being more efficiently used and the disposal of unrequired space. An example of this in practice is Unilever, which reviewed its existing space in order to operate more efficiently. Outlook Occupier activity set to gain momentum in H2 The outlook for the Western Corridor is for occupier activity to regain momentum over the remainder of the year. It remains an attractive location for new entrants but also for those occupiers located in Central London currently under cost pressure, looking to reduce property costs. Occupiers operating their space more efficiently and utilising spaceless growth are factors within the market but they also present opportunities as companies expand. Market fundamentals remain strong and combined with the positive business and economic environment, this should ensure that take up levels move upwards over the remainder of the year and into Western Corridor Office Market Report September

14 Western Corridor Map & Definitions The map shows the boundaries of the survey area. It is divided into West London and Thames Valley and then into submarkets.the submarkets are known by the name of a key town, although other towns and areas fall within them. Data employed is derived from various information sources collected by JLL Research. 14 Western Corridor Office Market Report September 2014

15 Definitions Take-up: Floorspace acquired for occupation by lease, prelease, freehold or long leasehold sale. Supply: Floorspace on the market and available for occupation. It includes space that is under offer. Under Construction: Speculative development of new building or substantial refurbishment where construction activity is ongoing. Prime Rent: The JLL view of the highest rent achievable for a hypothetical 10,000 sq ft unit of Grade A space in a prime location, without any adjustment for incentives. Business Sectors: Broad business sectors are classified as: Banking & Finance: Banks and other financial institutions Professional Services: Accountants, legal, management consultants etc Service Industries: Advertising and PR, broadcasting, internet services, printing and publishing, software houses and data processing, telecommunications services, transport, retail, leisure etc Manufacturing Industries: Pharmaceuticals, computer hardware, electronics, construction, mining, oil & gas, engineering, food and drink etc Public Administration & Institutions: Central and local government, institutions, charities, quangos, health and social etc Western Corridor Office Market Report September

16 Business contacts James Finnis Director South East Offices +44 (0) Angus Minford Director National Investment +44 (0) Mark Wilson Director National Investment +44 (0) Research contacts Ben Burston Head of UK Office Research UK Research +44 (0) Vicky Heath Associate Director UK Research +44 (0) Barrie David Senior Analyst UK Research +44 (0) jll.co.uk COPYRIGHT JONES LANG LASALLE This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.