UK Office Market Outlook

Transcription

1 UK Office Market Outlook - Q4 212 UK Office Market Outlook The UK economy struggled to find momentum resulting in below average leasing volumes in 212. A lack of larger deals continues to characterise the market. Overall supply remains inflated by secondary stock, but grade A supply remains constrained. Refurbishment presents an opportunity to bridge the gap in Grade A supply. Prime rents increased 2.3% over the year driven by increases in the Western Corridor and Cardiff. Grade A supply shortages will drive prime rental growth in the most undersupplied centres.

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3 On Point UK Office Market Outlook Q Statistical summary Summary statistics* (y-o-y) Take-up (s sq ft) 5,342 5, Supply (s sq ft) 25,5 25, Vacancy Rate (%) 12.3% bps Average Weighted Prime Rent ( psf) % U/C (s sq ft) 1,321 1,27-3. Investment Vol. ( m) 2,766 1, *(Includes Birmingham, Bristol, Cardiff, Leeds, Manchester, Western Corridor, Edinburgh & Glasgow) UK office rental clock Rental Growth Slowing Rents Falling London City, London West End Rental Growth Accelerating Rents Bottoming Out West London Manchester, Thames Valley Birmingham, Bristol, Cardiff Edinburgh, Glasgow, Leeds For information on the Central London market, please see the Jones Lang LaSalle Central London Market Report

4 4 On Point UK Office Market Outlook Q4 212 UK Outlook Executive Summary Occupier take-up totalled 5.5 million sq ft in 212, down 1 compared to 1 year average levels. The market remains characterised by an overhang of secondary stock but Grade A supply remains limited. Outside of the Western Corridor, investor sentiment weakened with prime yields moving out in most locations. Occupier Take-up and Demand The UK economy struggled to maintain momentum in the final quarter of the year, with preliminary estimates from the ONS indicating a.3% decline in GDP. For the whole year GDP growth was flat, however, these figures remain subject to revision. The ONS numbers showed the drop-off in growth from the services sector, often linked to demand for office space. The sector grew 1. on the back of the Olympics, but was flat in the final quarter. Unsurprisingly, occupier take-up across the UK regional markets was below average in 212. Take-up totalled 5.5 million sq ft, up 3. compared to 211 but 1 below 1 year average levels. A lack of larger deals and a slowdown in Grade A activity appear to be the primary reasons for the subdued level of take-up in 212. The majority of activity remains focused on smaller transactions. While there remains a reasonably healthy level of market churn, occupier caution persists with many opting to renew or re-gear existing leases in the context of fragile economic growth. 212 characterised by a lack of larger deals We estimate that across the Big 6 1 markets, Grade A activity accounted for just 2 of total volumes in 212. In Glasgow, there were just two Grade A lettings across the whole year, and in Bristol there were only five, with Grade B lettings making up the majority of deals. Figure 1: Big 8 office take-up s sq ft 9, 8, 7, 6, 5, 4, 3, 2, 1, year average Performance was however mixed across the region with some markets performing better than others. Edinburgh showed strong performance with leasing volumes up 3 on 211 and 1 ahead of five year average levels. Manchester also experienced a strong finish to the year, with the final quarter alone accounting for 3 of total volumes. 212 was also a solid year for Leeds, the Western Corridor and Cardiff with take-up broadly in line with average levels. Elsewhere however, activity was more subdued with volumes impacted. The services and professional services sectors drove volumes in 212, particularly companies from within the legal, IT and recruitment & training sub-sectors. Serviced office operators were notably active. I2 Offices continued their expansion in Q4 with further acquisitions in Birmingham, on the back of earlier acquisitions in Manchester, Leeds and Edinburgh over the last months. Figure 2: UK office jobs growth forecasts 3% 1% -1% Source: Oxford Economics Over the last three years, the UK has recovered less than half of the output lost during the slump in Despite this there are signs of improvement. The global situation is beginning to stabilise, although there remains an uneasy balance in the Eurozone and the US fiscal cliff has not been fully resolved. At home in the UK, a strong recovery in jobs pushed UK employment to a record high of almost 3 million. In the 3 months to November there were million people in employment, up 9, on June to August 212 and up 552, on a year earlier. Despite this, December s Markit/ CIPS survey of UK service providers indicated a modest reduction of service sector activity, the first in two years, as incoming new work dropped marginally amid reports of a challenging trading environment. The for the UK economy remains mixed. The latest figures from Oxford Economics, point towards a slight increase in office jobs in 213, however GDP growth remains limited at just 1.. Against this backdrop of limited jobs growth, lease events will remain an important source of demand over the medium term. Source: Jones Lang LaSalle 1 Birmingham, Bristol, Leeds, Edinburgh, Glasgow & Manchester

