Western Corridor Office Market Report: Autumn 2009

Transcription

1 Western Corridor Office Market Report: Autumn 2009 The first half of 2009 saw the lowest volume of take-up for ten years as more occupiers sought to renegotiate terms to remain in their existing space Prime, headline rents are now almost 11% below their summer 2008 peak but continued to be propped up by increasing incentives, which has resulted in 19% falls in net effective rents Investment volumes increased 52% in comparison with the latter half of 2008, while prime yields stabilised at 7.50% and 7.75% in West London and Thames Valley, respectively

2 2 On Point Western Corridor Office Market Report Autumn 2009 Summary Statistics West London Thames Valley Western Corridor Take-up Sizes in 000 sq ft Q1-4 Q1-2 Q1-4 Q1-2 Q1-4 Q1-2 Totals 1, , , Grade A , , Off Plan Under Construction New Completed Second Hand (incl refurbished) , , Supply Q2 2009Q Q2 2009Q Q2 2009Q2 Total Total Grade A Total Total Grade A Total Total Grade A Current Supply 3,517 3,617 1,991 5,978 7,374 3,422 9,495 10,991 5,413 Vacancy Rate 8.2% 8.4% 4.6% 14.5% 17.5% 8.1% 11.3% 12.9% 6.4% Speculative Development Total Over 50,000 Total Over 50,000 Total Over 50,000 (as at 30th June 2009) 100,000-99, ,000-99, ,000-99,999 Total Demand Total Active Potential Total Active Potential Total Active Potential (as at 30th June 2009) Totals 2,188 1, ,821 1, ,515 1,507 1, ,000+ 1, , ,000-99, ,000-49, ,000-24, ,000 9, Capital Transactions millions Q1-4 Q1-2 Q1-4 Q1-2 Q1-4 Q1-2 Totals UK Purchasers Property Companies Institutions Private Investors Owner occupiers & Other Prime Yield 7.25% 7.50% 7.50% 7.75%

3 On Point Western Corridor Office Market Report Autumn Western Corridor Market Update Overview The Western Corridor continued to be impacted heavily by the decline in economic conditions. Take-up levels were down 53% in comparison with the five-year average for H1, partly due to an increase in occupiers renewing leases and fewer exercising lease breaks. Occupiers remain focused on reducing capital expenditure and as a result are reluctant about committing to new space. For those with the ability to move, however, a combination of increasing supply and continuing financial pressure on landlords, means there are opportunities to secure space on highly competitive terms. Historically low values resulted in improved investment activity, driven by UK investors. Prime yields stabilised as property began to look more attractive. Occupier Take-up Take-up activity was subdued over the first half of 2009, with just under 615,000 sq ft let, reflecting a fall of 68% on the equivalent period last year and the lowest level for over 10 years. The combination of pressure on landlords to secure an income stream and occupiers desire to avoid the capital expenditure associated with a move or expansion has resulted in a significant increase in lease regear and renewal activity pushing take-up volumes to record lows. Take-up was driven by the IT sector, accounting for almost 30% of space let. This can be primarily attributed to Canon s decision to relocate its European HQ to the UK from Holland, which resulted in a 93,100 sq ft deal at 3 The Square, Stockley Park. With the majority of deals driven by market churn, take-up was focused on the sub-10,000 sq ft market. Of the 43 deals that completed over the last six months, 25 fell into this category. Take-up volumes for deals below 10,000 sq ft were still broadly in line with levels seen over the past five years. At the half year point, 48% of the five-year annual average for this size had been let. Figure 1: Western Corridor Take-up by Size Band H1 Millions sq ft , ,000-99,999 25,000-49,999 10,000-24,999 < 10,000 Occupier preference shifted to Grade B space. 