How To Predict The Growth Of Central London In 2015

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1 At a Glance CENTRAL LONDON OFFICE MARKET Q LEASING Despite persistent & robust demand for space in Central London the first quarter of 2015 saw take-up drop 36% to 2.87 million sq ft, the first time in eight consecutive quarters that take-up was below 3 million sq ft. The last time take-up was below this level was in Q when interestingly, the total volume was also 2.87 million sq ft. Recent history has seen the Media Tech sector driving Central London take-up and with the sector accounting for 21% of total first quarter take-up, the trend looks set to continue through Another trend that looks set to persist over the year ahead is the growth in prominence of serviced office operators. The sector made up 12% of take-up during the quarter. The total amount of space absorbed by these firms is 2 million sq ft since the beginning of 2013, almost double the amount taken between 2005 and The first quarter of the year is traditionally the quietest for take-up but whilst there are fewer larger requirements, demand from small and mid-sized businesses is solid. Competition for <5,000 sq ft units is intense and rents are being forced up across the Capital, indeed a record breaking rent of 185/sq ft was achieved in St James s in Q1. Central London take-up by sector INVESTMENT In line with the long-term trend, London economic growth is set to outpace that of the UK overall. By 2015 the London economy is expected to be over 25% larger than its pre-crisis peak in 2008 and over the next 3 years London GDP is expected to increase by 10.2%. Against this positive economic backdrop Central London office investment enjoyed a healthy start to At 3.86 billion it was the highest first quarter investment volume since 2007 ( 3.87 billion). Even more impressive considering this followed the highest 4th quarter volume on record (Q4 2014: 8 billion). At 1.72 billion the City market enjoyed it s most active first quarter since 2006 ( 2.3 billion), making up 45% of the Central London total. 68% of Q1 Central London office investment involved cross-border capital, down from 81% in Q Overseas involvement in 6 deals over 90 million in the City pushed foreign investment to 70%. With fewer trophy deals in the West End than in previous quarters UK investors saw their share of the market reach 48% across 15 deals. The strong performance during the quarter ensured prime yields remain at 3.50% and 4.00% for the West End and City respectively. Central London investment volume Central London key indicators Key investment transactions Q Q Q Price ( m) Yield (%) Purchaser Take-up (m sq ft) % -8% Supply (m sq ft) % -27% rate (%) 5.39% 5.10% 7.42% 29bp -202bp Investment Volume ( bn) % 19% West End prime yields (%) bp -25bp City prime yields (%) bp -50bp Sampson & Ludgate, SE1 308 N/A 526,280 Temasek/Amcorp The Pinnacle, EC2 300 N/A Site Temasek/Lipton Rogers Queensberry House, W ,073 Norges Bank Cannon Bridge House, EC ,580 Blackstone City Gate House, EC ,700 Brookfield 1 Neathouse Place SW ,472 Threadneedle Dan Bayley, London Office Agency, , daniel.bayley@bnppparibas.com Alistair Kemp, Research, , alistair.kemp@bnpparibas.com

2 WEST END The West End saw leasing transactions of 0.67m sq ft in Q Although 21% below the long term quarterly average, levels were on par with take-up during the respective period of Unlike recent quarters it was a lack of large individual deals that led to the overall subdued levels of demand, indeed just one deal in excess of 50k was recorded, Facebook s 65,000 sq ft acquisition at Regent s Place, NW1. Compared with recent trends, Victoria saw very low levels of take-up, which accounted for only 21,000 sq ft in 4 deals. West End take-up Key deals in the Media Tech sector such as the Facebook transaction and BMG Chrysalis acquiring 23,000 sq ft at 5 Merchant Square in Paddington, resulted in the sector accounting for 31% of total take-up in the West End during the quarter. The below average levels of take-up contributed to a 4.9% rise in supply to 2.62m sq ft, resulting in a vacancy rate of 3.8%. Despite this rise, a fall in vacancy rates over the course of 2015 is still expected due, in a large part, to the restrained development pipeline. 1.48m sq ft of office space is due for completion this year, 15% of which has already been pre-let. It is also worth noting that approximately 50% of the 2015 development pipeline is classified as extensive refurbishment, leaving only 0.71m sq ft as new build development space. West End rents and vacancy rate The low vacancy rate in the West End has continued to place upwards pressure on prices with the current prime rent now standing at 120 per sq ft. A new record high rent of 185/sq ft was achieved at 8 St James s Square, providing further evidence that tenants are prepared to pay a substantial premium to secure the best space. Mirroring the occupational market, investment activity was also more muted when compared against a strong Q4 14. Investment volumes reached 1.05bn, 51% below the previous quarter. The lack of larger lot size opportunities was a major contributor to the subdued investment volume. Norges Bank s 190m purchase of Queensbury House, Old Burlington Street in Mayfair was the largest transaction of the quarter. Despite this, appetite remains strong for West End assets, against a backdrop of extremely low levels of supply, prime yields could potentially see further compression during the course of Rent ( /sq ft) Tenant Regent's Place, NW1 65,000 Conf. Facebook 1-2 Stephen Street, W1 34, The Office Group Paddington Central, W2 23, Vertex Pharmaceuticals 5 Merchant Square, W2 23, BMG Chrysalis 8 St James's Square, SW1 7, SG Hambros 8 St James's Square, SW1 2, Helly Nahmad Gallery Market statistics (W1, W2, W8, SW1, SW3, SW7, NW1) Take-up % -3.7% Availability % -35.1% rate bp -200bp Mayfair/St James s , % 9.1% Victoria % 4.7% Soho % 3.2% North of Oxford Street (East) % 15.4% North of Oxford Street (West) % 0.0% Nick Rock, London Office Agency, , nick.rock@bnppparibas.com Steven Skinner, Investment Agency, , steven.skinner@bnpparibas.com Colin Mumford, Lease Advisory, , colin.mumford@bnpparibas.com

