DTZ Occupier Perspective The TMT Sector The new growth engine in search for space. The new growth engine wants space. Figure 1 1,000.

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1 DTZ Occupier Perspective The TMT Sector The new growth engine in search for space The new growth engine wants space 30 June 2014 Contents Sector overview 2 Property markets trends 3 Sector outlook 6 In this report, we examine the state of the technology, media and telecommunications (TMT) sector from an occupier perspective. We assess the dynamics and drivers of activity across key global technology hubs. The report provides a more detailed summary of recent activity in eight key hubs across the globe. We also explore the factors affecting the location choices of TMT companies and their implications for real estate. Across most key hubs, the TMT sector continued to record strong activity in Notably in London where take-up rose 107% on In contrast, the US hubs of San Francisco and Silicon Valley saw declines of 55% and 34% respectively (Figure 1). During 2013, the TMT sector was also characterised by high levels of M&A activity registering an increase of 54.1% on 2012 to US$510.3bn. This has been driven by strong balance sheets, low finance rates and a supportive lending environment. Contacts Milena Kuljanin Senior Analyst milena.kuljanin@dtz.com Nigel Almond Head of Strategy Research +44 (0) nigel.almond@dtz.com Hans Vrensen Global Head of Research +44 (0) hans.vrensen@dtz.com Richard Golding International Director Global Occupier Services +44(0) richard.golding@dtz.com On the supply-side, we expect the availability of flexible and scalable space sought by TMT companies to remain tight. This is likely to be compounded by a broader-based increase in demand. As a result we see start-up companies and the innovation divisions of larger ones continuing to cluster in lower cost fringe locations for affordability and flexibility reasons. We also see strong demand for space in more emerging markets, including Sub- Saharan Africa, Eastern Europe and Latin America where activity is driven by the pursuit for increased market penetration and the rising competition for new talent within this sector. Figure 1 TMT leasing activity in selected markets (000 s sq m/year) 1, San Francisco TMT Silicon Valley Other sectors Dublin Beijing London Bengaluru Source: DTZ Research DTZ Research

2 Sector overview Strong revenue growth in some segments alongside flatlining sales in others The strong growth of the TMT sector is being driven by the convergence of products, protocols, standards and services made possible by the proliferation of digital data, widespread connectivity and advances in technologies, ranging from higher processor speed to improved security and storage technology. The fast adoption and application of these technologies to other sectors also continues to drive the hiring rate of TMT companies, which lies behind much of the strong demand for real estate. However, the success of the fast-paced TMT sector can be short-lived and not all segments have fared equally well. In aggregate, TMT sector revenue growth per annum between 2005 and 2013 has been impressive, led by the software and IT services at 11% per annum (Figure 2). The hardware segment on the other hand, registered less than stellar performance with revenue growth of 4% per annum during the same period. Overall, TMT sector revenues in emerging markets increased by USD 81bn compared with just USD 7bn registered in developed regions. Technology firms continue to dominate the TMT sector Our analysis of the 100 largest global TMT companies shows that technology companies are dominant, accounting for 54% of the sector s combined market capitalisation. This is further illustrated by the representation of nine technology firms within the global top 15 largest TMT companies (Figure 3). Similarly, the US remains the pre-eminent technology powerhouse with more than 60% of the largest technology and media companies heardquartered there (Figure 4). Mergers and acquisitions Figure 2 TMT segments average revenue growth per year ( ) 12% 8% 4% 0% Source: DTZ Research, Bloomberg Figure 3 Top 15 TMT firms by market cap (USD billions, end 2013) Source: DTZ Research, Bloomberg Figure 4 Software & Mobile IT Services Telecoms Media Fixed Line Telecoms Hardware Technology Media Telecoms Distribution of top 100 TMT firms by sector & by domicile In 2013, the TMT sector was also characterised by a high level of merger and acquisitisons (M&A) activity with firms attempting to gain a foothold into promising new technology segments, expand geographic scale, or lock in leading markets positions. In 2013 global TMT M&A activity totalled USD 510bn representing an increase of 54.1% on The strong M&A activity recorded in 2013 has continued well into Q1 2014, with deal volumes up 5% YoY and deal value 70% higher to USD 180bn 1. 12% 11% 27% 26% 61% 63% 23% 28% 35% 15% Other Europe Asia Pacific US While M&A activities present opportunities to add value to corporate real estate, post-merger integrations also bring disruptions to real estate portfolios as merged companies look to dispose of duplications and cut waste. 1 Based on Bloomberg data Technology Media Telecoms Source: DTZ Research, Bloomberg DTZ Occupier Perspective 2