65% of space let in the first half of the year was Grade B stock, compared to the five year average of 37%. The paucity of deals means any trends should be viewed with caution but this change is reflective of the higher priority placed on cost by tenants. Major relocations and headquarter requirements, which boost Grade A take-up, have been put on hold. Occupier Demand Figure 2: Western Corridor Demand by Business Sector Banking and Finance Professional Services Service Industries Manufacturing Public Administration Other There was a considerable uplift in active named demand as 22 new requirements were added and poor take-up meant few were lost from the figures. At the end of June, there was around 1.5 million sq ft of active requirements in the market, which was 55% higher than the end of This was still 33% below levels 12 months ago, however, and reflects a fall of 47% from the peak in Q The increased demand was also reflected in our inspections during Q2 2009, which were up 22% in comparison with Q1. Although, some of this activity was due to occupiers seeking to leverage negotiations with existing landlords, it suggests there will be an increase in activity during the second half of the year. Named demand was dominated by the core strengths of this market; the Manufacturing and Service sectors. Within the Manufacturing sector it was Oil and Gas / Pharmaceutical occupiers that were particularly active, accounting for 17% of total active demand. While within the Service sector, IT Services and Software Houses were most significant. There were five active requirements, totalling 154,000 sq ft, from this subsector at the end of Q2 2009, including Pioneer, which was seeking 25-35,000 sq ft of new space. Occupiers looking to move are becoming increasingly interested in fitted out accommodation. Canon was one occupier that chose this type of space and we expect to see an increase in plug and play deals over the next 12 months. The drivers behind this trend are two-fold. Firstly, these deals involve lower capital

4 4 On Point Western Corridor Office Market Report Autumn 2009 expenditure and secondly, tenants looking to offload this space will typically be under pressure and have the ability to offer very aggressive financial deals. The majority of requirements were for less than 25,000 sq ft and new requirements brought to the market have tended to fall into this size band. Notable new enquiries included Mattel and Pharmanet, which were both seeking between 20-30,000 sq ft in anticipation of lease events in 2011 and Given the timing of these events, however, these requirements may not translate into take-up as they may ultimately stay in their existing space. There were only three active named requirements in the market seeking in excess of 100,000 sq ft, of which two were pharmaceutical companies. Existing Supply and Development Pipeline Supply continued to rise and was 16% higher than the end of Although there were significant completions at Green Park, Reading, most space placed onto the market was Grade B second hand space, controlled by landlords, as plans to refurbish or redevelop space were put on hold. At quarter end vacancy rates were 12.9%, with Grade A supply at 6.5%. Availability has now risen well above the 10-year average of 10.1% and 5.7%, for overall vacancy and Grade A, respectively. Supply conditions in West London were more favourable than the Thames Valley; overall vacancy rates were 8.4%, with Grade A at 4.6%, compared with 17.5% and 8.1%. Despite the high vacancy rate in the Thames Valley as a whole, there were still pockets of tight supply, particularly in several town centres, as the majority of available space was in the out of town market. In addition, only 15% of total available space was Grade A town centre supply, which has resulted in a conspicuous disparity between conditions in the town centre and out of town markets. Figure 3: Western Corridor Vacancy Rates H1 % existing stock 20% 15% 10% 5% 0% West London: Overall Thames Valley : Overall Grade A Grade A Additions of supply controlled by landlords outweighed space being returned to the market by tenants and as a result the proportion controlled by tenants fell from 28% to 23%. space is to be absorbed in the short-term. Any occupiers, with the ability to move and looking for larger units, will be able to secure highly competitive terms on certain buildings. There were no speculative starts in the first half of the year. As a result, at quarter end there was less than 930,000 sq ft of speculative space under construction; the lowest level since Q and the equivalent of only 1.1% of existing stock. Development was focused in the Thames Valley with 85% of space under construction in this market. There was only one scheme under construction in West London, which was Ealing