CENTRAL LONDON MARKET INSIGHT SERIES Challenge 2025: The Growth Map for Central London 30 April 2014
WELCOME Adam Hetherington Managing Director, Central London
AGENDA The Central London Market Kevin McCauley Head of Central London Research CBRE London 2025 and Beyond Dr Neil Blake Head of EMEA & UK Research CBRE The Big Debate: London 2025 How can the capital deal with growth? Sir Edward Lister Chief of Staff and Deputy Mayor, Policy and Planning GLA Rob Tincknell CEO Battersea Power Station Development Company Gary Yardley Investment Director Capital & Counties Properties plc Moderated by: Stuart Robinson Chairman, Planning CBRE
The Central London Market Kevin McCauley Head of Central London Research
ECONOMIC RECOVERY WELL SET London Jobs, Millions 6.0 5.5 430,000 jobs above previous peak 5.0 4.5 Pre-recession level by 2011 4.0 3.5 3.0 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Source: National Statistics
120 110 100 90 80 70 60 40 30 20 10 0-10 -20-30 -40-50 -60-70 Mar-00 Oct-00 May-01 Dec-01 Jul-02 Feb-03 Sep-03 Apr-04 Nov-04 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Balance of Responses, SA BUT CONFIDENCE IMPORTANT UK economic sentiment and services sector confidence Index, Series Average = 100 Whole Economy Economic Sentiment (LHS) Services Confidence Indicator (RHS) Source: DG ECFIN
INFLUENCING LEASING ACTIVITY Central London office take-up Central London take-up Under offer 10-year average 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2004 Q1 2004 Q3 2005 Q1 2005 Q3 2006 Q1 2006 Q3 2007 Q1 2007 Q3 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 Million sq ft Source: CBRE
UNDERLYING DEMAND DYNAMICS STRONG Central London take-up and under offers sq ft 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 West End 46% Southbank 56% Midtown 87% Docklands 71% City 55% Source: CBRE Take-up to Q1 Under offers at end of Q1 Take-up and under offers as % of 10-year average take-up
SUPPLY CRUNCH HAS STARTED Central London vacancy rates Percentage % 20 18 Central London City West End 16 14 12 10 8 6 4 2 0 5.0% 4.3% 3.4% 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: CBRE
POSITIVE STOCK ABSORPTION PRECURSOR TO RENTAL GROWTH NSA vs annual rental growth Annual Change, Million sq ft % Annual Change 40% 8.0 30% 6.0 20% 4.0 10% 2.0 0% 0.0 Rent -10% -20% -2.0-4.0-30% -6.0-8.0-40% 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 Source: CBRE
RENTAL PRESSURES BUILDING ACROSS MARKET Central London prime headline rent index Q4 2007 = 100 105 100 95 90 85 80 75 70 65 60 Q4 2007 West End City Midtown Southbank Docklands Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Source: CBRE
2.7BN IN Q1 2014 2014 WILL BE DOWN ON 2013 Central London office capital transactions Billion 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Domestic Purchasers Overseas Purchasers Unknown Origin 17.9bn 19.4bn 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % overseas 45 18 30 19 29 34 46 38 56 45 60 59 76 66 53 70 68 46
OVERSEAS BUYERS BECOMING ACTIVE IN RETAIL INVESTMENT MARKET Million 1,200 Domestic Overseas Unknown 1,000 800 600 400 200 0 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Source: CBRE
Domestic Overseas 45 40 35 30 25 20 15 10 5 0 London New York Paris (IDF) Tokyo Hong Kong Sydney Singapore Houston Chicago Munich LONDON IS THE GLOBAL GATEWAY Commercial real estate volumes, 2013 $ Billion Source: CBRE Research, RCA
OVERSEAS INVESTMENT INTO LONDON'S HOUSE BUILDING SECTOR SP Setia, IJM, Visionary Properties/Usahu Tegas Group Knight Dragon, Dalian Wanda, Hutchison Whampoa Oxley Holdings, Fraser Development Qatari Diar 34,000 Residential Units
LONDON REMAIN MAIN TARGET FOR INVESTORS Source: CBRE European Investor Intentions Survey 2014 Percentage % London 0% 5% 10% 15% 20% 25% 30% 35% Madrid Berlin Munich Paris Amsterdam Dublin Warsaw Hamburg Barcelona 2013 2014 Source: CBRE
18 16 14 12 10 8 6 4 2 0 FORECAST 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 TAKE-UP SUPPORTED BY ECONOMY Central London take-up Take-up, Millions sq ft Source: CBRE
PRELETS VS VACANCY RATES Central London prelets of 200,000 sq ft or more Percentage % Let during construction Let prior to construction Vacancy rate 6 16% 5 14% No of deals 4 3 2 12% 10% 8% 6% Vacancy rate 4% 1 2% 0 Source: CBRE 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 0%
SPECULATIVE ELEMENT FALLING SHARPLY Central London office space under construction Million sq ft 16 14 12 10 8 6 4 2 0 Source: CBRE 100% 80% 60% 40% 20% 0% 2004 Q1 2004 Q3 2005 Q1 2005 Q3 2006 Q1 2006 Q3 2007 Q1 2007 Q3 2008 Q1 2008 Q3 2009 Q1 2009 Q3 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 Speculative Committed % speculative
CENTRAL LONDON RENT FORECASTS Main markets, April 2014 5.7% 76.00 4.3% 4.7% 75.00 71.00 126.00 74.00 70.50 124.50 122.50 117.50 110.00 100.00 Mayfair / St James 70.50 65.00 57.50 Midtown 70.50 69.00 64.00 57.50 City 4.7% 48.50 48.00 47.00 45.00 41.50 Annualised growth (%) 2018 2017 2016 2015 2014 2013 7.0% 66.50 65.00 62.50 59.50 \ 38.50 Docklands Source: CBRE 55.00 47.50 Southbank (More London)
MARKET SUMMARY OCCUPIER MARKET INVESTMENT MARKET ABOVE-TREND leasing levels supported by ECONOMIC growth Strong pressure on RENTS SUPPLY tightening Occupiers looking for VALUE MORE development Lack of stock FRUSTRATING demand Strong demand from OVERSEAS into residential, office and retail London s GATEWAY status undiminished Helping to DRIVE development
2025 AND BEYOND Dr Neil Blake Head of UK and EMEA Research
OVERVIEW The London Paradox Long-term potential: How much can London grow? What are the growth sectors? What are the constraints? What does it mean for office space requirements? Where will the developments be?
