Research Q2 2015. Guide to rents and rent free periods

Research CENTRAL LONDON Q2 2015 Guide to rents and rent free periods

london office locations N1 NW1 W11 W2 W1 WC1 WC2 EC1 EC2 EC4 EC3 E1 E14 W8 SE1 W6 W14 SW7 SW3 SW1 Grades of office accommodation For marketing purposes office accommodation is generally categorised into Grades which are defined as follows:- Grade A - new or newly refurbished office space where the building specification includes suspended ceilings and fully accessible raised floors for data/telecoms cable management, passenger lift and air conditioning facilities. Grade B - office space that may only incorporate under floor or perimeter trunking for data/telecoms cable management, rather than fully accessible raised floors, and/or air cooling facilities, instead of an air conditioning system that dehumidifies, filters and draws fresh air into the building. Grade B space also tends to be of a generally lower quality building specification. Refitted - office space that is as new, having been completely refitted throughout, to include new fixtures and fittings to the common parts and reception area, new building services including air conditioning and passenger lift facilities, electrical, plumbing and lighting systems, and new raised floors, suspended ceilings and sanitary ware. The specification of works will comply with the latest health and safety legislation and may also include re-cladding the exterior of the building. Refurbished space is defined as office accommodation where the landlord has redecorated and recarpeted the available office space (but not necessarily the common parts) and overhauled, but not renewed, the building services, such as the air conditioning and passenger lift facilities. West End Paddington/Kensington/Chelsea Victoria/Westminster Mayfair/St James s Soho/North of Oxford Street Euston/King s Cross (West) Midtown Strand/Covent Garden Bloomsbury Holborn/Fleet Street King s Cross (East) City/City Fringe City Core City Fringe (East) City Fringe (North) South Bank London Bridge/ Southwark/Waterloo Docklands Canary Wharf Rest of Docklands West London Hammersmith/Olympia/ West Kensington 1 Carter Jonas 2015

Overview The number of visible tower cranes on the London skyline is a good barometer of the economy and business confidence. View London from the restaurant on the 33rd floor of The Shard and one can therefore be reassured that the good times are back. Appearances, however, can be deceptive. Yes, London is experiencing a mini building boom and to the lay person it would seem odd that Central London is currently suffering from one of the most acute shortages of vacant office space for over 40 years. How can this be? Closer analysis reveals that much of the development activity in the West End and South Bank districts, for example, is in fact residential or mixed use retail, leisure and residential, incorporating only a limited amount of office space, which tends to yield a lower profit margin. In the City, Midtown and Docklands sub-markets, a significant proportion of the office buildings that are under construction have already been pre-let. Well advised tenants The London office market in numbers... Only three sub-markets now offer refurbished Grade A space at rents below 40.00 per sq ft pa Docklands, east City fringe and Stratford City core rent, rates and service charge occupancy costs are typically 85.50-108.25 psf pa compared with 164.25-217.75 per sq ft for prime West End space City office rents are 57.50-72.50 per sq ft pa for prime located Grade A space and 80.00-87.50 per sq ft for the upper floors of tower buildings Rents for mid-rise prime located Grade A space in Midtown are 65.00-72.50 per sq ft and 55.00-65.00 per sq ft on the South Bank West End office rents for new and refitted prime located space in Mayfair and St James s are now 110-150 per sq ft pa and 70.00-80.00 per sq ft pa for space in areas such as Victoria and Fitzrovia Discounts on landlord s quoting rents are typically less than 3% throughout much of the London office market Rent free periods for 5 year leases up to 11 months (City core) and up to 8 months (West End prime) By Q2 2016, average rents for prime located, midrise, Grade A City and West End office space are anticipated to reach 70.00 per sq ft and 135.00 per sq ft respectively and 75.00 per sq ft and 65.00 per sq ft in the Midtown and South Bank markets Supply Side Constraints and Limited Tenant Choice Throughtout The Central London Office Market Are Encouraging Landlords To Increase Rents & Reduce Rent Free Period Incentives - a trend that is likely to continue for the next 18-24 months Michael Pain, Head of Tenant Advisory Team, Carter Jonas with large scale office requirements for 1,000 + staff / over 100,000 sq ft will be aware that there are limited opportunities to lease existing buildings capable of accommodating such big requirements and are therefore entering into pre-letting agreements with landlords before suitable buildings are developed. A recent example includes the pre-letting of the entire 266,000 sq ft at 1 New Street Square, EC4 to Deloitte. Pre-letting activity, traditionally the hallmark of the City office market, has also become an established trend in the West End as tenants compete to secure their future in their location of choice. The pre-letting of 144,000 sq ft to Estée Lauder at 1 Fitzroy Place, W1 is just one example. The supply of new vacant office space that is being delivered to the open market through the development process is therefore being eroded by pre-letting activity. The buoyant London housing market is also conspiring to reduce office vacancy levels: the quick profits that can be made from the residential property market and, importantly, a more relaxed town planning regime, has encouraged developers to construct high value apartments on sites that would traditionally have been built out for office use. This trend is particularly prevalent in the West End, Midtown and South Bank sub-markets. As the UK economy emerges from recession, and as businesses hire more staff, the demand for Central London office space will continue to increase. However, the crowding out of office development by more profitable residential development and office preletting actively continues to limit tenant choice throughout the Central London office market. An analysis of the pipeline of new office development completions and anticipated tenant demand indicates that it is likely to be 2017/18 before a better balance between supply and demand in the Central London office market is restored. Until then landlords will continue to exploit the prevailing market conditions, that offer tenants limited choice, by increasing rents, reducing rent free period incentives and demanding less tenant friendly lease terms, including longer leases without tenant break options or service charge caps. carterjonas.co.uk 2

