CENTRAL LONDON PROPERTY MARKET REVIEW

Transcription

1 CENTRAL LONDON PROPERTY MARKET REVIEW CBRE RESEARCH QUARTER NO ONE KNOWS LONDON QUITE LIKE

2 FOREWORD The summer marked a turning point for the UK economy, with the rate of recovery exceeding expectations. In Q2, we saw GDP rise by.7%, while the International Monetary Fund (IMF) once again upgraded its 213 growth forecast, predicting growth of 1.4%, up from.9% only three months ago. We ve seen UK services increase at their fastest rate since 1997, supported by growth in the financial and business sectors. Meanwhile, the key drivers of property demand office-based employment and retail sales continued to strengthen. The latter is particularly impressive when one factors in the positive impact of the Olympics on retail sales in 212. The summer also marked a turning point in the Central London real estate market, with office leasing above trend for a second consecutive quarter. We have also seen growing competition for space, with nine deals of over 1, sq ft each in 213 to date, compared with five in the whole of 212. Central London retail continued to attract strong demand from a range of international retailers, with a flurry of activity in preparation for Christmas. The shortage of available stock on the main streets has led to an increase in demand for other locations. Elsewhere, the Central London residential market has seemingly moved up another gear, with sales volumes continuing to rise as the economic recovery and increasing access to debt boost demand. Prime Central London continues to lead the way, thanks to its appeal to overseas buyers, but government initiatives such as Help to Buy and Funding for Lending are expected to stimulate the low to mid-end of the market in future. CONTENTS In the investment market, Central London experienced a surge in turnover in Q3, as domestic investors sought opportunities presented by the recovery in the leasing market. Overseas demand remained as strong as ever, resulting in a number of prominent transactions in both the office and retail markets. OFFICE LEASING page 3 Our expectation for the final quarter of 213 and the first half of 214 is for more of the same, with the strengthening economic recovery stimulating further demand in the occupier market. This will help support office take-up levels and lead to renewed rental growth. Meanwhile, the high demand for Central London retail from international retailers will help support prime retail rents, as formerly secondary areas become more established due to the spillover in demand. London is well positioned to capture future capital flows, offering overseas investors a gateway into Europe in addition to the opportunity to invest in one of the most liquid and transparent markets in the world. OFFICE DEVELOPMENT page 12 OFFICE INVESTMENT page 13 RETAIL LEASING page 17 Adam J Hetherington Managing Director, Central London RETAIL INVESTMENT page 21 RESIDENTIAL page 23 1

3 ECONOMIC OVERVIEW * GDP FORECAST.8% CL HOUSE PRICES 9.7% y-o-y July UK RETAIL SALES.7% y-o-y September UK BUSINESS CONFIDENCE UK CONSUMER CONFIDENCE GROWTH HAS EXCEEDED EXPECTATIONS SO FAR THIS YEAR, AND IF SURVEY EVIDENCE IS TO BE BELIEVED, FURTHER ACCELERATION IS ANTICIPATED IN THE REMAINDER OF THE YEAR. Economic growth accelerating As far as the UK economy is concerned, the news was almost universally positive over the summer. Quarterly GDP growth picked-up to.7% in Q2, and if survey evidence such as the Purchasing Managers Indices (PMIs) which are at their highest levels in years is to be believed, then further acceleration is projected for the remainder of the year. The labour market continues to be a source of good news. Total employment in the three months to July stood at 29.8 million, an increase of 275, from a year earlier. The unemployment rate fell to 7.7% from 7.8% in the previous three months and in August the claimant count declined for the 1th consecutive month. However, the trade-off for that job creation is that wage growth remains subdued. In July, average earnings growth was just 1.1%, less than half the rate of inflation. Fortunately for consumers, the rate of inflation is likely to ease during the coming months. At present it seems that increasing employment, combined with receding inflation and a recovery in the housing market, is offsetting subdued earnings growth and driving consumer spending growth. Retail sales are on an upward path, and in September, despite falling from the previous month, UK sales volumes were.7% above their level a year earlier. The housing market recovery is undoubtedly contributing to growth at present, but if price growth doesn t prompt a supply response from house builders, then it could be a source of problems in the future. These cautionary points don t change the fact that so far this year, growth has exceeded expectations. As a consequence, forecasts of GDP growth are being revised upward, with consensus forecast GDP growth of 1.3% in 213, accelerating to 2.1% in 214. London leading the recovery In the three months to July, total employment in London stood at 3.95 million, which was a new record high. This was an increase of 2.4% from a year earlier, comfortably outpacing the respectable.9% growth recorded across the UK. Recent survey evidence suggests that London s outperformance will continue. The PMIs for London have been even more upbeat than those for the UK as a whole. August s readings showed London outperforming in terms of output, orders, business outstanding and employment. Oxford Economics are forecasting GDP growth of 1.8% for London in 213 compared with 1.4% for the UK. A sustainable recovery? This growth is welcome, but it is not yet clear how broadly based the recovery has been. Recent growth has been concentrated in household expenditure rather than investment, while exports fell by 4.6% in July, unwinding some of the recent strength in net trade. Looking forward, the level of office-based employment in Inner London is expected to increase by an average of 1.9% per annum over the coming five years. This rate is a moderation from the rapid increase of recent years but is ahead of the 1.4% growth per annum forecast across the UK as a whole. Chart 1: UK Economic Sentiment & Services Sector Confidence Chart 2: Office-Based Employment Growth Index, Series Average = 1 Whole Economy Economic Sentiment (LHS) Service Confidence Indicator (RHS) Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep Balance of Responses, SA Annual % Change UK 21 Inner London FORECAST FORECAST 217 Source: DG ECFIN *Oxford Economics, ONS, ICAEW/Grant Thornton, DG ECFIN Sources: CBRE, Oxford Economics 2

