CONSIDERATIONS ON THE ABERDEEN OFFICE MARKET FOR RBS AS AT APRIL 2015 FOR THE JUPITER CMBS OFFERING

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1 Royal Bank of Scotland 135 Bishopsgate London EC2M 3UR CBRE Limited Henrietta House Henrietta Place London W1G NB Switchboard Fax Direct Dial peter.stoughton-harris@cbre.com FAO: Ms Natasha Singh Dear Madam, 21 April 215 CONSIDERATIONS ON THE ABERDEEN OFFICE MARKET FOR RBS AS AT APRIL 215 FOR THE JUPITER CMBS OFFERING We attach a report by our research team commenting in some detail on the impact of the price of oil on the Aberdeen office market. We set out below a brief summary. Over the six months the price of Brent Crude Oil fell steadily from $11 per barrel in June 214 to $45 per barrel (pb) in early January 215. Although dramatic, such a sharp correction is not unusual, for example in June 28 oil prices peaked at $14 pb before crashing to $39 pb less than six months later. The scale of the recent price fall is therefore similar in both magnitude and timing. Aberdeen s recent past success in attracting occupiers and catering for expanding business had put significant strain on local office markets. By the end of 214 there was a substantial undersupply of office space in the city which drove rent and capital values throughout the last cycle between 29 and 214 office capital values in Aberdeen rose on average by 6.1% per annum. Aberdeen had just over 54, sq ft of available office space at the end of 214 and just 27, sq ft (5% of total availability) was classified as new/grade A space. Even as oil prices were falling, occupiers continued to make long term lease commitments signing for terms of 15-2 years. As such, based on historic precedent, we do not expect a significant impact on rental values. Any slowdown in take up will allow a more balanced market to return. For second hand space rental values are likely to be less resilient. If businesses that have taken occupation of new space in recent years decide to reduce headcount they are likely to have surplus floor space they will seek to market. In some cases this could be problematic, for example where buildings were designed for single occupation and cannot easily be configured for multiple occupation. However it seems likely that the availability of second-hand space will rise but it is too early to say to what extent. Despite declining North Sea Oil production the world class skill base of exploration expertise has meant that Aberdeen remains attractive to occupiers. Retaining and expanding this critical local skill base should allow the sector and Aberdeen s office market to overcome the short term issues associated with a low oil price in the medium term. Registered in England No Registered Office St Martin s Court 1 Paternoster Row London EC4M 7HP CBRE Limited is regulated by the RICS and is an appointed representative of CBRE Indirect Investment Services Limited which is authorised and regulated by the Financial Conduct Authority.

2 Turning to the three assets which are part of this portfolio, Rubislaw House, Seafield House and Marathon House are situated in Hill Of Rubislaw, Aberdeen s first office park, approximately 1 mile west of the city centre. It is accessed directly off Anderson Drive (A9), Aberdeen s inner ring road, which connects to all routes north, south and west. Hill of Rubislaw is still considered one of the best out of town locations in Aberdeen even though the buildings are now of dated appearance externally; internally most have been refurbished and provide a good standard of accommodation with ample car parking. The three assets are reviewed below: Rubislaw House, Aberdeen The property comprises a prominent building with wings fronting onto both Anderson Drive and the main Hill of Rubislaw access road. The building is arranged over ground and three upper floors with ground level parking on all sides totalling 26 spaces giving an excellent parking ratio of 1:35 sq.ft. It was constructed in early 198 s and is of concrete frame construction with concrete floors and walls / elevations made up of pre-cast composite concrete panels with pivoting aluminium framed double glazed windows. The building was the subject of a wholesale internal refurbishment and addition of new floorspace at the rear built over part of the rear car park at a total cost of approx. 8.m. The refurbishment included a full upgrade of décor, floor coverings, lighting, suspended ceilings and the replacement of the heating with air-conditioning. The rear extension comprises approximately 2, sq.ft in two floors providing gym and meeting rooms at first floor and canteen / town hall space at second floor level. This space has raised access floors and air-conditioning (grade A specification). The tenant Conoco UK Ltd originally let the property on FRI terms from 1 January 1995 with 3 x 5 year options to extend, subject to review. The tenant exercised the first option to extend the lease to 31 December 214 but failed to serve notice to extend the term beyond this date. Given the lack of supply of suitable office space the landlord was in a strong negotiating position and tenant was forced to agree a new lease of the premises which included the previously un-rentalised extension. Under the new lease the property is let until 31 December 229 at a current rent of 2,978,822 pa ( per sq ft) with 5 yearly rent reviews subject to fixed uplifts reflecting 3% pa compounded in 31 December 22 and 225. There is an option to extend the term beyond this. 2

