CENTRAL LONDON PROPERTY MARKET REVIEW

Transcription

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

2 FOREWORD There are positive signs that the UK economy is starting to recover. Firstly, there was the good news that the double-dip recession at the beginning of 212 has been revised away, while higher than expected growth in Q1 and forecasts of.7% for Q2 suggest that the economic recovery is slowly beginning to establish a firmer foothold. We have also seen the International Monetary Fund (IMF) upgrade its 213 growth forecast for the UK, predicting growth of.9%. Secondly, there has been some very positive survey data with activity in the services sector Purchasing Managers Index (PMI) at its highest level since March 211, while the British Chambers of Commerce Survey showed general improvements in sales, exports and employment. Thirdly, the two key measures of property demand, office-based employment and retail sales, have continued to strengthen in the first half of the year. Central London retail sales have bounced back strongly since December while Central London office-based employment has gone from strength to strength, with the office leasing market back above trend over the quarter. Elsewhere, the prime residential market continued to see rising sales volumes, driven by oversees and increasingly, domestic demand. The prime Central London market has continued to outperform the wider market; however, we expect government initiatives such as Help to Buy will help stimulate the low-mid end of the market. The retail market remained as popular as ever with international retailers. The high demand for a limited number of prime pitches has meant that brands are CONTENTS considering other locations, in close proximity to the main streets, resulting in a spillover of rental growth. In the investment market, London continued to attract significant international investment, with overseas investors dominating both the office and retail markets. A number of large off-market deals helped support turnover in Q2, despite there being a limited supply of investment stock. Meanwhile, we saw continued high demand for residential development opportunities. Our expectation for the second half of 213 is for more of the same, with the positive employment data and improving business confidence filtering through to the occupier market. This will help support office take-up levels and lead to renewed, if unspectacular, rental growth. Meanwhile, the high demand for Central London retail from international retailers will help support prime retail rents. The ongoing issues in the Eurozone mean that London will continue to be the destination of choice for overseas capital. Whilst there remains a shortage of investment stock, we expect the trend for investors seeking off-market deals to «OFFICE LEASING pagge 3 «OFFICE DEVELOPMENT p a ge 1 2 «OFFICE INVESTMENT pa g e 1 3 «RETAIL LEASING p a ge 1 7 «RETAIL INVEESTM MENTT pagge 21 «RESIDENTIAL p a ge 2 3 continue, helping support transaction volumes in the second half of the year. Adam J Hetherington Managing Director, Central London 1

3 ECONOMIC OVERVIEW * GDP FORECAST.7% CL HOUSE PRICES 6.% y-o-y April UK RETAIL SALES 14.5% y-o-y June UK BUSINESS CONFIDENCE UK CONSUMER CONFIDENCE ECONOMIC NEWS HAS BEEN MORE UPBEAT THROUGH THE SECOND QUARTER OF THIS YEAR, SUGGESTING WE MAY BE SEEING A MODEST UPTURN IN THE RATE OF RECOVERY. More upbeat economic news Just three months ago we were mulling over whether the UK economy would be able to eke out some growth in order to avoid a triple-dip recession. Much has changed since, growth exceeded expectations in Q1 and not only was the triple-dip avoided but revisions to official data mean that there was no double-dip recession either. It was not all good news though as the same set of revisions revealed the recession after the financial crisis to have been more severe than previously thought. This data supports our view that most of the UK economy has been on a stable, if rather weak, recovery trajectory for some time. It also seems that we may currently be going through a modest up-turn in the rate of recovery. Survey evidence has been particularly upbeat. Taking the Purchasing Managers Indices (PMIs) as an example, the headline activity balance for manufacturing reached a 25-month high in June while the equivalent measure for service industries was at its highest level since March 211. Consumer confidence has also been improving, and there are some encouraging signs from the housing market. Consumers still under pressure Total UK employment has continued to increase and in the three months to April stood at million, an increase of 43, from a year earlier. However, earnings are still under pressure. In April average earnings growth was just 1.3%, less than half the rate of inflation. An easing in the rate of inflation is unlikely before the autumn, especially in light of recent sterling depreciation which will increase the price of imports. Monthly data on retail sales has been very volatile over recent months, but the underlying picture is one of slow improvement. However, the internet continues to capture much of what little sales growth there is, and the clutch of retailers going into administration in June was a reminder of the challenges still facing the sector. Rapid employment growth in London Recent data shows that over the 12 months to March 213 total employment in London grew by an impressive 2.2%. Comparing this with the equivalent UK figure,.5%, provides a clear illustration of the outperformance of the London economy. Narrowing our focus to office-based industries, employment in London grew by a striking 4.4%. This is the largest annual increase since 25. Central London office-based employment is forecast to continue growing, albeit not at the same pace, recording annualised growth of around 2.% p.a. between 213 and 217. The TMT sector is forecast to see the most significant percentage growth over the next few years; however, since it is still a maturing sector it will not contribute the largest number of new jobs. It will be more established industries, such as professional and business services, which will deliver the majority of new Central London office-based jobs. Chart 1: Economic Growth, Real GDP Growth Chart 2: Central London Office-based Employment 8 London UK 2, FORECAST 6 FORECAST 1,8 Annua al % chnage Employment (s) 1,6 1,4 1,2 1, *National Statistics, PWC, CBI, Oxford Economics and DG ECFIN Source: Oxford Economics, Oxford Economics 2

4 CENTRAL LONDON OFFICES There were signs in the spring that, despite the subdued levels of take-up, the Central London office market had reached a turning point. In Q2, the outlook is more positive, with leasing levels above trend in a number of markets and under offers continuing to rise. Mark Slim Executive Director City Agency Sixty London 3