4 CENTRAL LONDON OFFICE LEASING The Central London office market has turned, with the pick-up in the first half of the year continuing into Q3. With ever-increasing signs of economic recovery improving occupier confidence and therefore advancing relocation decisions, competition for space is likely to intensify in the final quarter. Phillip Howells Executive Director West End Agency View from 2 Fenchurch Street 3

5 CENTRAL LONDON OFFICE LEASING TAKE-UP 4% (3.6m sq ft) UNDER OFFERS -13% (2.5m sq ft) AVAILABILITY -5% (16.9m sq ft) CENTRAL LONDON PRIME RENT INDEX 2.3% LEASING LEVELS REMAINED ABOVE TREND FOR A SECOND CONSECUTIVE QUARTER, DEMONSTRATING THAT THE RECOVERY IN THE OCCUPIER MARKET IS UNDERWAY. WITH AVAILABILITY NEARING ITS PEAK, RENTAL GROWTH IS FORECAST IN ALL CENTRAL LONDON MARKETS IN 214. Take-up continues to rise Central London take-up increased by 4% over the quarter to reach 3.6m sq ft, remaining above the 1-year average of 3.m sq ft for a second consecutive quarter. The uplift in take-up is also reflected in the rolling annual total, with take-up for the past 12 months standing at 12.5m sq ft, marking its highest point since Q1 211 (12.6m sq ft). As in the previous quarter, the majority of take-up was concentrated in the West End (1.2m sq ft) and the City (1.1m sq ft), with the former back above trend and recording its highest level since Q2 211 (1.2m sq ft). Take-up was also above the 1-year average in Southbank (.8m sq ft) and Docklands (.3m sq ft). Midtown saw take-up fall to.2m sq ft from.6m sq ft. The largest fall in supply was in Southbank, where availability fell to 1.4m sq ft following the 43,2 sq ft letting to News UK at The Place in London Bridge Quarter. Availability also fell in the West End and Docklands to 4.9m sq ft and 1.7m sq ft respectively. Meanwhile, availability increased slightly in the City and Midtown to 7.1m sq ft and 1.8m sq ft respectively, when major schemes completing in 12 months were brought into the availability figures. Prime headline rents continue to rise in the West End Prime headline rents increased in five West End markets, including Mayfair and St James s, which increased by 3% to 1. per sq ft, a level last seen in 27. Under offers fall but remain high The volume of space under offer fell by 13% over the quarter to 2.5m sq ft, marginally below the 1-year average of 2.7m sq ft. This fall was due to a number of key lettings transacting. Even so, there remains a sufficient volume of space under offer to suggest that the recovery in leasing levels will continue in the final quarter of the year. Prime rents remained unchanged in all other main Central London markets, with both the City and Midtown at 55. per sq ft and Southbank and Docklands at 45. per sq ft and 38.5 per sq ft respectively. Availability falls to 16.9m sq ft Central London availability fell by 5% to stand at 16.9m sq ft, falling in line with the 1-year average. This caused the availability rate to fall to 7.7% from 8.1% a quarter ago. OUTLOOK Chart 3: Central London Take-up and Availability Take-up in 213 is forecast to be above trend, boosted by improving economic growth, higher business confidence and a number of significant lease events. With stronger economic growth forecast in 214, we expect leasing levels to accelerate, resulting in higher levels of take-up. Availability is forecast to peak in 213, preceding 214 s high point in the current development cycle. The high levels of demand forecast for 214 are expected to absorb the new supply coming through, causing availability to fall Take-up Availability (RHS) FORECAST

6 CITY OFFICE LEASING TAKE-UP -32% (1.1m sq ft) UNDER OFFERS -27% (.9m sq ft) AVAILABILITY +2% (7.1m sq ft) PRIME RENTS 55. Chart 4: City Take-up Chart 5: Sector Structure of City Take-up 2.5 Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) 7 15% 2% Banking and Finance % Business Services Manufacturing, Industrial and Energy % 4% 16% Insurance Public Sector Professional Consumer Services and Leisure Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q % 5% TMT City take-up fell by 32% in Q3 to 1.1m sq ft, following a high total in Q2, when a number of large deals completed. This caused take-up to fall below the 1-year average of 1.2m sq ft; however, the rolling annual trend is positive, with take-up for the past 12 months totalling 5.1m sq ft, marking its highest point since Q1 211 (5.1m sq ft). The downturn in take-up was reflected across all types of space, with the most significant fall noted in pre-let space, which fell by 71% to.1m sq ft. The volume of secondhand and new take-up also declined, falling by 17% and 24% to.7m sq ft and.3m sq ft respectively. In the previous quarter, nine deals over 5, sq ft helped support take-up. In Q3, the number of deals over that threshold fell to three. The largest of the quarter saw law firms CMS Cameron McKenna and Field Fisher Waterhouse take 14,3 sq ft at Cannon Place, 78 Cannon Street, and 1,7 sq ft at Riverbank House, 2 Swan Lane respectively. Those deals follow significant Central London lettings to Bird & Bird and Debevoise & Plimpton in the previous quarter and Nabarro in Q4 212, all of which were driven by pending lease events but adding further weight to the argument that occupier confidence is improving. Strong demand from the legal sector pushed the proportion of professional take-up to 26% in Q3. Banking and finance again showed signs of greater activity accounting for 2% of take-up. The sector was supported by a 49,1 sq ft letting to Vanguard at The Walbrook Building; business services, and technology, media and telecommunications (TMT), accounted for 16% and 15% of Q3 take-up respectively. The volume of under offers fell by 27% over the quarter to.9m sq ft, following the high turnover of deals. As a result, volumes fell below the 1-year average of 1.1m sq ft, but there remains sufficient space under offer to support current levels of take-up in the final quarter. Table 1: Key City Transactions, Address Sq Ft Occupier Business Sector Cannon Place, 78 Cannon Street Riverbank House, 2 Swan Lane The Billiter Building, 22 Billiter Street 14,3 CMS Cameron McKenna Professional 1,7 Field Fisher Waterhouse Professional 59,3 London School of Business and Finance Consumer Services and Leisure The Walbrook Building 49,1 Vanguard Banking and Finance 1/2 Broadgate 46,1 Royal Mail Public Sector 5