Cross, where 135,000 sq ft will be delivered in Q Figure 4: Supply Proportions In Town and Out of Town West London Supply (%) Town Centre: Total 58% 55% 56% Out of Town: Total 42% 45% 44% Town Centre: Grade A 42% 49% 49% Out of Town: Grade A 58% 51% 51% Thames Valley Supply (%) Town Centre: Total 43% 40% 41% Out of Town: Total 57% 60% 59% Town Centre: Grade A 28% 25% 31% Out of Town: Grade A 72% 75% 69% Rents Prime, headline rents fell 8% over the first six months of 2009 to per sq ft and are 10.8% below their peak. Increasing supply combined with weakening demand and empty rates costs is putting pressure on landlords to cut rents. Over the last six months, rents have been reduced on several buildings, including Room 404, Maidenhead, which has seen ING reduce rents by 15% from per sq ft to per sq ft. Headline rents continued to be propped up by increasing incentives which since 2007 have moved out from 15 months to between 24 to 30 months for a 10 year term. As a result, net effective rents have dropped to per sq ft, reflecting a fall of 19% from their peak in Q There has been considerable variation between the centres within the Western Corridor. Those towns that have either a large volume of supply or saw the most significant rental growth prior to 2008, such as Maidenhead and Staines, have seen prime rents decline most sharply, with net effectives falling 28% and 21%, respectively from their peaks. In contrast, a perceived lack of good quality supply in Reading town centre has resulted in landlords resisting cuts in rents, which have fallen by just 3.5%, putting it at odds with the rest of the market. There were nine existing units on the market at quarter end which were over 100,000 sq ft, of which two are controlled by tenants. Given that there are only three active requirements over this threshold, a multi-tenanted approach will be needed if this

5 On Point Western Corridor Office Market Report Autumn Figure 5: Prime and Net Effective Rents in the Western Corridor High Wycombe Thames Valley % Reading % M4 West London % % M25 Maidenhead % Uxbridge Slough % Hounslow -24% Chiswick Ealing Windsor % M4 M25 Staines % M4 Heathrow % Brentford Hammersmith % Richmond CENTRAL LONDON Wokingham Bracknell % Farnborough Chertsey Achievable Rent Net Effective Rent Change in net effective rent (July 08 July 09 %) Investment Volumes and Yield Movements Investment volumes over the first half of 2009 increased 52% in comparison with the final six months of 2008, with 157 million traded, but were still 42% below the equivalent period last year. This increase in activity combined with a lack of supply resulted in a stabilisation of prime yields, at 7.50% in West London and 7.75% in the Thames Valley, for prime properties let for a minimum of 10 years. Figure 6: Prime Yields H1 % 10% 9% 8% 7% 6% 5% 4% West London Thames Valley 15 Year Average 15 Year Average UK purchasers accounted for 97% of the volume traded a mix of property companies, institutions and private investors. UK institutions continued to be the primary vendors, however, and overall were net sellers of 62.1 million. It was UK property companies driving the market, as they started to recognise value in the market, signalled by historically high yields. They were the most significant net investors, increasing their holdings by 42.1 million. During Q2 there has been a noticeable increase in investor demand as purchasers seek to take advantage of historically high yields. It was a lack of available prime product, rather than investor appetite, that kept volumes relatively subdued, resulting in some competitive bidding, on prime well-let stock, which in some cases has exceeded the asking price. This has placed some downward pressure on prime yields but there has not yet been any inward movement as purchasers remain very price sensitive. We expect some tightening of yields during 2010 however, and as a result the window of opportunity for more prime assets is perceived to be narrowing. The gap between prime and secondary yields is still widening as investor focus is still firmly on prime. There has been some indication, however, that investors are beginning to show some interest in secondary product due to the competitive environment surrounding prime assets as well as a lack of choice.

