Central London Offi ce Market Report Confidence in the occupier markets drives high investment volumes
Central London overview Take-up and demand The Central London office market saw sustained strength in leasing activity during. Q4 take-up of 2.8 million brought the annual total to 11.3 million, representing growth of 3% on the high 2013 total. Docklands saw the fastest growth with take-up rising by 110% from 540,000 to 1.1 million, led by large deals to Société Générale in Q4 and EY earlier in the year. With 2.5 million under offer, and active demand standing at 9.2 million, the market is poised for a continuation of leasing momentum into 2015. Occupiers are increasingly aware of tight supply conditions and many are coming to market early to maximise their chances of securing their preferred option. This is supporting pre-leasing, which represented 26% of take-up in. Letting under construction is acting to reduce the amount of space that will be delivered speculatively in coming years, eroding an already limited pipeline of new supply. Rents continue to rise across Central London. In Q4 this was led by the rise in prime West End rents to 115, up 9.5% over the year. Investment Investment volumes in Central London continue to scale lofty heights hitting 18.6 in, up from 18.4 in 2013 and just under the record set in 2007. This came through in a wave of large deals in Q4, which saw 8.7 traded over the quarter, the highest quarterly total. High profile assets traded in Q4 include; 30 St Mary Axe, EC3 (The Gherkin) for 725 million, HSBC Tower, 8 Canada Square, E14 for circa 1.18 and 10 Broadway, SW1 for 370 million. Drop in oil price to reinforce economic growth momentum GDP growth continues to provide a supportive backdrop. After solid growth of around 3% for the UK during, 2015 is expected to see further expansion, albeit at a slightly reduced pace. Lagging growth in the Eurozone is weighing on exports but the large drop in oil prices is contributing to a solid outlook for consumer spending, contributing to lower inflation and consequently rising real wages after a long period of weakness. In London, businesses remain firmly in hiring mode, although recent surveys suggest that uncertainty surrounding the election and Britain s position in the EU are starting to impact on confidence. Rents Rents continue to rise across Central London. In Q4 this was led by the rise in prime West End rents to 115 per, up 9.5% over the year, as evidenced by recent deals at 33 Davies Street, W1. With this uplift, West End rents have now returned to the previous peak set in 2007 and look set for further growth in 2015. Prime non-tower City rents also rose to 62.50 per, representing growth of 4.2% in. While momentum in the City core has been slower to build, a muted supply pipeline in 2015 is expected to see conditions tighten resulting in further rental growth. Ben Burston Head of UK Office Research 2 Central London Office Market Report
Take-up Take-up: increased 3% Central London up by 110% from 540,000 Docklands/ East London to 1.14 million Central London take-up Rents Millions 14 12 10 8 6 4 2 City West End Docklands Increased 9.5% Prime West End 115 psf Increased 4.2% Prime City 62.50 psf 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Active demand Asia-Pacific investment Increased 10% from last year 3.4 2011-12 6.4 2013-14 2013 Q4 Q4 8.4 million 9.2 million Billions Investment volumes 20 16 12 8 8 4 0 2004 2005 2006 2007 City West End Docklands 2008 2009 2010 2011 2012 2013 Central London Office Market Report 3
Key transactions 33 Davies Street, W1 Tenant: ACG Size: 11,780 Rent: 115 per Andrew Barnes Central London Agency The property is now fully let following the final letting of two floors to ACG. 33 Davies Street illustrated the strength in the core market, we had four parties competing to secure the last remaining space. There are very few 5,000-12,000, high quality, Grade A units available in Mayfair and St James s; this should see rental growth continue in 2015. Ten Broadway, SW1 Price: 370 million Purchaser: Abu Dhabi Financial Group Capital Value: Circa 920 psf Charles Pinchbeck Central London Development Ten Broadway will be one of the most important redevelopment projects undertaken in Central London this decade, replacing a world famous headquarters with a world class development. With the bid process now complete, we look forward to creating an exceptional new landmark for London. Jassim Alseddiqi, CEO of Abu Dhabi Financial Group 1 Bank Street, E14 Tenant: Société Générale Size: 280,000 Sarah Shell Central London Agency The pre-letting of 1 Bank Street to Société Générale in (the largest pre-letting of a development site in Central London this quarter) reinforces Canary Wharf as a sought after location and one of the few areas that can deliver a pre-let building of this size and quality in Central London at a competitive price. HSBC Tower, 8 Canada Square, E14 Price: circa 1.18 Purchaser: Qatar Investment Authority NIY: 4.75% Andrew Hawkins Central London Capital Markets JLL fielded a major global team to represent our client NPS/JP Morgan. 50 presentations in 14 cities, over 10 days were led by JLL and after 7 months, the sale was concluded in excess of the 1.1 guide price. We believe this is the largest single asset deal in EMEA in. 4 Central London Office Market Report
