DTZ Research PROPERTY TIMES Rebound after a slow start Europe Office Q2 2015 28 August 2015 Contents Take-up 2 New office supply 3 Vacancy ratio 4 Prime office rents 5 Outlook 6 Definitions 7 3 million sq m of office spaces were taken-up in Europe in Q2 2015, up from 2.4 million sq m in Q1. Despite this rebound, the activity remained below its historical level of 2007 (3.9 million sq m). Greater Paris Region remained the most dynamic European office market in terms of letting activity with 542,500 sq m of take-up in Q2 2015, a sharp rebound after a subdued first quarter. German markets, at the exception of Munich, also posted a dynamic quarter. Four markets out of the five monitored registered more than 100,000 sq m of take-up in Q2 2015. Office space vacancy ratios declined across the board in Europe. The region average standing at 10.5% at the end of Q2 2015, down from 10.9% three months earlier. The range of vacancy ratios is wide, from less than 4% in Marseilles, Manchester and Birmingham to 23% in Kyiv. London ratio, that almost hit the 10% mark at the heart of the crisis, is now at 3.5%. The largest European office vacant stock is in the Greater Paris region with 4 million sq m immediately available reflecting a vacancy rate of 7.5%. New European office space deliveries fuel the market at a sustained pace. Indeed, 5.4 million sq m of new office space were delivered in 2014 and another 5 million sq m are expected to be inaugurated over the course of 2015. Five cities Paris, London, Stockholm, Moscow and Warsaw hosted 60% of the 1.7 million sq m of new office surfaces delivered over the first half of 2015. Rental values have increased on average by 1% in one year for the prime segment. Behind this figure the picture is diverse between very dynamic Dublin and London markets (+23.3% and 12% respectively) on one hand and Moscow and Kyiv decreasing by 21% and 25% respectively on the other hand. London West End is by far the most expensive European office market with a prime value at 1,167/sq m/yr in Q2 2015. Author Massinissa Fedala Senior Analyst +33 (0)1 49 64 46 29 massinissa.fedala@dtz.com Contact Magali Marton Head of EMEA Research +33 (0)1 49 64 49 54 magali.marton@dtz.com Figure 1 European office take-up, 000 sq m 4 500 4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 Quarterly take-up (LHS) Rolling annual take-up (RHS) 15 000 12 500 10 000 7 500 5 000 2 500 0 www.dtz.com PROPERTY TIMES 1
Take-up Figure 2 European office take-up, 000 sq m Average take-up Office take-up across Europe was 3 million sq m in Q2 2015, up from 2.4 million sq m recorded during the previous quarter. Nevertheless, market leasing activity remained below its historical level recorded in 2007 (Figure 2). The rolling annual take-up, at 10.9 million sq m, represents a modest 1% decline on a yearly basis. Half of the 28 markets covered in this report have registered a decrease in leasing activity during Q2 2015 from the previous quarter. CEE markets are gaining momentum Greater Paris Region remains the largest European office market in terms of leasing activity with 542,500 sq m of take-up in Q2 2015, a sharp rebound after a subdued Q1 2015 with 372,000 sq m let. Half year figure, at 915,200 sq m, is 22% down in comparison with the same period in 2014. Sizeable transactions, the traditional pillar of this market, are missing. London comes second with 331,782 sq m let in Q2 2015. The dynamic is better there with almost 600,000 sq m of take-up since the beginning of the year. Finance sector was the main market feeder, especially in the West End and the Emerging Markets. At the exception of Munich with 125,800 sq m let (-30% q-o-q, - 13% y-o-y), German markets posted a dynamic Q2 2015 with improving activity across the board. Contrary to other European countries where the bulk of the activity is concentrated on one or two cities, the federal Germany hosts 5 markets with an average quarterly leasing volume of more than 100,000 sq m. Worthy of note is the performance of Budapest with 213,000 sq m leased in Q2 2015, an absolute record volume. Budapest steps on the European podium in terms of office letting activity for the first time. The volume was boosted by several large prelease deals involving major telecom companies. In the Budapest footsteps, CEE major markets registered remarkable results in Q2 2015. As instance, Prague also posted a record quarter with 128,000 sq m of take-up. Professional services companies were the most active. Figure 3 Office take-up in selected markets, 000 sq m 2 000 1 500 1 000 500 0 London Moscow Berlin Paris (IDF) Warsaw Figure 4 European office market turnover in selected markets From our research, the overall stability of the European office market is reflected by the turnover ratio (take-up versus stock), which stood at 4.2% in Q2 2015, slightly above the 4.1% in Q2 2014. Both, the UK and the CEE posted the biggest increase with more dynamic activity over the 12 last months. By contrast, France experienced a slowdown in activity with 3.4% in Q2 2015 down from 3.9% one year earlier (Figure 4). www.dtz.com PROPERTY TIMES 2
