CLO Central London Office Overview Real Estate Q2 2014
2 Central London Office Overview 41% of Central London development completions are pre-let as availability falls by 8.7%. Economic Q2 has seen business confidence reach a high not seen for a generation, helping the UK economy return to pre-recession levels. The depth of recovery is evident with reports of stronger economic growth, rising employment and positive indicators such as manufacturing achieving its best quarterly result in two decades. Concerns in Q1 over the strength of the US recovery and UK growth being too dependant on consumer spending are both looking unfounded. The longest running of all business surveys, the CBI s industrial trends, suggests business optimism is at its highest level since 1973. Firms are responding with increased investment in staff and resources which, according to recruiter Morgan McKinley, led to a 15% uplift in City financial service jobs in May 2014, compared to a year earlier. Business confidence and a limited supply of large offices continue to fuel pre-letting activity in all areas of Central London. A restricted development pipeline and dwindling year on year availability figures in all Central London submarkets has resulted in a fall in availability of 8.7% in Central London as a whole. This has encouraged tenants with very large requirements to agree pre-lets much earlier than required. In the last 12 months, 6.8 million sq ft of development has completed in Central London of which 41% (2.8 million sq ft) has been pre-let. With little motivation for tenants to complete pre-lets quickly, deals are taking longer to complete and may explain why City take up for Q1 and Q2 combined of 2.45m sq ft is close to the 2.01 million sq ft currently under offer. This provides an encouraging outlook for the second half of the year. Significant pre-lets include Estee Lauder s acquisition of 144,000 sq ft at Exemplar and Aviva s 1 Fitzroy Place, M&G s 300,000 sqft acquisition at Generali s 10 Fenchurch Avenue and Clarkson s 76,000 sq ft acquisition of Max Properties St Katherine s Dock in the Eastern City fringe. The real success story of Q2 was at Stratford where the Financial Conduct Authority has secured a 430,000 sq ft pre let and TfL have agreed to acquire a further 250,000 sq ft. The deals will mark Stratford as a firmly established Central London sub market with both occupiers expected to move into their newly built offices in 2017/2018. There still remains circa 3.2 million sq ft of offices to develop on Lend Lease s International Quarter master plan. It is understood that the decision to relocate to Stratford over the Docklands was primarily based on value (rents at circa 30 to 35 per sq ft rather than 40 to 45 per sq ft) and Stratford s excellent transport connectivity. As employment in Central London grows, landlords are more confident of undertaking speculative developments. Landlords with developments in fringe locations attractive to the TMT (Technology Media and Telecoms) industry will have reason to be optimistic following Oxford Economics forecast that 46,000 new jobs will be created in the sector over the next decade. Amid all the positive news, there are still a number of high quality offices that have struggled to let. Typically these are for reasons such as size (there is an over supply of 15,000 sq ft floor plates in the City for instance), location in terms of transport links (offices in Aldgate would be far more attractive if Crossrail was already in operation from Whitechapel station) or simply mispricing. This provides opportunity for the flexible cost conscious tenant to still negotiate attractive terms. While investment demand from UK institutions has continued to build over the quarter, many are wary of competing against residential developers and overseas investors for prime Central London stock. Most see better value and a higher chance of success targeting fringe locations attractive to TMT companies, long leasehold interests and refurbishment opportunities to take advantage of low vacancy rates, a lack of development and forecasted rental growth. For example Cordea Savills acquired 8 Shepherdess Walk, N1 located in Hackney for 10 million, Legal and General the long leasehold interest in 55/56 Ludgate Hill, EC4 for 72.5 million and Orchard Street, 33 Golden Square, W1 which has refurbishment potential for 23.5 million. A recent PWC report stated that Central London has overtaken New York and Beijing as the global financial centre with the most economic clout. This will continue to make London attractive to overseas investors despite exceptionally low yields in comparison to other capital cities. While a stock deprived market and predicted rental growth provides some justification for low yields we are keeping a close eye on factors that may affect overseas demand, such as, the strengthening pound which hit a six year high against the dollar at the end of Q2. This may be deterring some overseas investors, but the weight of overseas demand still far outweighs the amount of prime Central London opportunities. This is demonstrated best in Q2 by the purchase of 10 Upper Bank Street in Docklands for 795m. This building, one of only five office buildings in Central London above 1m sq ft, was purchased by Chinese Life (70% interest), Qatar Holdings (20%) and the Canary Wharf Group (10%). A number of very large investments came to the West End market during Q2 suggesting a more active second half of the year. These include a 50% stake in the Pollen Estate W1 ( 200 million), 440 Strand WC2 ( 168.7 million) which formed part of the Hyperion Portfolio bought by Legal and General in Q1, 33 Grosvenor Place, SW1 ( 204 million) and Sanctuary Buildings, SW1 which is reportedly under offer to Henley s for around 185 million. The success of these sales could act as a barometer for overseas demand as Q3 and Q4 plays out and so we will be monitoring them closely.
