CENTRAL LONDON PROPERTY MARKET REVIEW

Transcription

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

2 FOREWORD We went into 2011 with high hopes, economic recovery was predicted, but due to the Eurozone debt crisis, this path to recovery was derailed. As a result, the UK s economic growth was weaker than initially anticipated. Despite this backdrop, whilst we are witnessing an impact on the Central London market, it s true to say that some parts of the London property market performed relatively well in The investment market, in particular, proved resilient as prime values in core markets held-up strongly, supported by a wide range of investors, particularly from overseas. In contrast, the office market suffered from below trend occupational demand, primarily because of weak take-up from the financial sector, although the TMT sector supported leasing levels in the West End. Looking ahead, 2012 will be a challenging year. The outlook for economic growth in 2012 has been substantially downgraded in light of the Eurozone debt crisis and there is a strong possibility of a technical recession during the first half of the year. London with its bias towards banking and finance is very exposed to any further deterioration in the Eurozone debt crisis. Perversely, because of this wider economic uncertainty, London has attracted overseas investors because of its perceived safe haven status and this looks set to continue into However, the occupational market will suffer from the weaker economic outlook with some tenants reluctant to commit to real estate decisions. Beyond the short-term, the medium term is more optimistic. Business profitability is high and rising many companies are sitting on large cash reserves and a return to more favourable economic conditions will see this translate through to more mergers and acquisitions activity, although this is looking more likely to occur in 2013 than this year. The US economy has also started to recover and notwithstanding another significant deterioration in the Eurozone, is a positive barometer for the global economy. And of course, we also have the Olympics to look forward to! Adam J Hetherington Managing Director Central London 1

3 ECONOMIC OVERVIEW * Q3 GDP 0.6% CL HOUSE PRICES 3.0% UK RETAIL SALES 0.7% y-o-y December UK BUSINESS CONFIDENCE UK CONSUMER CONFIDENCE ECONOMIC GROWTH EXPECTED TO STAGNATE DURING THE FIRST HALF OF THE YEAR AS GROWING UNCERTAINTY FROM THE EUROZONE CRISIS HAMPERS THE RECOVERY. Better than expected third quarter economic growth Despite the all pervading economic gloom cast by the ongoing Eurozone debt crisis, there was some positive news for the UK with latest estimates showing that the UK economy expanded by a better than expected 0.6% in the third quarter of Banking and finance was the main contributor to growth as the sector s output rose by 1.2% over the quarter. Inflation starts to fall Encouragingly, inflation, as measured by the CPI, fell to 4.8% during November, down from 5% the month before and is expected to fall further as the effects of last January s VAT increases drop out. In spite of this good news, disposable incomes are still being squeezed as average earnings rose 2% annually. Unemployment remains a real issue for the UK, with the proportion of people out of work continuing to rise, reaching 8.3% in the three months to October, or 2.64 million, up 0.4% on the previous quarter. This number is expected to rise over the next year, as government cuts start to impact in earnest. The combination of falling disposable incomes and rising unemployment has cast a shadow over the UK although London s retailers have not suffered to the same extent because overseas visitors have provided a degree of support. London s housing market remains resilient After a brief lull in the first half of the year when house price growth slowed, there was a return to stronger growth in Central London as the average house price grew by 9.2% over the 12 months to September. Economic outlook remains weak Forward looking surveys point to a more muted pace of growth in the final quarter and to a downturn, possibly even a technical recession in the early part of 2012, as the crisis in the Eurozone continues to act as a drag on economic growth. This growing uncertainty has brought expectations for economic growth in 2012 down, with the OBR now expecting growth of only 0.7% for the UK economy. With the economic conditions expected to remain weak, financial and business services employment in Central London is forecast to fall in 2012 and to rise thereafter as the economy recovers. Chart 1: Economic Growth Chart 2: Central London Finance and Business Services Employment London UK FORECAST 900, ,000 FORECAST Annua al % chnage Numbers Employed 700, , , , Source: Oxford Economics and Oxford Economics *National Statistics, PWC, CBI and DG ECFIN 2

4 CENTRAL LONDON OFFICES Take-up in 2011 highlighted the divergence between markets with the City performing below trend as financial occupiers, in particular, strove to cut costs. While in the West End, TMT occupiers helped drive take-up in spite of the economic climate. Phillip Howells Executive Director Office Agency 3