7 Chart 6: City Availability Chart 7: City Development Pipeline Secondhand New Under Construction New Completed 1-Year Average Completed Proposed Available Under Construction Let/Under Offer Proposed Let/Under Offer Under Construction Available 1-year Average Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q City availability rose by 2% over the quarter to reach 7.1m sq ft, also reflected in the availability rate, which increased from 9.3% to 9.5%. This compares with a 1-year average of 7.5m sq ft and marked its highest point since Q1 212 (7.1m sq ft). The increase was driven by a 19% uplift in early marketed stock, which reached 2.1m sq ft, as new developments such as the Leadenhall Building (with 216,6 sq ft still available) moved to within 12 months of completion. Q3 early marketed supply reached the highest level since Q1 29 (2.1m sq ft). The quantum of new completed space also increased over the quarter, rising by 3% to 1.4m sq ft. Secondhand supply fell by 5% to 3.6m sq ft. There were 14 buildings of 1, sq ft or more available in the City in Q3. Currently under construction, 2 Fenchurch Street represented the largest quantum of available space in a single building, at 292,5 sq ft; 125 London Wall was the largest secondhand unit, at 224,1 sq ft. Development completions totalled.4m sq ft in Q3, with a total of 1.3m sq ft expected in 213, which is substantially below the 1-year average of 1.9m sq ft. Completion levels are projected to peak at 3.1m sq ft in 214, with only 1.6m sq ft in 215 and 2.7m sq ft expected in 216. In total, the development pipeline equates to a potential 8.7m sq ft of new space being delivered from 213 to 216. Of that around 6.3m sq ft is speculative, with the largest volumes anticipated in 214 (2.2m sq ft) and 216 (2.3m sq ft). The long-term development outlook is likely to change though, because 2.6m sq ft, scheduled for delivery from 214 to 216, is not yet under construction and is unlikely to start without first securing a pre-let. OUTLOOK Typical headline City rents were unchanged, at 55. per sq ft over the quarter, having remained at that level since Q4 21. Even though there have been some isolated examples of improving rents, across the wider market typically rent-free incentives have hardened, thereby starting to increase net effective rents. Stronger demand in the Core and not just in the buoyant markets of Clerkenwell and Shoreditch will in time result in headline rents increasing in all City markets. This will be pronounced in 214 if current activity is maintained. Annual % Change Chart 8: Prime City Rent FORECAST

8 WEST END OFFICE LEASING TAKE-UP 17% (1.2m sq ft) UNDER OFFERS 2% (1.m sq ft) AVAILABILITY -1% (4.9m sq ft) PRIME RENTS 3% ( 1.) Chart 9: West End Take-up Chart 1: Sector Structure of West End Take-up Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) 24% 14% Banking and Finance % Business Services Manufacturing, Industrial and Energy Insurance Public Sector.2 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q % 6% 2% 16% Professional Consumer Services and Leisure TMT West End take-up increased again in Q3, rising by 17%, to reach 1.2m sq ft. This not only brought take-up back above the 1-year average of 1.m sq ft but also marked the highest point since Q2 211 (1.2m sq ft). The uplift in leasing activity caused the rolling annual total to reach 3.8m sq ft compared with 3.7m sq ft 12 months ago. The increase was driven by a significant upswing in new completed take-up, which reached.4m sq ft in Q3 from.1m sq ft in Q2, as deals to Facebook and Schlumberger Oil completed at 1 Brock Street, Regents Place (87,7 sq ft) and 62 Buckingham Gate (64,6 sq ft) respectively. The latter scheme also saw Rolls Royce take 37,4 sq ft. Conversely, the quantum of secondhand and pre-let space fell by 3% and 78% to.8m sq ft and 18,2 sq ft respectively. In contrast with previous trends, there were three deals over 5, sq ft, of which the largest saw retailer ASOS.com acquire 95,5 sq ft at Greater London House. The TMT sector was the most active over the quarter, accounting for 24% of take-up, of which a large proportion was underpinned by the deal to Facebook. The letting by ASOS.com helped boost take-up by the consumer services and leisure occupiers, accounting for 2% of the total; a number of lettings by serviced-office operators, such as Instant Managed Offices at The Point (35,5 sq ft), caused the proportion of business services take-up to stand at 18%. The high level of take-up was reflected across the majority of submarkets, with only North of Oxford Street West (117,1 sq ft) and Knightsbridge (3, sq ft) recording take-up below the respective 1-year averages of 141,6 sq ft and 24,5 sq ft. The best-performing markets relative to trend were Soho (97,2 sq ft) and North of Oxford Street East, including Bloomsbury and Euston (317,4 sq ft), against 1-year averages of 71,6 sq ft, and 238,6 sq ft respectively. The amount of space under offer increased by 2% over the quarter to 1.m sq ft, 22% above the 1-year average of.8m sq ft, suggesting that the improvement in take-up will be sustained in the coming quarters. Table 2: Key West End Transactions, Address Sq Ft Occupier Business Sector Greater London House, Hampstead Road 1 Brock Street, Regents Place 95,5 ASOS.com Consumer Services and Leisure 87,7 Facebook TMT 62 Buckingham Gate 64,6 Schlumberger Oil Manufacturing, Industrial and Energy 62 Buckingham Gate 37,4 Rolls Royce Manufacturing, Industrial and Energy The Point 41/43, North Wharf Road 35,5 Instant Managed Offices Business Services 7