5 On Point UK Office Market Outlook Q Existing Supply & the Development Pipeline Overall supply increased marginally over the year, up 1. with 26 million sq ft currently available. Vacancy rates increased from 12.3% at the end of 211 to 12. at the end of 212. Overall supply remains stubbornly high in a number of locations, with vacancy rates remaining well above the 1 year average of 1.. The issue with over-supply in the UK regional markets is that it is characterised by too much of the wrong type of space. The market continues to be characterised by an overhang of Grade B space, much of which remains difficult to let in the current climate. The government s announcement to allow changes from offices to housing without the need for planning permission may be one way to reduce this over-supply. The permitted change will come into effect from Spring 213 and apply for 3 years. Despite the government being positive about the planning system and how it operates there are concerns as to how it will work in practice. Refurbishment of obsolete or secondary stock could also help to alleviate overall vacancies as well as providing much needed Grade A supply. Grade A vacancy rates continued to fall in the majority of locations in 212, with average Grade A vacancy rates of just 2.9% across the Big 6 markets. Despite this, the development pipeline remains relatively constrained with just 1.3 million sq ft currently under construction speculatively. There are however, signs that confidence is beginning to return. 213 will see two new schemes commence in Glasgow, delivering c. 23, sq ft of Grade A office space in 215. In Bristol, we expect the refurbishment of 58, sq ft at Narrow Quay House and Skanska s 66 Queen Square is also earmarked to start on site by the end of this year. And in Cardiff, the Welsh Government are proposing to step in following on from their recent purchase of the undeveloped land at the city centre Callaghan Square scheme, formerly owned by MEPC. The Welsh Government are expected to offer a head-lease to enable the site to be developed with a first phase of circa 1, to 15, sq ft being proposed. Grade A supply remains constrained Rents and Rental Expectations to be far more limited. Jones Lang LaSalle s forecasts of IPD data indicate much more limited growth of just 1. per annum over for Rest of UK Offices. Figure 3: Prime UK office rents Source: Jones Lang LaSalle Birmingham Edinburgh Glasgow Leeds Manchester Thames Valley West London Investment Volumes and Yields Investment activity in 212 totalled 1.1 billion, down 58. on the back of what was a particularly strong 211. Investors continued to focus on the Western Corridor market, which accounted for 51% of total volumes. Outside of the Western Corridor, the investment market slowed in 212 with prime yields and sentiment showing signs of weakening. Prime UK regional office yields moved out from 6.29% at the end of 211 to 6.3 at the end of 212. Yields moved in 25 basis points in the Western Corridor as investor sentiment improved. However, in the majority of markets yields moved out between 25-5 basis points over the year. According to Jones Lang LaSalle s UK Prime Office Index, regional offices recorded marginally positive capital value growth over the year to end 212 of 1. driven largely by the Western Corridor. However, looking at the wider market, the IPD monthly index for Rest of UK offices recorded negative capital value growth of -9.9 over the s to December 212. Figure 4: UK weighted prime office yields % Despite the weak demand side, limited Grade A supply drove rental growth of 2.3% in the UK Regional Office Rental Index over the year to end 212. Average weighted prime rents stood at at the end of Q4 as increases in the Western Corridor and Cardiff drove growth. The lack of Grade A supply will continue to drive rents for the very best space. On aggregate, we forecast growth of 3. per annum over in the major UK cities. The Western Corridor is predicted to outperform this, with growth of 3. per annum over the same period. Turning to the wider market, rental growth is expected 3% 1Q 2Q1 3Q2 Source: Jones Lang LaSalle 4Q3 1Q5 2Q6 UK incl. London 3Q7 4Q8 1Q1 2Q11 UK excl. London 3Q12 4Q12

6 6 On Point UK Office Market Outlook Q4 212 Birmingham Summary statistics Q4 12 Q-o-Q Y-o-Y Take-up (s sq ft) % +8.1% Supply (s sq ft) 3, % Vacancy Rate (%) bps -6bps Prime Rent ( psf) U/C (s sq ft) Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) Investment Vol. ( m) 53 n/a +1.3% Prime Yield (%) bps +5bps Leasing activity picked up in Q4, but full year volumes totalled 54,552 sq ft, down 2 compared to 211. Availability continued to fall, however overall vacancy rates remain inflated. Prime yields moved out a further 25 basis points to 6.5. Take-up totalled 54,552 sq ft in 212, down 2 on 211 and 2 below 5 year average levels. Q4 was the strongest quarter of the year with take-up of 185,399 sq ft. Q4 witnessed 4 deals in excess of 1, sq ft, bringing the total in 212 to just 11, down slightly on the previous year. The most significant transaction in Q4 involved the acquisition of 4,36 sq ft at 2 Colmore Square by law firm Shoosmiths. Serviced office occupier I2 Offices also continued with its UK expansion. The company acquired 28, sq ft at Birmingham s 3 Brindleyplace having already taken space in Manchester, Leeds and Edinburgh in the last months. Overall supply continued to fall in Q4, with vacancy rates edging down to 16.. A significant amount of space was withdrawn for alternative uses, however this was partly offset by refurbished space at 5 Brindleyplace (133, sq ft) coming back onto the market. While we have seen some repositioning of Grade B space, the vast majority of available supply is of Grade B quality. Grade A vacancy rates remain low at around just 3.1%. The development pipeline was unchanged with no new starts in Q4. Snowhill (phase II), due to complete in 213, remains the only scheme currently under construction. Prime rents remained at 28.5 per sq ft. The market remains broadly tenant favourable with tenants able to achieve up to 36 months rent free based on a 1 year term. The investment market continued to soften in Q4 with prime yields moving out a further 25 basis points to 6.5. City centre investment volumes totalled 53 million in Q4. Hermes REIM purchased Baskerville House for 4 million, reflecting a net initial yield of 7.3%. Hermes will take over ownership of the 196, sq ft office building from administrators Deloitte. Figure 5: Take-up s sq ft 1,2 1, Take-up 5 year average Figure 6: Supply and vacancy rates s sq ft 3, , 1 2,5 1 2, 1 1 1,5 1, 5 Supply (lhs) Vacancy rate (rhs) Figure 7: Prime rents and rental growth Figure 8: Prime yields Prime yields 1 year average 2 year average