Figure 1 London Office Market Typical Landlord Quoting Rents Q2 2015 Location Typical Quoting Rent per sq ft per annum Grade A Grade B City of London Pt EC1, Pt EC2, Pt EC3 & Pt EC4 New / Refitted Refurbished Refurbished City of London - Prime locations e.g. Gracechurch Street, Lime Street / Fenchurch Street, Old Broad Street 57.50-72.50 (TB = 80.00-87.50) 47.50-58.50 (TB = 65.00-75.00) 38.50-45.00 City of London - Secondary locations e.g. Blackfriars, Old Bailey, Barbican, Liverpool Street, Aldgate 55.00-70.00 (TB = 70.00-77.50) 45.00-55.00 (TB = 57.50-65.00) 37.50-42.50 Fringe City of London Pt EC1, Pt EC2, Pt EC3 & E1 City Fringe North / North West Farringdon Clerkenwell, EC1, Finsbury Square & Shoreditch, EC2 50.00 65.00 40.00 50.00 27.50-37.50 City Fringe East - Spitalfields, Aldgate East, E1 & Tower Hill, EC3 45.00-69.50 35.00-45.00 22.50-27.50 South Bank - SE1 Waterloo / Southwark / London Bridge 55.00-65.00 (TB= 67.50-80.00) 42.50-52.50 30.00-40.00 Docklands - E14 & Stratford E15 & E20 Docklands - Prime locations e.g. Canary Wharf / Heron Quays 42.50-47.50 35.00-39.50 25.00-32.50 Docklands - Secondary locations e.g. South Quay, Limeharbour 30.00-35.00 22.50-30.00 17.50-20.00 Stratford 35.00-39.50 21.50-35.00 16.00-20.00 Midtown - WC1, WC2, NW1, Pt EC1 & Pt EC4 Bloomsbury 60.00-72.50 47.50-57.50 38.50-45.00 Holborn Prime locations e.g. New Street Square, High Holborn, Kingsway) 58.50-70.00 52.50-62.50 40.00-50.00 Holborn - Secondary locations e.g. Gray s Inn Road, Theobalds Road 52.50-57.50 42.50-55.00 38.00-40.00 Covent Garden / Strand / Charing Cross 65.00-72.50 (TB = 80.00-87.50) Shaftesbury Avenue / St Martin s Lane 60.00-70.00 (TB = 80.00-87.50) 55.00-65.00 45.00-52.50 45.00-55.00 38.50-42.50 Kingsway / Aldwych / Fleet Street 57.50-69.50 42.50-55.00 35.00-40.00 King s Cross / St Pancras 70.00-77.50 47.50-60.00 38.50-45.00 West End - W1, W2 & SW1 Mayfair / St James s - Prime locations e.g. Berkeley Square, St James s Square 110.00-150.00 87.50-110.00 65.00-77.50 Mayfair / St James s - Secondary locations e.g. Albermarle Street, St James s Street 85.00-97.50 70.00-85.00 55.00-69.50 North of Oxford Street (west) - Prime locations e.g. Portman Square, Cavendish Square 77.50-90.00 62.50-75.00 42.50-55.00 North of Oxford Street (west) - Secondary locations e.g. Seymour Street, George Street 65.00-75.00 47.50-57.50 40.00-45.00 North of Oxford Street (east) - Fitzrovia / Great Portland Street 65.00-79.50 52.50-62.50 39.50-52.50 Soho, Regent Street 70.00-85.00 57.50-65.00 42.50-52.50 Haymarket, Lower Regent Street 60.00-69.50 50.00-60.00 37.50-47.50 Victoria 65.00-80.00 52.50-63.50 40.00-47.50 Westminster, Millbank 55.00 65.00 45.00 55.00 30.00 42.50 Knightsbridge 85.00-95.00 65.00-80.00 45.00-52.50 Paddington / Bayswater 55.00-62.50 42.50-55.00 37.50-42.50 Euston 70.00-77.50 47.50-60.00 35.00-45.00 South West / West London, SW3, SW6, W4, W5, W6, W8, W11, W14 Chelsea 57.25-67.50 42.50-52.50 30.00-40.00 Kensington / Queensway / Notting Hill 50.00-57.50 38.50-47.50 28.50-37.50 Fulham / Hammersmith / West Kensington / Olympia 45.00-50.00 35.00-45.00 25.00-32.50 Chiswick 48.50-52.50 35.00-45.00 25.00-30.00 Ealing - 30.00-35.00 20.00-29.50 3 Carter Jonas 2015 Source: Carter Jonas Research

Rent Discounts As the supply of vacant office space continues to fall throughout Central London, landlords are becoming less inclined to offer discounts on quoting rents. However, where office space has been slow to let some landlords may offer discounts of, typically, up to 3%. In the current rising market there is an increasing tendency for some landlords of new and refurbished space not to quote a rent preferring, instead, to provide a guide rent to enable a rent above the guide to be quoted later to prospective tenants that show interest in the office space. Office Rents Throughout most parts of the Central London office market landlords have increased quoting rents by, typically, circa 2.50 and 7.50 per sq ft per annum since Q2 2014 with office space in the City, east City fringe and South Bank recording increases at the higher end of the rental range. Contrast the super-prime office market in St James s and Mayfair where quoting rents for Grade A space have risen by over 20.00 per sq ft per annum during the last 12 months. The table on the opposite page provides a geographical summary of typical office rents in each of the Central London office sub-markets as at Q2 2015, assuming that leases for a minimum period of 5 years are to be granted. The upper floors of tower buildings (TB) tend to command rental premiums, typically of 20 30% compared with the rents for lower floors, and are shown in brackets. The geographical variation in rents is reflective of: the different supply and demand dynamics of each sub-market the age, quality and specification of the available office space proximity to public transport Rent Free Periods Rent free periods throughout Central London have shortened considerably since mid 2009, the low point in the office market following the banking crisis, when rent free periods of 12 15 months for a 5 year lease and 24-30 months for a 10 year lease were typical. Longer rent free periods of 15 18 months and 30 36 months on 5 and 10 year leases respectively were commonplace in areas such as Midtown, the City and Docklands where demand was weakest. Where a proposed letting is to incorporate a break option it has, until recently, been possible to negotiate a further rent free period that would typically commence after the break option date. However, due to current market conditions increasing numbers of landlords are now less willing to offer such concessions and it may not therefore be possible to negotiate a break option linked rent free period on the lettings of some buildings. Tenants may therefore wish to consider how important it is to secure the flexibility that a break option offers compared with the financial benefit that a longer rent free period could bring, where a lease without break options is to be granted. Since Q2 2014 rent free periods throughout most parts of London, for leases of between 5 and 10 years, have shortened by 1-2 months as a direct consequence of supply side constraints and are now typically as set out in Figure 2 overleaf. Small office suites of less than 5,000 sq ft tend to command higher pro-rata rents usually 1.50-3.00 per sq ft pa above those set out in Figure 1 and have been excluded to prevent distortion in the data. RENTS FOR second hand REFURBISHED GRADE A SPACE IN THE CITY CORE ARE NOW 47.50-58.50 PER SQ FT, CONTRAST WITH RENTS OF 35.00-39.50 PER SQ FT FOR SIMILAR QUALITY SPACE AT CANARY WHARF carterjonas.co.uk 4