9 Chart 11: West End Availability Chart 12: West End Development Pipeline Secondhand New Under Construction New Completed 1-Year Average Completed Proposed Available Under Construction Let/Under Offer Proposed Let/Under Offer Under Construction Available 1-Year Average 1.2. Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q Availability fell by 1% over the quarter to 4.9m sq ft, also falling 9% below the 1-year average of 5.4m sq ft. This caused the availability rate to fall to 5.7%. The largest decrease was noted in new completed supply, which fell by 13% to 874,7 sq ft, but which remained above the 1-year average of 773,9 sq ft. Q3 also saw the quantum of secondhand and early marketed space fall by 8% and 1% to 2.8m sq ft and 1.2m sq ft, respectively. However, early marketed supply remained well in excess of the 1-year average of.9m sq ft due to the high levels of new development. Supply levels in the majority of West End submarkets were below trend, with the exception of St James s, and Covent Garden and Strand, where availability stood 5% and 5% above the 1-year average respectively. As in the previous quarter, Knightsbridge recorded the lowest amount of available stock relative to trend: 35% below its 1-year average. Development completions increased to.6m sq ft in Q3 from.5m sq ft in Q2, bringing total completions for the year to date to 1.2m sq ft. The largest scheme to complete over the quarter was British Land s 1 Brock Street, totalling 32,4, of which 295,3 sq ft is let to occupiers, including Debenhams (174,5 sq ft) and Facebook (87,7 sq ft). The largest available unit in the West End was at 1 Bloomsbury Way, due to complete in Q2 214 and totalling 152,2 sq ft; the largest ready-to-occupy unit was at Park House (14,9 sq ft). The fall in availability was reflected across most submarkets, with only Soho, Covent Garden and Strand, and St James s seeing an increase, with availability rising by 12%, 5%, and 3% to.3m sq ft,.5m sq ft, and.6m sq ft respectively. The largest decline was noted in North of Oxford Street East where availability fell by 28% to.9m sq ft following the high levels of take-up in Q3. Development completions are scheduled to total 1.4m sq ft in 213, which is above the 1-year average of 1.m sq ft. In 214 and 215, completion levels are projected to deliver 1.3m sq ft and 1.5m sq ft respectively before peaking at 1.7m sq ft in 216. Around 4.9m sq ft of the 5.9m sq ft scheduled for delivery from 213 to 216 is speculative. However, with the majority of that space yet to go under construction, the timing of later schemes will depend on the availability of financing and the continuation of the occupier market recovery over the next year or so. OUTLOOK Prime rents increased in the majority of West End markets, including Mayfair and St James s, which increased for the third consecutive quarter to 1. per sq ft. The strongest growth was seen in Victoria and Knightsbridge, where prime rents rose by 8% each to 7. per sq ft and 65. per sq ft, respectively. Prime rents in Soho ( 77.5 per sq ft) and North of Oxford Street East ( 65. per sq ft) also increased. West End prime rents, reflective of Mayfair and St James s, are unlikely to increase further in 213, having already risen by 8.1%. However, that might change should leasing activity remain strong. We forecast rental growth of around 4.% in 214, driven by the wider economic recovery filtering through to the occupier market. Annual % Change Chart 13: Prime West End Rent FORECAST

10 SOUTHBANK OFFICE LEASING TAKE-UP 386% (.8m sq ft) UNDER OFFERS -55% (.2m sq ft) AVAILABILITY -26% (1.4m sq ft) PRIME RENTS 45. Chart 14: Southbank Take-up Chart 15: Southbank Availability Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-Year Average Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Take-up in Southbank increased to.8m sq ft in Q3 from.2m sq ft in Q2, marking the highest level since Q2 27 (.9m sq ft) and compared with a 1-year average of.2m sq ft. This brought the rolling annual total to 1.2m sq ft, 31% above the.9m sq ft in Q Take-up in Q3 was driven by two deals over 2, sq ft. The largest occurred at The Place, 25 London Bridge Street, where News UK moved its London headquarters from Wapping, taking 43,2 sq ft. Advertising firm Ogilvy & Mather leased 216,3 sq ft at Sea Containers House, North Building, in the second largest deal of the quarter. In a quarter of strong Central London take-up, both deals represented the largest across Central London in Q3. As a result of the aforementioned lettings, the TMT sector accounted for the majority of take-up in Q3, taking 86% of the total. The high turnover of deals caused the volume of space under offer to fall by 55% to.2m sq ft in Q3, although it remained roughly in line with the 1-year average, suggesting that take-up will remain above trend in the final quarter. Availability fell by 26% over the quarter to stand at 1.4m sq ft but remained significantly above the 1-year average of.9m sq ft. This quarterly change caused the availability rate to fall to 7.9%. The largest decline was in early marketed space, which fell by 79% over the quarter to.2m sq ft following the lettings at The Place and Sea Containers House. There was also a 2% fall in secondhand supply, which stood at.4m sq ft. New completed stock increased by 35% to reach.8m sq ft. Completion levels in 213 to date reached.8m sq ft, boosted by the completion of major schemes such as The Place (43,6 sq ft) and 1 London Bridge (168,3 sq ft, with 138,2 still available) in Q3. There are no further developments planned in 213. A further 1.4m sq ft is scheduled for delivery from 214 to 216, of which.8m sq ft is speculative. OUTLOOK Southbank prime rents, reflective of More London, remained unchanged over the quarter at 45. per sq ft, having increased from 42.5 per sq ft in Q Chart 16: Prime Southbank Rent 2 15 FORECAST Southbank prime rents are forecast to end the year at 47.5 per sq ft, driven by strong demand for new space. Rental growth is forecast to accelerate in 214 as occupier confidence improves due to stronger economic growth and as the new development around London Bridge changes the rental dynamic in the Southbank market Annual % Change