7 On Point UK Office Market Outlook Q Bristol Summary statistics Q4 12 Q-o-Q Y-o-Y Figure 9: Take-up 1,2 Take-up (s sq ft) , Supply (s sq ft) 1, % 8 Vacancy Rate (%) 11.3% bps +2bps Prime Rent ( psf) %. % U/C (s sq ft) 5. n/a Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) s sq ft Take-up year average Investment Vol. ( m) % -89.9% Prime Yield (%) 6.75 % +25 bps +5 bps Figure 1: Supply and vacancy rates 2, 1 Annual take-up down on the 5-year average. Lack of Grade A supply remains an issue. Bristol City Council s property decision may shape the market in 213. s sq ft 1,6 1, City centre take-up in Bristol totalled 49,2 sq ft in 212, down on 211 and below the 5-year annual average. Total take-up was pulled down by a 7 y-on-y reduction in Grade A take-up with just 37, sq ft taken up over the entire year. On a positive note, there was strong activity in the second hand sector which recorded a 3 increase in volumes on 211. A number of large active requirements and the combined pressure from structural demand indicates that take-up will exceed the five-year average in 213. Bristol City Council s property consolidation, which could lead to a potential 2, sq ft requirement, will be actioned in 213 with Bristol s newly elected Mayor strongly influencing the council s decision-making process. Total supply has remained broadly unchanged over the course of 212 with the vacancy rate at end Q4 standing at 11.3%. Grade A supply is very fragmented in terms of quality, age and size and the vacancy rate is just 2.. The lack of Grade A supply is focusing attention on the various development sites and refurbishment options are also being explored. Asides from Prupim/Cubex s major refurbishment of 1 Victoria Street, which is underway, Standard Life will commence refurbishment of Narrow Quay House (58, sq ft) in 213, 6 of which will be pre-let to a firm of solicitors, and Skanska s 66 Queen Square is also earmarked to start on site by the end of this year. Prime rents remain at 27.5 per sq ft and incentives are generous with three months rent free for each year of lease commitment. Bristol s investment market was relatively subdued in 212 with 95m transacted over the year as a whole compared with 264m in 211. The largest sale in 212 comprised Prupim s purchase of Temple Circus for 26m. With a handful of significant properties on the market we anticipate a stronger 213. Supply (lhs) Vacancy rate (rhs) Figure 11: Prime rents and rental growth Figure 12: Prime yields Prime yields 1 year average