ACUTE SHORTAGES OF VACANT FLOOR SPACE IN mayfair and st james s AND the south bank HAS RESULTed IN RENT INCREASES OF up TO 20% AND 18% RESPECTIVELY SINCE Q2, 2014 for new, prime located, grade A office space and in the city core rents have risen by up to 16% Figure 2 Typical Rent Free Periods Q2, 2015 Location Typical Rent Free Period (Months) (lettings over 5,000 sq ft) 5 year lease 10 year lease City of London Prime - Old Broad Street, EC2 / insurance district, EC3 9-11 18-23 City of London Secondary - Blackfriars, EC4, Barbican, EC2, Liverpool Street, EC2, Aldgate, EC3 10-13 20-24 City Fringe North / North West Farringdon, Clerkenwell, EC1 & Shoreditch, EC2 5-7 10-16 City Fringe East Spitalfields, Aldgate East, E1 & Tower Hill EC3 10-13 22-25 Midtown - Holborn, WC1 / Covent Garden, WC2 / King s Cross, N1 7-10 16-20 West End Prime - Mayfair, W1 / St James s, SW1 5 8 12-18 West End North Marylebone, Fitzrovia, W1 7-10 17-22 West End South Westminster, Victoria, SW1 8-11 19-24 South Bank - London Bridge / Southwark / Waterloo, SE1 7-9 18-23 West London - Hammersmith, W6, Olympia, W14 6-9 14-18 Docklands Canary Wharf, E14 & Stratford, E15 & E20 11-14 24-27 Source: Carter Jonas Research tenants may wish to consider whether securing a longer rent free period is more important than the inclusion of a break option 5 Carter Jonas 2015

Comparison Of Total Office Costs Q2 2014 vs Q2 2015 Rent, business rates and building service charge costs are the principal outgoings associated with leasing office space in a multi-tenanted building. Figure 3 below provides a summary, by submarket, of the changes in the costs for prime located, new and refitted, Grade A office space since Q2 2014. Figure 3 Typical Office Costs - Prime Located New & Refitted Grade A Space Q2 2014 vs Q1 2015 ( per sq ft pa) Cost Variable West End City of London Docklands Midtown South Bank City Fringe 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 Rent 105.00-125.00 110.00-150.00 55.00-62.50 57.50-72.50 35.00-42.50 42.50-47.50 62.50-70.00 65.00-72.50 47.50-55.00 55.00-65.00 45.00-55.00 55.00-69.50 Business Rates 44.00-50.00 45.00-55.00 18.50-22.50 18.75-23.00 14.75-16.00 15.00-16.60 23.00-27.00 23.50-28.00 16.50-18.25 16.75-18.75 12.75-17.50 13.00-18.00 Service Charge 9.00-12.50 9.25-12.75 9.00-12.50 9.25-12.75 11.94-15.44 12.33-15.83 9.00-12.50 9.25-12.75 9.00-12.50 9.25-12.75 9.00-12.50 9.25-12.75 Total 158.00-187.50 164.25-217.75 82.50-97.50 85.50-108.25 61.69-73.94 69.83-79.93 94.50-109.50 97.75-113.25 73.00-85.75 81.00-96.50 66.75-85.00 77.25-100.25 % Increase 3.96-16.13% 3.63-11.03% 8.10-13.20% 3.42-3.44% 10.95-12.54% 15.73-17.94% 1. The table summarises typical landlord quoting rents for prime located new and refitted Grade A space incorporating air conditioning and fully accessible raised floors for data / telecoms cable management. 2. The rents for the upper floors of tower buildings, which typically command rental premiums of circa 20-30%, have been excluded. 3. Geographical definitions - the prime office locations for each Central London office sub-market set out in the table above comprise the following: West End = Mayfair, W1 & St James s, SW1 City of London = Old Broad Street, EC2 & the insurance district, EC3 Docklands = Canary Wharf, E14 Midtown = Covent Garden, Strand and Kingsway, WC2 South Bank = London Bridge, SE1 City Fringe = Finsbury Square, EC2 and Spitalfields, E1 4. Docklands service charge costs include the Canary Wharf estate charge, currently 3.08 per sq ft pa. 5. Business rates are based on the rental value of a property and will therefore be higher in areas associated with high rents. The cost estimates include the Crossrail levy, calculated at 2 pence for every 1 of rateable value. Source: Carter Jonas Research carterjonas.co.uk 6