5 CENTRAL LONDON OFFICES TAKE-UP 33% (3.4m sq ft) UNDER OFFERS 4% (3.m sq ft) AVAILABILITY +3% (17.7m sq ft) CENTRAL LONDON PRIME RENT INDEX 1.8% A RETURN TO ABOVE-TREND LEASING LEVELS AND RISING UNDER OFFERS INDICATES THAT OCCUPIER CONFIDENCE IS STARTING TO IMPROVE. THIS IS ALSO REFLECTED IN PRIME HEADLINE RENTAL GROWTH IN A NUMBER OF WEST END SUBMARKETS OVER THE QUARTER. Take-up at its highest point since Q4 21 Central London take-up rebounded strongly in Q2 following a sustained period of subdued leasing activity, rising by 33% over the quarter to reach 3.4m sq ft. As a result, take-up stood at 14% above the 1-year average of 3.m sq ft and marked its highest point since Q4 21, when 4.2m sq ft was let. New supply pushes up availability Central London availability increased by 3% over the quarter to reach 17.7m sq ft (the 1-year average has been 17.1m sq ft). This marked the highest volume of supply since Q4 29 (18.4m) and reflected an availability rate of 8.1% compared with 7.8% in the previous quarter. Much of this increase was concentrated in the City and West End, where take-up rose by 83% and 47% to reach 1.6m sq ft and 1.m sq ft respectively. In the case of the City, Q2 marked a return to above-trend levels of take-up (1.2m sq ft), while the West End was only 4% below (1.4m sq ft). Midtown also recorded above-trend levels of take-up at.5m sq ft. Notable increases were observed in the Docklands and Southbank, although take-up in these markets remained below the 1-year average. Under offers continue to rise The volume of space under offer increased for a second consecutive quarter, rising by 4% in Q2 to reach 3.m sq ft. This compares with the 1-year average of 2.7m sq ft and reflects its highest point since Q2 211 (3.2m sq ft). This suggests that the recovery in leasing levels observed over the quarter will be sustained in the second half of the year. Rising availability has been driven by a strengthening development pipeline, with more early marketed space (12 months from completion), currently standing at 4.8m sq ft from 4.2m sq ft in Q1, becoming available. Prime headline rents continue to rise in the West End Prime headline rents increased in five West End markets, including Mayfair and St James s which increased by 3% to 97.5 per sq ft, marking a second consecutive quarterly rise. Prime rents remained unchanged in all other main Central London markets, with the City and Midtown both at 55. per sq ft and Southbank and Docklands at 45. per sq ft and 38.5 per sq ft respectively. Completion levels rise in Q2 Completion levels totalled 1.m sq ft in Q2, up from.3m sq ft in Q1. Over the next six months a further 2.7m sq ft is projected to be delivered, bringing the total for the year to 4.m sq ft, which is below the 1-year average of 4.3m sq ft. Around 2.8m sq ft of the space completing in 213 is speculative. OUTLOOK Chart 3: Central London Take-up and Availability Take-up in 213 is forecast to improve from 212, boosted by improving economic growth, higher business confidence and a number of significant lease events. However, with the economy still fragile and occupiers still largely cautious about committing to real estate decisions, it is likely that take-up will remain below trend until next year. Availability is forecast to peak in 213, driven by strengthening speculative development completions in 213 and 214. However, availability is forecast to fall in 214 as increasing demand absorbs the new supply Take-up Availability (RHS) FORECAST

6 CITY OFFICES TAKE-UP 83% (1.6m sq ft) UNDER OFFERS -9% (1.4m sq ft) AVAILABILITY -3% (6.9m sq ft) PRIME RENTS 55. Chart 4: City Take-up Chart 5: Sector Structure of City Take-up Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) % 13% 24% 22% 12% Banking and Finance Business Services Manufacturing, Industrial and Energy Insurance Public Sector Professional. 3% Consumer Services and Leisure Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q % 2% TMT City take-up rebounded in Q2, rising by 83% over the quarter to reach 1.6m sq ft, which is not only above the 1-year average of 1.2m sq ft but is also the highest level since Q3 21 (1.8m sq ft). This increase caused the rolling annual total to rise to 4.8m sq ft and compares with 3.9m sq ft a year ago. Large uplifts in leasing activity were noted across all grades of space, with the most significant nominal increase observed in secondhand space, which rose by 64% to.9m sq ft virtually level with total take-up in the preceding quarter. Stronger growth was noted in new completed and pre-let space, with both more than doubling to reach.4m sq ft respectively. Underpinning the increase in take-up were nine transactions over 5, sq ft, compared with three in the previous quarter. The largest deal of the quarter saw Amazon pre-let 25,8 sq ft at Sixty London, expanding its UK operation from its headquarters in Slough. The Amazon deal also represented the largest in Central London in Q2. Elsewhere, insurer Amlin acquired 111,8 sq ft at British Land / Oxford Properties The Leadenhall Building, with an option to take a further 36,8 sq ft, in the second-largest letting of the quarter. Amazon s acquisition at Sixty London caused the proportion of TMT take-up to rise to 24%. In a continuation of recent trends, the insurance sector was once again a prominent taker of space, reflecting 2% of the total. The volume of under offers fell by 9% over the quarter to 1.4m sq ft, following the high turnover of deals in Q2. However, under offers remained above the 1-year average of 1.1m sq ft, which should help support take-up in the second half of 213. Table 1: Key City Transactions, Address Sq ft Occupier Business Sector Sixty London 25,8 Amazon TMT The Leadenhall Building 111,8 Amlin Insurance The Walbrook Building 92,4 Worldpay Banking and Finance Banking and finance showed signs of greater activity in Q2 following a long hiatus, accounting for 22% of take-up. The sector was supported by a 92,4 sq ft letting to Worldpay at The Walbrook Building and a 45,9 sq ft acquisition by Julius Baer Investments at 1 St Martin s Le Grand. 2 Aldersgate Street 89,9 FTI Consulting Professional Turnmill 56,8 Publicis TMT 5