8 8 On Point UK Office Market Outlook Q4 212 Cardiff Summary statistics Q4 12 Q-o-Q Y-o-Y Figure 13: Take-up 6 Take-up (s sq ft) Supply (s sq ft) 1, % 4 Vacancy Rate (%) 9.9% +9bps -4bps Prime Rent ( psf) 22.. % +4.8 % U/C (s sq ft) % Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) % +.9% s sq ft Take-up year average Investment Vol. ( m) % -95. Prime Yield (%) bps +25bps Figure 14: Supply and vacancy rates 1,4 1 Take-up of Grade A space impacts on occupier choice. Prime rental growth recorded in 212. Subdued investment activity as yields move out. s sq ft 1,2 1, Cardiff s office market recorded a relatively strong year with annual take-up of 33, sq ft, up on 5-year average levels. The largest deal in Q4 was Conduit taking the remaining 3, sq ft in the former Zurich building (which it now occupies in its entirety) with Zurich acquiring additional space elsewhere in the city. During Q4 leasing activity was otherwise driven by Grade A acquisitions. The largest Grade A transaction in Q4 was Hugh James / Involegal (12,767 sq ft) at Fusion 2. A number of significant requirements remain active in the Cardiff market and should provide Cardiff with a solid base during 213. Supply rose slightly in Q4 due to the release of second hand grade B space, but remains marginally down on the same period in 211. The lack of Grade A space remains an issue with no new space due to come on to the market until Capital Quarter completes in Q With the AA downsizing in Cardiff some refurbishment opportunities will materialise over 213. In addition, in recognition of the lack of new office space, the Welsh Government are proposing to step in, which follows on from their recent purchase of the undeveloped land at the city centre Callaghan Square scheme, formerly owned by MEPC. The Welsh Government is expected to offer a head-lease to enable the site to be developed with a first phase of circa 1, to 15, sq ft being proposed. Cardiff is one of the few regional markets to show rental growth in 212 with prime rents increasing by 4. y-on-y and stabilising at 22 per sq ft. Typical rent free periods remain at s for a five-year term and 24 months for 1 years, although the lack of Grade A space should lead to the tightening of incentives. Cardiff s city centre investment market experienced a subdued 212 with total volumes for the year comprising 4.8 million, compared to 63. million in 211. In Q4 just one sale completed in the city centre, namely Ashville Group s purchase of the Grade B multi-let Castlebridge (55, sq ft) for 2.95m, 21% NIY. Prime yields have moved out by 25 bps to Supply (lhs) Vacancy rate (rhs) Figure 15: Prime rents and rental growth Figure 16: Prime yields 9% Prime yields 1 year average

9 On Point UK Office Market Outlook Q Leeds Summary statistics Q4 12 Q-o-Q Y-o-Y Take-up (s sq ft) % Supply (s sq ft) 1, % -9.1% Vacancy Rate (%) 1. +5bps -1bps Prime Rent ( psf) 25.. %. % U/C (s sq ft) Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) Investment Vol. ( m). -n/a n/a Prime Yield (%) 6.5 bps +25bps Leasing volumes steady despite a lack of larger deals. New development remains constrained but 213 will see some refurbishment activity. Grade A supply continued to be gradually absorbed. Take-up totalled 46, sq ft in 212 up slightly on 211 and 5 year average levels. Leasing volumes continued to tick over in Q4 with around 7, sq ft transacted. There were very few larger transactions with no deals over 1, sq ft recorded in the final quarter. The most substantial letting was to DLA Design Group, who acquired 9,9 sq ft at 55 St Paul s Street. Looking at the year as a whole, activity has been generated by a mixture of churn, regears and lease events. There were few Grade A lettings in 212, although Grade A take-up accounted for 4 of volumes, compared to an average of around 4 in previous years. Overall supply fell 9.1% compared to the equivalent period in 211, reflecting an overall vacancy rate of 1. at the end of Q4. Grade A supply also fell reflecting a vacancy rate of 4., the lowest level since 28. There is currently 38, sq ft of space under construction at 21 Queen Street, which is due to be delivered speculatively in Q While we expect limited new speculative starts in 213, we anticipate the part refurbishment at Minerva House to deliver 2, sq ft later in the year. Prime rents were unchanged at 25. per sq ft. Incentives remain generous, with up to 3 months rent free achievable on a 1 year term. Prime yields remained stable at 6.5, having drifted outwards in the previous quarter. There were no deals recorded in the city centre in Q4, however in the out of town market Pure Offices Ltd purchased Icon Business Centre, Thorpe Park for 4 million. Full year volumes totalled just 52 million, with the sale of Princes Exchange to Credit Suisse REF Global for 37 million the most significant deal in 212. Figure 17: Take-up s sq ft Take-up 5 year average Figure 18: Supply and vacancy rates s sq ft 1,6 1, ,2 1 1, Supply (lhs) Vacancy rate (rhs) Figure 19: Prime rents and rental growth Figure 2: Prime yields Prime yields 1 year average 2 year average