3 We consider that this building offers a secure long term income stream secured to Conoco UK Ltd who has a D&B Rating 5A1 and of the three assets is likely to be the least affected by the impact of any short term fall in the property market. We have considered the possible market value today as compared to our market value in August 214. Sentiment for offices in Aberdeen will weaken over the past 6 months and has a result we would not be surprised if the value would have fallen by between -5% reflecting the reduction in the number of buyers seeking opportunities in Aberdeen. Seafield House, Aberdeen The property comprises the largest building within Hill of Rubislaw situated at a slightly higher level towards the rear /western part of the site. The building is arranged in six wings over three, four and five storeys with ground and basement level parking on all sides totalling 771 spaces giving a parking ratio of 1:265 sq.ft. The building has been the subject of various internal refurbishments over various floors / wings. In 2, Chevron undertook a major refurbishment and extension to create a new ground floor entrance with atrium above and first floor office space on the south side of the building. The flooring, décor, ceilings and lighting were all upgraded in the remainder of their space and comfort cooling installed. Multi let with a WAULT as at today of 1.78 years to breaks and 2.41 years to expiries. The principal tenants include AMEC, Shell and Chevron. However Shell are no longer in occupation whilst AMEC and Chevron are in the process of rationalising occupation with the intention of vacating. It is likely that this space will fall vacant at expiry. At the time of our valuation in August we were aware of this potential and made not inconsiderable allowances to cover this potential against a background of a constrained supply and a resilient market. However, as at today a purchaser would be more concerned about the reletting prospects and therefore require a higher return. As a result we consider this property could have fallen in the range of 5-1%. 3

4 Marathon House, Aberdeen The property comprises a prominent building with a wing fronting onto Anderson Drive, although the main entrance is on the northside of the building and accessed off a service road. The building is arranged in four wings over three, four and five storeys with ground and basement level parking on all sides totalling 284 spaces giving a parking ratio of 1:325 sq.ft. Internally the space has a mixture of open plan areas and individual rooms created by partitioning installed by the tenant. The building was the subject of a wholesale internal refurbishment in 28/9. The refurbishment included a full upgrade of décor, floor coverings, lighting, suspended ceilings and the installation of air-conditioning. The building is let in its entirety to Marathan albeit on three separate leases all expiring in March 217 and clearly the value is very dependent upon Marathan future occupational requirements. As at today whilst its value will be under pressure we consider the fall would be likely to be in the range 2.5%-7.5%. For avoidance of doubt I confirm that this letter is provided under the same terms of engagement instruction letter dated 2th August 214, including the agreed liability cap, which permits (amongst other things) the information to be disclosed in the offering circular produced in relation to any securitisation and to be circulated to potential investors in any such securitisation. Yours faithfully PETER STOUGHTON-HARRIS EXECTIVE DIRECTOR RICS Registered Valuer For and on behalf of CBRE Ltd 4