3 Property markets trends The TMT sector re-drawing office markets Across most key hubs, the continued to thrive, more than offsetting the decline in demand by traditional office-based sectors that downsized. In London and Bengaluru, take up by TMT companies increased 107% and 6% to 440,000 sq m and 590,000 sq m respectively over the course of San Francisco and Silicon Valley were the exceptions, with both locations recording a decline in take up by the sector from the high levels recorded in the previous two years (Figure 5). In 2013, leasing transactions by the TMT sector relative to total space demand by all sectors remained highest in tech clusters of Silicon Valley, Bengaluru and San Francisco with 80%, 59% and 46% respectively (Figure 6). Location and buildings with flexible space remain TMT companies most prised attributes. However, for a sector placing a premium on creativity and innovation, being able to attract and retain talent is equally paramount. For most TMT companies, the labourforce is a young demographic that values work and play in equal measure. It is also the reason why many non-traditional city centre districts are thriving. They offer the combination of non-corporate environments along with flexible floorplates that provide for open layouts and collaboration, a priority for companies in this sector. All within the proximity of city life. Relocation of R&D and manufacturing functions Facing stagnant revenue growth in developed regions, TMT companies are also establishing high-end functions such as R&D and high-tech manufacturing outside their home markets in search for talent and growth markets. This is likely to benefit cities such as Bengaluru and Beijing where clusters of technology firms, world-class universities and IT services suppliers contribute to their appeal to the sector. Opportunities for network operators in emerging regions With richer internet content and varied mobile services starting to reach emerging regions, thanks to increasingly affordable and low cost smartphones, the way people work and live there is changing. Mobile money, mobile grocery pricing update and online courses are now part of daily life in many developing countries. As a result, the demand for high capacity broadband connection is also increasing. This has created growth opportunities for network operators, content and service providers as revenue streams follow suit. We expect this trend to lead to increasing demand for associated real estate in large emerging markets, with low broadband infrastructure base including Indonesia, Brazil, Russia, Nigeria and South Africa. Most likely to benefit from this demand are offices and certain segments of retail as a route to access the market. While start-up companies remain cost conscious compared to mature, established firms, they all prioritise lease flexibility. Few buildings have the specifications to respond to such technical requirements, and indeed the availability of such stock in many cities, is increasingly tight. As a result, we expect TMT companies to remain footloose in search of where suitable stock is available. Figure 5 TMT leasing activity in selected markets (000 s sqm/pa) 1, TMT Other sectors Figure 6 TMT share of total take-up in selected markets, , % 2,000 80% 1,500 60% 1,000 40% % 0 0% 0 San Silicon Francisco Valley Dublin Beijing London Bengaluru Total take-up (000s sqm) TMT take-up % of total (RHS) Source: DTZ Research Source: DTZ Research DTZ Occupier Perspective 3

4 United States New York Silicon Valley TMT clusters: broadcasting, advertising, technology Occupancy costs, end 2013: 11,360 USD/workstation/annum Average annual costs growth, : 3% Sony 48,800 Technology Group M 47,900 Media Warner Music Group 26,800 Media Appnexus 18,600 Technology Yahoo 16,400 Technology TMT clusters: software, high-tech manufacturing, R&D Occupancy costs, end 2013: 5,640 USD/workstation/year Average annual costs growth, : 0.7% Key recent TMT deals(sqm): Google 48,300 Technology Microsoft 47,800 Technology Netflix 22,500 Technology Google 21,550 Technology Juniper Networks 9,500 Technology The demand from TMT companies remained strong throughout the Manhattan office market with Midtown South as the sector s location of choice. As a result, with the sub-market s availability tightening further, office demand was spilling over into co-working spaces, executive suites and serviced offices. New York s vibrant environment and young talent pool is an overwhelming factor in TMT companies location decisions. Demand from TMT companies in Silicon Valley retreated from the high take up levels recorded in 2011 and In spite of this more than 35 technology occupiers were reported to be in the market for space of over 10,000 sqm. San Francisco TMT clusters: technology, internet intermediation Occupancy costs, end 2013: 7,720 USD/workstation/year Average costs growth pa, : 3% Dropbox 47,000 Technology Twitter 30,000 Social media Neustar 12,800 Technology Square 7,900 E-commerce Google 4,650 Technology Although many large sized expansions took place in San Francisco throughout 2013, the demand from TMT companies came in below trend as technology firms completed or solidified their expansions in 2011 and In addition, large-block options were reported to be in short supply as vacancy rate moved into single digits. DTZ Occupier Perspective 4