10 1 On Point UK Office Market Outlook Q4 212 Manchester Summary statistics Q4 12 Q-o-Q Y-o-Y Figure 21: Take-up 1,4 Take-up (s sq ft) % 1,2 Supply (s sq ft) 2,22-6.9% -11.9% 1, Vacancy Rate (%) 1. -7bps -13bps Prime Rent ( psf) 3... U/C (s sq ft) Investment market Q4 12 Q-o-Q Y-o-Y s sq ft Cap. Value ( psf) Take-up 5 year average Investment Vol. ( m) % Prime Yield (%) bps +5bps Figure 22: Supply and vacancy rates 3, 1 2, leasing volumes totalled 788,269 sq ft, up 13% compared to the previous year. Grade A supply fell to its lowest level since early 211. Prime city centre rents were stable at 3 per sq ft. s sq ft 2, 1,5 1, 5 1 Manchester experienced a strong end to the year with Q4 leasing volumes totalling 297, sq ft - accounting for 3 of total activity in 212. Activity in Q4 was boosted by a number of larger lettings with a total of 6 deals over 1, sq ft. The top 1 deals in terms of floorspace acquired, accounted for 4 of the total. Significant lettings in Q4 include the relocation of HSB from Manchester s out of town market into the city centre following the acquisition of 19,37 sq ft of new space at Chancery Lane. Specialist recruiter Air Enegi also acquired 17,699 sq ft at Bruntwood s refurbished Riverside development. Incentives remain tenant favourable with around 3-36 months achievable on a 1 year term dependent upon grade, type, characteristics and location of the building. It is however anticipated that incentives will reduce shortly particularly for the more attractive stock. Prime headline rents were also stable at 3. per sq ft. Work completed at the 32, sq ft owner occupied Co-op building in Q4. However the development pipeline was broadly unchanged, with just one scheme (One St Peter s Square) currently under construction. A number of schemes have been further postponed, with any new starts in 213 likely to be underpinned by pre-letting activity. Prime yields moved out a further 25 basis points in Q4, to 6.5 reflecting continued investor caution. Investment activity in 212 totalled 91 million, down significantly on 211. The most significant deal to transact was the sale of 1 New York street, for 42 million to Invesco Real Estate. Supply (lhs) Vacancy rate (rhs) Figure 23: Prime rents and rental growth Figure 24: Prime yields Prime yields 1 year average 2 year average

11 On Point UK Office Market Outlook Q Western Corridor Summary statistics Q4 12 Q-o-Q Y-o-Y Take-up (s sq ft) % -24. Supply (s sq ft) 12, Vacancy Rate (%) 14. bps +9bps Prime Rent ( psf) % +4. U/C (s sq ft) % -6. Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) % Investment Vol. ( m) % Prime Yield (%) 6.2 bps -25bps 212 take-up in line with 5-year average. West London continues to face under supply of Grade A. Average prime rents increase by 4. y-on-y. Overall, 212 was a solid year for leasing activity in the Western Corridor with take-up for the year as a whole hitting 2. million sq ft, in line with the 5-year average. Activity was dominated by West London, where annual take-up totalled 1.15 million sq ft, 19% above the 5-year annual average, while the Thames Valley was 2 down on the corresponding 5-year average. Looking ahead to 213, the level of named active demand at end Q4 212 stood at 3.3 million sq ft, up 4 y-on-y, and this encouraging upward trend looks set to continue. Total supply across the Western Corridor increased by y-on-y, driven by a release of second hand Grade B space in the Thames Valley. The West London market continues to have a shortage of Grade A space with the corresponding vacancy rate at just 2.9%. The development pipeline remains constrained with 51, sq ft on site on a speculative basis and due to complete during 213. Beyond this, limited starts on site are expected, particularly impacting on the already undersupplied West London market. Average prime rents have held up relatively well with Western Corridor average prime rents increasing by 4. y-on-y to per sq ft - this is driven by the West London market where rents have grown by 8. over the year to per sq ft. The mismatch between supply and demand is feeding through to rents and we are forecasting further rental increases in a number of undersupplied locations. The wider South East investment market saw 795m transacted during 212, down 5 on the 211 figure (which included the Green Park and Chiswick Park transactions). In Q4 212 notable Western Corridor sales include Chiswick Green to PRUPIM for 48 million, 6.2 initial yield and 5 Longwalk, Stockley Park to a private overseas investor for circa 42 million, 6. initial yield. Figure 25: Take-up s sq ft 3,5 3, 2,5 2, 1,5 1, 5 Take-up 5 year average Figure 26: Supply and vacancy rates s sq ft 14, 12, 1 1 1, 1 1 8, 6, 4, 2, Supply (lhs) Vacancy rate (rhs) Figure 27: Prime rents and rental growth Figure 28: Prime yields Thames Valley prime yields TV 1 year average West London prime yields WL 1 year average