The Outlook For Tenants During The Next 12 Months The continuing imbalance between the supply and demand for office space throughout London is resulting in a shift in the balance of negotiating power away from tenants, which is resulting in the following trends: little or no rent discount on landlord s quoting rents shorter rent free periods limited or no break option linked rent free periods an increasing reluctance by some landlords to accept tenant only lease break options instead of agreeing the more usual leasing structure a ten year lease incorporating a five year tenant break option larger rent deposits where the financial status of the proposed tenant is considered weak CITY, MIDTOWN AND WEST END TENANTS ARE NOW COMPETING FOR OFFICE SPACE IN THE FEW REMAINING LOWER COST AREAS THAT EXIST INCLUDING DOCKLANDS, STRATFORD AND THE EAST CITY FRINGE Rental Growth Predictions Based on an analysis of the office development completion pipeline, and predicted patterns of office demand, the Carter Jonas Research Team has prepared a series of rental growth predictions for prime located new/refitted Grade A office space in each of the London office sub-markets, which are summarised in Graph 1. Graph 1 Current and Forecast Average Office Rents For New and Refitted Grade A Space This graph illustrates current and forecast average rents, excluding business rates, building service charge and all other outgoings, for new and refitted Grade A office space, excluding rents for the upper floors of tower buildings. Q2 2015 Q2 2016 Q2 2017 West End Prime 125.00 135.00 145.00 West End Secondary 75.00 80.00 85.00 Midtown 70.00 75.00 80.00 City Prime 67.50 70.00 72.50 City Fringe 62.50 67.50 70.00 South Bank 60.00 65.00 67.50 West London 50.00 55.00 60.00 Docklands 45.00 47.50 50.00 Stratford 36.50 38.50 40.00 160 140 Rent per square foot per annum 120 100 80 60 40 Q2 2015 Q2 2016 Q2 2017 20 0 West End Prime West End Secondary Midtown City Prime City Fringe South Bank West London Docklands Stratford 7 Carter Jonas 2015 Source: Carter Jonas Research

docklands, stratford and the east city fringe represent the last few remaining areas that offer refurbished, air conditioned, office space at rents below 40.00 per sq ft Where Can Value For Money Office Space be Found? The above inflation increases in rents over the last few years, underpinned by the loss of a significant proportion of office space to residential conversion, and the inflation busting business rates increases following the 2010 business rates revaluation, have catalysed the eastward migration of tenants based in the West End and Midtown to the City, City fringe, South Bank and Docklands. The consequent increase in demand for office space in these locations from migrating tenants, coupled with indigenous demand, has, in turn, fuelled above inflation rent increases, and a narrowing of rent free periods, in these, hitherto, low cost areas. At the beginning of 2014 there were eight London office sub-markets where it was possible to lease refurbished air conditioned office space for less than 40.00 per sq ft per annum. There are now just three locations meeting this criterion: Docklands, Stratford and the east City fringe. Crossrail Crossrail, once operational in late 2018, should assist in relieving the upward pressure on rents in high cost areas, particularly in the W1 postcode area, by dissipating demand through improved accessibility, and reduced travel times, to other districts such as Paddington, Holborn, the City and Docklands, many of which offer newer, better specified, office accommodation, with larger floor plates, typically in excess of 10,000 sq ft, at appreciably lower rental and business rates costs. The Crossrail journey times from Bond Street station are scheduled to be 3 minutes to Paddington, 4 minutes to Farringdon, 7 minutes to Liverpool Street and 13 minutes to Canary Wharf. The City of London The City of London office-market was one of the last in Central London to record rental growth following the global financial crisis. The sustained upturn in demand began during the third quarter of 2013 and has been maintained since with a spate of lettings, particularly in the EC3 insurance district. Land Securities 674,000 sq ft Walkie Talkie building, 20 Fenchurch Street and British Land / Oxford Properties 610,000 sq ft Cheesegrater / The Leadenhall Building were both over 50% pre-let by the time construction of the buildings had been completed in 2014. Significantly, the majority of tenants that have taken space at both buildings emanate from the insurance sector. Landlord s quoting rents for low / mid-rise new/refitted Grade A office space in the City core have risen by, typically, 2.50-10.00 per sq per per annum since Q2 2014 to 57.50-72.50 per sq ft per annum during Q2 2015, representing an increase of up to 16%. Rents for the upper floors of new tower buildings are now typically above 80.00 per sq ft per annum and a rent of 83.50 per sq ft per annum is reported to have been agreed in relation to the letting of the 41st floor of The Leadenhall Building, comprising circa 7,700 sq ft, to insurance company FM Global, which represents a record high City office rent. The rents for second hand City office accommodation have similarly increased since Q3 2013 as vacancy levels reach historic lows throughout all size ranges. Office space of sub 5,000 sq ft is in particularly short supply which is forcing many tenants to consider alternative locations including, for example, the north and east City fringes, South Bank and Docklands sub-markets. Some City office tenants are finding themselves competing against West End and Midtown office occupiers that are similarly combing the City fringe and Docklands office markets for space that offers lower rental and business rates overheads. The City Fringe The promotion of the area around Old Street roundabout, rebranded Silicon Roundabout, as a hub for start-up technology companies has been reinforced by the likes of Google and Microsoft setting up coworking / incubator centres in the area which offer young companies the opportunity to lease space on carterjonas.co.uk 8