7 Chart 6: City Availability Chart 7: City Development Pipeline Secondhand New Under Construction New Completed 1-year Average Completed Proposed Available Under Construction Let/Under Offer Proposed Let/Under Offer Under Construction Available 1-year Average Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q City availability fell by 3% over the quarter to 6.9m sq ft, a trend also reflected in the availability rate which tightened from 9.5% to 9.4%. This compares with a 1-year average of 7.6m sq ft and marked its lowest point since Q4 211 (6.9m sq ft). Secondhand supply saw the largest fall in availability, declining by 6% over the quarter to 3.8m sq ft, while the level of early marketed space fell by 1% to 1.6m sq ft. This was driven by the high volume of secondhand take-up and pre-letting over the quarter. Meanwhile, the amount of new completed space increased marginally by 2% in Q2 to reach 1.5m sq ft. The supply of early marketed space is likely to increase in the coming quarters as the speculative development due for completion in the latter part of 214 becomes available. There are 12 buildings of 1, sq ft or more available in the City. 2 Fenchurch Street, which is currently under construction, represents the largest quantum of available space in a single building at 292,5 sq ft, while 125 London Wall is the largest secondhand unit at 224,1 sq ft. Development completions totalled.3m sq ft in Q2, with a total 1.3m sq ft expected in 213 which is below the 1-year average of 1.9m sq ft. Completion levels are projected to peak at 3.3m sq ft in 214, with a further 1.6m sq ft and 2.6m sq ft expected in 215 and 216 respectively. In total, the development pipeline equates to a potential 8.8m sq ft of new space being delivered between 213 and 216. Of this around 6.5m sq ft is speculative, with the largest volumes anticipated in 214 (2.4m sq ft) and 216 (2.2m sq ft). It should be noted that 2.8m sq ft of the space earmarked for delivery between 213 and 216 is not yet under construction and is unlikely to start without securing a pre-let. OUTLOOK Prime headline City rents were unchanged at 55. per sq ft in Q2, having remained at this level since Q4 21. Typical rent-free incentives have reduced in most cases across the market. Chart 8: Prime City Rent 3 2 FORECAST Improving demand in the Core and the western City area is currently maintaining rental levels and until rent-free incentives reduce further, growth in headline rents will be sporadic. Rental growth is forecast to increase in 214, in line with the strengthening economic recovery and more robust occupier demand. Annual % Change

8 WEST END OFFICES TAKE-UP 47% (1.m sq ft) UNDER OFFERS -5% (.8m sq ft) AVAILABILITY +5% (5.4m sq ft) PRIME RENTS 97.5 Chart 9: West End Take-up Chart 1: Sector Structure of West End Take-up Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) 24% 17% Banking & Finance Business Services % 29% Manufacturing, Industrial and Energy Insurance Public Sector Professional Consumer Services and Leisure Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q % 3% 1% 8% TMT Take-up in the West End increased by 47% over the quarter to reach 1.m sq ft, marking the highest level since Q1 212 (1.1m sq ft); it was nonetheless marginally (4%) below the 1-year average. The sharp uplift in leasing activity over the quarter caused the rolling annual total to reach 3.5m sq ft compared with 3.8m sq ft 12 months ago. As in the City, the largest nominal increase was in the volume of secondhand take-up, rising by 26% to.8m sq ft which compares with total take-up in Q1 of.7m sq ft. The volume of new completed space let also increased to.1m sq ft in Q2 from 32,8 sq ft in Q1. There was also a return to pre-letting as.1m sq ft was pre-let in Q2. In continuation from the previous quarter, there were no deals over 5, sq ft. The largest deal in Q2 was achieved at The Point, 41/43 North Wharf Road, where serviced office provider Instant Managed Offices acquired 45,1 sq ft. The second-largest deal of the quarter saw retailer John Lewis increase its Central London presence by taking 36,6 sq ft at 123 Victoria Street. Paddington (9,6 sq ft), recorded take-up above the respective 1-year quarterly average of.2m sq ft and 49, sq ft. Of the remaining markets, Mayfair, at 184,6 sq ft, was virtually level with the 1-year average of 188,3 sq ft. 28% of West End take-up was concentrated in North of Oxford Street East, while Mayfair and Victoria accounted for 18% and 13% respectively. The amount of space under offer fell by 5% over the quarter to.8m sq ft, level with the 1-year average. The majority of this space is concentrated in North of Oxford Street East (.2m sq ft), Victoria (.2m sq ft), Mayfair (.1m sq ft) and North of Oxford Street West (.1m sq ft). Table 2: Key West End Transactions, Address Sq ft Occupier Business Sector The Point 45,1 Instant Managed Offices Business Services Business services occupiers were most the active in Q2, accounting for 29% of take-up. A large proportion of this was underpinned by serviced office providers such as Instant Managed Offices at The Point and again at 5 Eastbourne Terrace (23,8 sq ft). Mobile network operator Weve s acquisition of 21,3 sq ft at 1 New Oxford Street helped support TMT take-up in Q2, with the sector accounting for 24% of the total. Banking and finance and consumer services and leisure accounted for 17% and 16% respectively. 123 Victoria Street 36,6 John Lewis Consumer Services and Leisure 95 Wigmore Street 29,4 Bridgepoint Advisers Banking and Finance Central St Giles 25,5 King.com Consumer Services and Leisure Despite the overall increase in take-up in the wider West End, only two markets, North of Oxford Street East (.3m sq ft) and 62 Buckingham Gate 24,4 World Fuel Services Manufacturing, Industrial and Energy 7