12 12 On Point UK Office Market Outlook Q4 212 Edinburgh Summary statistics Q4 12 Q-o-Q Y-o-Y Take-up (s sq ft) Supply (s sq ft) 1, Vacancy Rate (%) 7. -1bps +1bps Prime Rent ( psf) U/C (s sq ft) Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) Investment Vol. ( m). n/a n/a Prime Yield (%) 6.2 bps +25bps Q4 leasing volumes increased 6. year-on-year. Grade A availability remains severely constrained. Prime rents remain stable, but further growth is expected. Despite the challenging economic conditions, take-up volumes for 212 totalled 737,65 sq ft, up 3 compared to 211. Take-up in 212 was 1 above the 5 year average and only below 1 year average levels. The number of deals was broadly consistent with previous years, however 212 saw some significant lettings in the first half of year which helped to boost volumes. Activity tailed off slightly in the final quarter with just one deal over 1, sq ft. The largest deal involved the acquisition of 11, sq ft at 1 George Street, by Standard Life Investments. Looking ahead, there are a number of active requirements as well as some units under offer which we expect to transact in 213. Overall supply increased slightly year-on-year as a result of further releases of secondary/grade B stock. Overall vacancy rates ended the quarter at 7., however grade A supply remains severely constrained reflecting a vacancy rate of just 1.. The development pipeline was broadly unchanged with 214, sq ft due to be delivered speculatively in 213. Speculative starts are likely to remain limited in 213 or triggered by pre-letting activity. Prime rents were stable in Q4 at 27. per sq ft however we anticipate upward pressure on rents for the best space in the market. Incentives remain tenant favourable with around 3-36 months achievable on a ten year term. Turning to the investment market, prime yields remain stable at 6.2. There was limited investment activity in the city centre during the final quarter, however, PruPIM exchanged on the acquisition of Waverleygate and the German Fund GLL was under offer to acquire Calton Square. Both are significant deals, highlighting that for prime stock there remains interest from UK Institutions and foreign buyers. Figure 29: Take-up s sq ft 1,4 1,2 1, Take-up 5 year average Figure 3: Supply and vacancy rates s sq ft 2,5 1 9% 2, 1,5 1, 3% 5 1% Supply (lhs) Vacancy rate (rhs) Figure 31: Prime rents and rental growth Figure 32: Prime yields Prime yields 1 year average 2 year average

13 On Point UK Office Market Outlook Q Glasgow Summary statistics Q4 12 Q-o-Q Y-o-Y Figure 33: Take-up 1,2 Take-up (s sq ft) , Supply (s sq ft) 1, % 8 Vacancy Rate (%) 11. bps +13bps Prime Rent ( psf) U/C (s sq ft). n/a n/a Investment market Q4 12 Q-o-Q Y-o-Y Cap. Value ( psf) 44.. s sq ft Take-up year average Investment Vol. ( m) % Prime Yield (%) 6.2 bps bps Figure 34: Supply and vacancy rates 2, 1 Supply fell marginally but vacancy rates remain high. Take-up remained subdued, with a lack of larger deals and Grade A lettings the primary cause. Speculative activity is expected to pick up pace in 213. s sq ft 1,6 1, City centre take-up in Glasgow totalled 358,452 sq ft in 212, 1 up on 211 but 1 below the 5-year annual average. Leasing activity continued to slow in the fourth quarter with just 7,558 sq ft let, bringing full year volumes to 358,452 sq ft. There continued to be a lack of larger deals with just eight deals over 1, sq ft in 212. Grade A activity was also subdued with just two Grade A transactions recorded. The most significant deal in Q4 involved the acquisition of 14,931 sq ft at George House by investment managers Spiers & Jeffrey. Supply conditions were broadly unchanged over the quarter, however 212 has seen a steady increase in overall availability. The volume of surplus grey space stood at c. 744, sq ft at the end of Q4, compared to around 624, sq ft at end 211. Vacancy rates currently stand at 11. compared to 1. at the end of 211. However, new build Grade A supply remains relatively low with vacancy rates currently at 3.. At the end of Q4 there was nothing under construction. However, following the acquisition of 1 West Regent Street, Mountgrange and Prupim will jointly fund development of 15, sq ft of new build Grade A office space. Construction is expected to commence in Q1 with completion estimated in early 215. BAM Properties will also redevelop 11 Queen Street delivering a further 18, sq ft of new office space in mid-215. Both schemes will provide much needed new build office space for Glasgow. Prime office yields were unchanged in Q4, at 6.2. Investment activity for 212 as a whole totalled 156 million, up from 11 million in the previous year. Notable transactions in 212 include the sale of 141 Bothwell Street for 7 million to Pramerica as well as the acquisition of G1 by Union Investment for 6 million. Supply (lhs) Vacancy rate (rhs) Figure 35: Prime rents and rental growth Figure 36: Prime yields Prime yields 1 year average 2 year average