5 CENTRAL LONDON OFFICES TAKE-UP 12% (3.1m sq ft) UNDER OFFERS -9% (2.3m sq ft) AVAILABILITY 7% (15.6m sq ft) STRONG END TO THE YEAR BOOSTS ANNUAL TAKE-UP, BUT FALLS SHORT OF THE 10-YEAR AVERAGE. PRIME HEADLINE RENTS REMAIN UNCHANGED AMID WEAK DEMAND AND INCREASING SUPPLY. Strong final quarter boosts annual total take-up Central London take-up increased in the final quarter of 2011 to reach 3.1m sq ft, up 12% from Q3. The final quarter was the strongest performing of the year and the only period in 2011 to exceed the 10-year quarterly average of 2.9m sq ft. This brought take-up for the year to 10.3m sq ft; down considerably from the 14.6m sq ft let in 2010 and below the 10-year average of 11.6m sq ft. The strongest performing market, relative to trend, was the West End which recorded take-up in excess of its annual 10-year average at 4.1m sq ft. The West End benefitted from its broader occupier base, with a large number of high profile acquisitions made by occupiers from retail and TMT industries. Supply continues to edge upwards Central London availability continued to rise in the final quarter, rising to 15.6m sq ft from 14.6m sq ft in Q3, reflecting a vacancy rate of 5.2%. This also marks an increase from 14.6m sq ft at the end of 2010, but remains below the 10-year average of 17.7m sq ft. Much of this increase is accounted for by new additions of early marketed space and tenant release space in the City. Prime rents remain unchanged Prime rents were largely unchanged across all the Central London markets in Q4 with City and West End prime rents staying at per sq ft and per sq ft respectively. This was reflected in the CBRE prime rent index for Central London which increased by only 0.3% over the quarter. Development activity to pick up from 2012 Development completions were down significantly compared to 2010, with only 1.7m sq ft completing in 2011; the lowest total since the early 1990s. Completion levels are expected to increase in 2012, rising to 3.0m sq ft, but remain modest compared with an annual 10-year average of 4.7m sq ft. OUTLOOK Take-up is forecast to remain below trend in 2012 as the weak economic outlook forces many occupiers, particularly financial, to hold off expansion plans until signs of economic recovery become apparent. The outlook for 2013 is more positive as take-up is projected to return to trend as the economy picks up. Availability is forecast to rise over the next two years as the delivery of newly completed space outstrips demand. Supply will be supplemented further by the addition of tenant release space as some occupiers rationalise to cut costs, particularly in the City. Chart 3: Central London Availability and Take-up Take-up Availability (RHS) FORECAST

6 CITY OFFICES TAKE-UP 9% (1.1m sq ft) UNDER OFFERS -10% (1.0m sq ft) AVAILABILITY 10% (7.0m sq ft) PRIME RENTS Chart 4: City Take-up Chart 5: Sector Structure of City Take-up, Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) % 9% 15% 17% Banking and Finance Business Services Manufacturing, Industrial and Energy Insurance Public Sector % 1% Professional Consumer Services and Leisure 0.0 Q Q Q Q Q Q Q Q Q Q <1% 27% Computers/Hi-Tech There was a strong finish to the year in the City as take-up in Q4 rose to just over 1m sq ft. This reflected a 9% increase on the previous quarter but was still 5% below the long-term average of 1.1m sq ft. The amount of space under offer fell by 10% over the quarter largely as a result of the Aon deal and now stands at just over 1.0m sq ft which is 6% below the long-term average. Only 3.8m sq ft was leased in 2011 overall, down 40% from last year and 16% lower than the 10-year average. This weaker performance was largely because City occupiers, particularly from the banking and finance sector, were most affected by the Eurozone debt crisis. Table 1: Key City Transactions, Address Sq ft Occupier Business Sector As has been the case in the previous two quarters, take-up in Q4 was concentrated on secondhand space (72%), which is significantly elevated compared with the long-term average (60%). There was a noticeable lack of large deals during the quarter. The quarter was dominated by insurer Aon pre-letting 191,700 sq ft at British Land / Oxford Properties The Leadenhall Building, EC3, which is due to complete in Beyond this, only one other deal was over 50,000 sq ft as Deloitte took 87,600 sq ft of secondhand space at Murray House, EC3. The Leadenhall Building, EC3 Murray House, 1 Royal Mint Court, EC3 Seal House, 1 Swan Lane, EC4 191,700 Aon Insurance 87,600 Deloitte Professional 43,500 Groupon Consumer Services & Leisure As a result of the Aon deal, take-up from the insurance sector jumped to 27% compared with 15% in the previous quarter. The professional sector was also up on the previous quarter: 22% against 20%. In comparison, banking and finance accounted for only 15% of take-up, down from 18% last quarter and a long-term average of 35%. Beaufort House, 15 St Botolph Street, EC3 26,100 FSCS Banking & Finance 3 Minster Court, EC3 24,600 DAC Beachcroft Professional 5

7 Chart 6: City Availability Chart 7: City Development Pipeline Secondhand New Under Construction New Completed 10 Year Average Completed Proposed Available Under Construction Let/Under Offer Proposed Let/Under Offer Under Construction Available Million sq ft Q Q Q Q Q Q Q Q Q Q Availability rose by 10% over the quarter to reach 7.0m sq ft. This was the second successive quarterly increase which takes availability to its highest level since December 2010, although availability still remains below its long-term average of 7.9m sq ft. The overall increase in availability was largely down to a sharp rise in the amount of secondhand space on the market. Despite this, the availability of secondhand space remains below the long-term average of 4.6m sq ft. In sharp contrast, the availability of newly completed space is at 2.5m sq ft, which is high compared with the long-term average of 1.7m sq ft. Grade A space accounted for 67% of total availability, up from 64% a quarter ago. The rise in availability was reflected in the vacancy rate which rose slightly over the quarter to 7.0% from 6.9% in the previous quarter. There were 12 buildings of 100,000 sq ft or more available in the City, up from nine in the previous quarter. Six of these were secondhand and were the legacy of deals done in 2009 and 2010 by Nomura, Blackrock and JP Morgan. Only 100,000 sq ft of developments were completed in the final quarter of 2011 taking the total for the year to 1.0m sq ft. Completion rates are expected to fall further as only 0.8m sq ft of developments, mostly refurbishments, are scheduled for completion in Development completions are projected to increase in 2013 and 2014 with 1.6m sq ft and 2.6m sq ft scheduled for delivery. OUTLOOK Prime City rents were unchanged over the quarter at per sq ft. Rent-frees remained at months on a 10-year lease. Chart 8: Prime City Rent Index FORECAST In contrast, the CBRE City prime rent index fell by 0.2% over the quarter; while the annual measure increased by only 0.6%. Annual % Change Looking ahead, prime rents are expected to come under -25 pressure during the year but rent-frees are expected to increase in the first instance helping to support rents. Rents should start to increase again in 2013 as the pace of economic growth picks up