11 DOCKLANDS OFFICE LEASING TAKE-UP 22% (.3m sq ft) UNDER OFFERS -37% (.3m sq ft) AVAILABILITY -6% (1.7m sq ft) PRIME RENTS 38.5 Chart 17: Docklands Take-up Chart 18: Docklands Availability 1.4 Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-Year Average Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Take-up in Docklands increased significantly in Q3, rising to.3m sq ft from.1m sq ft in Q2, to lift take-up back above the 1-year average of.2m sq ft. Q3 marked the highest level since Q3 211 (.4m sq ft) and caused the rolling annual total to rise to.5m sq ft, which is roughly level with a year ago. In contrast with recent quarters when take-up focused entirely on secondhand space, 61% of take-up in Q3 was new completed, with the remainder secondhand. Take-up in Q3 was boosted by the 25,3 sq ft letting to accounting firm KMPG at 3 North Colonnade, with the firm planning to relocate from its current London headquarters at Salisbury Square in the City, following the expiry of its lease in 215. The second largest deal of the quarter saw HSBC take 54,2 sq ft at 1 Canada Square. Under offers fell by 37% over the quarter to stand at 31,8 sq ft, 83% below the 1-year average of.2m sq ft. Availability fell by 6% to 1.7m sq ft in Q3, reflecting an availability rate of 8.9%, but remained above the 1-year average of 1.5m sq ft. That decrease was driven by a 5% decline in new completed space, which fell to.2m sq ft in Q3 following the letting to KPMG in addition to an 8% fall in secondhand space (1.3m sq ft). Early marketed stock remained unchanged at.2m sq ft. The largest available unit in Q3 was at 5 Churchill Place, comprising 286,6 sq ft. There were five additional buildings available at the end of Q3 that were capable of fulfilling a requirement over 1, sq ft. As a result of the letting to KPMG, professional occupiers accounted for 61% of take-up, and banking and finance reflected 21% of the total. OUTLOOK Prime headline rents in Docklands remained stable at 38.5 per sq ft over the quarter, maintaining a level held since Q Chart 19: Prime Docklands Rent FORECAST We expect prime Docklands rents to remain unchanged for the remainder of the year. The outlook for 214 is more positive, however, with growth driven by improving economic conditions, which should filter through to the occupier market. Annual % Change

12 MIDTOWN OFFICES TAKE-UP -71% (.2m sq ft) UNDER OFFERS 33% (.3m sq ft) AVAILABILITY +3% (1.8m sq ft) PRIME RENTS 55. Chart 2: Midtown Take-up Chart 21: Midtown Availability Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-Year Average Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Take-up in Midtown has become more subdued following a very strong start to the year, with.2m sq ft let in Q3, marking a 71% decline from the previous quarter. This caused take-up to fall below the 1-year average of.3m sq ft. The rolling annual total also fell to 1.9m sq ft, but compared with 1.3m sq ft a year ago. In the first half of the year, take-up was driven by a handful of large deals. In Q3, the largest deal was a 27, sq ft letting to investment manager Quilter Cheviot at 1 Kingsway. The second largest deal of the quarter was at 22 Tudor Street, where BAT Industries acquired 16,7 sq ft. As a result, take-up in Q3 was dominated by occupiers from banking and finance, and consumer services and leisure, accounting for 27% and 21% of the total respectively. In addition, manufacturing, industrial and energy accounted for 19% of take-up and TMT 15% of the total. Under offers continued to rise in Q3, increasing by 33% over the quarter to reach.3m sq ft, which is level with the 1-year average. The increase caused under offers to rise to its highest point since Q3 27 (.4m sq ft) and suggests an improvement in take-up in the coming quarters. Availability rose for the second consecutive quarter, rising by 3% in Q3 to reach 1.8m sq ft, which reflected an availability rate of 7.8%. As a result, availability rose further above the 1-year average of 1.5m sq ft and marked its highest level since Q3 25 (1.8m sq ft). The uplift in availability was driven by an increase in secondhand and early marketed space, which increased by 7% and 3% to.7m sq ft and.9m sq ft respectively. The increase was partly offset by a 15% reduction in new completed stock, which fell to.1m sq ft. Development completions are projected to total.4m sq ft in 213, which is on trend, with.3m sq ft having completed in 213 to date. The peak in the development cycle is expected to be reached in 214 with the delivery of 1.3m sq ft. A further 1.1m sq ft is projected per year in 215 and 216, although that may change subject to the strength of the occupier market. Of the 4.m sq ft scheduled for delivery from 213 to 216, 62% is speculative. OUTLOOK Midtown prime rents remained unchanged at 55. per sq ft over the quarter, retaining parity with the City. Midtown prime rents are unlikely to increase further in 213, having already risen by 4.8%. However, Midtown is forecast to show strong rental growth over the next few years, because of its attraction to West End occupiers looking east for lower rental levels, the market s ability to provide suitable grade-a stock, and the impact of Crossrail. Chart 22: Prime Midtown Rent Annual % Change FORECAST