3 City Take-up hit 1.67m sq ft in the first quarter of 2015, despite being 6% below Q4 14 take-up, the figure was still 13% ahead of the five year quarterly average of 1.48m sq ft. Deloitte s 275,000 sq ft pre-let at Land Securities 1 New Street Square provided the largest boost to the overall take-up figure. As the supply and demand imbalance becomes more pronounced we anticipate a further increase in the amount of pre-letting activity over the course of The Professional Services sector helped drive demand over the quarter, largely as a result of Deloitte s acquisition, which in itself accounted for a quarter of total Q take-up. Continuing on from the trend set in 2014, the Serviced Office sector s appetite for significant chunks of prime space in the City continued into 2015, with WeWork s 168,000 sq ft deal at the recently completed Moor Place taking the sector s share of overall take-up to 12%. Supply levels continued on a downward trend with only 5.32m sq ft of available space recorded at the end of the quarter. Availability is now fast approaching the previous historic low of 5.16m sq ft recorded in 2006 and the current vacancy rate of just 6.0% is one of the lowest on record. Can the City development pipeline offer any reprieve to the tight level of supply? With an average of 3.3m sq ft per annum due for completion over the next three years ( ), the talk of a supply crunch in the City perhaps looks baseless. However, on closer inspection, it becomes evident that a third of the total development and refurbishment space scheduled for completion over the next three years has already been pre-let. In addition, with refurbishments stripped out, there is just 3.05m sq ft of new office development, an average of only 1.13m sq ft per annum over the next three years. A continued high level of take-up will ensure further downward pressure on the vacancy rate over the next 12 months. These favourable landlord conditions continue to squeeze rents upwards, with prime rents now at 64.00/sq ft, up from 62/sq ft in Q4 14. The positive rental growth story over the next five years should encourage developers to focus on delivering new stock but with limited sites currently available we foresee strong competition for the opportunities that do exist. Indeed there was a flurry of investment activity in Q with volumes reaching 1.7bn, 35% ahead of the respective period in Rent ( /sq ft) Tenant 1 New Street Square, EC4 274,766 Conf. Deloitte Moor Place, Fore Street, EC2 167, WeWork 1 Aldermanbury Square, EC2 68,803 Conf. Hewlett-Packard 30 Gresham Street, EC2 61, Investec Willis Building, Fenchurch Street, EC3 52, Deutsche Bank The Leadenhall Building, EC3 11, Ipsoft Nexus Place, 25 Farringdon Street, EC4 8, Baker Tilly & Co City take-up & vacancy rate City development pipeline City prime rents and vacancy rate Take-up 1, % 45.0% Availability 5, % -26.4% rate bp -228bp Non-towers % 9.4% Towers % 7.1% 110 Bishopsgate, EC2 6, Trailstone UK Fred Hargreaves, London Office Agency, , fred.hargreaves@bnppparibas.com Richard Garside, Investment Agency, , richard.garside@bnpparibas.com Colin Bell, Lease Advisory, , colin.bell@bnpparibas.com