8 WEST END OFFICES TAKE-UP 23% (1.2m sq ft) UNDER OFFERS 4% (0.8m sq ft) AVAILABILITY 8% (4.9m sq ft) PRIME RENTS Chart 9: West End Take-up Chart 10: West End TMT Take-up Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) TMT take-up TMT % Total West End Take-up (RHS) 25% 20% 15% 10% 5% % Q Q Q Q Q Q Q Q Q Q Having dropped below 1m sq ft in the previous quarter, take-up recovered strongly in Q4 to reach 1.2m sq ft, 14% above the 10-year average of 1.0m sq ft. This resulted in annual take-up of around 4.4m sq ft. Whilst this marked a 10% decline from the 4.7m sq ft acquired in 2010, it stands comfortably above the annual 10-year average of 4.1m sq ft; emphasizing the West End s resilience in the current economic climate compared with the City. West, Paddington, Soho and The Strand recorded take-up above their respective 10-year average. The amount of space under offer increased over the quarter by 4% to reach 819,600 sq ft. Whilst this marks a decline from the 936,700 sq ft recorded in Q4 2010, it stands around 5% above the 10-year average (781,400 sq ft). Much of the increase in take-up over the quarter was attributed to a sharp recovery in newly completed acquisitions, which increased to 261,000 sq ft having fallen to only 62,300 sq ft in the previous quarter. Volumes were boosted by a number of large lettings to TMT and financial occupiers, the largest of which saw Nokia acquire 58,400 sq ft at 2 Kingdom Street, W2. The majority of take-up was concentrated on secondhand space (69%), while the 64,100 sq ft taken by Savills at Marque, 33 Margaret Street, W1 was not only the largest letting during construction but also the largest deal of the quarter. Table 2: Key West End Transactions, Address Sq ft Occupier Business Sector Marque, 33 Margaret Street, W1 64,100 Savills Professional 2 Kingdom Street, W2 58,400 Nokia TMT Much of the West End s strength is derived from its diverse occupier base. Over the course of the year, occupiers from TMT industries became increasingly active, regularly taking large amounts of space in markets, such as North of Oxford Street East. Demand from the sector has developed rapidly since the downturn with TMT take-up increasing from 369,200 sq ft in 2009 to 1.0m sq ft in % of West End take-up for the year. 11 Baker Street, W1 55,900 Pimco Europe AirW1, 20 Air Street, W1 51,000 Telefonica TMT Banking & Finance The majority of take-up in Q4 was concentrated in the North of Oxford Street West (20%), Soho (14%), Victoria (12%) and Mayfair (11%). In what was a strong quarter, Covent Garden, North of Oxford Street 11 Strand, WC2 35,200 Punter Southall Group Professional 7

9 Chart 11: West End Availability Chart 12: West End Development Pipeline 9 Secondhand New Under Construction New Completed 10 Year Average 2.0 Completed Proposed Available Under Construction Let/Under Offer Under Construction Available Q Q Q Q Q Q Q Q Q Q Availability increased by 8% over the quarter to reach 4.9m sq ft, reflecting a vacancy rate of 4.3%, up from 4.2% in Q3. Despite this quarterly increase, availability has fallen by 12% from the 5.5m sq ft recorded in Q and remained comfortably below the 10- year average of 5.8m sq ft. This rise in supply was driven by a 30% increase in new space under construction, brought on mainly by the addition of 279,100 sq ft of early marketed space at Park House, W1 and 1a Page Street, SW1, contributing 163,000 sq ft and 116,100 sq ft of speculative space respectively. The level of secondhand and newly completed space remained constant from the previous quarter. market. In Victoria, the addition of 79,200 sq ft early marketed space pushed supply up by 7% over the quarter. Mayfair also recorded a sizeable increase as availability rose by 43% to 906,200 sq ft, driven largely by the addition of early marketed space. Despite this increase, supply remained tight, standing around 17% below its 10-year average. Development completions totalled only 329,800 sq ft in 2011, making it one of the lowest years on record. The majority of this space was delivered at AirW1 (182,800 sq ft); where only 80,800 sq ft is still available. Availability in the West End submarkets remained below the 10- year average in most markets, excluding Bloomsbury (405,800 sq ft), Soho (419,800 sq ft), Victoria (958,400 sq ft) and Paddington (313,300 sq ft). While supply in both Soho and Paddington declined by 17% and 19% respectively over the quarter, Bloomsbury recorded a quarterly increase of 95% as an additional 219,800 sq ft of secondhand space was released back to the Completion rates are projected to increase in 2012 and 2013, with 1.1m sq ft and 1.7m sq ft respectively scheduled for delivery. However, much of the development pipeline is yet to commence construction. As of the end of Q4, only 2.0m sq ft was under construction up until OUTLOOK Prime rents remained stable across all West End submarkets in Q4, with benchmark prime rents in the core remaining at per sq ft. Chart 13: Prime West End Rent Index FORECAST The CBRE West End prime rent index increased by only 0.5% over 15 the quarter; while the annual measure rose by 4.8% over the last 12 months. Looking forward, prime rental growth is forecast to be weak over the next two years, with growth projected to be around 1.1% in 2012 and 2.4% in 2013 in the wake of a weak economic outlook. Annual % Change

