CLO. Central London Office Overview. Real Estate Q3 2014

CLO Central London Office Overview Real Estate Q3 2014

2 Central London Office Overview Midtown, Southbank and City Fringe yields harden in Q3 with further yield compression predicted Economic Data to be published at the end of October is expected to show that the UK economy will record its seventh consecutive quarter of growth in Q3. Further good news for the UK has come from the International Monetary Fund (IMF) who expects UK GDP growth of 3.2% in 2014 and 2.7% in 2015. The impact of a strong economy is feeding through to employment where recent data shows that the London workforce has reached a new record high of 5.6 million. In fact, there are 17% more office related jobs in London now than there were at the pre-recession peak. Record London employment levels had a positive effect on take-up data, which amounted to 2.7 million sq ft in Q3. By the time all transactions have been reported, take-up is likely to exceed the long run quarterly average of 3.0 million sq ft for the eighth quarter in succession. A further 4.8 million sq ft is under offer. Availability in Central London decreased by 9% in Q3 and by 25% since September 2013. This is the fifth consecutive quarter of decreasing availability and the market has now reached the levels last seen in 2007. The largest occupational transaction of the quarter was Amazon s pre-let of 431,000 sq ft at Principal Place for its London headquarters hosting 5,000 employees. The building is situated to the north of Broadgate and links the City with the media-tech area of Shoreditch. This deal reinforces the importance of the digital sector in driving take-up and the desirability of the northern City fringe market. As demand for this location grows digital start-ups craving cheap and flexible space on short leases are establishing themselves further out in areas such as Islington, Camden Town and beyond. In the West End, British Land confirms that it has fully let its recently completed Grade A office development at 39 Victoria Street, SW1. The company commented that this continued a period of successful letting across its recently completed West End developments, which are now all fully let or under offer at terms ahead of ERV. Further demonstrating the strength of the West End market, British Land reports its 2.4 million sq ft office portfolio has a 96% occupancy rate, up from 88% at 31 March 2014. Whilst development completions in 2014 will hit a 5 year high, they have been running below the long term average since 2010 and the pipeline for 2015 and 2016 remains limited. Coupled with low availability and robust demand, prime rents in the City and Midtown both currently at 60 per sq ft may surpass their 2007 highs of 70 per sq ft in the City and 65 per sq ft in Midtown. Despite our Prime West End Rent increasing to 105 per sq ft in Q3, the West End still has some way to go to reach the 2007 high of 135 per sq ft. However, with a growing amount of deals above 120 per sq ft it appears likely this rent will also be reached in this cycle. Prime rents in Southbank at 52.50 per sq ft and City Fringe at 48.50 per sq ft are already at record levels having increased by 23% and 17% respectively in the last 12 months. A decrease in Central London investment turnover in Q3 of 14% to 3.75 billion from 4.36 billion in Q2 was expected as seasonal averages show that Q3 is typically weaker than Q4 or Q2. Net investment in the 12 months to the end of September amounted to 18.08 billion, compared to 17.10 billion in the year to September 2013. This indicates that after allowing for some quarterly volatility, investment demand is showing no sign of easing. As UK institutional investors continued to seek value in the markets beyond the core West End and City, yields hardened in the City fringe, Midtown and Southbank markets by 0.25% in Q3 to 5.0% in Midtown and Southbank and 5.25% in City Fringe. A raft of deals in the fringe were agreed this quarter below 5.0%, including 280 High Holborn, WC1 sold to Citi Private Bank for 86m reflecting 4.3%; The Blue Building, 4/8 Whites Ground, SE1 sold to TIAA Henderson for 4.3m reflecting 4.87%; and 186/188 City Road, EC1 near Old Street roundabout sold to Alan Sugar s Amsprop for 23.28m reflecting 4.08%. Prime fringe market yields still have further to fall before hitting the record lows achieved in Q1 2007 of 4.50% in Midtown and 4.75% in City Fringe and Southbank. The transactions in Q3 indicate we are close to achieving these levels. Yields on prime Central London offices are now more than 160 basis points below their long run average and 25 basis points below the level seen at the top of the market in June 2007. Rolling 12-month investment in Central London has consistently exceeded the levels last seen, briefly and for just one quarter, at the top of the market in 2007. Overseas investors were the dominant investor type in Q3 increasing its share by 14% to 2.32 billion compared to 2.04 billion in Q2. In comparison, net investment by domestic investors decreased by 38% in Q3 from 2.31 billion to 1.43 billion. So far during 2014 overseas investors have been responsible for 51% of total net office investment. The speed of UK economic recovery has raised speculation of an earlier than expected rise in base rates. However weak wage growth and inflation 0.5% below the 2% target provides policy makers with justification to keep interest rates low for longer. The September edition of Forecasts for the Economy published by the Treasury shows that independent forecasters expect the base rate to remain unchanged at 0.5% at the end of the current year, but to rise by 0.75% to 1.25% in 2015. However, longer term gilt yields have consistently been pricing in an increase in the Base Rate and therefore even when the Bank Rate does eventually increase, the impact on the longer term interest rates used to benchmark property pricing could be limited. One consequence of the economic recovery is that sterling has strengthened in value by 11% since March 2013 according to the Bank of England s effective exchange rate index. This makes UK property more expensive for overseas investors and coupled with growing inflows of UK institutional money we may start to see UK buyers become more competitive in core markets.