Issue to watch: London tops JLL s global City Momentum Index The combined forces of urbanisation, globalisation and technology are recasting the commercial geography of real estate offering new opportunities and challenges in a fast-changing hierarchy of cities. In this world of rapid transformation, JLL has launched its second annual City Momentum Index (CMI) to track the speed of change of a city s economic base and its commercial real estate market. London tops global ranking for momentum in 2015 London tops this year s CMI 2015 as a result of robust economic fundamentals, further boosted by high levels of cross-border real estate investment and a positive outlook for office capital values. London also continues to cement its reputation as a global tech hub and is the highest ranking centre for education. With GDP growth picking up over the past year and employment growth at a 15 year high, demand for prime office space is increasing. This is driving a stronger rental growth than any other European city. Meanwhile, London has maintained its position as the location of choice for global investment in commercial real estate, with the highest total and crossborder investment volumes of any city globally over the past year. Capturing current economic and market momentum and long term growth dynamics Covering 120 major established and emerging business hubs across the globe, the Index measures a city s short-term socio-economic and commercial real estate momentum (over a three-year horizon), and also combines measures of future-proofing whether a city has the essential ingredients to ensure longer-term sustainable momentum in terms of education, innovation and environment. City momentum involves far more than just raw GDP growth it is also about speed of adaptation, the speed of innovation and the creation of cutting-edge new businesses. And it further entails capturing the dynamics of a city s real estate market rates of construction and absorption, price movement and the attraction of a city s built environment for cross-border capital and corporations. In producing this Index, JLL s intention is to alert the market to signals of change and to highlight the characteristics of city success. It does not necessarily hold that those cities at the top of the CMI will show the most immediately attractive real estate investment environments, but rather that they are the cities where change is occurring fastest and are the ones to be closely monitored. Jeremy Kelly Global Research JLL City Momentum Index 2015 top 20 Economy Connectivity Corporate Presence Construction Property Prices Real Estate Investment Business Start-ups Technology Environment Education R&D 1 2 3 4 5 6 7 8 9 10 London San Jose Beijing Shenzhen Shanghai Ho Chi Minh City Boston Wuhan San Francisco Chongqing 11 12 13 14 15 16 17 18 19 20 Sydney Bangalore Dubai Dublin San Francisco Nairobi Singapore New York Tianjin Nanjing Central London Office Market Report 5
West End overview Take-up Take-up volumes in Q4 were subdued after a robust third quarter, notwithstanding volumes are consistent with the long term, a solid outcome given occupiers remained mobile across London last year and existing supply was limited. Services were the most active sector in Q4 representing 37% and were driven by Serviced Office Operators who let in excess of 120,000 in four deals which capped off a very active year for the sub-sector (270,000 in 10 deals, or 9% of total West End volumes). The occupier profile in was more evenly balanced compared to recent years, both the TMT and service sector let approximately a third of total volumes while the banking and finance sector registered their largest proportioned share of take-up since 2010, positive signs for the occupational market moving into 2015. The strength in the pre-letting market remains strong; slightly over 96,000 was let prior to completion in two transactions in Q4. This brings the total volume of pre-lets in to 804,000, the second highest total in 13 years representing 25% of total take-up. We expect pre-letting and pre-completion activity to feature heavily in 2015 due to the limited availability of existing supply in the market. Pre-letting and pre-completion activity should feature heavily in 2015 due to a shortage in existing supply in the market. Speculative under construction rose to 2.9 million, all of which is due for completion between now and Q3 2016. 34% or near to 1 million is in Victoria. Five schemes started construction in the fourth quarter totalling over 651,000, such high volumes of commencements (or building withdrawals) offset the increase in available second hand accommodation and helped to minimise a rise in overall vacancy. 