Once operational in late 2018, Crossrail is likely to reinforce the trend for West End and Midtown occupiers to migrate east to the city, city fringe and Docklands easy in / easy out short term leases / desk sharing agreements which are specifically intended to encourage the sharing and development of ideas. Boutique investment funds specialising in the fledging tech sector are also setting up offices in the area to be closer to their client base. Traditionally regarded as a low cost property option for media and the creative industries that have been priced out of areas such as Soho and Covent Garden, the north City fringe ( Clerkenwell, Farringdon and Shoreditch ) is rapidly becoming a mature market for those businesses not seeking start up incubator space preferring, instead, non-serviced, conventional, office space. Demand from technology, media and creative businesses has, over the last few years, fuelled the rise in office rents to a point that has significantly reduced the cost advantages of the location. As a consequence, those tenants seeking better value are now focusing their searches for conventional office space in the east City fringe, in areas such as Aldgate, Spitalfields and Tower Hill, where rents for refurbished air conditioned space are typically 35.00-45.00 per sq ft per annum, contrast with Clerkenwell and Farringdon, where rents for equivalent quality space are now typically 40.00-50.00 per sq ft per annum. This migratory trend is reflected in the contrasting rates of rental growth in the north and east City fringes up to 18% and 40% respectively for new or refitted Grade A space since Q2 2014. Commodity Quay at St Katherine Docks, E1 illustrates well the dramatic shift in quoting rents in the east City fringe where rents were typically 47.50-49.50 per sq ft pa at the beginning of 2014 and are now 57.50-60.00 per sq ft pa a rise of 21%, while the recent launch of The Steward Building at Spitalfields has set a new benchmark quoting rent for the area of 69.50 per sq ft. The success in promoting the Old Street area to technology companies, with their potential for fast growth, has prompted property developers such as Derwent and Helical Bar to invest in the construction of new, larger, office buildings in the area including, respectively, the White Collar factory, which will comprise 237,000 sq ft when competed in summer 2016 and The Bower, a 320,000 sq ft mixed use retail and office development, due for completion Q2, 2015, which are intended to tap in to the growing technology sector. There are, however, threats to the success of the Silicon Roundabout phenomenon as other London office submarkets attempt to emulate its success including, for example, Docklands which is home to Level 39 which is billed as Europe s largest technology accelerator space for finance, cyber-securities, retail and future cities technology companies, located at One Canada Square, Canary Wharf. Technology start up incubator centres are also being set up elsewhere in Central London, including the Pancras Square development, which forms part of the mixed use King s Cross Central scheme, and there are similar proposals associated with the Battersea Power station development and The Shard, at London Bridge. Docklands, E14 The Docklands office market has been the last of the eight London office sub-markets to register rental growth reflecting weaker demand and the fact that the area has not suffered from the same supply side constraints as all the other sub-markets. Rents for refurbished Grade A space at Canary Wharf have typically risen by 2.50 per sq ft per annum since Q2 2014, representing an increase of just under 6%. However, Docklands still retains the distinction of being the only sub-market where it is still possible to negotiate rent free periods of up to 14 months (five year leases) and up to 27 months (ten year leases). The restoration of rental growth in the Docklands submarket has been brought about by a combination of factors including the gradual reduction in vacancy levels, following a pickup in demand and a number of large scale lettings including, for example, 150,000 sq ft at 30 North Colonnade to KPMG, 38,500 sq ft to the General 9 Carter Jonas 2015

10,500 sq ft on the 27th floor of The Shard at London Bridge a record rent for the South Bank sub-market. Of the 598,000 sq ft of office space in the building just under 300,000 sq ft is currently available to let mainly on the middle and lower floors of the building. Quoting rents range from 59.50 per sq ft for the lower floors rising to 80 per sq ft for the highest available floor space. Pharmaceutical Council at 25 Canada Square and 55,000 sq ft at 1 Canada Square to HS2. There has also been an increase in lettings in the Docklands sub-market to non-traditional Docklands office occupiers including, for example, media companies and regulatory bodies that have migrated from the West End, Midtown and South Bank sub-markets in search of Grade A office space that offers occupation on a single floor with rent and business rates overheads that are appreciably lower. Recent examples include the relocation of the World Association of Nuclear Operators (previously based in Marylebone, W1) to circa 7,000 sq ft at 25 Canada Square and The Medical Defence Union (formerly situated in Southwark, SE1) which has moved to 47,000 sq ft at 1 Canada Square. Once operational in late 2018, Crossrail is likely to reinforce the trend for West End and Midtown occupiers to migrate to Docklands the new transport link will provide direct access to Canary Wharf from Bond Street (13 minutes) and Tottenham Court Road (12 minutes) roughly the same amount of time that it currently takes to travel by tube from Bond Street to Bank. Recognising that Docklands is no longer just the preserve of global banking, financial and legal services companies the owner of Canary Wharf, Canary Wharf Group, has recently obtained planning consent for its Wood Wharf development, neighbouring Canary Wharf, which will comprise 4.9 million sq ft of residential, retail and leisure uses, including circa 1.9 million sq ft of low / mid-rise office space, which has been designed specifically to attract a different type of occupier to the Docklands area businesses from the creative, media and technology sectors. Phase one of the construction programme, which will include up to 200,000 sq ft of office space, is scheduled to complete in 2020. The South Bank, SE1 Private equity firm Arma Partners, is reported to have paid a rent of 80 per sq ft per annum on a letting of Waterloo has excellent mainline and underground rail connections serving both Central London and locations outside the capital. However, the lack of available, good quality, office space is holding the area back as a viable, alternative, office location. The development of new office buildings in the South Bank has, over the last decade, been focused on the London Bridge and Southwark areas where there have been better opportunities for developers to acquire and redevelop under-utilised / former warehouse sites for higher value office use. However, this issue is gradually being addressed following the failed legal challenge by Westminster Council and English Heritage to Lambeth Council s decision to grant consent for the redevelopment of Elizabeth House, York Road which is to make way for a mixed use residential and office development which will incorporate up to 950,000 sq ft of office space. Final approval to proceed is expected from the Mayor of London and the Secretary of State in the next few months. The lack of available office space in Waterloo will be further addressed following the recent failed legal challenge to the proposed redevelopment of The Shell Centre, which will incorporate circa 800,000 sq ft offices. Mayfair, W1 / St James s, SW1 At the time of going to press, it has been reported that two lettings have just taken place in the West End that have breached the 140 per sq ft per annum all time high rent achieved in 2007 on the letting of the top floor of 12 St James s Square to Permal Investment Management. A rent of 185 per sq ft per annum has reportedly been agreed on a letting a circa 2,960 sq ft on the top floor of 8 St James s Square, SW1, to the private office of gallery proprietor Helly Nahmad, and a rent of 150 per sq ft is understood to have been agreed on 7,900 sq ft at the same building to SG Hambros Bank. These latest lettings are likely to confer upon London the title of the most expensive office location in the world ahead of Hong Kong and Moscow While these lettings of super prime properties are not necessarily representative of the wider West End office market they do, however, illustrate an increasing trend in significantly above inflation rent increases - of up to 20% since Q2, 2014 in the super prime market - underpinned by falling vacancy levels and limited tenant choice which has been exacerbated by the loss of office floor space to residential conversion. It is no coincidence that the record rents associated with new Grade A office space in prime West End office locations is continuing to fuel the eastward migration of tenants to the City and City fringe recent examples carterjonas.co.uk 10