5 Europe Dublin, Ireland London, United Kingdom TMT clusters: technology, internet intermediation Occupancy costs, end 2013: 8,560 USD/workstation/annum Average annual costs growth, : 3.8% Facebook 11,200 Social media Yahoo 6,800 Technology SalesForce 5,000 Technology Google 3,900 Technology IBM 2,500 Technology TMT clusters: technology, media services, internet services Occupancy costs, end 2013: 15,640 USD/workstation/annum Average annual costs growth, : 5.3% Google 74,300 Technology News UK 39,950 Media Ogilvy & Mather 21,200 Media Amazon 19,800 E-commerce Worldpay 8,550 E-commerce The share of Dublin s TMT sector has increased from 17% of the city s total take up in 2005 to 31% in Dublin s low corporate tax rate, flexible lease provisions and large pool of skilled technology talent underpin the city s strong appeal to the sector. While the city centre remains the most attractive location, however, with costs there rising, suburban areas have started to provide viable alternatives. In central London, take up by the sector remained buoyant throughout 2013 reaching 440,000 sqm for the year, representing 37% of total activity. London s large technology talent pool, vibrant creative and cultural scene, the city s connectivity and provisions for capital raising contribute to its appeal to the sector. The areas around King s Cross are drawing established TMT players with large space requirements, while small space users are attracted to the Southbank, Shoreditch and Whitechapel areas. DTZ Occupier Perspective 5

6 Asia Pacific Beijing, China Hong Kong, China TMT clusters: Hardware design and manufacturing, R&D Occupancy costs, end 2013: 10,290 USD/workstation/annum Average annual costs growth, : 5.6% Samsung 18,000 Technology Hewlett Packard 6,000 Technology Edelman 2,900 Media Centre for Film & Television 2,900 Media China Net 1,700 Media TMT clusters: E-commerce, internet intermediation Occupancy costs, end 2013: 21,600 USD/workstation/annum Average annual costs growth, : 3.3% SAP 18,000 Technology LinkedIn 1,500 Social media Google 1,500 Technology ebay 1,400 E-commerce Beijing s demand from the TMT sector remained strong in 2013, with the sector accounting for 30% of new leases. Beijing s Zhongguancun continued to benefit from its proximity to the city s world class universities and large pool of technology and software company clusters. Bengaluru, India In Hong Kong, demand from the TMT sector continued to increase reaching 17% of total office take up in Due to prohibitively high occupancy costs in the centre, the focus of the sector remained on areas outside of the Sheung Wan/Central/Admiralty prime office precincts. Hong Kong s position as a major gateway to mainland China continues to be a major driver of location choice. TMT clusters: software development, R&D, IT services Occupancy costs, end 2013: 2,220 USD/workstation/annum Average annual costs growth, : 8% Texas Instruments 89,200 Technology Samsung-SISO 49,200 Technology Tata Consultancy Services 37,150 Technology Cap Gemini 27,900 Technology Oracle 11,200 Technology The TMT sector take up was recorded at 590,000 sq m, representing 60% of Bengaluru s total in The majority of leases were concluded by global technology companies attracted to Bengaluru by its large pool of highly skilled, English speaking workers. Competitive occupancy costs and a wide range of scalable space options also contributed to the city s appeal. Bengaluru s Outer Ring Road (ORR) and Whitefield technology clusters continued to expand further while a new growth corridor, North Bengaluru, started to emerge. DTZ Occupier Perspective 6

7 Sector outlook Since the onset of the global financial crisis, office take up by the TMT sector has remained resilient. Strong activity has helped offset the decline in demand by the traditional office-based sectors that scaled down during the recent downturn. The growth of the TMT sector is expected to continue. This is driven by increasing diffusion and convergence of technologies amidst improving communication infrastructure, ubiquitous connectivity and widespread adoption of smartphones and technology gadgets. With market penetration levels in many emerging regions still low for many new technologies, we expect the sector hiring rates to grow further. Consequently we see strong demand for space in more emerging markets, including Sub-Saharan Africa, Eastern Europe and Latin America where activity is driven by the pursuit for increased market penetration and the rising competition for new talent within this sector. We also expect TMT companies to continue outsourcing services and technology components from low-cost thirdparty providers leading to increasing levels of cross-border expansions. This is expected to benefit technology clusters in cities with business friendly practices. On the supply-side, the availability of flexible and scalable space sought by TMT companies across most key hubs is expected to remain tight. We expect start-up companies and younger generation firms to continue clustering in coworking spaces, incubators and low costs fringe areas for affordability and flexibility reasons. The lack of flexible buildings will be compounded by a broad-based recovery of traditional office-based sectors able to commit to longer leases. In such a fast changing industry, where fortunes can change quickly, we also expect the flexibility of space and flexible contracts to remain high on most TMT companies agendas. As a result we see startup companies and the innovation divisions of larger ones continuing to cluster in lower cost fringe locations for affordability and flexibility reasons. We expect TMT companies space-grabing practices to remain high, with firms leasing more space than they need in the immediate future, in anticipation of future growth. Similarly, we anticipate the flexibility to sublease such space, should growth fail to materialize, to remain one of their top priorities. DTZ Occupier Perspective 7