9 Chart 11: West End Availability Chart 12: West End Development Pipeline 9 Secondhand New Under Construction New Completed 1-year Average 2. Completed Proposed Available Under Construction Let/Under Offer Proposed Let/Under Offer Under Construction Available 1-year Average Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q Availability increased by 5% in Q2 to reach 5.4m sq ft, 2% below the 1-year average of 5.5m sq ft and reflecting an availability rate of 6.3%. The largest available unit in the West End was at 1 Bloomsbury Way, due to complete in Q1 214 and totalling 152,2 sq ft, while the largest ready-to-occupy unit was at Park House (14,9 sq ft). The increase in availability was driven by new supply, with new completed and early marketed space rising by 21% and 5% respectively over the quarter to reach 1.m sq ft and 1.3m sq ft respectively. Meanwhile, the volume of secondhand space was unchanged at 3.1m sq ft. This increase was reflected across a number of markets, with the largest nominal increases noted in North of Oxford Street East (up 23% to 1.2m sq ft), while St James s (up 59% to.6m sq ft). Knightsbridge (up 44% to.1m sq ft), Paddington (up 17% to.3m sq ft), North of Oxford Street West (up 5% to.7m sq ft) and Soho (up 2% to.3m sq ft) also saw uplifts in availability. Despite this increase in availability, only St James s, North of Oxford Street East and Mayfair (1.1m sq ft) were above the 1-year average of.4m sq ft, 1.1m sq ft and 1.m sq ft respectively. All other West End markets were below trend, with Knightsbridge the market with the lowest amount of available stock, 37% below its 1-year average. Development completion levels increased from just 15,6 sq ft in Q1 to.5m sq ft in Q2. The largest scheme to complete over the quarter was Land Securities 62 Buckingham Gate, totalling 257, sq ft, of which 137,7 sq ft remains available. The development pipeline is projected to deliver 1.5m sq ft (of which.7m sq ft is speculative) in 213 compared with 1.m sq ft in 212, which is above the 1-year average of 1.m sq ft. Completion levels are projected to fall in 214 and 215 to 1.1m sq ft and 1.3m sq ft respectively, before increasing to 1.5m sq ft in 216. Around 4.6m sq ft of the 5.4m sq ft scheduled for delivery between 213 and 216 is speculative. However, with the majority of this space yet to go under construction, the timing of those schemes will depend on the availability of finance and market conditions over the next year or so. OUTLOOK Prime rents in Mayfair and St James s increased again in Q2, rising by 3% over the quarter to reach 97.5 per sq ft amid rising interest from financial occupiers. Prime rents also increased in Victoria ( 65. per sq ft), North of Oxford Street East ( 62.5 per sq ft), North of Oxford Street West ( 87.5 per sq ft) and Knightsbridge ( 6. per sq ft). All other West End markets remained unchanged over the quarter. West End prime rents, reflective of Mayfair and St James s, are not expected to increase further in 213, with all of the growth (5.4%) front-loaded in the first half of the year. However, this might change should leasing activity remain strong. The outlook for 214 is for rental growth to continue at a similar level to 213, driven by the wider economic recovery filtering through to the occupier market. Chart 13: Prime West End Rent Annual % Change FORECAST

10 SOUTHBANK OFFICES TAKE-UP 37% (.2m sq ft) UNDER OFFERS 144% (.4m sq ft) AVAILABILITY -9% (1.9m sq ft) PRIME RENTS 45. Chart 14: Southbank Take-up Chart 15: Southbank Availability Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-year Average Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Take-up in Southbank increased by 37% over the quarter to reach 17,5 sq ft, but remained below the 1-year average of 21,7 sq ft. This brought the rolling annual total to.5m sq ft in compared with 1.m sq ft in Q level since Q2 27 (55,1 sq ft) and was, unsurprisingly, above the 1-year average of 241,3 sq ft. The level in Q2 was supported by 216,3 sq ft going under offer at Sea Containers House, North Building to Ogilvy & Mather. Take-up was once again characterised by smaller units, with only two deals over 2, sq ft. The largest deal of the quarter was achieved at 2/6 Boundary Row, where serviced office operator London Serviced Offices took 34,1 sq ft. In a quarter of below-trend take-up, business services accounted for 41% of the total in Q2, supported by the deal to London Serviced Offices. TMT occupiers represented 22% of the total, with the largest TMT deal by Tableau Software at the Blue Fin, 11 Southwark Street for 12,2 sq ft. Meanwhile, under offers also increased significantly, rising from 18, sq ft in Q1 to reach 439,8 sq ft. This marked the highest Availability fell by 9% over the quarter to stand at 1.9m sq ft, still significantly above the 1-year average of.9m sq ft. This quarterly change caused the availability rate to fall to 11.%. The largest decline was in early marketed space, which fell by 15% over the quarter to.9m sq ft. New completed (.6m sq ft) and secondhand (.4m sq ft) stock also fell by 4% and 1% respectively..6m sq ft of new development completed in 212, of which 589,6 sq ft was made up of The Shard. Completion levels are projected to rise in 213 with.8m sq ft scheduled for delivery. A further 1.4m sq ft is projected to complete between 214 and 216. OUTLOOK Southbank prime rents, reflective of More London, remained unchanged over the quarter at 45. per sq ft having increased from 42.5 in Q Southbank is forecast to see the strongest rental growth of the main Central London markets in 213 at 5.6%. With much of the rental growth front-loaded, 214 is forecast to be more subdued as the large volume of new development is absorbed. Chart 16: Prime Southbank Rent Annual % Change FORECAST -1 The significant new development around London Bridge and Waterloo is likely to support further rental growth as the expected rental premium for these units changes the rental tone in the market