6 6 On Point Western Corridor Office Market Report Autumn 2009 Market Focus: Reading In Town: Town centre take-up reduced sharply in the first half of 2009, falling 67% in comparison with H2 2008, with only one deal of 11,000 sq ft completed. Activity was hampered by landlords perception that the limited Grade A supply means tenants will be prepared to pay a premium to locate here. All occupiers remain extremely cost conscious, however, and as a result are choosing to renew leases or look towards other locations. Grade A supply continued to be limited in the town centre. Although the overall Reading vacancy rate stood at 14.4% at the end of Q2 2009, around 60% of available space is out of town. In addition, of the space in the town centre only 206,500 sq ft (31%) was Grade A. More than half of this space was within The Blade, the only scheme to have completed speculatively over the last 18 months. Less than 65,000 sq ft of unlet space remained under construction, all at Reading Central (Phase 1), due to complete in Consequently, Grade A supply will stay limited moving into 2010 and will place the town centre in a relatively strong position in terms of recovery. Lack of supply is not a new trend and has been at a comparable level since During 2006 and 2007, there was more activity here than out of town with this trend changing only in the latter half of This suggests that it is not this lack of supply restricting take-up and therefore, is more likely to be related to cost and demand. Figure 7: Headline Rental Growth in Reading % Annual Growth 20% 15% 10% 5% 0% -5% -10% -15% Reading Thames Valley To date prime rents have remained robust, falling only 3.5% from their peak to per sq ft, compared with 11% across the Western Corridor. A lack of prime deals, however, means that the market has yet to be truly tested and this is based more on asking rents. Any deals completing in the next six months are likely to be at significant discounts to this. The investment market in the town centre has been quiet over the first half of the year and there were no transactions. Over the second half of the year, the sale of One Forbury Square is expected to complete and we understand this is likely to achieve a net initial yield of between 8.00% and 8.25% Figure 8: Reading Supply: In Town versus Out of Town 000s sq ft 1,200 1, % 44% 47% 56% 66% 68% 34% 32% 42% In Town Out of Town Out of Town: There was more, if modest, take-up activity out of town. Around 35,000 sq ft was let, reflecting an increase of 14% on the final six months of A wide range of choice combined with increasingly competitive deals from landlords has been successful in attracting tenants, including Thames Valley Water, which has recently taken space on Green Park. In contrast to the town centre, there is a significant volume of Grade A supply which accounts for around 70% of available space. This was boosted over the last six months by the completion of 90,000 sq ft of speculative space at Green Park. Little additional development is anticipated, with only one building, 450 Brook Drive also at Green Park, still underway and scheduled to complete by year end. Tenant controlled supply comprised 70% (647,540 sq ft) of available space. Excluding the space Cisco controls at Green Park, however, this figure drops to 124,350 sq ft or 31%. We believe that this could more than double by the end of 2010 having identified a further 200,000 sq ft which may be returned to the market. This includes a further 110,000 sq ft at Green Park, built for Wyeth, before its take-over by Pfizer, but not yet occupied. Headline rents have fallen 7% from their peak in summer 2008 to per sq ft, while increasing incentive packages have pushed net effective rents down 13%. Looking ahead, the oversupplied conditions will continue to apply downward pressure. Although competitive packages are already available in this market we anticipate that rents have further to fall before they start to stabilise. There was one investment deal completed out of town. 100 Berkshire Place, Winnersh Triangle, was sold to Harrison Properties for 8.25 million, reflecting a net initial yield of 14.3%. The building was let to Symbol Technologies with an unexpired lease term of four years. Harrison have now negotiated a lease surrender with Symbol Technologies and returned the building to the market with vacant possession, quoting 5 million. 58%

7 On Point Western Corridor Office Market Report Autumn Market Focus: Hammersmith & Chiswick There was little activity in Hammersmith and Chiswick over H No space was let in Hammersmith and only 40,230 sq ft across three deals was let in Chiswick, reflecting a fall of 70% in comparison with the latter half of 2008 and 83% below the equivalent period last year. In contrast to centres in the Thames Valley, available space remained tight, broadly unchanged from the end of Overall vacancy rates stood at 5.9% of which Grade A supply comprised the majority; it accounted for 71% of supply, reflecting a Grade A vacancy rate of 4.2%. Supply of Grade A has been inflated by relatively strong levels of speculative development over the last 18 months, around half of the current available Grade A space having