13 CENTRAL LONDON OFFICE DEVELOPMENT DEVELOPMENT COMPLETIONS 13% (1.9m sq ft) CONSTRUCTION STARTS -85% (.3m sq ft) VOLUME OF LAND SALES 15% ( 617m) DEVELOPMENT COMPLETIONS WILL PEAK AT 6.7M SQ FT IN 214 FOLLOWING THE COMPLETION OF A NUMBER OF CITY TOWERS. MEANWHILE, STRONG DOMESTIC DEMAND HELPED BOOST LAND SALES FOLLOWING A SLOW START TO THE YEAR. Completions more than double in Q3 Completion levels more than doubled in Q3 to reach 1.9m sq ft, with 1.4m sq ft concentrated in Southbank (.8m sq ft) and the West End (.6m sq ft), bringing completion levels for the year to date to 3.1m sq ft. Construction starts fall Construction starts fell by 85% to.3m sq ft in Q3, marking their lowest point in 213. The largest scheme to go under construction was Alphabeta (formerly Triton Court), Finsbury Square, totalling 215,1 sq ft, all of which is speculative. The largest scheme to complete over the quarter was The Place, 25 London Bridge Street, totalling 43,2 sq ft and fully let to News UK. The second largest scheme to complete was British Land s 1 Brock Street, totalling 32,4 sq ft, of which 295,3 sq ft is multilet to occupiers including Debenhams, Twitter, and Facebook. The largest speculative scheme to complete was Africa House, 64/78 Kingsway, at 118,3 sq ft. Central London development nearing its peak Development completions are expected to reach 4.m sq ft in 213, exceeding the low totals recorded in 211 (1.7m sq ft) and 212 (2.4m sq ft), but still below the 1-year average of 4.3m sq ft. Completions will peak at 6.7m sq ft in 214, of which 4.6m sq ft is speculative. The total in 214 is boosted by the completion of a number of City towers such as 2 Fenchurch Street (668,9 sq ft, of which 292,5 sq ft remain available) and 122 Leadenhall Street (574,9 sq ft, with 216,6 sq ft remaining). There is currently a further 4.5m sq ft and 6.1m sq ft scheduled to complete in 215 and 216 respectively. These totals may change to reflect market conditions.t Domestic demand drives increase in land sales Land sales continued to recover following a slow start to the year, rising by 15% in Q3 to reach 617m. This brought the total for the year to date to 1.4bn, 5% below the corresponding total in 212. As in the previous quarter, domestic purchasers were the most prominent, accounting for 59% of the total. The value differential between residential and commercial real estate has continued to drive demand for residential land sales, with 59% of land sales in 213 to date for residential use. In Q3, the residential component accounted for 41% of the total compared with 78% in the previous quarter. Chart 23: Central London Developments 16 Completed City West End Other Central London 1-Year Average

14 CENTRAL LONDON OFFICE INVESTMENT Central London remains a key target for overseas capital, and we expect this trend to continue, with growing demand from Asian institutional investors. However, we have also witnessed significantly increased demand from domestic buyers, with UK property companies becoming more active in Q3. Michael Edwards Executive Director Office Capital Markets 44 Dover Street 13

15 CENTRAL LONDON OFFICE INVESTMENT INVESTMENT VOLUMES 1% ( 4.2bn) CL PRIME YIELDS 4.7% FOREIGN BUYERS 45% of transaction volumes AVAILABLE STOCK 1.7bn EFFECTIVE X-RATE 4% TRANSACTION LEVELS REMAINED HIGH IN Q3, DRIVEN BY INCREASED ACTIVITY FROM DOMESTIC INVESTORS. THE WEIGHT OF OVERSEAS MONEY AND RENEWED CONFIDENCE IN THE OCCUPIER MARKET WILL PUT FURTHER PRESSURE ON PRICING IN Q4, PARTICULARLY FOR PRIME ASSETS. Turnover at its highest level since Q3 27 Central London investment transactions increased marginally over the quarter to reach 4.2bn, marking their highest level since Q3 27 ( 5.6bn). This brought the rolling annual total to 14.6bn compared with 12.3bn a year ago. The West End saw the highest volume of transactions over the quarter, contributing 2.bn compared with 1.8bn in the City,.2bn in Docklands,.2bn in Southbank and only 2m in Midtown. 15 deals over 1m drive turnover Underpinning the increase in transaction levels were 15 deals over 1m compared with 1 in the previous quarter and 7 in Q1. The largest deal of the quarter saw British Land buy the Paddington Central Estate, for 476m. The second largest deal of the quarter was by Samsung SRA Asset Management, following the purchase of 3 Gresham Street, for 31m (a 5.15% yield). Recovery in leasing market attracts domestic investors Q3 saw a significant increase in activity from domestic investors, particularly from UK property companies. Drivers for this have been an increase in capital flows and also the desire to take advantage of the growing signs of recovery in both the economy and the leasing market. This has broadened investors investment criteria from core to core plus, resulting in increased competition for development and refurbishment opportunities, with multiple bidding on some assets. Asian demand expected to increase In addition to the increase in domestic investor activity, Central London remains a key market for overseas investors, accounting for 66% ( 17.bn) of transaction volumes since the start of 212 ( 25.8bn). About 2% of the total for the whole period originated from Asia, with the strongest demand from Malaysian ( 1.7bn), Chinese ( 1.bn) and South Korean (.9bn) investors. We expect Asian demand to broaden over the next 12 months, with certain legislative changes in such countries as Taiwan and China that will permit those countries pension funds to invest in non-domestic real estate for the first time. We also anticipate greater demand from those Asian pension and sovereign wealth funds with little or no exposure to international real estate, as illiquid home markets cause investors to consider alternatives. Central London s reputation as a transparent and highly liquid market is likely to continue to make it a priority destination for future overseas demand. Pressure on pricing The high level of investment, coupled with the recovery in the leasing market, has maintained positive pressure on pricing across Central London, with City prime yields moving to 4.75% in Q The weight of money that is chasing limited investment stock could translate into further yield compression in the final quarter in some markets. SOURCES OF DEMAND In contrast with previous quarters, domestic investors accounted for 54% of turnover in Q3, with UK property companies representing 37% of the Q3 total. This was supported by five deals over 1m and five over 5m. UK institutions accounted for 8% of Q3 turnover. Overseas investors accounted for 45% of transaction volumes in Q3. Of these, Asian investors were the most prominent, accounting for 25% of the total, while Middle Eastern investors traded 1%. North American investors were more subdued in Q3, accounting for only 5% of the total. Chart 24: Investment Transactions by Purchaser, 2% 25% 1% 5% 1% 3% 9% 8% 37% UK Institution UK Property Companies UK Other USA and Canada Middle East and North Africa Germany Europe Other Asia Other Overseas Unknown 14