New office supply Regular flow of new surfaces coming onto the market Since the trough of 2012 with only 3.6 million sq m of new office surfaces completed across Europe, the building activity has steadily increased reaching 5.4 million sq m in 2014. 2015 is forecasted to be a plateau and to put a halt to this progression with 5 million sq m of deliveries expected over the course of the year. Around 1.7 million sq m of new office space has been inaugurated since the beginning of the year in Europe. Five cities - Paris, London, Moscow, Warsaw, and Stockholm represented around 60% of the new supply delivered over the first half of the year. By contrast, building activity was subdued in secondary cities in the UK as Manchester and Birmingham. The bulk of these deliveries were already pre-let before completion. In Paris were 1.1 million sq m of new surfaces should be inaugurated in 2015, the largest pipeline in Europe, around 70% of the surfaces are already pre-let. In London, where the development pipeline is steadily growing, with 400,000 sq m of new surfaces in 2015, the demand has eaten into the speculative supply. In the City and the Emerging markets less than 20% of the completed surfaces remains available. Figure 5 European office market new supply, million sq m Figure 6 European office market development pipeline in 2015 and 2016 as % of stock Strong office pipeline in Central and Eastern Europe We expect over 10 million sq m of new office space to enter the European market in 2015 and 2016. A part of this new supply is hypothetical; given the start of construction will often depend on securing surfaces with tenants, especially in secondary markets. At a European level, the total pipeline of new supply expected in 2015 and 2016 accounts for 4% of the existing stock (Figure 6). As it is the case for three years now, the relative strongest office development pipeline is expected in Istanbul, at 650,000 sq m of new office space - or 22% of existing stock. Then, we found four CEE markets out of the five following places. These markets are catching up with the Western part of the Continent and developing themselves at a sustained pace. Indeed, Bucharest ranks second, with 417,200 sq m of new supply expected over the same period, equivalent to 19% of the existing office stock at the end of Q2 2015. In Core Europe, Paris, London and Berlin are going at the same pace with the equivalent of 4% of the existing stock expected to fuel the market in 2015 and 2016. 2 million sq m of new office surfaces are expected to be delivered in Paris in 2015 and 2016, 925,000 sq m in London and 680,000 sq m in Berlin over the same period. www.dtz.com PROPERTY TIMES 3
Vacancy ratio Decreasing vacancy across the board Vacancy ratios are decreasing across the board in Europe. The regional average standing at 10.5% at the end of Q2 2015, down from 10.9% in Q1 2015. DTZ Research shows that the European office market continues to display a wide range of vacancy ratios, from less than 4% in France and UK regional markets as Marseilles, Birmingham and Manchester to 23% in Kyiv. Vacancy ratios remained far below the Regional average in the two largest European office markets, Paris and London, with 7.5% and 3.5% respectively at the end of Q2 2015. As a reminder, vacancy ratio in London almost hit the 10% mark in 2009, at the heart of the crisis; this ratio has regularly shrunk since then reaching a trough in Q2 2015. Demand registered in London in Q2 2015 was 80% higher than new supply coming to the market. At the exception of Peripheral markets, notably in CEE where building activity is strong, other European markets now suffer from a lack of qualitative supply meeting tenant s new requirements. In the Greater Paris Region, over the 4 million sq m of office surfaces available at the end of Q2 2015, almost three quarters are second hand surfaces. In other European capitals as Brussels or Rome, Grade A buildings represent a marginal part of the availabilities. Strong decline in the UK and CEE On an annual basis, vacancy rates remained broadly stable (Figure 8). However, more detailed analysis by country reveals some various trends in vacancy changes ranging from -28% in London to + 21% in Geneva. Over the last 12 months, the biggest declines in vacancy have been recorded in the UK with London leading the way (-28% in one year) followed by Birmingham where the vacancy rate declined by a quarter over the past year. Then CEE markets as Budapest (-19% in one year) and Bucharest (-16%) have also benefitted from a strong demand. Supply on these markets is on the verge of matching with tenants expectations thanks to a relatively high level of new deliveries fuelling the market. Absorption of vacant space is progressing quarter after quarter even in markets with relatively high vacancy rate as Prague. Figure 7 European office market- availability ratio in selected markets, % Europe Frankfurt London Moscow Paris (IDF) Figure 8 European office market vacancy rates changes (Q2 2015 VS Q2 2014) -30% -20% -10% 0% 10% 20% 30% Geneva Moscow Marseille Lyon Prague Manchester Paris (IDF) Rome Warsaw Milan Istanbul Amsterdam Glasgow Brussels Stockholm Kyiv Europe Zurich Madrid Frankfurt Dusseldorf Hamburg Munich Copenhagen Barcelona Dublin Bucharest Budapest Birmingham London 25 20 15 10 5 0 www.dtz.com PROPERTY TIMES 4