Central London Office Overview 3 At a glance

4 Central London Office Overview West End At a glance 130 Shaftesbury Avenue, W1 76-90 Wardour Street, W1 Marble Arch House, W1 Purchaser: Qatari Investor Tenant: Freehold Tenure: Multi-let Lease expiry: AWULT 11 years Price: 66,500,000 Net Initial Yield: 4.47% Transaction: Letting Landlord: Legal & General Group plc Tenure: Thoughtworks Size: 7,007 sq ft (650.9 sqm) over 1st floor Term: 10 year lease Rent: 62.50 psf Rent free: 18 months Transaction: Letting Landlord: British Land Tenant: NERA Economic Consulting Size: 11,554 sq ft (1,073.3 sqm) over 3rd floor Term: 10 years lease Rent: 72.50 psf Rent free: Confidential

Central London Office Overview 5 Take Up Development Pipeline Availability Prime Rent Vacancy

6 Central London Office Overview City At a glance Deals 15/16 Bonhill Street, EC2 1 London Wall, EC2 Cannon Place 78 Cannon Street, EC4 Purchaser: Legal & General Group plc Tenant: Multi let Tenure: Freehold Lease expiry: AWULT 6.8 years Price: 62,600,000 Net Initial Yield: 4.50% Transaction: Letting Landlord: Hansainvest Tenant: KCA Deutag Drilling Size: 33,400 sq ft (3,102.94 sqm) over 3rd and 5th floor Term: 10 years Rent: 45.00 psf Rent free: 12 months Transaction: Letting Landlord: Hines Tenant: Franklin Templeton Management Ltd Size: 33,813 sq ft (3,141.30 sqm) on the part 5th floor Term: 15 years Rent: c. 60.00 psf Rent free: Confidential

8 Central London Office Overview City Fringe At a glance Deals 186/188 City Road, EC1 3-7 Ray Street, EC1 Purchaser: Amsprop Tenure: Freehold Tenant: Multi-let Lease expiry: 2014 to 2021 Price: 23,280,000 Net Initial Yield: 4.08% Transaction: Letting Landlord: The Goldsmith s Tenant: All3Media Size: 18,200 sq ft (1,690.82 sqm) over entire building Term: 15 years with a break after the 10th Rent: 43.50 psf Rent free: 12 months

10 Central London Office Overview Midtown At a glance Deals 280 High Holborn, WC1 The Halo Building 1 Mabledon Place, WC1 81 Chancery Lane, WC2 Purchaser: Citi Private Bank Transaction: Pre-letting Transaction: Pre-letting Tenure: Freehold Landlord: Stanhope Landlord: Deerbrook Tenant: Multi let Tenant: The Doctor Laboratory Tenant: Thirty Nine Essex Street Lease expiry: AWULT 11.3 years Price: 86,000,000 Net Initial Yield: 4.3% Size: 89,000 sq ft (8,268.30 sqm) over entire building Term: 15 years Rent: 41.57 psf Rent free: 28.5 months Size: 51,000 sq ft (4,738 sqm) over Basement, 1st 2nd, 3rd, 4th and 5th floors Term: 15 years Rent: 53.50 psf Rent free: Confidential

12 Central London Office Overview Southbank At a glance Deals The Blue Building 4/8 Whites Ground, SE1 56 Southwark Bridge Road, SE1 Hop Exchange 24 Southwark Street, SE1 Purchaser: TIAA Henderson Transaction: Letting Transaction: Letting Tenure: Freehold Tenant: Multi-let Lease expiry: 2017 Price: 4,300,000 Net Initial Yield: 4.87% Landlord: Southwark Council Tenant: Lifeways Group Size: 6,379 sq ft (592.62 sqm) over Basement, 1st, 2nd and 3rd floors Term: 10 years lease, tenant break option in year 5 Rent: 35.27 psf Rent free: 6 months Landlord: Pier Property Development Ltd Tenant: RSL Law Limited Size: 1,800 sq ft (167.22 sqm) over 1st floor Term: 10 year lease, tenant break option in year 5 Rent: 42.57 psf Rent free: 4 months