2.7 was invested in Q4, the highest quarterly volume on record and 45% of total volumes in. Investment Investment volumes finished the year strongly; 2.7 was traded in 36 transactions, 75% higher than Q3 and the highest quarterly volume on record. Even though investment volumes in started the year slowly following a strong 2013, volumes totalled 5.9 at year end, of which 71% completed in the second half of the year and 45% in Q4 alone. The weight of money (both UK and overseas) looking to invest in the West End market and the continued confidence in the leasing market will place pressure on pricing and yields in 2015. Existing and future supply Existing supply rose marginally in Q4 solely due to a rise in second hand accommodation reflecting an overall vacancy rate of 2.8% but still remaining well below the long term of 4.6%. Existing availability is dominated by smaller lot sizes, with only 10% of total existing supply larger than 50,000, and only one option larger than 100,000 : Park House, W1. Larger occupiers will need to consider locations outside the West End or pre-let new accommodation in 2015. Alyson Martinovich Associate 6 Central London Office Market Report
Take-up 641,200 3.2 million 3.2 million Under offer 507,000 Key deals New requirements ACG 11,780 115 psf Confidential occupier 49,875 Neuehaus 64,660 57.50 psf ITV Texas Pacific Group (TPG) 200,000 to 260,000 25,000 Orbis 20,000 25,000 33 Davies St, W1 2 Kingdom St, W2 The Aldelphi, W1 AnaCap Financial Partners 20,000 Active demand Q4 2.9 million 8% increase, since Q3 34% is being driven by expansion 27% is being driven by a lease event Vacancy Vacancy Lowest levels since 2000 4.6% Overall vacancy 2.8% 2.7% Grade A vacancy 1.9% New vacancy 0.6% Rents Prime rents 115 psf Annual growth 9.5% Net effective rents 102 psf Forecast prime rents 2015 0.9% 125 psf Annual growth 9% Net effective rents 113 psf Investment volume yields Prime yields 2.7 75% 5.9 64% 3.75% for sub 10 million 4.0% for 10 to 80 million lot sizes 4.5% for lot sizes over 80 million Overseas in origin Overseas in origin Central London Office Market Report 7
City overview Take-up Take-up volumes in Q4 were healthy; 1.9 million was let, a decrease of 20% from the exceptional volumes recorded in Q3. Strong take-up in the second half of boosted annual volumes to 7 million, marginally lower than 2013 which saw 7.1 million transacted but well ahead of the 10 year of 5.3 million. Total take-up over the previous two years is the strongest back to back take-up since 2000 to 2001. The TMT sector once again accounted for an above share of occupier activity with 23% of annual take-up, compared to the long term of around 11%, although this was skewed by large deals to Amazon (445,000 ) and Omnicom (374,000 ). The market share of banking & finance was the highest since 2010 with 23%, still someway short of the annual of 30%. The service sector accounted for the largest share (26%) of take-up, with insurance and legal firms particularly active in. The recent strength of the City occupier market has been supported by an uptick in pre-letting which accounted for 34% of take-up in 2013 and 23% in, compared to an of 13% between 2008 and 2012. This equates to circa 4 million of take-up over the previous two years, split between 2.5 million let during construction and 1.5 million off-site. Existing and future supply Total existing supply increased marginally in Q4 to 7.3 million. The quarterly change was driven by a rise in second-hand and refurbished availability which ended the quarter at 4.8 million, and reflecting a vacancy rate of 4.4%. Five schemes reached practical completion in Q4 totalling 745,000, 42% of which was pre-let. This ends a year in which 4.3 million of new and refurbished stock was delivered to the market; 45% of this space was let prior to completion. Completions in Q4 include; Aldgate Tower (316,000 ) and 70 Mark Lane, EC3 (168,000 ) where the majority of the scheme has been pre-let. JLL expects the balance of supply and demand in the City to reach a tipping point in 2015. The level of development completions will return to an level in 2015 however 66% of this space is pre-let, leaving a balance of circa 700,000 of speculative supply. If the current rate of take-up continues the vacancy rate could fall rapidly in 2015. JLL expects the balance of supply and demand in the City to reach a tipping point in 2015. Investment Investment volumes finished the year strongly; 4.4 was traded in Q4, double Q3 s total of 2.2 and the highest quarterly total since record setting volumes were traded in Q4 2013. Investment turnover for was 9.9, 15% below 2013 which was a remarkably strong year, but well ahead of the 10 year annual of 7.1. Overseas investors continue to dominate the market for large lot sizes, all transactions in Q4 in excess of 100 million were acquired by overseas buyers, who accounted for 80% of total investment. James Norton Associate 8 Central London Office Market Report