16 CITY OFFICE INVESTMENT INVESTMENT VOLUMES 43% ( 1.8bn) PRIME YIELDS 4.75% FOREIGN BUYERS 58% AVAILABLE STOCK 1.bn EFFECTIVE X-RATE 4% Chart 25: City Office Investment Transactions Chart 26: City Prime Yield vs Swap Rate 2.5 Total 4-Quarter Average 8 City 5-Year Swap Rate billion % Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Investment volumes in the City increased by 43% over the quarter to reach 1.8bn, marking their highest level in a year. This brought transaction levels for the year to date to 3.6bn, which compares with 5.4bn at the same point last year. The total in Q3 was supported by six deals over 1m compared with four in the previous quarter. The largest deal of the quarter saw Samsung SRA Asset Management, a new entrant in Q2, purchase 3 Gresham Street from GIC for 31m on a 5.15% yield. The second largest deal of the quarter involved the sale of the Lloyds Building, 1 Lime Street, to Chinese investor Ping An, for 26m (a 6.1% yield). Sources: CBRE, Macrobond Prime City yields were unchanged at 4.75% in Q3 having moved in from 5.% in Q1, but remain under pressure. The weight of the international capital that is chasing a limited supply of prime buildings with long-term income means that pricing is expected to remain robust. Pricing on secondary or subprime assets with short-term income is likely to improve, as purchaser demand increasingly turns toward less prime assets as the recovery in the occupier market gathers momentum. As in the previous quarter, overseas investors accounted for the majority of turnover in Q3, at 58% compared with 65% in Q2. Asian investors once again accounted for the highest proportion, reflecting 36% of the Q3 total. This was supported by the big-ticket purchases by Samsung SRA Asset Management and Ping An, mentioned above. UK property companies were responsible for 24% of investment volumes in Q3, supported by Area Property Partners 115m purchase of 1 Fleet Place at a 6.17% yield. Stock levels remain tight, which could potentially limit the options available to overseas investors, who have tended to target core assets in prime locations with long income streams. However, some investors have overcome that obstacle by turning to off-market deals, whereas others, such as UK property companies, have sought to take advantage of the improvement in the leasing market by investing in development opportunities in the hope of capitalising on potential rental growth. Table 3: Key City Transactions, Address 3 Gresham Street Lloyds Building, 1 Lime Street Purchaser Samsung SRA Asset Management Capital Value ( m) Yield (%) Ping An Gracechurch Street Legal & General Group Fleet Place Area Property Partners Fleet Place Private investor

17 WEST END OFFICE INVESTMENT INVESTMENT VOLUMES 61% ( 2.bn) PRIME YIELDS 4.% FOREIGN BUYERS 35% of transaction volumes AVAILABLE STOCK.6bn EFFECTIVE X-RATE 4% Chart 27: West End Office ainvestment Transactions Chart 28: West End Prime Yield vs Swap Rate 2.5 Total 4-Quarter Average 6 West End 5-Year Swap Rate 2. 5 billion % Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Investment volumes in the West End increased by 61% over the quarter to reach 2.bn, achieving one of the highest levels on record. This brought turnover for the year to date to 4.7bn compared with 3.3bn a year ago. Turnover in Q3 was driven by seven deals over 1m totalling 1.2bn, compared with four in the previous quarter. The largest deal of the quarter saw the sale of the Paddington Central Estate to British Land for 476m, also marking the largest investment deal in Central London in Q3. The second largest deal saw the Canada Pension Plan Investment Board purchase the CPPIB portfolio, consisting of eight properties, from the BT Pension Fund Trustees for 174m. Sources: CBRE, Macrobond There remains strong demand for properties with residential conversion opportunities due to the value differential between residential and commercial. We expect this trend to intensify in the short-term while planning authorities debate future planning restrictions on residential conversion. Prime yields remained unchanged at 4.%, a position held for over two and a half years. The weight of the money that is chasing a limited supply of available stock could lead to some yield compression in Q4, but it would more likely be property specific and not across the board. In contrast with previous quarters, domestic purchasers accounted for 64% of the West End total, of which the largest proportion was accounted for by UK property companies, reflecting 49% of the total. This was supported by, not only, the British Land acquisition, but also transactions by Almacantar and Alchemy Properties at 125 Shaftesbury Avenue ( 122m on a 5.42% yield) and Great Minster House, North Horseferry Road ( 1m on a yield of 5.75%). Asian investors accounted for 21%, boosted by a 133m purchase by Hong Kong hotel group, Peninsula Hotels at 1/3 Grosvenor Place. West End stock continued to decline over the quarter, falling from 982m in Q2 to 615m in Q3, and placing further constraints on the options open to investors. In the previous quarter, we commented on the possibility of vendors being enticed to bring product to the market due to current pricing and high levels of demand. In Q3, there was some evidence that this has taken place, which should replenish supply levels and help support turnover in the final quarter. Table 4: Key West End Transactions, Address Purchaser Capital Value ( m) Yield (%) Paddington Central Estate British Land 476. Portfolio CPPIB Canada Pension Plan Investment Board Portfolio 1/3 Grosvenor Place Peninsula Hotels Shaftesbury Avenue Almacantar Park Crescent West AMIRI Construction 15. Portfolio 16

18 CENTRAL LONDON RETAIL LEASING The number of London flagship stores continues to grow, as strong international demand spills over from prime Central London streets. This in turn has raised the competition for space in locations previously considered secondary, resulting in significant rental growth in these markets. Steven Stedman Senior Director Retail Picture of the recently opened global Pandora flagship within the Park House development, Oxford Street 17