completed during this period. Most notable were 165,000 sq ft at Chiswick Park, Building 9, which completed in Q and 165,000 sq ft at The Ark, Hammersmith. There was no space under construction speculatively at the end of June and we do not anticipate any additional speculative starts for at least the next 12 months. The volume of supply controlled by tenants was limited at quarter end but additions over the remainder of 2009 and 2010 present the most significant threat. We have identified almost 300,000 sq ft of space that has the potential to be returned to the market, predominantly due to downsizing and occupiers desire to reduce overheads. If all of this grey space is released it will increase supply by over 30%. This increase will come from a low base, relative to other areas within the Western Corridor, however, and as a result we expect vacancy rates to remain below the market average. Figure 9: Headline Rental Growth in Hammersmith % Annual Growth 20% 15% 10% 5% 0% -5% -10% -15% Hammersmith West London The combination of falling demand and increasing supply has put pressure on rents. Over the last six months rents fell 6% to per sq ft in Hammersmith while in Chiswick they have declined 3% to per sq ft. From their peaks in September 2008, rents have dropped 10% and 11%, respectively. As has been seen across all markets, these headline rents are being supported by significant outward movements in incentives. Over 2009 the last 12 months, rent-free periods offered on a 10 year term certain have doubled from 12 to 24 months. Consequently, we have seen more than 18% come off net effective rents in Hammersmith and 20% in Chiswick. Despite these rental declines, falls in headline rents in the West End of up to 35% has meant that the rental differential between these markets has narrowed significantly. This has reduced the number of occupiers looking for more cost efficient space in West London. The rating re-evaluation in 2010, however, may trigger a return to this trend, as rates are anticipated to increase sharply in Central London over the next five years in some cases this could be by up to 70%. We expect this to have a significant effect on the West London centres, particularly Chiswick, where rates will remain relatively constant. The resulting cost differential will make these locations more attractive to Central London occupiers. Figure 10: Historical take-up by Size Band H1 000s sq ft , ,000-99,999 25,000-49,999 10,000-24,999 < 10,000 The availability of good quality supply in these markets means that occupiers will be able to secure highly competitive terms on Grade A product, and this will place occupiers with upcoming lease events in an interesting dilemma as this ability will need to be balanced by continued uncertainty within the economy and on headcount. There was one investment deal in Hammersmith over H BP Pension Fund purchased 200 Hammersmith Road, for million, reflecting a net initial yield of 8.70%. The building is one of the best in Hammersmith, however, in part it is over rented and is multi-tenanted but with a relatively short secured income. It is let for an average unexpired term of 7.24 years. This activity is an improvement on the second half of 2008 when no deals completed but reflects a drop of 67% in investment volumes in comparison with the equivalent period last year. Although a continued shortage of debt is keeping demand from investors at a lower level, a lack of available product is also having a negative influence on investment volumes. There are currently no buildings being marketed in Hammersmith and Chiswick.

8 8 On Point Western Corridor Office Market Report Autumn 2009 Where Next? The effects of the recession are becoming increasingly evident in the Western Corridor and will continue to have a negative impact on take-up volumes by dampening occupier activity, which will manifest in two key ways. Firstly, to avoid capital expenditure more occupiers will renew leases or choose not to exercise breaks; the IPD Lease Events Review 2009 showed that during 2008 only 30% of occupiers with breaks exercised them, down from 46% in On the upside, this will help stem the volume of lower quality Grade B space returned to the market in the short term, which is historically more difficult to let. Secondly, occupiers with requirements will continue to be hesitant about committing to space. Corporate inertia will present the greatest challenge to the market over the next six months and subdue overall market activity. After a year of recession, however, corporates are close to reaching the bottom of the cost cutting curve. This will put more occupiers in a position to take advantage of market conditions, resulting in recovery slowly returning to the market. On a sector level, activity will be driven by the Manufacturing and Service sectors. Within the Manufacturing sector, the pharmaceutical industry, in particular, has been less impacted by the economic downturn and continues to seek new space. In addition, there is much consolidation activity in this sector driven by corporate mergers and acquisitions, including GlaxoSmithKline and Stiefel and Pfizer and Wyeth. In the shortterm the larger deals in the market will