include private equity fund investor Pantheon Ventures relocation from 31 St James s Square, SW1 to over 17,000 sq ft at 10 Finsbury Square, EC2. Victoria, SW1 The new office developments currently under construction in Victoria, including Land Securities, Zig Zag Building at 66-74 Victoria Street (187,000 sq ft), the mixed use office, residential and restaurant Nova development, comprising 480,000 sq ft offices and the Verde development (formerly Eland House), circa 280,000 sq ft, at Bressenden Place are, by virtue of their scale, transforming the built environment and turning Victoria into a vibrant area in which to live, work and shop. Victoria offers tenants based in areas such as Marylebone, Mayfair and St James s the opportunity to remain in the West End in new, lower cost, buildings that offer larger, more efficient, floors, typically in excess of 10,000 sq ft. Rents for new Grade A office space are typically 65-80 per sq ft per annum and business rates are circa 25.50-29.50 per sq ft per annum contrast with Mayfair and St James s where rents for space of equivalent quality are currently 110-150 per sq ft per annum with correspondingly higher business rates outgoings of 45.00-55.00 per sq ft per annum. The regeneration of Victoria is, however, displacing rent sensitive tenants that typically occupy less than 5,000 sq ft to areas such as Southwark and London Bridge on the South Bank and the north and east City fringes, as a new influx of larger international tenants take up residence in the area which has become a particularly popular location for the UK offices of luxury brands including Jimmy Choo, Giorgio Armani, Moet, Burberry, Gucci and Stella McCartney. Victoria is also now well established as a location for energy and financial services companies. Recent lettings include the 56,000 sq ft pre-let at Land Securities Zig Zag Building to Jupiter Asset Management at a rent reported to be circa 80 per sq ft per annum a new record for the Victoria office market, which has also witnessed some of the largest lettings in the West End during 2014 including 81,000 sq ft at 5 Howick Place to Dong Energy and 90,000 sq ft at 39 Victoria Street to the Parliamentary Estates Directorate. Although its influence has been waning since the global financial crisis, and implementation of the Government s deficit reduction policies, the Parliamentary Estates Directorate letting is a reminder of the continuing importance of the public sector on the Westminster/Victoria office market. Paddington, W2 The Paddington office market has for many years been the ugly duckling of the West End office market perceived by many occupiers as having inadequate public transport links with other areas of Central London and a poor array of retail, banking and restaurant facilities to serve the local workforce. However, these factors are reflected in quoting rents of, typically, 55.00-62.50 per sq ft per annum which are appreciably lower than the rents for office space of equivalent quality in locations such as the adjoining Marylebone district ( 77.50-90 per sq ft) and other comparable West End locations including Victoria ( 65-80 per sq ft). However, frustrated at being unable to find operationally suitable office space within budget in the more central areas of the West End office market, a number of international corporates have opted to move to Paddington including Marks & Spencer, Rio Tinto, Nokia and AstraZeneca Confidence in the area is growing as demonstrated by British Land s decision to press on with the speculative development of 4 Kingdom Street which will comprise 145,200 sq ft when complete in early 2017. Crossrail should also give the area a further boost as transport links improve. Crossrail journey times from Paddington will be 3 minutes to Bond Street, 10 minutes to Liverpool Street, 17 minutes to Canary Wharf and 24 minutes to Heathrow. Soho, W1 The Crossrail development, which is scheduled to come into service in late 2018, has catalysed the regeneration of a large swathe of east Soho. The demolition works associated with the redevelopment of the Tottenham Court Road Crossrail station have opened up the area and provided developers with a blank canvas enabling new, larger scale, mixed use developments to be constructed. Many of the film companies and advertising agencies that were the hallmark of the Soho office market have migrated to Farringdon, Clerkenwell and Shoreditch having been either been priced out of the area or forced to move as a consequence of redevelopment. It is inevitable that the tenant mix in Soho will continue to change over the next few years as new, larger scale, office developments attract occupiers from the financial and business services and technology and telecoms sectors as they shift eastward from their more traditional locations, including Marylebone, Mayfair and St James s, in search of better value. This trend has already established itself following the lettings to Telefonica and Generation Investment Management at The Crown 11 Carter Jonas 2015