11 DOCKLANDS OFFICES TAKE-UP 42% (.1m sq ft) UNDER OFFERS -43% (.1m sq ft) AVAILABILITY +12% (1.8m sq ft) PRIME RENTS 38.5 Chart 17: Docklands Take-up Chart 18: Docklands Availability 1.4 Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-year Average Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Take-up in Docklands increased from only 2,3 sq ft in Q1 to.1m sq ft in Q2, but remained below the 1-year average of.2m sq ft. This caused the rolling annual total to rise to 371,8 sq ft, compared with 665,9 a year ago. In a quarter of below-trend take-up, the largest deal was completed by the Financial Ombudsman Service, taking 3,3 sq ft at Exchange Tower, 1/2 Harbour Exchange Square, helping bring the proportion of public sector take-up to 29%. Meanwhile business services accounted for a larger proportion, taking 36% of the total. The largest deal from this sector saw CCT Venues acquire 19,4 sq ft at 4 Bank Street. Under offers fell by 43% over the quarter to stand at 5,2 sq ft, 73% below the 1-year average of.2m sq ft. Availability increased to 1.8m sq ft in Q2, rising by 12% from 1.6m sq ft in Q1 and reflecting an availability rate of 9.5%. This caused availability to rise further above its 1-year average of 1.5m sq ft. This increase was driven by the addition of 163,3 sq ft of early marketed space, reflected by the speculative component of 25 Churchill Place (522,5 sq ft in total). This represents the first early marketed space since Q3 29. The volume of secondhand space also increased, rising by 3% over the quarter to reach 1.2m sq ft. New completed stock remained unchanged at.4m sq ft. The largest available unit in Q2 was at 1 Canada Square, comprising 326,1 sq ft. There were six additional buildings available at the end of Q2 capable of fulfilling a requirement over 1, sq ft. OUTLOOK Prime headline rents in Docklands remained stable at 38.5 per sq ft in Q2, maintaining a level held since Q We expect prime Docklands rents to remain unchanged for the remainder of the year. The outlook for 214 is more positive, however, with growth driven by improving economic conditions. Chart 19: Prime Docklands Rent Annual % Change FORECAST

12 MIDTOWN OFFICES TAKE-UP -38% (.5m sq ft) UNDER OFFERS 39% (.3m sq ft) AVAILABILITY +41% (1.7m sq ft) PRIME RENTS 55. Chart 2: Midtown Take-up Chart 21: Midtown Availability Secondhand Pre-let New Completed Rolling Annual Take-up (RHS) Secondhand New Under Construction New Completed 1-year Average Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Take-up fell by 38% over the quarter to.5m sq ft. Even so, take-up in Q2 was 62% above the 1-year average of.3m sq ft, bringing the rolling annual total up to 2.m sq ft, the highest total since Q1 21 (2.3m sq ft). In the previous quarter take-up was almost entirely driven by the 725, sq ft pre-let to Google at 3 King s Cross Central. In Q2 there were two deals over 5, sq ft, the largest of which was at Great Portland Estates 12/14 New Fetter Lane, where law firm Bird & Bird took 138,3 sq ft. The second-largest deal of the quarter saw advertising firm Publicis acquire 96,5 sq ft at Derwent London s 4 Chancery Lane. As in the previous quarter, TMT occupiers were the most prolific takers of space, accounting for 4% of take-up, which was supported by the deal to Publicis. The Bird & Bird deal caused the proportion of professional occupiers to reach 33% of take-up. Under offers continued to rise in Q2, increasing by 39% over the quarter to reach 258,9 sq ft, which is in line with Q2 212 but 9% below the 1-year average of 285,6 sq ft. Availability increased for the third consecutive quarter, increasing by 41% in Q2 to reach 1.7m sq ft and reflecting an availability rate of 7.4%. As a result, availability rose above the 1-year average of 1.5m sq ft and marked its highest level since Q4 29 (1.7m sq ft). The uplift in availability was driven by a significant increase in early marketed space, which increased from.3m sq ft to.8m sq ft over the quarter. The volume of secondhand space also increased, rising by 3% to.7m sq ft, while the amount of new completed space fell by 15% to.2m sq ft. Development completions are projected to rise in 213 to.4m sq ft from.3m sq ft in 212, which is on trend (.4m sq ft). Completion levels are expected to peak in 214 at 1.7m sq ft, with.7m sq ft projected in 215 and 1.m sq ft in m sq ft of the 3.9m sq ft projected to be delivered between 213 and 216 is speculative. OUTLOOK Midtown prime rents remained unchanged at 55. per sq ft in Q2, retaining parity with the City. Chart 22: Prime Midtown Rent 25 FORECAST 15 Midtown is forecast to show strong rental growth over the next few years, due to its attraction to West End occupiers looking east for lower rental levels, the market s ability to provide suitable grade-a stock and the impact of Crossrail on the transport system. Prime Annual % Change 5-5 rents are unlikely to increase further in 213, having already risen by 5% in Q1. We forecast stronger prime rental uplifts in as more robust economic growth filters through to the leasing market