be derived primarily from this type of activity. Within the Service sector, the more cautious approach to property that IT/Telecom occupiers have taken since the dot.com boom coupled with their more efficient use of work space means that these tenants will remain active. In addition, we also anticipate that serviced office operators will generate an increased number of deals. Regus has already signed for 15,000 sq ft at Hyde Park, Hayes and there are several other requirements in the market. This sector is seeing some growth, benefitting from current occupier caution and unwillingness to commit to longer term conventional space. As activity levels revive we expect an increase in Grade A deals. Occupier demand is still biased towards this but the nature of deals done in H1 general market churn meant the majority of space let was Grade B. Overall 62% of available Grade A space is located out of town. The higher level of choice out of town will result in more significant cuts in rents and incentives than town centres and a disparity in market conditions. Town centres will be characterised by limited, Grade A supply while the out of town markets will have more choice combined with lower rents. As occupiers will continue to be cost conscious, this rental differential between town centres and the out of town market will be key. More footloose occupiers may be attracted to the more cost-effective locations and could result in more activity in the out of town market over the next 12 months. Since the dot.com boom the Western Corridor has matured. Consequently once the economy improves, demand will be derived primarily from existing occupiers within the market, driven by lease events. Over the next five years, there is more than 16 million sq ft subject to a lease event. Although some will choose to remain in existing premises, this will still result in significant volumes of poor quality second hand space becoming vacant, as occupiers upgrade their space, which will present challenges for landlords as well as opportunities for refurbishment, redevelopment or change of use. Figure 11: Western Corridor Speculative Development Pipeline 000s sq ft 1,400 1,200 1, Completion Year Completed Speculatively Under Construction Speculatively Sites expected to start speculatively There is 927,190 sq ft of space under construction speculatively in the Western Corridor, of which 70% is scheduled to complete in H Notable additions will include 98,500 sq ft at Windsor House, Slough, a joint venture between LIM and Green Properties and 188,090 sq ft across two buildings at Terrace Hill s Maxis, Bracknell. As the equivalent of only 1.1% of existing stock, however, we do not anticipate that vacancy rates will be greatly inflated by these completions. The continued difficulties in acquiring speculative development funding combined with the lack of developer appetite to build, means that we do not expect development to revive in this market until 2012 at the earliest. There is around 13 million sq ft in the Western Corridor with planning permission waiting for either a prelet or for development to become viable again. Those that can deliver ahead of the pack will be relatively unopposed. We expect selective shortages to have materialised by 2012, particularly in West London. Falling headcounts and consolidations will lead to an increase in occupiers releasing space onto the market and it is this grey space that will have a greater impact on vacancy rates. There is 1.4 million sq ft we have identified as having the potential to be returned to the market by the end of 2010, in addition to the 2.5 million sq ft of tenant controlled space available now. If all of this is returned to the market, conditions will be comparable to the end of 2003 when 3.55 million sq ft of occupier controlled space was available. Additions of supply will be primarily in the Thames Valley. Of the 2.4 million sq ft either under construction or with the potential to be returned to the market by tenants, 1.8 million sq ft or 75% will be here. This will produce marked differences in the supply

9 On Point Western Corridor Office Market Report Autumn profiles of the two submarkets, with the Thames Valley largely oversupplied while available space in West London tightens. Centres that may see the most significant supply increases are Maidenhead, Slough and Bracknell, which may see additions to supply equal to 8%, 6% and 6% of existing stock, respectively. These markets could, therefore, see the toughest market conditions, with rental growth and speculative development slower to return here. In Bracknell, however, it is notable that most of this space is within two schemes. In contrast, centres throughout West London will have much more limited choice and it will be more difficult for occupiers to find suitable space when the economy begins to recover. Figure 12: Western Corridor Prime Rental Growth Forecasts % Growth (May 2009) In the short term we expect further falls of 10% in headline rents. In total, this will be the equivalent of over 20% from the peak, which is comparable with the 25% fall between 2000 and Generous incentives will continue to be a significant feature of the market but will