10 SOUTHBANK OFFICES TAKE-UP 95% (0.4m sq ft) UNDER OFFERS 31% (0.2m sq ft) AVAILABILITY -2% (1.1m sq ft) PRIME RENTS 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 10 Year Average Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q After an uncharacteristically strong Q3, take up in Southbank in Q4 increased again to reach 385,000 sq ft, its highest quarterly total since Q3 2007, a rate which is more than twice the long-term average. Some of the key transactions during Q4 involved sizeable acquisitions by accountancy firms PriceWaterhouseCoopers (40,900 sq ft at Goldings House) and Ernst & Young (35,400 sq ft and 23,500 sq ft at 6 More London). Availability in Southbank has remained at 1.1m sq ft for the third consecutive quarter after increasing sharply in Q2 2011, when The Shard became available for the first time. This building remains under construction and at 590,000 sq ft unsurprisingly remains the largest available space in Central London. At 238,000 sq ft, space under offer remains high relative to recent quarters, but below the 10-year average of 261,000 sq ft. This suggests that the recent up-turn in demand will be sustained into the near future as some of the space under offer translates into take-up. OUTLOOK Southbank prime rents remained at per sq ft in Q4 for the eighth consecutive quarter whilst the CBRE prime rent index increased by 2.1% quarter on quarter and 4.5% annually. Prime rents are forecast to remain stable in 2012, as high supply outstrips low demand. A modest uplift of around 2.5% is projected in 2013 as economic growth returns. Chart 16: Prime Southbank Rent Index Annual % Change FORECAST

11 DOCKLANDS OFFICES TAKE-UP -81% (0.07m sq ft) UNDER OFFERS -26% (0.05m sq ft) AVAILABILITY 1% (1.4m sq ft) PRIME RENTS 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 10 Year Average Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Take-up in Docklands remains extremely volatile. After a twelvefold increase between Q2 and Q3, take-up in Q4 was 288,000 sq ft lower than the previous quarter. Only 67,000 sq ft was transacted during the quarter. Despite the fact that this is well below the long-term quarterly average of 283,000 sq ft, only Q3 saw a higher level of take-up in The largest deal of the quarter was for 29,100 sq ft of space at 1 Canada Square by Banco Bilbao Vizcaya Argentaria. The only other deal over 10,000 sq ft was 19,100 sq ft at 40 Bank Street by G4S. Availability remained around the 1.4m sq ft mark for the third consecutive quarter. As such, availability in Docklands remains below the long-term average of around 1.5m sq ft. There are five buildings currently available that can fulfil a requirement of over 100,000 sq ft, the largest of which is 205,000 sq ft of new Grade A space at 30 North Colonnade. Space under offer fell to 47,000 sq ft in Q4, significantly below the peak of 258,000 sq ft seen in Q and the lowest figure since Q The large decline over the year is primarily a result of the completion of the 250,000 sq ft pre-letting at 25 Churchill Place to the European Medicines Agency in Q3. OUTLOOK Docklands prime rents remained stable at per sq ft. The CBRE prime rent index also remained stable on a quarterly basis while the annual index indicated growth of only 1.4%. Going forward prime rents are forecast to remain stable in 2012, with only 1.1% projected in 2013 as a weak economic outlook places further pressure on occupiers, particularly those from the financial sector, to rationalise and cut costs. Chart 19: Prime Docklands Rent Index Annual % Change FORECAST

12 MIDTOWN OFFICES TAKE-UP 44% (0.4m sq ft) UNDER OFFERS -56% (0.1m sq ft) AVAILABILITY -2% (1.3m sq ft) PRIME RENTS Chart 20: Midtown Take-up Chart 21: Midtown Availability Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 10 Year Average Take-up in Midtown increased by 44% to 391,900 sq ft in Q4, placing it above trend for the first time since the end of This quarterly increase marks a continuation of the recovery in take-up levels that had dipped dramatically at the start of the year. This resulted in an annual total of 986,900 sq ft, reflecting a 12% decrease from 2010, and was some way short of the 10-year annual average of 1.2m sq ft. Take-up in Q4 was predominantly focused on grade A stock, accounting for 71% of the total. The largest transaction of the quarter was concluded at Argent s King s Cross development by the London Borough of Camden, who pre-let 138,000 sq ft. OUTLOOK Midtown prime rents remained stable at per sq ft. The CBRE prime rent index also remained unchanged on both an annual and quarterly basis. Chart 22: Prime Midtown Rent Index FORECAST Rental growth is forecast to return in 2012, supported by limited supply of prime stock. Annual % Change Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Under offers declined by 56% to stand at 145,900 at the end of Q4, falling significantly below the 10-year average of 279,100 sq ft. This suggests that the recent recovery in take-up may stall, and that leasing activity may return to sub trend levels in the coming quarters of Availability remains significantly below the 10-year average (1.7m sq ft) having decreased marginally over the final quarter to stand at 1.27m sq ft, marking a 2% decline from Q3. Despite this decrease, the trend is largely stable having remained around the same level for the last three quarters. The largest single available building remains 183,300 sq ft at 2 Waterhouse Square. 11