Take-up 1.9 million 7 5.3 million million second consecutive year of above take-up Under offer 1.1 million Key deals Active demand Omnicom 373,840 45 psf (Bankside 2) 47 psf (Bankside 3) Bankside 2 & 3, SE1 Zurich Insurance 68,267 Confidential rent 70 Mark Lane, EC3 Threadneedle Investments 64,755 61.50 psf Cannon Place, EC4 Q4 7million 6.5% decrease, since Q3 23% higher than long term New requirements ITV Ashurst Morris Crisp London Metal Exchange 200,000 260,000 200,000 50,000 Vacancy Vacancy City supply reaching tipping point 7.3% Overall vacancy 6.5% 4.5% Grade A vacancy 4.4% 1.8% New vacancy 2.2% Development Rents completions Speculative: 2,390,338 Pre-let: 1,949,330 Speculative: 717,919 Pre-let: 1,331,829 2015 under construction Speculative: 1,454,614 Pre-let: 632,903 68.50 2016 under construction Prime rents 62.50 psf Annual growth 4.2% Net effective rents 51 psf psf Annual growth 9.6% Net effective rents 59.95 psf Forecast prime rents 2015 Investment volumes Prime yields 4.4bn UK buyers 31/56 12 deals greater than 100 million 9.9 4.25% for sub 40 million 4.5% for 40 to 124 million lot sizes 4.5% for lot sizes over 125 million 83% overseas in origin Transactions in Q4 15% lower than the exceptional volumes traded in 2013 but ahead of the 10 year annual of 7.1 Central London Office Market Report 9
Docklands & East London overview Take-up There was a strong finish to the year in the Docklands and East London markets; 326,000 was let in the final quarter, more than double the 153,000 transacted in Q3 and 15% ahead of the 10 year quarterly of 286,000. Q4 volumes were driven by Société Générale s pre-let of 280,000 at 1 Bank Street, E14 and will kick start the 688,000 development. Full year take-up reached 1.1 million, more than double the 500,000 transacted in each of the previous three years and the highest annual total since 2010 when take-up reached 2.2 million. There is an additional 866,000 under offer, the majority of which is to the Financial Conduct Authority (425,000 ) and Transport for London (250,000 ) at The International Quarter, Stratford. Existing and future supply Overall supply increased 20% to 1.4 million, equating to an overall vacancy rate of 6.8%, largely due to newly marketed second hand space at South Quay Building, E14. Take-up 326,000 New requirements : 1.1 million 1.1 million Trinity Mirror plc (70,000 100,000 ) UCL (25,000 30,000 ) Following the completion of 25 Churchill Place, E14 in Q2 there are now no developments under construction in Docklands and East London. Construction is expected to start at 1 Bank Street, E14 in Q1 2015 pre-let by Société Générale, with the remaining 400,000 of speculative space expected to complete in Q4 2018. Investment Investment turnover totalled 1.3 in Q4 with the sale of HSBC Tower, E14 dominating the quarterly investment figures. The building has been purchased by the Qatar Investment Authority for a price very close to 1.18 and is the largest transaction of the year in Docklands and across Central London. Investment turnover totalled 2.8 in which is the highest annual total since 2007. Vacancy Vacancy Mazars (70,000 80,000 ) 7.4% Overall supply 6.8% 6.6% Grade A vacancy 6.6% Investment volumes James Norton Associate 1.3 2.8 97% 3/9 Overseas in origin UK buyers 10 Central London Office Market Report
Rental conditions in Central London 80.00 119.75 77.50 112.15 47.50 71.50 75.00 108.10 67.50 91.50 67.50 107.25 62.50 97.15 60.00 87.45 STRATFORD 92.50 133.50 115.00 172.70 CAMDEN MARYLEBONE, EUSTON & KING S CROSS 57.50 84.95 61.50 90.50 35.00 51.95 REGENT S PARK BLOOMSBURY CLERKENWELL SHOREDITCH NORTHERN 62.50 91.50 58.50 89.00 PADDINGTON HYDE PARK NORTH OF OXFORD STREET MAYFAIR FITZROVIA CITY WESTERN CITY CORE SOHO MIDTOWN COVENT SOUTHERN GARDEN EASTERN ST. JAMES S SOUTHBANK ALDGATE 62.50 92.00 HAMMERSMITH KENSINGTON & CHELSEA BELGRAVIA & KNIGHTSBRIDGE VICTORIA WATERLOO VAUXHALL 62.50 91.50 40.00 64.95 DOCKLANDS 57.50 92.15 BATTERSEA 42.50 66.50 57.50 82.90 62.50 91.50 48.50 75.50 82.50 119.70 35.00 59.00 72.50 110.70 115.00 172.70 52.50 76.50 PRIME RENTS 50.00 77.45 OCCUPANCY COSTS Central London Office Market Report 11
Contacts Leasing Neil Prime Head of UK Office Agency +44(0)20 7399 5190 neil.prime@eu.jll.com Capital Markets Damian Corbett Head of London Capital Markets +44(0)20 7399 5286 damian.corbett@eu.jll.com Research Jon Neale Head of UK Research UK Research +44(0)20 7852 4685 jon.neale@eu.jll.com Adrian Crooks Central London Agency +44 (0)20 7399 5135 adrian.crooks@eu.jll.com Julian Sandbach Central London Capital Markets +44 (0)020 7399 5973 julian.sandbach@eu.jll.com Ben Burston Head of UK Office Research UK Research +44 (0)20 7399 5289 ben.burston@eu.jll.com Dan Burn Central London Agency +44 (0)20 7399 5966 dan.burn@eu.jll.com Chris Northam Central London Capital Markets +44(0)20 7399 5826 chris.northam@eu.jll.com Alex Hodge Associate UK Marketing +44(0)20 7399 5735 alex.hodge@eu.jll.com jll.co.uk 2015 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.