13 CENTRAL LONDON OFFICE DEVELOPMENT DEVELOPMENT COMPLETIONS 221% (1.m sq ft) CONSTRUCTION STARTS 11% (1.9m sq ft) VOLUME OF LAND SALES 78% ( 495m) DEVELOPMENT COMPLETIONS ARE PROJECTED TO TOTAL C.21M SQ FT BETWEEN 213 AND 216. THIS COUPLED WITH AN UPTICK IN THE DEVELOPMENT TRADING MARKET INDICATES THE IMPROVING CONFIDENCE IN THE DEVELOPMENT MARKET. Completions set to rise again in the second half of the year Completion levels increased significantly over the quarter from.3m sq ft in Q1 to 1.m sq ft in Q2, with the majority of the space concentrated in the West End (.5m sq ft). The largest scheme to complete over the quarter was Finsbury Circus House, South Place, totalling 269,3 sq ft, which was developed speculatively by CORE and Union Investment Real Estate. Completion levels are expected to pick up in the second half of the year, with 2.7m sq ft in the pipeline, of which 2.2m sq ft is expected in Q3. In total, 213 is projected to deliver 4.m sq ft. This compares with 2.5m sq ft in 212, but is still below the 1-year average of 4.3m sq ft. Completions will peak at 7.2m sq ft in 214, which is low compared with previous cycles, before falling to 3.9m sq ft in 215 and rising again to 5.7m sq ft in 216. As ever, it should be noted that the timing of these schemes may change to reflect market conditions. Construction starts more than double Construction starts increased from.9m sq ft in Q1 to 1.9m sq ft in Q2, following the commencement of a number of large schemes including Bloomberg Place 1 (48, sq ft, pre-let to Bloomberg) and Bloomberg Place 2 (225, sq ft, developed speculatively). Under constructions at their highest point since Q3 28 The quantum of space under construction increased by 13% over the quarter to reach 11.m sq ft (around 6% being speculative), its highest level since Q3 28 at 11.7m sq ft. Of this, 5.4m sq ft is concentrated in the City and 2.m sq ft in the West End. The largest scheme currently under construction is 5 Broadgate, totalling 7, sq ft (pre-let to UBS). The largest speculative scheme in Q2 was at The Place at 43,2 sq ft, but this was fully let to News UK in July. This increase indicates that developer confidence is improving, as the volume of speculative space under construction has increased by 139% since the low point of 2.9m sq ft in Q1 21 to 7.m sq ft in. Meanwhile, the level of pre-committed space also increased over the same period from 1.5m sq ft to 4.1m sq ft. We expect the volume of space under construction to continue rising as the recovery in the occupier market strengthens and demand for new space increases. Land sales pick up as investors focus on residential As predicted in the previous quarter, there was a significant increase in land sales in Q2 with volumes rising by 78% to 495m. Domestic purchasers were again most prominent, accounting for 59% of the total. Residential development accounted for 46% of the 3.5bn traded in 212. The proportion of residential land sales has increased so far in 213, accounting for 75% of the 772m traded to date. In Q2, the residential component accounted for 86% of the total, as investors continued to take advantage of the value differential between residential and commercial real estate.. Chart 23: Central London Developments 16 Completed City West End Other Central London 1-year Average

14 CENTRAL LONDON OFFICE INVESTMENT Central London continues to capture international capital, particularly investors from the Middle East, Asia and North America, who have dominated the market for large lot sizes in Q2. Whilst availability of stock remains tight, we have seen a sharp rise in turnover due to an increase in off-market deals. Kingdom Street, Paddington 13 Mike Edwards Executive Director Office Capital Markets

15 CENTRAL LONDON OFFICE INVESTMENT INVESTMENT VOLUMES 46% ( 4.1bn) AVERAGE YIELDS 4.9% FOREIGN BUYERS 73% of transaction volumes AVAILABLE STOCK 3.bn FOREX RATES VS -.6% TRANSACTION LEVELS REBOUNDED STRONGLY OVER THE QUARTER, DRIVEN BY A NUMBER OF LARGE OFF-MARKET DEALS. IF H2 TURNOVER CONTINUES AT THE SAME PACE AS H1, WE COULD SEE ONE OF THE HIGHEST ANNUAL TOTALS ON RECORD. Large deals drive turnover Central London investment transactions increased by 46% over the quarter to reach 4.1bn. This brought investment for the first half of the year to 6.9bn, compared with 7.2bn by the same point in 212 and 5.2bn in 211. Underpinning this increase was an uplift in large deals, with ten deals over 1m in Q2 compared with seven in the previous quarter. crisis, but also because of the availability of a range of prime assets, of varying size, across a number of diverse markets. The exceptionally high levels of overseas demand have led to an erosion of available stock since the end of 211. As a result, a number of large transactions in Q2 were completed off-market as investors actively sought opportunities. Most importantly, 24% of turnover was attributed to a single deal in the Docklands, where AGC Equity Partners, believed to be representing Middle Eastern investors, purchased Citi Tower, 25 Canada Square for 1.bn, reflecting a yield of 5.4%. Pricing pressure The increase in turnover, together with renewed confidence in the leasing markets which should lead to renewed rental growth, has maintained positive pressure on pricing across the Central London market. This could translate into further yield compression later this year. Increase in off-market deals as stock remains low The last two years have seen many overseas investors focusing on secure income in core markets. Central London has benefitted partly because of its relative security from the Eurozone sovereign debt Number of new entrants picks up whilst established investors return 212 was characterised by a steady stream of new overseas entrants. Between Q4 212 and Q1 213, the number of new entrants dropped from ten to two. However, the upward trend resumed in Q2 with six new entrants to the market. The largest deals attributed to a new entrant in Q2 included Samsung SRA Asset Management s 142m acquisition of 3 Crown Place and Australian pension fund QSuper s 82.5m purchase of Exchequer Court, 33 St Mary Axe. Meanwhile, established investors, such as Canadian investor Oxford Properties and German open-ended fund Deka Immobilien Investment, continued to invest in Central London. Indeed, over the past three and a half years each has invested 823m and 892m respectively. SOURCES OF DEMAND In a continuation of recent trends, overseas investors accounted for 73% of all transactions completed in Q2. Of these, US / Canadian investors were the most prominent, accounting for 27%, while Middle Eastern investors acquired 25% of the total. UK property companies were the most active domestic investor type, representing 1% of the Q2 total. UK institutions acquired 7% of the quarter s deals by volume. Overseas investor appetite for large lots remained high, accounting for eight of the ten deals over 1m in Q2. This compares with seven in the previous quarter. Chart 24: Investment Transactions by Purchaser, 1% 2% 14% 25% 3% 4% 7% 1% 27% 7% UK Institution UK Property Companies UK Other USA / Canada Middle East / North Africa Germany Europe Other Asia Other Overseas Unknown 14