13 CENTRAL LONDON OFFICE DEVELOPMENT * CONSTRUCTION STARTS 104% (1.5m sq ft) CONSTRUCTION COSTS -0.1% VOLUME OF LAND SALES DEVELOPMENT COMPLETIONS FELL TO AN 18 YEAR LOW IN 2011, WHILE FUTURE ACTIVITY WILL BARELY EXCEED THE LONG-TERM AVERAGE AS BANKS CUT LENDING FOR FUTURE DEVELOPMENT. Completion levels plummet in 2011 The level of development activity in Central London decelerated rapidly following the credit crunch. The restriction of finance available for development, in addition to falling occupier demand resulted in a number of schemes being abandoned or mothballed. The sharp fall in construction starts is reflected by a drop in completions since 2009, with only 1.7m sq ft delivered in 2011, making it the lowest total since the early 1990s. Completion levels are expected to recover slightly next year rising to 3.0m sq ft but this is a modest increase, particularly when set against an annual average of 4.7m sq ft of development completions over the last 10 years. The development pipeline becomes much stronger from 2013 onwards as completion rates are scheduled to increase to 4.4m sq ft in 2013, with 5.1m sq ft projected in 2014; although this could decline over time. Rights of light issues hinder future development In the City, development activity is increasingly constrained by rights of light issues. Developers are looking to settle these before securing funding or pre-lets, further restricting the development pipeline which is already affected by a weak occupational market and economic outlook. City projected to deliver the highest proportion of new space The City is projected to deliver 4.9m sq ft between 2012 and Much of this space will be delivered in 2014 with the completion of a number of large tower schemes, including the Pinnacle (885,200 sq ft) and 20 Fenchurch Street (657,300 sq ft). This compares with 3.4m sq ft in the West End, with around 2.8m sq ft expected to be completed in the next two years. There is 1.9m sq ft scheduled for delivery in Southbank and 1.8m sq ft in Midtown over the same period, with the majority concentrated in Argent s King s Cross scheme. The Docklands will see only 522,500 sq ft. High number of refurbishments among forthcoming completions A large number of the schemes scheduled for delivery between 2012 and 2013 are refurbishments, accounting for 3.3m sq ft of the 7.4m sq ft to be delivered during this period. This is most pronounced in the City where 70% of the schemes projected to complete in the next two years are refurbishments. Land sales on the rise The volume of land sales rose sharply from 2.0bn in 2010 to 3.3bn in Over half of all trades were undertaken by UK developers with the Middle East seeing their lowest market share for some years at 15%. Chart 23: Central London Developments Completed City West End Other Central London *CBRE, BCIS 12

14 CENTRAL LONDON OFFICE INVESTMENT Increased availability of prime stock in the third quarter has whet investor appetites, with new entrants placing a significant proportion under offer in Q4. Whilst turnover was slow at the end of 2011, we expect 2012 to be stronger as the deals complete. Mike Edwards Executive Director Offices Capital Markets 13

15 CENTRAL LONDON OFFICE INVESTMENT INVESTMENT VOLUMES -3% ( 1.7bn) YIELDS 5.1% FOREIGN BUYERS 62% of transaction volumes AVAILABLE STOCK 3.4bn FOREX RATES VS 1.35% OVERSEAS INVESTORS APPETITE FOR LONDON OFFICES SHOWS NO SIGN OF ABATING AS THEIR SHARE OF Q4 TRANSACTION VOLUMES RISES TO A YEAR HIGH 62% down on previous year as deals are rolled over into 2012 Central London investment volumes were 1.7bn in Q4, down slightly on the previous quarter and also the weakest quarter of the year. Investment volumes for the year were 8.4bn, down 14% on a year ago. crisis and weak economic climate we expect the pricing of prime properties to remain robust because of strong overseas demand and a general flight to quality. In contrast, investors will become more discerning towards secondary properties and pricing will suffer as a consequence. Strong start to 2012 expected The outlook for 2012 is more positive as deals which went under offer in late 2011 complete, making up for the slow end to the year. As a result, we anticipate an increase in turnover in the first half of 2012, supported by a significant supply of existing stock from 2011, in addition to fresh supply becoming available in Overseas investors to continue to play a key role Equity-rich investors will be well-placed to take advantage of opportunities in the market with debt restricted to all but the best of properties. Some of the large lot sizes are currently under offer or close to going under offer, mainly to overseas buyers who have tended to favour large, prime assets. Flight to quality provides protection for prime pricing More properties will come to the market through a continuation of distressed and bank-led sales which will support transaction volumes, although pricing in some instances will need to adjust to allow this. Despite the ongoing Eurozone sovereign debt SOURCES OF DEMAND Overseas investors returned to the Central London market in strength during Q4. This was led by Middle Eastern (19%) and Far Eastern (16%) investors. There was also a strong German representation with 8% of investment volumes. North American investors were absent from the market for the first time in over a year. UK Institutions were the most active domestic investors with 19% of transactions by volume. In a continuation of recent trends, Q4 saw more new entrants to the Central London market with the arrival of Crosstree who acquired 1 Berkeley Street for 155m from Aviva Investors. Chart 24: Investment Volumes by Purchasers, 16% 11% 8% 3% 1% 2% 4% 19% 19% 8% 5% 4% UK Institutions UK Other UK Private UK Property Companies Middle East/Africa German European Other Far East Japan Irish Other overseas Unknown 14