vary considerably between deals, dependent upon lease length, tenant covenant and building location. In the medium term, we anticipate a return to rental growth from 2011 and 2012 as the economy begins to recover and surplus space starts to be absorbed. Purchasers are beginning to take advantage of the historic value in the market and this has resulted in competitive bidding on limited prime lots. We anticipate more activity in the second half of the year, although overall investment volumes will remain low. Obtaining debt will continue to be difficult and rising swap rates has meant that the cost of money has increased. Consequently, most activity will be derived from equity rich investors. It has been reported that UK funds are beginning to see net inflows and as a result there has been a rise in demand for defensive assets from this type of investor. As a result we expect these purchasers to shift to net investors over the second half of the year. Although investment activity will start to increase it will still be limited by the lack of long leases in the market. Falling rents coupled with weak occupier demand and empty rate liabilities has meant that investors are currently focused on long-term income. Conversely, since the last recession occupiers have moved away from longer leases to ones that are shorter and more flexible and so as a result, there is less potential for investors to buy such properties. Issue To Watch: Structural Change Driving Corporate Need With weaker economic conditions and lower growth forecasts across the globe, occupiers are under increasing pressure to reduce their real estate footprint. UK unemployment has reached 2.38 million and negative employment growth is expected across the UK in The Western Corridor is not immune to these drivers and through conversations with large companies, occupying in the region of 2.5 million sq ft of office space across the market, we have sought to understand what will be shaping property requirements over the coming 12 months. Although in recent years the Western Corridor has diversified its tenant base it remains dominated by the technology sector and our survey work reflects this with some of the world s biggest technology companies offering their views, plus those from other important sectors such as utilities and oil and gas. In addition the majority of those surveyed are operating their sales and marketing functions from within this market, which is reflected within their responses. The survey was designed to be a relatively simple snapshot and not provide quantitative evidence and so the following paragraphs reflect the perhaps surprisingly aligned sentiment and headlines. Staffing remains a priority, but in terms of the next 12 months lease events are the main driver From 2002 to 2007 accessing appropriate skills was the number one location driver across multiple UK and global surveys with costs and transport usually vying for second and third. Over the last two years, and most particularly since mid 2008 as the broader economy has caught up with the banking sector crisis, headcount has been reduced and skills have become a lower priority. It is perhaps not surprising, therefore, that amongst our short term (12 months) location drivers the number one spot is occupied by lease events. The recent past has witnessed significant M&A activity which has left many CRE teams managing out unnecessary space. With market conditions such that disposal is a challenge, lease events are the logical route to divest of surplus accommodation. In close second we have a level pegging of staffing, costs, and rents and incentives. Transport is further down the ranking although still an important consideration as discussed later. In sixth place is sustainability, which we described as environmental sustainability. Again, perhaps unsurprising given the current economic climate, although the majority of respondents were keen to stress that sustainability is important to them, it would be less likely to impact their property decisions over the following 12 months.

10 10 On Point Western Corridor Office Market Report Autumn 2009 We have a car parking strategy not an office strategy Although there is a clear acceptance that those locations with good public transport have limited need of car parking, when considering out of town space the ability to make use of ample car parking for the operational needs of the business is viewed as a deal breaker by the majority. The impact of car parking tends to fall into two camps depending on the operational nature of the business. Many of the companies interviewed had advanced flexible working cultures with highly mobile workforces (some up to 70%). Such flex bring benefits in as much as less people will be in the office on a daily basis needing car parking. It does, however, bring its own issues as the buildings work to greater capacity and density, in some cases with up to eight people desk sharing. The opportunities for unexpected and severe car parking shortage are therefore of real concern. For others, the operational nature of the business does not allow flexible working, perhaps because the workforce already lives a great distance from the workplace