16 CITY OFFICE INVESTMENT INVESTMENT VOLUMES 16% ( 1.3bn) YIELDS 4.75% FOREIGN BUYERS 65% AVAILABLE STOCK 2.bn FOREX RATES VS -.6% Chart 25: City Office Investment Transactions Chart 26: City Prime Yield vs Swap Rate 2.5 Total 4 Quarter Average 8 City 5 Year Swap Rate billion % Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Investment volumes in the City more than doubled in Q2, rising to 1.3bn from.6bn in Q1. However, while this marked a significant improvement from Q1, it was still some way below the average quarterly level of 1.8bn in 212. As a result the rolling annual total fell to 5.6bn in Q2 from 6.3bn in Q1, but was 15% above the 4.8bn recorded in Q The total in Q2 was supported by four deals over 1m, compared with one in the previous quarter. The largest deal of the quarter saw Oxford Properties purchase King Edward Court, 1 Paternoster Square for 235m, reflecting a yield of 5.4%. The second-largest deal of the quarter involved the sale of 1 Basinghall Avenue to UK investor Oxygen Asset Management, for 216m on a 4.75% yield. In contrast with the previous quarter, overseas investors accounted for the majority of turnover in Q2 with 65%, resuming the trend observed in 212. Asian investors accounted for the highest proportion of overseas investors, reflecting 32% of the total. This was supported by a 215m investment by Malaysian pension fund KWAP at 88 Wood Street, on a 5.76% yield, marking its second purchase since its 2m acquisition of 1 Gresham Street in Q Address King Edward Court, 1 Paternoster Square Purchaser Capital Value ( m), Macrobond It has been well documented that the erosion of investment stock has reduced the options open to investors who, in most cases, have focused on the highest-quality assets with long income streams. The lack of options has encouraged some investors to seek off-market deals. Signs of recovery in the occupier market have encouraged other investors to contemplate assets involving greater risk, including development opportunities and shorter income streams, in order to maximise returns. It is anticipated that Q3 turnover will be supported by a large pipeline of deals currently under offer. An increase in investment stock ( 2.bn) will, to some extent, help alleviate the tight supply in the second half of the year. Table 3: Key City Transactions, Yield (%) Oxford Properties Basinghall Avenue Oxygen Asset Management Prime City yields remained unchanged at 4.75% in Q2, having moved in from 5.% in Q1. The weight of international capital chasing a limited supply of prime buildings with long-term income means that pricing is expected to remain robust. Pricing on secondary or subprime assets with short-term income is likely to improve in 213, as purchaser demand increasingly turns towards less-prime assets as the recovery in the occupier market gathers momentum. 88 Wood Street KWAP Crown Place Samsung SRA Asset Management Gresham Street Deka Immobilien Investment

17 WEST END OFFICE INVESTMENT INVESTMENT VOLUMES 38% ( 1.2bn) YIELDS 4.% FOREIGN BUYERS 57% of transaction volumes AVAILABLE STOCK 1.bn FOREX RATES VS -.6% Chart 27: West End Investment Transactions Chart 28: West End Prime Yield vs Swap Rate 1.8 Total 4 Quarter Average 7 West End 5 Year Swap Rate billion % Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Q2 28 Q4 28 Q2 29 Q4 29 Q2 21 Q4 21 Q2 211 Q4 211 Q2 212 Q4 212 Investment volumes in the West End rose by 38% over the quarter to reach 1.2bn, which compares with a quarterly average of 1.1bn in 212. This brought the rolling annual total up to 4.4bn, compared with 3.7bn in Q Turnover in Q2 was driven by four deals over 1m totalling.8bn, compared with three in the previous quarter. The largest deal of the quarter was at The Adelphi, 1/11 John Adam Street, purchased by US investor Blackstone for 265m off a yield of 6.2%. The second-largest deal of the quarter saw the purchase of 9 Long Acre for 164m by US investor Northwood Investors., Macrobond There is an argument that with continued low supply of product coupled with the weight of money in the market for certain stock pricing could harden further; but this will be property specific and not across the board. Any properties with residential conversion opportunities continue to sell well. This trend is likely to continue while the value differential between residential and commercial persists or until there is a response from planning authorities regarding an enforced restriction of residential conversion. Prime yields remained unchanged at 4.%, a position held for two and a half years. As in the previous quarter, Q2 was dominated by overseas purchasers, accounting for 57% of the total, with investors from the US / Canada particularly active at 49%. This was supported by three deals over 1m, including the deal to Blackstone mentioned above. Q2 also saw Oxford Properties enter into a 5% JV with The Crown Estate at the St James s Market scheme. Meanwhile, domestic investors accounted for 36% of the total, with UK property companies the most active domestic investor type, accounting for 27% of the total. In contrast with the City, the steady reduction in investment stock levels continued in Q2 with the West End falling to just under 1.bn. Current firmness in pricing may mean potential vendors continue to look at today s market conditions and the current overseas interest as an opportunity to sell into, which will then bolster stock and help support transaction levels for the rest of 213. Table 4: Key West End Transactions, Address The Adelphi, 1/11 John Adam Street Purchaser Capital Value ( m) Yield (%) Blackstone Long Acre Northwood Investors St James's Market Oxford Properties 16. Portfolio 111 Strand DTZ Investment Management Brook Street Wing Tai Properties Group

18 CENTRAL LONDON RETAIL Demand for Central London retail remains as strong as ever, with a number of new flagship stores opening over the quarter. Despite a limited supply of units on the main streets, retailers have sought to acquire space through assignments, in addition to moving to alternative markets. Chanel, New Bond Street 17 Alan Spencer Senior Director Retail