16 CITY OFFICE INVESTMENT INVESTMENT VOLUMES 165% ( 1.0bn) YIELDS 5.0% FOREIGN BUYERS 77% of transaction volumes AVAILABLE STOCK FOREX RATES VS 1.35% Chart 25: City Office Investment Volumes Chart 26: City Prime Yield vs Swap Rate 3.5 Total 4 Quarter Average 8 City 5 Year Swap Rate billion % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Investment volumes recovered strongly in the City to reach just under 1.0bn in Q4, up from 0.4bn a quarter ago but down on 1.5bn for the same quarter a year ago. The total for the year was 3.5bn, which is down 13% on the 4.0bn recorded last year. In contrast to the previous quarter, there were three deals over 100m compared with only one last quarter. The largest deal of the quarter was St Martin s purchase of 60 Threadneedle Street from Hammerson for 176.0m, reflecting a yield of 4.75%. In the second largest deal of the quarter, the Malaysian Employees Provident Fund acquired their second property of the year, with the purchase of Tower Bridge House from Credit Suisse Euroreal for 163.0m, off a yield of 5.60%. The first was 12 St James s Square in the West End. A significant number of properties remain on the market following the sharp rise in stock coming to the market over the summer. Many of these properties are now under offer suggesting the end of year momentum will continue through to Investment volumes are likely to be high in Q1 as a result, in comparison with. Prime yields stayed at 5.0% in Q4 in the face of the large rise of stock on the market over the, previous quarter. Prime yields are still expected to remain at 5.0% for most of 2012 with yields on secondary properties likely to be most responsive to any changes in the market. Overseas investors accounted for 77% of transactions by volume during Q4 driven mainly by Middle Eastern and Far Eastern investors as highlighted by the largest deals of the quarter. Over the year as a whole, overseas investors were marginally more active than UK investors; accounting for 51% of transactions. Table 3: Key City Investment Transactions, Address 60 Threadneedle Street Tower Bridge House Purchaser Capital Value ( m) Yield (%) St Martin s Malaysian Employees Provident Fund Crown Place Hannover Leasing Bunhill Row Manafea Bartholomew Lane Korean Investment Corporation

17 WEST END OFFICE INVESTMENT INVESTMENT VOLUMES 58% ( 0.3bn) YIELDS 4.0% FOREIGN BUYERS 76% of transaction volumes AVAILABLE STOCK FOREX RATES VS 1.35% Chart 27: West End Investment Volumes Chart 28: West End Prime Yield vs Swap Rate 2.5 Total 4 Quarter Average 7 West End 5 Year Swap Rate billion % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q West End transaction volumes dropped by 58% over the final quarter to stand at 0.3bn in Q4, in part due to the limited availability of stock constraining investment turnover. This took total investment for the year to 3.2bn, significantly down from the 4.0bn transacted in The increased premium on a limited number of prime assets has caused some investors, particularly domestic institutional investors, to reassess their investment criteria. Economic uncertainty and rising premiums have led to many becoming more risk averse and price sensitive. However, on the upside, overseas investors have been drawn to the West End as a safe haven for equity while the Eurozone sovereign debt crisis unfolds. Prime yields remained at 4.0% during Q4. Yields have not moved since Q and are now 150 basis points lower than their peak during the downturn. Yields are expected to remain firm for prime properties, supported by strong overseas demand, whilst secondary properties could see yields move out in response to weaker economic conditions. Table 4: Key West End Investment Transactions, Address Purchaser Capital Value ( m) Yield (%) This was reflected over the course of the year, with overseas investors involved in many of the largest deals in In total overseas investors accounted for around 57% of the annual total; the sum of their involvement in Q4 amounted to 261m, down from 504m in the preceding quarter. 1 Berkeley Street Crosstree St George s House, 61 Conduit Street Orchard Street Investment Management The only West End deal to exceed 100m in the final quarter was concluded by Crosstree Real Estate, who purchased 1 Berkeley Street for 155m, reflecting a yield of 3.79%. 60 St Martin s Lane CFH International Wardour Street Private Bedfordbury Private

18 CENTRAL LONDON RETAIL The West End continues to see strong tenant demand for flagship stores in the prime streets. Ed Humbert Senior Director Retail 17