EMPLOYMENT EXCEEDS EXPECTATIONS Employee Jobs in Office-Based Sectors*, Greater London 2,300,000 2,200,000 2,100,000 2,000,000 1,900,000 1,800,000 1,700,000 1,600,000 1,500,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 London Plan Latest Estimate Source: ONS, CBRE * SIC J-O
CENTRAL LONDON* DRIVES GROWTH Office-Based Employee Jobs 1,600,000 1,400,000 1,200,000 13.3% Growth 1,000,000 800,000 600,000 400,000 200,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Other London Boroughs Central London* Note: * Camden, City, Hammersmith & Fulham, Kensington & Chelsea, Westminster, Hackney, Islington, Lambeth, Southwark, Tower Hamlets Source: ONS, CBRE
CENTRAL LONDON OFFICE MARKETS Office-Based Employee Jobs 2,100,000 1,900,000 1,700,000 1,500,000 1,300,000 1,100,000 900,000 700,000 500,000 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 London Plan* CBRE Note: * Re-based to match 2011 employee estimates & CBRE definition of office-based employment Source: ONS, GLA, CBRE,
DOES THE LONDON PLAN UNDERSTATE POTENTIAL DEMAND? Employee Jobs in Central London Office Markets Percentage change 0 10 20 30 40 50 60 70 Next 23 Years Last 25 25 years Years Next 23 years London Plan* CBRE 2/3 of London Plan projected job growth by 2031 already achieved by end-2013 *difference between the London Plan 2026 projection and the 2013 out-turn Source: ONS, CBRE
SOURCES OF NEW JOBS Net Employment Change 2014-2036 Business Services TMT Insurance & Fund Management Law & Accountancy* Administrative Services Banking Public Admin -50 0 50 100 150 200 250 300 350 400 000 s Note: * Management consultants are included in Business Services Source: ONS, CBRE
THE BIG QUESTIONS Is this rate of growth sustainable? Can the workers be housed? Can the transport system cope? How much new office space is involved and where will it be?
WHERE WILL THE WORKERS COME FROM? Central London Employment 2,100 1,900 FORECAST 1,700 1,500 000 s 1,300 1,100 900 700 Further investment in the transport infrastructure will be required including Crossrail 2 500 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 Source: ONS, CBRE Living in Inner London Boroughs Commuting in from outside Inner London
INCREASED HOUSING DEMAND Central London Net New Households per annum 25,000 20,000 15,000 10,000 5,000 0 Strategic Land Availability Assessment (potential supply) Implied by CBRE Employment Numbers Source: ONS, CBRE
CENTRAL LONDON: LONG TERM POPULATION TRENDS We have been here before! Millions 5,500 5.5 5,000 5.0 4,500 4.5 4,000 4.0 3,500 3.5 3,000 3.0 2,500 2.5 2,000 2.0 1,500 1.5 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 GLA CBRE Source: ONS, CBRE
EMPLOYMENT CHANGE AND THE DEMAND FOR SPACE Central London (GIA) 2014-2036 New employment needs minus efficiency gains Equals net requirement - = 36m sq ft 98m sq ft 62m sq ft Pipeline = 60m sq ft
OFFICE SPACE IN THE PIPELINE* M sq ft Westminster / Euston / Paddington 7.0m sq ft Old Oak Common 8.1m sq ft King s Cross 3.7m sq ft City Fringe/Tech City 10.3m sq ft Stratford 7.4m sq ft Heathrow 1.8m sq ft City 4.3m sq ft Earls Court/Olympia 1.4m sq ft Vauxhall / Nine Elms / Battersea 3.7m sq ft Isle of Dogs 16.2m sq ft Southbank 6.9m sq ft Outer London Central London Crossrail Crossrail 2 Northern Line Ext. HS2 Note: * GIA in 000 sq ft
THE BIG QUESTIONS Is this rate of growth sustainable? London has boomed across the recession and it is not clear why it should grind to a halt now Can the transport system cope? The transport system can only cope if there is sustained further investment beyond Crossrail Can the workers be housed? Housebuilding needs to be ramped up even to hit the London Plan. PRS needs to take off How much new office space is involved; where will it be? Completions do not need to be that different from the historical average but Central London will have to expand
The Big Debate London 2025 How can the capital deal with growth? Panellists: Sir Edward Lister Chief of Staff and Deputy Mayor, Policy and Planning GLA Rob Tincknell CEO Battersea Power Station Development Company Gary Yardley Investment Director Capital & Counties Properties plc Chaired by: Stuart Robinson Chairman, Planning CBRE
CENTRAL LONDON MARKET INSIGHT SERIES Thank you www.cbre.co.uk/central-london-seminar CENTRAL LONDON MARKET INSIGHT SERIES