14 14 On Point UK Office Market Outlook Q4 212 Beyond the Core Markets Bath Exeter Slight upturn in occupier activity. Financial services drive the market. Incentives remain key. Take up during 212 reached 1, sq ft in the city centre, an encouraging level and up 2 on the previous year. Bath continues to offer a highly sustainable quality of life argument with employers able to recruit at all levels utilising the Bath offer and this is reflected in the relatively strong demand levels. Key deals during 212 include the letting of 18, sq ft at Midland Bridge House to Withy King as their new corporate headquarters and Altran Praxis relocating to 17, sq ft at St Lawrence Court, Southgate. However, it is the financial services sector that continues to drive the market with expansion from Novia, Investec and Epoch Wealth Management all indicative as to the strength of this particular sector. Figure 37: Prime city centre rents Alternative uses remain key in terms of absorbing outdated stock with developers and owners reviewing options, particularly having regard to recent announcements on the relaxation on planning requirements for change of use from offices to alternative uses. Office development activity remains at a standstill and is unlikely to change until stock levels are reduced and incentives minimised. Headline rents have moved forward to 22 per sq ft but incentives remain key with two to three months on offer for every year of term certain. Prime yields in the Bath office market are currently at 7.5 which is above the level of the UK weighted regional office yield at Take-up slightly down on 211. Limited Grade A supply but some signs of development activity. Prime rents stabilise and are supported by generous incentives. Take-up in the Exeter market totalled 13, sq ft during 212. The majority of good quality space was taken up in the out of town market. There were no deals over 1, sq ft but Barratts acquired 8, sq ft and the Gro Company 7, sq ft, both at Matford. In the city centre, the impact of structural demand was highlighted by Your Move, who were under offer on 22, sq ft of new Grade A space but instead renewed their existing lease (12, sq ft) and took just under 8, sq ft in the Forum of good quality refurbished space. The most significant acquisition in the city centre was St Loyes Foundation`s freehold acquisition of Beaufort House (3, sq ft) for their own occupation. Overall supply for the whole market currently stands at 31, sq ft, reflecting a vacancy rate of 13.1 %. Grade A supply remains constrained with no speculative development activity in 212. However there are signs of some occupiers starting to look at new build for occupation in two years time. Whilst no new development has started in the out of town market, substantial infrastructure works have been funded by the public sector to open up the Science Park, SkyPark and the airport. Following this, work will start in June 213 on the new 3, sq ft Science Park Centre on the Exeter Science Park which will kick start the scheme with Growing Places Funding. Prime rents in town have stabilised at 15. per sq ft for new and 13. per sq ft for good quality second hand, down from around 18. (inclusive of parking) per sq ft at the end of 21. However, it remains difficult to set a tone because of the disparity in dealing levels and the incentives which landlords are willing to offer. Quoting rents for new build remain static at 17.5 per sq ft. Prime yields in the Exeter office market are currently at 7.5. Figure 38: Prime city centre rents

15 On Point UK Office Market Outlook Q Liverpool Newcastle Total volume of space (lettings above 1, sq ft) taken in 212 was down on 211. Overall supply remains inflated, but Grade A space in the city centre is dwindling. Prime rents remain stable, with little sign of any upward pressure. Take-up in Liverpool (lettings above 1, sq ft) during 212 totalled 159, sq ft which is down on the previous year. Demand in the Liverpool Commercial District has largely been characterised by an internal churn of indigenous occupiers moving to higher quality refurbished buildings or Grade A space. Key transactions during 212 include Service Source acquiring 22,5 sq ft at The Plaza and TATA taking 22,12 sq ft at 1 Tithebarn Street. There are a few large requirements currently in the market, mainly owing to forthcoming lease expiries, which provides some encouragement for demand levels in 213. In terms of supply, Liverpool offers a good level of high quality refurbishments but a more restricted supply of new build Grade A. There is a large supply of Grade C and Grade D accommodation, much of which is unlikely to ever be occupied again as offices and will attract alternative uses. There is currently no speculative development on site in Liverpool and it would take two to three years for any scheme to complete, therefore requirements in the short to medium term will rely on the remaining grade A space and good quality refurbishments. Prime rents have stabilised at 2. per sq ft. Grade A space in the central business district varies from: per sq ft, Grade B in-town rents range typically between per sq ft dependent on location and specification. Incentives remain generous, with in the region of two years rent free on a five year lease. Figure 39: Prime city centre rents Out of town market performed well in 212. Balanced Grade A supply and demand in the city centre. Headline rents increase, although incentives remain generous. Take-up levels in Newcastle s city centre during 212 remained subdued but activity in the out-of-town market was higher with the largest transactions including Amec acquiring 48, sq ft in Darlington and 29,79 sq ft at L9 Partnership House, Gosforth and Foster Wheeler leasing 25,317 sq ft at Centre North East. Middlesbrough. Traditionally office occupier demand in Newcastle has been driven by the public sector. However, public sector retrenchment in recent years has led to reduced demand and many existing requirements are a result of lease expiries or businesses trading up into better space. Indeed over the next s we expect to see some larger transactions complete as a result of break clauses in leases dating back to 27/8. Supply and demand levels are relatively balanced In Newcastle with the city centre vacancy rate currently standing at 9.. There is circa 33, sq ft of Grade A space available in 1 buildings in the city centre. There is no speculative development activity in Newcastle s city centre market and, given the reasonable supply levels, it is unlikely that any will start on site in the short term. In the out of town market, the most significant speculative development underway is Highbridge Properties 58,4 sq ft headquarters-style building at Cobalt Business Park, which is due for completion early 213. Figure 4: Prime city centre rents Prime headline rents in Newcastle rose to 21.5 per sq ft over the course of 212, increasing by 7. y-on-y. However, this is not typical of the Newcastle market in general where rents are being squeezed. Landlords continue to offer generous incentives, at around 36 months based on a 1 year term