Prime office rents Upside in UK and Ireland, downside in East On average, prime office rents posted a y-o-y 1.0% increase in Q2 2015. The growing imbalance between a recovering demand and a lack of qualitative supply in most of the markets put a slight upward pressure on rents, at least for the prime segment. This average masks contrasting trends across the European countries as shown in figure 9. Given the severe geopolitical issues recorded in these countries, Moscow and Kyiv rental values are severely tumbling, by 21% and 25% in one year respectively. Whereas these markets were amongst the faster growing in Europe in terms of deliveries, with a significant part of speculative developments, demand, precisely from international companies has almost stopped for one year now. Moscow, which was one of the most expensive place in the European office market at the end of 2013 with a prime rental value at 1,167/sq m/yr almost lost half of its value in 18 months with a prime rental value at 673/sq m/yr at the end of Q2 2015. At the other end of the scale we find Dublin and London (West End) which have seen their prime values soar by 23% and 12% respectively. In London West End, strong competition from finance sector and a very low availability ratio has driven rental values to new highs. After two years of double digit rental growth, the prime rental value is at 1,822/sq m/yr. The gap with other European markets reached a record level. Indeed, an office sq m in the Continental most expensive markets, Geneva, Zurich and Paris cost less than half a London West End one. The story is quite different in Dublin where the strong increase in prime rental values is a recovery after a sharp decline during the crisis. Figure 9 European office market prime rents Q2 2015 (y-o-y change in %) www.dtz.com PROPERTY TIMES 5
Outlook Rental growth to soften After a flat 2013, European rental values rebounded by a solid 3.8% in 2014. On a prospective view rental value growth is expected to remain above the water line over the three coming year. Thus, the growth pace is forecasted to gradually soften over the course of the years. Demand is not expected to evolve tremendously as visibility remain quite vague for corporates. Indeed, the global economic outlook is gaining momentum but at a limited pace. In some markets, particularly Tier 1 ones, demand is expected to remain strong but leasing activity is expected to be dampened by a limited supply both in quality and quantity. Given this background, we expect prime office rents to increase by 3.2% in 2015 and by 2.7% in 2016. On a longer notice, rental value growth is forecasted to gradually converge to zero. London dominates the top 5 for highest forecast rent growth Going forward, even if London is already by far the most expensive European office market, room of vehicle for further increases does still exist; Indeed, rental values in the UK Capital is forecasted to increase at an annual rate of 5% in the Midtown, 4.9% in the City and 3.6% in the West End until 2019. At the other end of the scale, declines in value are forecast in the three markets of Geneva, Kyiv and The Hague. However it is worth noting that these adjustments are quite modest and range from -1.5% in The Hague to -0.5% per annum in Geneva over the 5 next years. Figure 10 European office rental forecasts Figure 11 Highest and lowest forecast average rental growth (2014 & 2015-2019) www.dtz.com PROPERTY TIMES 6
Definitions Availability Commercial Total floorspace in properties marketed as available to let, whether physically vacant or occupied, and ready for occupation either immediately, or, in the case of occupied space/new developments, within the next 6 months. Availability ratio Total space currently available as a percentage of the total stock of floorspace. Development pipeline Comprises two elements: 1. Floorspace in course of development, defined as buildings being constructed or comprehensively refurbished to grade A standard. 2. Schemes with the potential to be built in the future, though having secured planning permission/development certification. Grade A floorspace Buildings newly developed or comprehensively refurbished (involving structural alteration, and/or the substantial replacement of the main services and finishes), not previously occupied, including sublet space not previously occupied. Net absorption The change in the total of occupied floorspace over a specified period of time, either positive or negative. Prelet A development leased or sold prior to completion. Prime rent The highest rent that could be achieved for a typical building/unit of the highest quality and specification in the best location to a tenant with a good (i.e. secure) covenant. (NB. This is a net rent, excluding service charge or tax, and is based on a standard lease, excluding exceptional deals for that particular market.) Stock Total accommodation in the commercial and public sectors both occupied and vacant. Take-up Floorspace acquired for occupation, including the following: (i) offices let/sold to an eventual occupier; (ii) developments pre-let/sold to an occupier; (iii) owner occupier purchase of a freehold or long leasehold. (NB. This includes subleases but excludes lease renewals.) Vacancy Floorspace that is empty - i.e. not occupied. It may be being marketed, or it may not (whether because a lessee is not occupying, it is being refurbished, or deliberately being left empty by the landlord. New supply Total marketed grade A floorspace which is ready for occupation either now or within the next six months. Ready for occupation means practical completion, where either the building has been issued with an occupancy permit, where required, or where only fit-out is lacking. www.dtz.com PROPERTY TIMES 7
EMEA John Forrester Chief Executive +44 (0)20 3296 2002 john.forrester@dtz.com Heading Name Title +44 (0)20 3296 3820 email@dtz.com Disclaimer This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ. DTZ 2015 To see a full list of all our publications please go to www.dtz.com/research Global Headquarters 77 West Wacker Drive 18th Floor Chicago, IL 60601 USA phone +1 312 424 8000 fax +1 312 424 8080 email info@dtz.com EMEA 125 Old Broad Street London EC2N 1AR, UK phone :+44 (0)20 3296 3000 www.dtz.com/research