19 CENTRAL LONDON RETAIL * RETAIL SALES 6.8% y-o-y December FOOTFALL 0.3% y-o-y December RENTAL OUTLOOK % UNSEASONABLY WARM AUTUMN WEATHER HIT SALES IN OCTOBER AND NOVEMBER, BUT DECEMBER HAS SEEN STRONG LIKE FOR LIKE SALES GROWTH Central London retail sales Following a strong Q3 increase in retail sales, unseasonably warm weather in the autumn led to reduced year on year sales in both October and November as shoppers delayed winter wardrobe purchases. The opening of Westfield Stratford in September has inevitably also resulted in a short term decline in West End footfall but its impact is expected to reduce as the honeymoon period ends. In line with the rest of the UK, footfall numbers in the West End were down in October and November, as high streets were adversely affected by a combination of reduced consumer confidence, warm weather and increasing internet sales. Demand continues in core Central London markets Despite concerns over the Eurozone and UK economies, the market for prime retail units in London remains very robust. Demand continues to outweigh supply for prime units in all of the major shopping streets of the core West End, Knightsbridge and Covent Garden. Whilst the extraordinary premium levels paid in mid-2011 may not be repeated in the short term, a lack of supply, particularly for larger flagship stores on new leases, has led to continued rental growth. There is no doubt however that a two tier market has emerged with well configured larger units in the best positions attracting multiple bids whilst smaller units in secondary locations are proving harder to let. This trend looks set to continue into 2012 as retailers become increasingly discerning in their search for new stores. Luxury markets continue to thrive Luxury markets of London have fared particularly well in the latter part of Bond Street remains the most expensive retail location in London but Sloane Street has also seen significant rental growth during this period. Zone A rents have now risen to a record 800 per sq ft ( 670 on 30 ft zones) at the prestigious northern end of the street as a result of new lettings. This represents an increase from 675 per sq ft in Q3. Mount Street has also continued to see significant growth and rents now stand at 375 Zone A with several new arrivals on the street including RRL (Ralph Lauren). London continues to attract large numbers of wealthy overseas visitors from the Middle East, Far East, USA and Europe. Luxury spending in 2010 increased by 19% and it looks likely that 2011 will also see a healthy increase in luxury goods year-on-year sales. Harrods have reported that sales in December are ahead of 2010, suggesting annual sales for 2011 will surge past the 1bn achieved last year. Chart 29: Central London Prime Rent, per sq ft (Old) Bond St* (New) Bond St* *BRC, NWEC, CBRE, IPD Oxford St (West)* Brompton Road Sloane St Covent Garden Oxford St (East)* Regent St* Piccadilly Circus Kings Road Mount St Marylebone High St* Tottenham Court Road Victoria* Strand Kensington High St* Moorgate/Liverpool St Cheapside High Holborn Fenchurch St Paddington *30 ft zones 18

20 Chart 30: Retail Sales Chart 31: Footfall 12% National Retail Sales West End Retail Sales 10% National Footfall West End Footfall 10% 8% 5% Annual % Change 6% 4% 2% 0% 0% -5% -2% -10% -4% -6% -15% Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Sep -10 Oct -10 Nov - 10 Dec - 10 Jan - 11 Feb - 11 Mar - 11 Annual % Change Apr - 11 May - 11 Jun - 11 Jul- 11 Aug - 11 Sep - 11 Source: BRC, NWEC Source: HSI, AS, NWEC Regent Street continues to be one of London s most sought after streets and the southern end is due to be transformed with the arrival of more than 150,000 sq ft of new retail and restaurant accommodation in early Coach and Sebago have both recently acquired stores and will join Hollister, Superdry, Wholefoods and a new 30,000 sq ft Burberry flagship at this end of the Street. The reopening of the 160 bedroom 5 star Café Royal Hotel, again in time for the Olympics, will be another significant boost for this part of the Street. Likewise Covent Garden continues to perform well and there is growing sentiment in the market that both spend and customer demographic is increasing. Recent lettings include Links of London, GShock, Oliver Sweeney and Eileen Fisher, along with some pop up lettings over Christmas to brands including Pretty Polly to launch their new collabortation with Henry Holland and Aigle for their first UK store. CapCo exchanged just before Christmas with 7 For All Mankind for a flagship store on King Street. On Kings Road, there have been several significant transactions this quarter including the reletting of 19/21 Kings Road to Massimo Dutti for a 7,000 sq ft flagship store and Gerald Darel s acquisition of 90 Kings Road. Brompton Road has also performed very strongly in late 2011, boosted by Harrods undoubted appeal. Recent lettings in the prime pitch on the south side of the street include Tommy Hilfiger and Ted Baker, showing new Zone A rents of 565 and 603 respectively. OUTLOOK Chart 32: Central London Prime Rental Growth Prime rental values are forecast to rise in Central London throughout 2012 by 2.5%, as a result of increasing demand from retailers for limited prime space, in particular a lack of larger flagship stores. Compared with 2011, this reflects a more subdued growth rate because the majority of retailers have fulfilled their space requirements ahead of the forthcoming Olympics. Strongest rental growth is expected to occur on Bond, Regent and Oxford Streets. Annual % Change 10% 8% 6% 4% 2% 0% -2% -4% -6% FORECAST Rental growth is expected to continue into 2013, at an increased rate of 4%, driven by stronger economic growth , IPD 19

21 Coach, Bond Street In Covent Garden Zone As have moved on significantly in the last few months. The last handful of deals in St Martin s Courtyard fronting on to Long Acre showed 425 Zone A, albeit the letting to Rabeanco within CapCo s ownership (Unit 25 Long Acre) moved the tone on further, showing 477 Zone A. King Street is also improving, with Oliver Sweeney showing just short of 300 Zone A, (almost double where levels were 12 months ago), with interest on the rest of King Street pushing this tone further. Terms have been agreed for 7 for all Mankind to open a further flagship store in King Street, Covent Garden Similarly Park House (at the Marble Arch end of the street) is due for completion Q and the line up of international retailers will further enhance values in this areas. Oxford Circus retains its prime position in terms of value, reinforced by the letting to Coast on the former Clintons store involving a positive incoming premium from the tenant as well as a tone over 700 Zone A. Oxford Street continues to attract a wide range of retailers seeking flagship representation in London. The proposed 120,000 sq ft Primark flagship at the eastern part of Oxford Street (at the junction with Tottenham Court Road) has created significant interest and rents are already increasing in reaction to the opening later in There is still a very positive feeling in the core West End areas as the Diamond Jubilee and the Olympics approach when we expect to enjoy the benefits of increased UK and international tourism. Table 5: Key Leasing Transactions, Address Landlord Retailer Rental Level ( pa) Net Zone A/Premium ( ) 102 Brompton Road HSBC National Geographic 500, Regent Street The Crown Estate Coach 575, Oxford Street Lancer Coast 750, Oxford Street Private Irish Boots 1.19m King Street CapCo 7 For All Mankind 190,000-20