19 CENTRAL LONDON RETAIL LEASING * CL RETAIL SALES 3.5% y-o-y September CL FOOTFALL -4.6% y-o-y September RENTAL OUTLOOK % WITH THE ECONOMIC RECOVERY GATHERING PACE, CONSUMER CONFIDENCE HAS BEGUN TO IMPROVE, ALTHOUGH SUCH ISSUES AS FALLING REAL INCOMES COULD DERAIL THE RECOVERY. DESPITE THIS, DEMAND IN THE LEASING MARKET HAS REMAINED STRONG, WITH FURTHER GROWTH FORECAST FOR 214. Economic recovery under way, but real wages lag behind Since the start of the year, we have seen the UK take its first steps toward economic recovery. Over the summer, the recovery established a firmer foothold, with strengthening GDP growth (the IMF again upgraded its forecast for 213 to 1.4%), rising employment, and ever-improving business confidence, and with the Purchasing Managers Index for services at its highest level since December 26. Despite that good news, it is important not to get too carried away. Disposable incomes continue to be squeezed due to weak wage growth, and inflation has caused the real value of workers incomes to fall. This has led some consumers to try to save money by trading down and bargain hunting. Retail sales strengthen despite falling footfall Central London retail sales continued to improve in Q3 from the previous year, with average annual growth of 5.6% per month. This growth resulted from good weather at the start of the quarter helping boost July (6.%) and August (7.4%) in addition, sales were supported by rising consumer confidence and household expenditure. previous year and poorer weather in September caused footfall to fall on an annual comparison. Demand for limited prime pitches pushes up rents The shortage of available space on the main streets is well documented. Demand for the best units remains high, with limited supply causing prime rents on Old and New Bond Street to each rise by 8% to 1,3 ZA. Retailers have also been aggressively acquiring space outside the core West End. This was reflected in rental growth in such markets as Covent Garden (up 12% to 77 ZA) as well as Brompton Road, King s Road, and Mount Street, which rose by 4% to 675 ZA, 415 ZA and 4 ZA respectively. Cheapside prime rents also increased in Q3, rising by 9% to 245 ZA. Rental growth in Central London is forecast at 1% in 213, with 214 also forecast to see strong growth, supported by more robust economic growth and continued competition from retailers for limited units. The good weather at the start of the quarter helped support annual footfall growth of 2.3% in July. In August and September, a combination of a reduction in tourists following the Olympics in the Chart 29: Central London Prime Rent, 1,4 1,2 1, per sq ft ZA (Old) Bond St* (New) Bond St* Sloane St Oxford St (West)* Covent Garden Brompton Road Regent St* Oxford St (East)* Piccadilly Circus Kings Road Mount St Marylebone High St* Strand Moorgate/Liverpool St Cheapside Tottenham Court Road Victoria* Kensington High St* High Holborn Fenchurch St Paddington *CBRE, NWEC *3 Ft zones 18

20 In the Central London leasing market, Q3 witnessed an increase in activity as retailers rallied in preparation for the Christmas period. The quarter saw a number of key deals, flagship store openings and major fit-outs of newly acquired units. Demand remains exceptionally strong on Oxford Street, which has witnessed a surge in activity from retailers looking to secure a presence on the street and interest from established retailers looking to relocate or expand. The increase in demand comes at a time when the existing public realm and shopping environment are being addressed by the New West End Company, which launched a rebrand of Oxford Street in August. This was achieved alongside a revolutionary partnership with the British Fashion Council to promote the street as London s top fashion destination during London Fashion Week Autumn / Winter 213. Bond Street to Chopard, which marked the highest rent achieved in Central London to date. Regent Street remains a key market for international retailers looking to establish a UK presence prior to expanding into Europe. There were fewer notable transactions over the quarter but there were a number of store opening announcements. For example, J.Crew has confirmed its European flagship store at 165 Regent Street will open on 7 November, in preparation for the Christmas period. Adjacent to J. Crew, Watches of Switzerland plans to open the largest watch store in the UK in spring 214. In addition, Longchamp has opened a new UK flagship store in the former Quiksilver unit at 229 Regent Street. The Shaftesbury Estate, which comprises Carnaby Street and Seven Dials, has continued to rebrand and reposition its existing retail holdings by securing a number of niche retailers and restaurant operators. This followed an earlier announcement in Q1 of a 1-year commitment to regenerate the public realm and overall shopping environment surrounding the key West End shopping districts, namely Bond Street, Oxford Street, and Regent Street. Over the past 18 months, Carnaby Street has attracted independent boutiques and concept stores, including Lavand, which acquired the former Gola Store at 4 Carnaby Street for its first UK store on a new 1-year lease. New Bond Street has witnessed continued strong demand from brands looking to upsize, with Victoria s Secret the latest retailer believed to be upsizing its existing unit by taking the former Bally store at 117 New Bond Street adjacent to its flagship store at 111. Such is the strength of demand that high premiums are still being offered to secure the best units. One such example saw the Kering Group acquire the former Marina Rinaldi store at 39 New Bond Street at an estimated premium of 6m. However, the key story of the quarter was the establishment of a new prime rent of 1,3 ZA, achieved with the letting of 13/15 New Other new retailers include Lyle & Scott at 1-2 Carnaby Street, which recently opened, whilst Gant Rugger and Eleven Paris established their first UK stores on Beak Street and Carnaby Street respectively. There were also a number of new restaurant openings, such as Grillshack, Rosa s Thai and Flat Iron. At Seven Dials in Covent Garden, there has been a strategic move to increase the menswear offering, with new stores opened by Farrell and Industrie. Q3 also saw the opening of a number of concept restaurants, namely Flesh & Buns and Homeslice. Chart 3: Retail Sales Chart 31: Footfall 16% 14% 12% 1% 8% 6% 4% 2% National Sales West End Sales -2% -4% Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sept-13 Annual Change Annual Change 8% 6% 4% 2% -2% -4% National Footfall West End Footfall -6% -8% -1% Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Sources: BRC, NWEC Sources: HSI, AS, NWEC 19