16 16 On Point UK Office Market Outlook Q4 212 Nottingham Southampton Low level of occupier in-town activity in Q4. Shortage of Grade A in-town options and no speculative development planned. Headline city centre Grade A rents unchanged. Take-up in Nottingham during 212 was down on the previous year with fewer larger deals (over 1, sq ft) signing. Looking ahead to 213 a significant upturn in demand is not expected due to a lack of lease expiries in the pipeline which would typically generate requirements. Tenants remain generally reluctant to move unless they can get into better quality space without compromising on overheads. The vacancy rate ended 212 at 12. and is expected to decrease further over the course of 213 as a number of poorer quality buildings are redeveloped for student accommodation principally in the northern part of the city around Nottingham Trent University. During 212 Lawrence House (45, sq ft) was acquired by Study Inn for such a conversion. There is limited Grade A in-town space available, with 8 of the 1, sq ft available located in just two buildings (Castle Wharf and 37 Park Row). In terms of future potential development there are a number of consented sites which could be brought forward in the short to medium term. However the best sites are not quite ready and have not been fully master planned. Subdued take-up levels during 212. Shortage of Grade A in-town space with no speculative development planned. Prime in-town rents remain stable. Take-up levels were relatively subdued in Southampton during 212 with the third quarter proving the best for take-up in an otherwise quiet year. Significant city centre transactions included NHS Shared Business Services taking 17,5 sq ft at Waterside House and Lloyds Register taking 13, sq ft at Mountbatten House. Out-oftown the largest deal was the acquisition by owner occupier, Ageas of around 86,1 sq ft at Hampshire Corporate Park, Chandlers Ford. City centre Grade A supply levels are limited with just four buildings available. The market is generally characterised by a glut of Grade B / C accommodation. There is a growing trend towards change of use on a number of buildings which have outlived their economic usefulness. In the development pipeline, there are a couple of significant schemes in the city centre with permission. The largest of these comprises Cumberland Commercial s site, which has two existing consents totalling circa 161,46 sq ft. Figure 42: Prime city centre rents Figure 41: Prime city centre rents % % Headline in-town Grade A rents are currently at 19. per sq ft. Typical incentives offered on a five-year term certain stand at 12 to 18 months rent free. Prime city centre rents remain unchanged at 19.5 per sq ft. Incentives vary from building to building and location to location but for good quality space the average rent free period is typically 12 months for every five years term certain

17 On Point UK Office Market Outlook Q Definitions Take-up Floor space acquired for occupation by lease, prelease, freehold or long leasehold sale in the City Centre (unless otherwise stated). All deals are included with the exception of Western Corridor and Bristol where a 5, sq ft and 1, sq ft threshold is applied respectively. Cardiff Take-up includes City Centre and Cardiff Bay. 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. Demand New enquiries logged on a quarterly basis, over 2, sq ft for London and the South East and over 1, sq ft for the regional markets Prime Rent The Jones Lang LaSalle view of the highest rent achievable for a hypothetical 1, 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, engineering, food and drink etc Public Administration & Institutions: Central and local government, institutions, charities, quangos, health and social etc

18 18 On Point UK Office Market Outlook Q4 212 Business contacts Jeremy Richards National Offices Bristol +44 () Chris Hiatt National Offices London West End + 44 () chris.hiatt@eu.jll.com Leasing contacts John Mulholland Bath +44 () john.mulholland@eu.jll.com Jonathan Carmalt Birmingham +44 () jonathan.carmalt@eu.jll.com Ian Wills Bristol +44 () ian.wills@eu.jll.com Rhydian Morris Cardiff +44 () rhydian.morris@eu.jll.com Cameron Stott Edinburgh + 44 () cameron.stott@eu.jll.com Andrew Pearce Exeter +44 () andrew.pearce@eu.jll.com Mike Buchan Glasgow +44 () mike.buchan@eu.jll.com Jeff Pearey Leeds +44 () jeff.pearey@eu.jll.com Chris Prescott Liverpool +44 () chris.prescott@eu.jll.com Chris Mulcahy Manchester +44 () chris.mulcahy@eu.jll.com Simon Taylor Newcastle +44 () simon.taylor@eu.jll.com Matthew Smith Nottingham +44 () matthew.smith@eu.jll.com Jason Webb Southampton +44 () jason.webb@eu.jll.com James Finnis Western Corridor +44 () james.finnis@eu.jll.com

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20 Investment contacts Mark Wilson National Offices +44 () Angus Minford National Offices +44 () Ben Kelly Midlands +44 () Olly Paine South West +44 () Simon Merry North West +44 () Andrew Summersgill North East +44 () Chris Macfarlane Edinburgh +44 () Colin Finlayson Edinburgh +44 () Ross Burns Glasgow +44 () Research contacts Karen Williamson UK Research +44 () Vicky Heath UK Research +44 () UK Office Market Outlook Q4 212 OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends. Printed on recycled paper COPYRIGHT JONES LANG LASALLE IP, INC 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.