4 MIDTOWN DOCKLANDS Following the trend seen across Central London office markets, takeup in Midtown struggled to match the buoyant level recorded during the previous quarter. Take-up reached 219,000 sq ft in Q1 15 compared with 345,000 sq ft in Q4 14. The largest deal was 40,090 sq ft at 80 Stand which was let to marketing & analytics firm Aimia. Encouragingly, we are currently tracking 412,000 sq ft of space under offer, 280,000 sq of which is under offer to King s College at Aldwych Quarter. We understand that the University is close to agreeing a 50 year lease. The buildings will be occupied on a phased basis we believe some space will be offered on subleases after completion. The addition of The Adelphi and Aldwych House to our supply figures pushed up availability by 22% to 1.19m sq ft, a vacancy rate of 6%. Despite this, the vacancy rate is still below the average of 6.5%. Of the 836,500 sq ft of developments due to complete in % is pre-let suggesting occupiers looking further ahead to fulfil their property requirements. Market statistics (WC1, WC2) Market statistics (E14, E16) Q take-up was 117,236 sq ft, 69% lower than the previous quarter and less than half the 10 year quarterly average. However, with a market that relies mainly on large corporate deals to boost performance we anticipate that supply constraints in other London submarkets should see increasing demand for the high quality, economical space that is available within the Canary Wharf location. The largest deal of the quarter saw MasterCard taking 26,811 sq ft on the 17th floor of 10 Upper Bank Street. We understand that a rent of 38/ sq ft was achieved on a nine year lease with a break option included halfway through the term. The vacancy rate jumped 172 bps to 9.04% during the quarter, but with around 230,000 sq ft of space currently under offer, the rate could return to the Q level just as quickly as it moved out. Although we have witnessed both a drop in take-up and a rise in availability, rental evidence still supports prime rents of 40/ sq ft in Canary Wharf, whilst rents in Rest of Docklands, nudged up to 28. Take-up % -21.2% Availability % -15.5% Take-up % -74.6% Availability % 0.0% rate bp -83bp Holborn % 0% Covent Garden % 3.4% Midtown take-up and vacancy rate rate bp -29bp Canary Wharf % 6.7% Rest of Docklands % 7.7% Docklands take-up and vacancy rate Rent ( /sq ft) Tenant 80 Strand, WC2 40, Aimia 1 Kingsway, WC2 13, LSE 6 Agar Street, WC2 13, Natural Motion 1 Kingsway, WC2 13, Uniqlo 115 Shaftesbury Avenue, WC2 2, The Platform Ltd Rent ( /sq ft) Tenant 10 Upper Bank Street, E14 26, Mastercard 5 Churchill Place, E14 26, Ipagoo 5 Churchill Place, E14 24,975 Conf. JP Morgan 3 Harbour Exchange Sq, E14 8, Ciegtel 40 Bank Street, E14 1, Pension Service Online All sources: BNP Paribas Real Estate All sources: BNP Paribas Real Estate Chris Williams-Ellis, London Office Agency, , chris.williams-ellis@bnppparibas.com Paul Henwood, Investment Agency, , paul.henwood@bnpparibas.com Nick Jones, Lease Advisory, , nick.jones@bnpparibas.com

5 WEST END RETAIL MARKET Q WEST END RETAIL MARKET - Q OCCUPIER MARKET The London retail occupier market has continued to strengthen in the first quarter of Vacancies have remained particularly low in several key submarkets. To the untrained eye, vacancies on Bond Street, Oxford Street and Covent Garden appeared to be far higher, though this was due to refurbishment works rather than stores lying empty. Achieved rents have remained stable throughout Q1. A lack of suitable stock has meant that the West End has not witnessed the same level of occupier turnover as in previous years. The recent Links of London letting at 199 Regent Street at a record 750 psf ZA, demonstrates considerable upward pressure on rents for the best units. The high rent on this particular space was exacerbated by it being a small unit. There remains a plethora of luxury retailers who do not have a presence in London. A recent BNPPRE Research sample of some of the top luxury brands within the global market showed that 31% were not currently present in London, compared to 21% in Paris, indicating that the market still has considerable scope for growth. As a result, we are anticipating further rental growth within the West End, at around 5.5% this year. PRIME RETAIL RENTS/ VACANCIES INVESTMENT MARKET West End retail investment in Q1 stood at 237.8m, representing a 31% increase for the same period in However, the level of investment into retail fell considerably below the long run average for the second quarter running. Similarly to the occupier market, this has been due to a lack of suitable opportunities as opposed to a lack of demand. We anticipate that this trend will continue throughout Overseas money continued to flow into the sector in Q1 and represented 38% of the total volume transacted. Whilst still a considerable sum, it does mark a slight decline in foreign involvement compared to the last few quarters. The lack of availability on prime retail pitches has resulted in average prime yields for the West End, namely Bond Street and Knightsbridge sharpening to 1.9%. INVESTMENT VOLUMES This level was surpassed in Q1 with the purchase of 100 Knightsbridge by a private Saudi Arabian investor for 22.5m, which represented a yield of 1.7%; the prime unit is currently tenanted by Rolex. Prime yields on Oxford Street are now established at 2.5%. The sale of Oxford Street to a private Hong Kong investor for 58m achieved 2.43%. Significantly, the unit is located towards the lesser eastern end of the street. With the construction of Crossrail due to complete in late 2017, the prime section of Oxford Street will extend further down towards Tottenham Court Road. KEY DEALS Address Price ( m) Yield (%) Purchaser Vendor 100 Knightsbridge , Oxford Street , Kensington High Street ,000 Private Saudi Arabian Private Hong Kong Grosvenor Fund Mgmt Williston Properties NFU Mutual Lum Chang & Kensington High Street ,981 DTZ Investors Aviva Investors 19 Marylebone High Street ,651 UK Charity Undisclosed Steven Skinner, Investment Agency, , steven.skinner@bnpparibas.com Rob Hargreaves, Retail Agency, , rob.hargreaves@bnppparibas.com Nick Robinson, Research, , nick.robinson@bnpparibas.com