and needs to be office based. For these tenants even the traditional ratios can cause concern. We would renegotiate a lease as we intend to stay in the UK and don t want to pay over the odds There was a general consensus that it would be beneficial to take advantage of current market conditions and renegotiate existing leases on the core portfolio to ensure continued occupancy at lower cost. Tenants would extend out leases to ensure this; however, the consensus would not push beyond 7 to 10 years. It was felt by some that purchase may be preferential to leasing beyond this time frame. Cutting costs is business as usual for us and not linked to the current economic volatility When asked about their position on the cost cutting curve, for the majority it was felt that cost containment, management and reduction is simply business as usual and a process ongoing over the past few years and continuing for the foreseeable future. Much of the initial cost management and space consolidation has taken place, and strategy is now focused on longer term efficiency and active workplace management, for example desk sharing and reducing desk sizing to increase capacity. M&A activity ensures cost management and portfolio restructuring are an ever evolving feast. To this end the majority saw their overall headcount either remaining the same or possibly growing slightly. By working their offices harder they are able to use existing space for much longer time horizons and thus save considerable capital outlay on accommodation for expansion. In the main our survey responses indicated a highly proactive corporate real estate market, which has positioned itself over the past few years to work portfolios harder and drive down costs. It should be anticipated therefore that lease re-gearing and disposal of surplus space through lease events will be embraced. Many viewed current conditions as an opportunity to drive further cultural change through the business but accepted that some of their buildings are getting tired and have the potential to become an operational risk through impact on the workforce. Over the coming years as attracting and retaining skills moves again to the top of the location decision making, the need to improve space will become paramount. Maps & Definitions Market Area Definitions Take-up Floorspace acquired for occupation by lease, prelease, freehold or long leasehold sale. Supply Floorspace on the market and available for occupation. It includes space that is under offer. Under Construction Speculative development of new building or substantial refurbishment where construction activity is ongoing. Prime Rent The Jones Lang LaSalle view of the highest rent achievable for a hypothetical 10,000 sq ft unit of Grade A space in a prime location, without any adjustment for incentives. Business Sectors Broad business sectors are classified as: Banking & Finance: Banks and other financial institutions Professional Services: Accountants, legal, management consultants etc Service Industries: Advertising and PR, broadcasting, internet services, printing and publishing, software houses and data processing, telecommunications services, transport, retail, leisure etc 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 The map shows the boundaries of the survey area.it is divided into West London and Thames Valley and then into submarkets.the submarkets are known by the name of a key town, although other towns and areas fall within them. Data employed is derived from various information sources collected by Jones Lang LaSalle Research.

11 On Point Western Corridor Office Market Report Autumn Headline Transactions & Definitions Investment Transactions January June 2009 Property Address Sq ft Purchaser Reported Price ( M) Estimated Initial Yield Building 2, Vanwall Business Park, Maidenhead 76,660 Confidential % The Chelton Centre, Marlow 80,480 Confidential % Sybase Court, Crown Lane, Maidenhead 31,850 Orbit % 100 Berkshire Place, Winnersh Triangle 55,915 Harrison Properties % Broadwater Park, Denham 97,230 Tritax % 200 Hammersmith Road, Hammersmith 66,940 BP Pension Fund % Surrey House & Lever House, Kingston 165,000 Salmon Harvester % Capital Court, Windsor Street, Uxbridge 54,380 Standard Life % Leasing Transactions January June 2009 Property Address Sq ft Tenant Reported Rent ( psf) Building Status Panasonic Building, Bracknell 30,000 The John Lewis Partnership n/a Second Hand Thompson House, Thames Valley Park, Reading 24,790 Open Text UK Second Hand Eaton Court, Oxford Road, Reading 11,710 Bottomline Technologies Second Hand Lakeview 1420, Arlington Business Park, Reading 8,235 The Wrigley Company U/Construction 3 The Square, Stockley Park, Heathrow 93,090 Canon UK Second Hand Pine Trees, Chertsey Road, Staines 80,515 BUPA / Refurbished 365 Chiswick High Road, Chiswick 21,170 Harvey Nicholls New Building 5, Chiswick Park, Chiswick 11,560 Baker Hughes Corporation New 200 Hammersmith Road, Hammersmith Building 2, Vanwall Business Park, Maidenhead Pine Trees, Chertsey Road, Staines Building 5, Chiswick Park, Chiswick 3 The Square, Stockley Park, Heathrow Sybase Court, Crown Lane, Maidenhead

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