in the next 3-5 years battersea/nine elms in south west london, croydon to the south, silvertown, stratford and wood wharf to the east and white city to the west are likely to emerge as credible, well connected, alternative lower cost office locations as a consequence of regeneration initiatives Estates Air W1 office development, located in the south west quadrant of Soho, near Piccadilly Circus. Office rents for new/refitted Grade A space in Soho have risen from, typically 39.50-52.50 per sq ft per annum in mid 2009, the low point in the office market cycle following the global financial crisis, to 70.00 85.00 per sq ft in Q2 2015 a rise of over 70%, reflecting supply side constraints and the establishment of new benchmark rents associated with new office developments. King s Cross, N1 King s Cross is now firmly established as a credible alternative office location to rival the West End, City and Midtown areas such as Holborn and Covent Garden. The 67 acre mixed use King s Cross Central development is transforming the area into a vibrant and attractive place to work, live and shop. The redevelopment of King s Cross / St Pancras station, incorporating the Eurostar hub, has also reinforced King s Cross as a credible alternative office location with sufficient land to accommodate large-scale office requirements where build to suit options can be offered. Google s decision to relocate from several buildings in the West End and purchase land at King s Cross Central upon which to develop a 1 million sq ft purpose designed office campus is a case in point. The Eurostar hub has also influenced other large scale office occupiers to relocate to the area, including French advertising agency, Havas which has taken a pre-let of 160,000 sq ft at 3 Pancras Square. Office rents in King s Cross have risen significantly since Q2 2014 when rents for new Grade A office space were typically 62.50 per sq ft per annum - contrast with the most recent lettings where rents of between 75.00 and just under 80.00 per sq ft per annum have reportedly been agreed at Pancras Square - an increase of over 20%, which has prompted the developer of King s Cross Central to proceed with the speculative development of 4 Pancras Square, which will comprise 170,000 sq ft, construction of which is scheduled to complete in 2017. Hammersmith, W6 Hammersmith is the capital of the west London office market and, as with the Central London office sub-markets, is suffering from a severe shortage of vacant floor space. Following the final two lettings at Development Securities/Scottish Widows Investment Partnership s 10 Hammersmith Grove to Fox International Channels (22,600 sq ft) and tobacco company Philip Morris (34,240 sq ft), at rents reported to be approaching 50 per sq ft per annum, the developer has decided to press on with the speculative construction of the adjoining 12 Hammersmith Grove, scheduled for completion during the first quarter of 2016, which will comprise 167,000 sq ft. Landlord s quoting rents for new and refitted Grade A office space have risen to, typically, 45-50 per sq ft per annum. Prompted by rising rents and falling vacancy levels, Legal and General has recently obtained planning consent to redevelop Bechtel House, 245 Hammersmith Road, which will provide a mixed use retail / office development totalling 255,000 sq ft of which circa 242,000 sq ft will comprise office space. Completion of the development is scheduled for summer 2017. Emerging Office Markets New office sub-markets are beginning to emerge as regeneration initiatives, including improved transport infrastructure, make their effects felt in areas such as Battersea/Nine Elms, in South West London and White City, Old Oak Common in the West and Stratford and The Royal Albert Docks in the east. Although it is likely to be up to five years before many of these alternative locations will be ready to accommodate businesses seeking better value office space, they do, nevertheless, present rent sensitive Central London occupiers with an alternative to cramped and costly office space in the medium term. The International Quarter at Stratford has already attracted Transport for London and the Financial carterjonas.co.uk 12

if a relocation to a lower cost area is not an option, in a rising market the key to securing the best rent/rent free period letting package is to start the lease renewal negotiations early Conduct Authority - each organisation having agreed pre-lets of 250,000 sq ft and 425,000 sq ft respectively. We believe that Stratford will, over the next few years, continue to establish itself as a hub for public sector occupiers due to its low cost and good transport links. At Royal Albert Dock in Silvertown plans to redevelop 35 acres for mixed residential, retail, leisure and commercial uses, including up to 2.5 million sq ft of offices, are underway with completion of the first phase of the development scheduled for 2017. The regeneration of the docks will incorporate a Crossrail station, operational in 2018, making it a credible alternative location for Central London office occupiers compared with Docklands and Stratford. In south west London, the Battersea Power Station Development Corporation, which is to develop circa 1.25 million sq ft of office space as part of the power station redevelopment, has recently launched a global campaign to attract foreign businesses to the area. The power station building will incorporate 470,000 sq ft of office space and is scheduled for completion in 2019. The Nine Elms opportunity area has been given a further boost as a credible alternative to the West End following the US Government s decision to relocate its embassy there - completion of the building is scheduled for 2017. Further, the proposed construction of the northern line extension, due for completion in 2020, will provide a direct link to the City of London and West End business districts, further reinforcing the area as a commercial, as well as residential, centre. In West London, White City is beginning to establish itself as a vibrant place to live, work and spend leisure time as regeneration initiatives sponsored by the five major local landowners Transport for London, Stanhope, Berkeley Group, Westfield and Imperial College begin to take shape. Stanhope s redevelopment of the BBC Television Centre will incorporate over 500,000 sq ft of office space and Imperial College is planning a 430,000 sq ft research and translation facility while Westfield and Berkeley plan to add to the mix of uses by, respectively, extending the Westfield shopping centre and developing several thousand new homes. The completion of the Crossrail development in 2018 will open up the Old Oak Common area where local landowners have teamed up with developers to put forward proposals to regenerate the area to include up to 24,000 new homes and commercial / office space capable of accommodating up to 55,000 new jobs. Further out, in north West London there are plans by developer Quintain to construct up to 2.25 million sq ft of office space at Wembley. Croydon is also likely to become a viable location for Central London occupiers seeking better value as many of the 1970 s and early 1980 s office buildings are demolished to make way for new office and mixed use retail, residential and office buildings. The Government s Property Unit has reportedly targeted Croydon and Stratford as suitable locations to establish office hubs in order to reduce the footprint of government departments in Westminster where office rents for refurbished, air conditioned, space have risen by over 20% since 2009. The plans to redevelop Euston station, and the development of the HS2 rail hub, together with Sydney and London Properties plans to redevelop its landholdings adjoining the station, to create a mixed use commercial and residential development, including over 3 million sq ft of offices, will turn Euston into a new and vibrant business district capable of offering those tenants based in more traditional West End locations such as Marylebone, Fitzrovia, Soho, Mayfair and St James s with new, lower cost, office accommodation with excellent rail links with the rest of the country. Minimising Office Costs Property costs are typically a business second largest overhead after staff costs. Because of the rapid inflation in office costs over the last few years brought on, principally, by unprecedently low vacancy levels and the 13 Carter Jonas 2015