8 Other DTZ Research Reports Other research reports can be downloaded from These include: Occupier Perspective Updates on occupational markets from an occupier perspective, with commentary, analysis, charts and data. Global Occupancy Costs Offices Global Occupancy Costs Logistics Occupier Perspective - User Guide to The Americas Occupier Perspective - User Guide to Asia Pacific Occupier Perspective - User Guide to EMEA Occupier Perspective - Global User Guide India Office Demand and Trends Survey Sweden Computer Games Developers November 2013 Property Times Regular updates on occupational markets from a landlord perspective, with commentary, charts, data and forecasts. Coverage includes Asia Pacific, Baltics, Bangkok, Barcelona, Bengaluru, Berlin, Brisbane, Brussels, Budapest, Central London, Chennai, Chicago, Delhi, East China, Europe, Frankfurt, Geneva, Guangzhou & Central China, Hamburg, Helsinki, Ho Chi Minh City, Hong Kong, Hyderabad, Jakarta, Japan, Kolkata, Kuala Lumpur, Los Angeles, Luxembourg, Lyon, Madrid, Manhattan, Melbourne, Milan, Mumbai, North China, Paris, Poland, Prague, Pune, Rome, San Francisco, Seoul, Singapore, South & West China, Stockholm, Sydney, Taipei, Toronto, Ukraine, UK, Warsaw, Washington. Investment Market Update Regular updates on investment market activity, with commentary, significant deals, charts, data and forecasts. Coverage includes Asia Pacific, Australia, Belgium, Czech Republic, Europe, France, Germany, Italy, Japan, Mainland China, South East Asia, Spain, Sweden, UK. Money into Property For more than 40 years, this has been DTZ's flagship research report, analysing invested stock and capital flows into real estate markets across the world. It measures the development and structure of the global investment market. Available for Global, Asia Pacific, Europe, North America and UK. Foresight Quarterly commentary, analysis and insight into our inhouse data forecasts, including the DTZ Fair Value Index. Available for Global, Asia Pacific, Europe, UK and China. In addition we publish an annual outlook report. Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. Insight Beijing TMT Office Occupier Survey- June 2014 Insight European Transaction Based Index Q Net Debt Funding Gap - May 2014 China Insight Office Pipeline and Dynamics May 2014 Deflation and Commercial Property - March 2014 Tokyo Retail Market 2014 Great Wall of Money March 2014 German Open Ended Funds March 2014 China Investment Market Sentiment Survey - January 2014 China The Technology Sector - January 2014 Czech Republic Green buildings - December 2013 UK secondary market pricing - October 2013 Quantitative Easing - UK Regions September 2013 DTZ Research Data Services For more detailed data and information, the following are available for subscription. Please contact graham.bruty@dtz.com for more information. Property Market Indicators Time series of commercial and industrial market data in Asia Pacific and Europe. Real Estate Forecasts, including the DTZ Fair Value Index TM Five-year rolling forecasts of commercial and industrial markets in Asia Pacific, Europe and the USA. Investment Transaction Database Aggregated overview of investment activity in Asia Pacific and Europe. Money into Property DTZ s flagship research for over 40 years providing capital markets data covering capital flows, size, structure, ownership, developments and trends, and findings of annual investor and lender intention surveys. DTZ Occupier Perspective 8

9 DTZ Research Contacts Global Head of Research Hans Vrensen Phone: +44 (0) Head of Strategy Research Nigel Almond Phone: +44 (0) Head of Forecasting Fergus Hicks Phone: +44 (0) Head of UK Research Richard Yorke Phone: +44 (0) Head of CEMEA Research Magali Marton Phone: magali.marton@dtz.com Head of North Asia Research Andrew Ness Phone: andrew.ness@dtz.com Head of South East Asia / Australia New Zealand Research Dominic Brown Phone: +61 (0) dominic.brown@dtz.com Head of Americas Research John Wickes Phone: john.wickes@dtz.com Head of Asia Pacific Forecasting and Strategy Dennis Fung Phone: dennis.kk.fung@dtz.com DTZ Business Contacts Global Occupier Services Steven Quick Phone: steven.quick@dtz.com Global Occupier Services, EMEA James Maddock Phone: +44 (0) james.maddock@dtz.com Global Occupier Services, APAC David Jones Phone: david.jones@dtz.com Global Occupier Services, US Martin Woodrow Phone: martin.woodrow@dtz.com Global Occupier Services, Workplace Strategy Antonia Cardone Phone: antonia.cardone@dtz.com DISCLAIMER This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ June DTZ Occupier Perspective 9