14 Central London Office Overview Docklands At a glance Deals Citi Tower 25 Canada Square, E14 Westferry House 11 Westferry Circus, E14 Transaction: Letting Landlord: Citi Group Tenant: GFK Group Size: 40,000 sq ft (3,716.09 sqm) over 17th and 18th floors Term: 15 years, with a tenant break in year 10 Rent: 32.50 psf Rent free: 30 months initially Transaction: Letting Landlord: Union Tenant: Ministry of Justice Size: 33,272 sq ft (3,091.04 sqm) over the 6th and 7th floor Term: 10 years Rent: 30.00 psf Rent free: c. 30 months

16 Central London Office Overview Locations West End City City Fringe Midtown Southbank Docklands

Central London Office Overview 17 Glossary Average Rent Typical headline rent for an average quality Grade A building. Assumes a single floor of over 5,000 sq ft in a refurbished building in an average location. Availability Offices on the market for occupation. Excludes offices under offer up to exchange but includes all development and refurbishment projects that are scheduled to be completed within the next 12 months. Development Pipeline Offices under construction or comprehensive refurbishment. The forecast of development completions relates only to developments commenced and currently under construction. Grade A, B or C Subjective view of quality reflecting age, specification, floorplate efficiency and aesthetics. Transaction Activity Capital transactions comprising freehold and long leasehold acquisitions for investment or development. Net Effective Rents Prime rents reflecting lease incentives typical in the market for a 5,000 sq ft floorplate on an assumed a market term. Net effective rents assume a notional three month fit-out period and amortisation over term of the lease up to a maximum of 10 years. Prime Rent Typical headline rent for the best quality buildings following development or comprehensive refurbishment to Grade A quality. Assumes a single floor of over 5,000 sq ft in a prime location. Assumes a middle floor in a tower building. Prime Yield Net Initial Yield for a rack rented freehold building in a prime location which has been newly developed/ refurbished to Grade A quality and let for a market term to a tenant of very good covenant status. Rent Free Period Typical Market incentive granted for a lease of 10 years without break option. Assumes a prime Grade A quality building and floor plate of 10,000 sq ft. Take-up Office acquisitions for occupation including all lettings, pre-lettings and sales to owner occupiers completed in the quarter. Vacancy Rate Availability or supply as a percentage of total stock.

18 Central London Office Overview Contacts Andrew Mercer Central London +44 (0)207 544 4215 amercer@capita.co.uk Paul Clark Central London Development +44 (0)20 7544 2215 paul.clark3@capita.co.uk Archie Hubble Central London Agency +44 (0)207 544 2156 archie.hubble@capita.co.uk Ben Nichols Central London Agency +44 (0)20 7544 2143 benjamin.nichols@capita.co.uk Alan Dornford Head of Markets +44 (0)207 544 2211 alan.dornford@capita.co.uk James Beresford Central London +44 (0)207 544 2256 james.beresford@capita.co.uk

Central London Office Overview 19 Whilst we have no reason to believe that there are any inaccuracies or defects in the information and forecasts provided in this report, it is constrained by the use of information and forecasts from other persons and we cannot warrant the accuracy and completeness of such information and forecasts. The information and forecasts provided through this report are of a general property market nature although, where possible, we have attempted to take account of the nature of the relevant properties. Growth forecasts should be seen as indicative rather than definitive and we recommend that decisions should be supported by appropriate professional advice on value. We accept no liability for any loss or damage (including consequential or indirect loss or damage which shall include but which shall not be limited to loss of property or of profit, business revenue or anticipated savings) or for any costs, claims, demands, proceedings, expenses or liability of any nature arising directly or indirectly out of the use of or access to the information and forecasts of this report and whether or not arising from our negligence nor that of our employees or agents. Capita 2014 The copyright and all other rights of whatsoever nature relating to the information and forecasts provided in this report shall remain ours. Exception to this arises where such information and forecasts are sourced to third parties in which case they shall remain the property of such third parties. The information and forecasts provided in this report are for the sole use of the person or persons for whom the report has been prepared and therefore may not be reproduced, replicated, retransmitted or passed on to third parties whether in the form in which they are received or in any other form without our prior written consent.

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