2010 business rates revaluation - increasing numbers of office occupiers are migrating to lower cost areas. Many are using the relocation as a catalyst for change in their working practices and use of technology in order to minimise their property footprint and reduce operating costs. As a consequence, a number of trends are emerging among London based office users, including: choosing buildings that have been designed to accommodate a higher occupancy density traditionally office buildings have been constructed to accommodate one person per 107 sq ft / 10 sqm but improvements in design and technology, particularly with regard to air conditioning capacity, coupled with IT hardware that generates less heat, is enabling developers to create buildings capable of accommodating up to 1 person per 87 sq ft / 8 sqm. hot desking the sharing of workstations between staff that are not permanently office based. This office occupancy strategy is particularly relevant to management consultancies and sales organisations that employ high numbers of project/field based staff. agile /remote working increasing numbers of organisations are exploiting the freedom to operate remotely from the office which has been conferred by advances in mobile data / telecoms technology, including the use of laptops, smartphones and tablet computers, which has enabled some occupiers to reduce their property footprint. smaller desk sizes ten years ago desks were typically 1600-1800mm wide. Advances in flat screen technology and the greater use of laptops and tablet computers, coupled with electronic, rather than hard copy, filing means that today s office workforce can work as efficiently with smaller desks of 1400-1500mm. cloud technology the use of cloud computing technology negates the need to develop dedicated data / telecoms rooms, incorporating expensive supplementary air conditioning systems, and also enables savings to be made in the quantum of floor space to be leased. office fitting out costs are typically one of the largest items of capital expenditure associated with an office move. There are several ways in which these costs can be mitigated, including: leasing space that is being marketed with the previous tenant s fitting out works in situ although some adaptation may be required, it is often possible to make significant savings by modifying a previous tenant s fit out making use of HMRC tax reliefs including Investment and Capital Allowances using tax efficient finance leasing to fund the fitting out works Issues To Address When Negotiating A Lease Whether negotiating a new lease on existing premises or relocating to alternative premises, we recommend that the key issues set out below are addressed in the lease negotiations in order to secure best value lease terms. When embarking on a lease renewal, and to strengthen the tenant s bargaining position, it is good practice to start the negotiations at least 18 months before the lease expires, particularly in a market where rents are likely to continue rising. Adopting this timeframe will allow sufficient time to effect an orderly relocation if terms for a new lease cannot be agreed, as well as conferring on the tenant a stronger bargaining position and the ability to use the credible threat of relocating if the lease renewal negotiations become protracted. financial components rent discount rent free period and break option linked rent free periods landlord capital contributions towards any refurbishment / fitting out works that the tenant may wish to undertake limiting exposure to increases in annual running and future exit costs by including: a service charge cap a rent review cap - where the LL is seeking to include a rent review a schedule of condition to record the condition of the office space before the lease is granted to limit future repairing and dilapidations costs limiting the scope of the tenant s repairing obligations building flexibility into the tenancy by addressing: the length of lease to be granted the timing and frequency of tenant only lease break options the minimum period of notice required to exercise the break option(s) the scope of the pre-conditions to be complied with in order to exercise the break option security of tenure exclude landlord break options where landlord break options are to be included, ensure that they can only be exercised on meeting certain pre-conditions, for example, when the landlord wishes to redevelop as evidenced by placing a demolition or building contract negotiate a lease that is to be granted within the security of tenure and compensation provisions of the 1954 Landlord and Tenant Act which confers rights on tenants of business premises to a new lease and compensation in the event that the landlord wishes to redevelop the property or occupy for it s own use carterjonas.co.uk 14

The Carter jonas Tenant Advisory Team The Tenant Advisory Team does not provide property consultancy services to landlords. Our tenant representation services include: Office search and relocation management services Relocation budgeting and planning Lease and rent review negotiation Repairs/dilapidations assessment and negotiation Building, air conditioning and passenger lift surveys Business rates analysis and appeal Service charge audit For more data on the Central London office market, office availability, rents and rent free periods and information on budgeting and planning for a lease renewal, rent review or office relocation please contact one of the team. Commercial offices London Bath Cambridge Leeds Oxford case studies Lease negotiations and relocations 10,000 sq ft+ 37,000ft 33,000ft 28,000ft 23,000ft Frank Hirth 236 Gray s Inn Road, WC1 UK Payments Administration 2 Thomas More Square, E1 Warner Bros / Shed Media 85 Grays Inn Road, WC1 Nursing & Midwifery Council Two Stratford Place, E20 KEY CONTACTS Michael Pain Partner 020 7016 0722 michael.pain@carterjonas.co.uk Mark McAlister Partner 020 7518 3297 mark.mcalister@carterjonas.co.uk Jeremy Gidman Partner 020 7016 0727 jeremy.gidman@carterjonas.co.uk Greg Carter Associate Partner 020 7518 3303 greg.carter@carterjonas.co.uk 17,500ft 16,000ft 15,000ft 11,000ft Hackett Limited The Clove Building, SE1 Circle Housing Two Pancras Square, N1 Hitachi Rail Europe 40 Holborn Viaduct, EC1 Salamanca Group 50 Berkeley Street, W1 Ed Caines Associate 020 7016 0724 ed.caines@carterjonas.co.uk Luke Wild Associate 020 7016 0725 luke.wild@carterjonas.co.uk Catherine Penman Head of Research 01604 608203 catherine.penman@carterjonas.co.uk One Chapel Place, London W1G 0BG carterjonas.co.uk/officesearch The information set out in this document is provided for guidance purposes. We recommend that the advice of an experienced, qualified, property consultant is sought prior to exchanging contracts or making any irreversible strategic lease renewal, rent review or relocation decisions. The contents of this document are protected by copyright and should not, in whole or part, be published or otherwise reproduced, without the prior written approval of Carter Jonas LLP.