5 VIEWPOINT Aberdeen Office, April 215 The steady fall in the price of oil during the second half of 214 may now have come to an end, but oil prices remain 45% below levels of June 214. For many property markets, this is potentially a positive situation, helping to support growth in the UK economy as a contributor to low rates of inflation. However, for those markets whose success is related to the oil and gas sector, the outlook appears more challenging. In the UK, one city in particular is exposed to the price falls more than any other: Aberdeen. This ViewPoint examines Aberdeen s relationship with the energy sector and explores what low oil prices may mean for the future direction of its property markets. APRIL 215 CBRE Research 215 CBRE Limited 1

6 US $ per barrel VIEWPOINT ABERDEEN OFFICE Andrew Marston, UK Research Derren McRae, Managing Director, Aberdeen Gordon Pirie, Associate Director, Aberdeen WHAT HAS HAPPENED? Brent Crude Oil Price, Having moved within a narrow band between $1 and $12 pb, oil prices plunged during the second half of 214 to less the $5 pb. Prices recovered just over $6 pb in early 215, before settling at around $55 pb at the end of March 215. Source: Macrobond APRIL 215 CBRE Research 215 CBRE Limited 2

7 Take-up (sq ft) Oil Price (US $ per barrel) VIEWPOINT ABERDEEN OFFICE OIL AND OFFICE PROPERTY Aberdeen Office Take-up and Brent Crude Oil Price 1,2, 12 1,, 8, 6, 4, 2, Annual Take-up (LHS) Brent Crude Price (Average of month end prices) (RHS) Source: CBRE Research APRIL 215 CBRE Research 215 CBRE Limited 3

8 Annual Production (m tonnes) Proven and Probable Reservces VIEWPOINT ABERDEEN OFFICE Crude oil production from the UK Continental Shelf 18 2, , 14 1, ,5 1 1,25 8 1, Annual Production (lhs) Proven and Probable Reserves (rhs) Source: DECC APRIL 215 CBRE Research 215 CBRE Limited 4

9 Index, YE 27 = 1 VIEWPOINT ABERDEEN OFFICE ABERDEEN HOTELS Oil, Aberdeen hotel performance, and supply Aberdeen hotel metrics and oil prices RevPAR (GBP) Brent crude price (USD) TrevPAR (GBP) Supply (rooms) Source: HotStats, AM-PM, Macrobond, CBRE Research APRIL 215 CBRE Research 215 CBRE Limited 5

10 Number of jobs VIEWPOINT INDUSTRY RESPONSE TO LOW OIL PRICES: EMPLOYMENT Employment forecast for the UK oil and gas sector 4, Induced 3, 2, Supply Chain (export) Supply Chain (domestic) Tier 1 (Oil majors) 1, Source: EY / Oil & Gas UK APRIL 215 CBRE Research 215 CBRE Limited 6

11 VIEWPOINT ABERDEEN OFFICE Energy businesses reporting skills shortages ABERDEEN 75% REST OF UK 5% Source: EY / Oil & Gas UK APRIL 215 CBRE Research 215 CBRE Limited 7

12 VIEWPOINT ABERDEEN OFFICE INDUSTRY RESPONSE TO LOW OIL PRICES: OPERATIONS Break-even prices ($ per barrel) by reserve type 12 Average break even Maximum break even Minimum break even North Sea production primarily fits into the Offshore Shelf category, with areas to the west of Shetland in the Deepwater group. Source: Rystad Energy APRIL 215 CBRE Research 215 CBRE Limited 8

13 VIEWPOINT ABERDEEN OFFICE IMPLICATIONS FOR PROPERTY APRIL 215 CBRE Research 215 CBRE Limited 9

14 Oil Price ($ per barrel) Prime Rent ( per sq ft) VIEWPOINT ABERDEEN OFFICE Prime Aberdeen office rental movements following oil price falls Brent Crude Oil Price (LHS) Aberdeen Prime Office Rent (RHS) Source: Macrobond / CBRE CONCLUSIONS APRIL 215 CBRE Research 215 CBRE Limited 1

15 VIEWPOINT ABERDEEN OFFICE CBRE S UK RESEARCH TEAM CONTACTS Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.