22 CENTRAL LONDON RETAIL INVESTMENT Rental growth shows no signs of abating in the key streets and this factor coupled with anticipated lack of supply will underpin core values. Phil Cann Executive Director Retail Capital Markets 21

23 CENTRAL LONDON RETAIL INVESTMENT INVESTMENT VOLUMES 570m YIELDS 3.5% AVAILABLE STOCK FOREX RATES VS 1.35% Chart 33: Bond Street Prime Rent vs. FTSE 100 Index Chart 34: Central London Prime Shop Yields per sq ft Prime Bond Street Rent (LHS) Q Q Q Q Q Q FTSE Index (RHS) Q Q Q Q Q2 2011, Macrobond 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Q New Bond Street Old Bond Street Oxford Street East Oxford Street West Regent Street Q Q Q Q Q Q Q Q Q The enforced sale of prime assets has continued into the final quarter of 2011 with key transactions such as the sale by administrative receivers of Oxford Street and also the sale of New Bond Street and New Bond Street accounting for approximately 400 million or c. 70% of market volume. All three transactions underlined another key trend which is the purchase by retailing or retailer dynasties who are now established stakeholders within the key Oxford Street and Bond Street retailing footprint. Total transactions of 2.3 billion for 2011 suggest that volumes for the final quarter of 570 million were on trend for the year. In the broader Central London markets the other key buyers remain the landed estates with The Crown Estate, Cadogan, Grosvenor and Howard de Walden Estates all active evidenced by The Crown Estate s purchase of the long leasehold interest of Regent Street. Institutional investors remain active although we anticipate that for 2012 this category will be net sellers of Central London retail assets given the anticipated lack of supply and aggressive pricing of the key overseas investors. Although London continues to attract equity from a variety of sources it is becoming clear that the scarcity of supply and pricing aspirations is undermining the attractiveness of London with investors also keen to explore prime retail assets in other key European trading locations such as in Paris, Hamburg, Vienna and Munich. The outlook for 2012 remains positive although thinner trading is anticipated with values remaining stable. Table 6: Key Investment Transactions, Address Key Tenants Capital Value ( m) New Bond Street Louis Vuitton 200.0* /42 New Bond Street Smythson and Coach 100.0* New Bond Street Hublot (on assignment from Furla) Knightsbridge McLaren Oxford Street Calzedonia, Ben s Cookies Jaeger House, Regent Street Jaeger *CBRE estimate Yield (%) 22

24 CENTRAL LONDON RESIDENTIAL With stock in short supply in Prime Central London, buyers are increasingly looking eastward. This is causing high prices to ripple out from the traditional core to the eastern periphery. Mark Collins Executive Director Residential 23

25 CENTRAL LONDON RESIDENTIAL * PRICES 3% SALES VOLUMES 5% RENTS 4.5% STARTS 208 Units DESPITE THE ONGOING TURMOIL IN THE EUROZONE, LONDON CONTINUES TO BE A SAFE HAVEN ATTRACTING A WIDE RANGE OF FOREIGN BUYERS. Central London sales volumes continue to grow Market activity has seen a boost over the autumn. There were 1,528 transactions in Q3, 5% up on the previous quarter. Transaction levels are now 25% below where they were at the 2007 peak. Central London house prices still rising The average house price in Central London is 805,000, up 3% in Q3 with prices now 9.2% higher than a year ago. The greatest uplift this quarter was in Kensington and Chelsea where prices increased by 12.3%. Rental growth continues Rents have grown by 4.5% over Q3. The average rent for a 2 bed property in Kensington and Chelsea is 600 per week, slightly higher than in Westminster where it is 550 per week. Two schemes under way this quarter Two schemes with 208 units in total, both in the City, began construction in Central London in. That means there are 3,831 units currently under construction across 21 sites, with over 60% of these schemes in the City or the Docklands. There are a further 54 schemes with 14,734 units in the Central London pipeline, 75% of which are private. London is moving eastwards Development is increasingly concentrating in the east of London, towards the Olympic site in Stratford. This reflects a lack of stock in the west and a burgeoning demand pushing development eastwards. Formerly edgy areas like Shoreditch, Old Street and Farringdon have recently gone from being up and coming to desirable. The result is that high price contours are rippling out from prime Central London to other parts of London. In some cases Q3 stats are latest available from industry sources. Chart 35: Central London House Prices 900,000 Value (LHS) Annual Price Change (RHS) 40% 800,000 30% Average Value ( ) 700, , , , , ,000 20% 10% 0% -10% -20% Annual Price Change (%) 100,000-30% 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % *Land Registry, VOA, Molior Source: Land Registry 24