Central London Office Overview 3 At a glance
4 Central London Office Overview West End At a glance 110 Park Street, Mayfair, W1 1 Fitzroy Place, Mortimer Street, W1 20 Grosvenor Street, W1 Purchaser: Scottish Widows Tenant: Long leasehold (expiry 2121) Tenure: Multi-let Lease expiry: AWULT 3.4 years (1.55 years to breaks) Price: 33,700,000 Net Initial Yield: 3.25% Landlord: Exemplar, Aviva Investors and Kaupthing Bank Tenure: Estee Lauder Companies Size: 144,000 sq ft (13,378 sqm) Term: 20 year lease, tenant break option after year 10 Rent: 72.50 psf Rent free: Confidential Landlord: Grosvenor Tenant: KPMG Size: 37,268 sq ft (3,462.3 sqm) Term: 15 years lease Rent: 125.00 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 28/30 Cornhill, EC3 The Helicon 1 South Place, EC2 Salesforce Tower 110 Bishopsgate, EC2 Purchaser: Ignis Asset Management Tenant: Multi let Landlord: Deutsche Bank Landlord: Heron International Tenure: Freehold Tenure: Experis (advised by Capita) Tenant: Salesforce Lease expiry: AWULT 8.5 years (5.5 years to break) Price: 26,100,000 Net Initial Yield: 4.18% Size: 9,980 sq ft (927.17 sqm) on the 8th floor Term: 10 years with a break at 7th Rent: 53.50 psf Rent free: 22 months Size: 39,751 sq ft (3,693 sqm) over the 28th, 29th, 30th & 31st floors Term: 15 years Rent: late 50.00 psf Rent free: Confidential
Central London Office Overview 7 Take Up Development Pipeline Availability Prime Rent Vacancy
8 Central London Office Overview City Fringe At a glance Deals 99 City Road, EC1 The Lever Building 85 Clerkenwell Road, EC1 Commodity Quay St Katherine Docks E1W Purchaser: London & Regional Properties Ltd Tenure: Long leasehold Tenant: Inmarsat Plc Lease expiry: 2028 (break option 2023) Price: 102,000,000 Net Initial Yield: 5.6% Landlord: GE Capital Real Estate Tenant: Tesco Holdings Plc Size: 30,482 sq ft (2,837.9 sqm) entire building Term: 11 years lease Rent: 44.06 psf Rent free: Confidential Landlord: Max Property Plc Tenant: Clarksons Plc Size: 75,780 sq ft (7,040.2 sqm) Term: 15 years Rent: Range from 43.00 to 50.00 psf Rent free: Confidential
Central London Office Overview 9 Take Up Development Pipeline Availability Prime Rent Vacancy
10 Central London Office Overview Midtown At a glance Deals Tavis House 1/6 Tavistock Square WC1 200 Grays Inn Road, WC1 90 Long Acre, WC2 Purchaser: Macquarie Lending Tenure: Long Leaseholding expiring 2089 Tenant: Secretary Lease expiry: December 2037 (break option 2022) Price: 19,300,000 Net Initial Yield: 4.62% Landlord: The Great Ropemaker Partnership Tenant: Warner Bros. Entertainment UK Limited Size: 24,503 sq ft (2,276.4 sqm) over 1st and part 6th floors Term: 10 years, tenant break option after year 5 Rent: 45.00 psf Landlord: Northwood Investors Tenant: The Health Foundation Size: 15,377 sq ft (1,428.6 sqm) over part 1st floor Term: 5 years Rent: 55.00 psf Rent free: 13 months Rent free: Confidential
Central London Office Overview 11 Take Up Development Pipeline Availability Prime Rent Vacancy
12 Central London Office Overview Southbank At a glance Deals Beckett House 1 Lambeth Palace Road, SE1 240 Blackfriars Road, SE1 Pentagon House, 52-54 Southwark Street, SE1 Purchaser: Proprium Estates & Development Securities (JV) Tenure: Long Leasehold expiring 2151 Tenant: Multi let Lease expiry: 2026 Price: 87,000,000 Net Initial Yield: 5.1% Landlord: The Great Ropemaker Partnership Tenant: Ramboll Uk Ltd Size: 31,140 sq ft (2,893.0 sqm) over 1st, 2nd & 3rd floors Term: 15 years lease, tenant break option in year 10 Rent: 47.00 psf Landlord: The Mount Stuart Trust Tenant: Wuardrille Publishing Ltd Size: 4,930 sq ft (458.01 sqm) over 5th & 6th floor Term: 5 years Rent: 38.54 psf Rent free: 6 months Rent free: 33 months (12 months break penalty)
Central London Office Overview 13 Take Up Development Pipeline Availability Prime Rent Vacancy
14 Central London Office Overview Docklands At a glance Deals 10 Upper Bank Street, E14 1 Canada Square, E14 Purchaser: China Life, Qatar Holding & Canary Wharf Group Tenure: Freehold Tenant: Clifford Chance Lease expiry: 2028 Price: 795m Net initial yield: 5.3% Landlord: Canary Wharf Group Tenant: European Banking Authority Size: 44,702 sq ft (4,153 sqm) Term: 12 years Rent: 42.00 per sq ft Rent free: Confidential
Central London Office Overview 15 Take Up Development Pipeline Availability Prime Rent Vacancy
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 Alan Dornford Head of Markets +44 (0)207 544 2211 alan.dornford@capita.co.uk Andrew Mercer West End +44 (0)207 544 4215 amercer@capita.co.uk Ben Nichols West End Agency +44 (0)20 7544 2143 benjamin.nichols@capita.co.uk Archie Hubble City Agency +44 (0)207 544 2156 archie.hubble@capita.co.uk Paul Clark Central London Development +44 (0)20 7544 2215 paul.clark3@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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