19 CENTRAL LONDON RETAIL * RETAIL SALES 14.5% y-o-y June FOOTFALL 4.2% y-o-y June RENTAL OUTLOOK % ROBUST RETAIL SALES AND INCREASED FOOTFALL, DRIVEN BY GOOD WEATHER AND IMPROVING CONSUMER CONFIDENCE, IS FILTERING THROUGH TO THE RETAIL MARKET, DRIVING DEMAND. Consumer confidence slowly improving, but remains fragile In the past three months there has been a mixture of largely good economic news, including the revision of the double-dip recession, the IMF upgrades for GDP growth in 213 and continued employment growth, which should act as a catalyst in reinvigorating consumer confidence. However, it is important to note that the recovery is still in its infancy, as disposable incomes continue to be squeezed due to falling real wages. This has led to some consumers looking to save money by trading down and bargain hunting, which has caused a number of high-profile retailers to go into administration at the start of the year. Good weather boosts retail sales and footfall There was a strong bounce-back in Central London retail sales over the quarter, with monthly growth averaging around 9.9% year-on-year (y-o-y). This was supported by the May Bank Holiday and improving weather conditions in June, leading to y-o-y growth of 9.3% and 14.5% in May and June respectively. Meanwhile, average monthly footfall also picked up, rising by 1.5% y-o-y in Q2, with y-o-y growth of 2.4% and 4.2% in April and June respectively. This uplift caused Central London to outperform the rest of the UK, which saw average y-o-y retail sales growth of.3% per month and average footfall growth of 1.3% per month in Q2. Rental growth driven by spillover from the main streets The demand / supply imbalance on New Bond Street and Old Bond Street resulted in prime rents rising by 9% and 14% respectively over the quarter to 1,2 ZA in each market, reflecting the highest rental levels in Central London. Prime rents also increased in Regent Street, rising by 2% to 63 ZA. Elsewhere, the spillover in demand resulted in rental uplifts in markets such as Kings Road ( 4 ZA), Mount Street ( 385 ZA), Marylebone High Street ( 32 ZA), High Holborn ( 17 ZA) and Paddington ( 9 ZA). All other markets remained unchanged. Rental growth in Central London is forecast at 3.2% in 213, but is expected to strengthen in 214 supported by more robust economic growth and continued competition from retailers for limited units. Chart 29: Central London Prime Rent, per sq ft ZA (New) Bond St* (Old) Bond St* Oxford St (West)* Sloane St Covent Garden Brompton Road Regent St* Oxford St (East)* Piccadilly Circus Kings Road Mount St Marylebone High St* Strand Moorgate/Liverpool St Tottenham Court Road Victoria* Cheapside Kensington High St* High Holborn Fenchurch St Paddington *3 ft zones *CBRE, NWEC 18

20 Central London retail sales recovered from a slow start to the year, to record progressively stronger y-o-y growth in each month, averaging around 9.9% per month in Q2, compared with -.3% per month in Q1. This was driven by better weather in Q2, which also resulted in improved footfall, with average annual growth of 1.5% y-o-y in each month in Q2, compared with -.2% in Q1. Retail sales also benefitted from a higher number of shoppers in summer 213 compared with 212, when some Londoners left the city prior to the Olympics. In terms of footfall, Mayfair and the three core streets in the West End (Oxford Street, Regent Street and Bond Street) benefitted from annual growth of 4.2% in June and an 8% increase in May. April also saw a 2.4% increase when compared with 212 due to the mild weather halfway through the month. As in the previous quarter, high demand for units on the main streets has persuaded some retailers to consider alternative locations. One such example saw Solange Azgagury-Partridge, the new brand established by the former Boucheron creative director, complete on its first UK store at 5 Carlos Place. Carlos Place has been a focus for majority landowner The Grosvenor Estate, which has been proactively asset managing this parade to attract more retailers to the area. Previously an office location, these buildings have been converted from offices to retail over the past 18 months to add critical mass to the Mount Street area as a whole, and further consolidate Mount Street village as a luxury retail destination. The Solange Azgagury-Partridge store, in addition to other brands such as Oscar de la Renta and Celine, also on Mount Street, and Agent Provocateur on Grosvenor Street, highlight the growing trend for luxury brands to locate off the traditional `core luxury streets, constrained by rents and availability. On New Bond Street, Chanel opened its largest flagship store, at 12, sq ft over three floors, carrying its full product range. This marked a significant upsize from its previous location where it traded from a much smaller ground floor and basement space. In response, Christian Dior has acquired the unit adjoining its existing store to create a new flagship store comprising 8, sq ft. This signals a change in strategy as the top luxury brands use much larger flagship stores to attract international tourists. Another example is the rumoured acquisition of the existing Marina Rinaldi store by Brioni at a premium believed to be around 6m and a new rent understood to be at 1,2 ZA. This represents a considerable upsize from its existing location on Bruton Street and provides further evidence that luxury brands are increasingly competing for large, well-configured units on Bond Street. Following the recent acquisition of the former HMV store east of Oxford Circus by Sports Direct, HMV is now rumoured to have acquired its original London store at 363 Oxford Street comprising 2, sq ft, subject to the landlord s consent. Regent Street continues to trade very well within the context of the West End and sustained demand for retail space continues to outstrip supply. As a consequence, rental growth has been substantial over the past months and a number of transactions have been premium led. Strong international demand coupled with a lack of supply has led several brands to assign their leases to benefit from this growing demand. One notable example saw Coast assign its lease to Kiko at 262/264 Regent Street during Q2, having relocated to Oxford Street. Chart 3: Retail Sales Chart 31: Footfall 12% National Sales West End Sales 1% National Footfall West End Footfall 7% 5% % Annual Change 2% -3% Annual Change 5% 1% -8% -15% -13% Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13-2% Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Source: BRC, NWEC Source: HSI, AS, NWEC 19