RESEARCH Q1 2009 CENTRAL LONDON Quarterly Highlights • Sentiment in the occupational market remained subdued in Q1 2009 with just 1.3 m sq ft of take-up across Central London, 70% below the long-term average level. • The delivery of new space and the continued release of tenant space to the market resulted in a 23% quarter-on-quarter increase in availability, which now totals 22.3 m sq ft. This is the largest single-quarter increase since 2001. • Occupier caution and increased supply continued to place rents under pressure across all markets. • Investment turnover fell to £626 m, its lowest level for 7 years, as the continued lack of available debt restricted market activity. Q1 2009 CENTRAL LONDON Quarterly • Take-up fell by 65% to 1.3 m sq ft, one of the lowest quarterly levels on record. Central • Availability increased as speculative schemes completed and tenants continued London to release space. The vacancy rates is now 10.0%. • Speculative construction activity continued to fall to 6.2 m sq ft, 35% lower than Overview last year, with only one construction start during the quarter. • Investment turnover fell to £626 m, the lowest for 7 years and a 70% drop on the previous quarter. Figure 1 Demand and take-up Investment market Central London take-up by quarter & market sub-area The global economic crisis continued to place Investment turnover fell to £626 m in Q1 Q1 2008 - Q1 2009 (000’s sq ft) pressure on occupier activity in the first 2009, 60% below the long-term average and quarter as take-up dropped to 1.3 m sq ft, a 70% less than the previous quarter’s level. 4,000 65% fall on the previous quarter’s level and The continuing lack of debt availability was one of the lowest quarterly levels on record. apparent, with private investors accounting 3,000 There were just 343,000 sq ft of transactions for almost 40% of total purchases across involving new and refurbished space, 80% Central London. Despite the muted level of below the long-term average, with only two activity, there are positive signs that market 2,000 deals in excess of 50,000 sq ft across the sentiment is beginning to change, with whole market. Also significant was the fall in Central London representing a potential transaction volumes involving second-hand opportunity to foreign investors looking 1,000 space, which totalled just 950,000 sq ft, 36% to exploit the weak Pound. lower than the previous quarter and 44% The outward shift of prime yields appears 0 below the long-term average of 1.7 m sq ft. Q1 Q2 Q3 Q4 Q1 to have stabilised, with yields in the City 2008 2009 Active demand levels fell across Central remaining at 6.75%. In the West End, prime London as a number of requirements were yields softened to 6.00% although further West End City Docklands placed on hold or withdrawn. There are now outward movement is considered unlikely. Source: Knight Frank 6.2 m sq ft of active named requirements in Central London, 31% below the level witnessed 12 months ago. Figure 3 Supply and development Central London net investment Figure 2 Availability across Central London rose for Q1 2009 (£ m’s) Central London availability the sixth consecutive quarter as more 200 by quarter & market sub-area speculative schemes joined supply and Q1 2008 - Q1 2009 (000’s sq ft) tenants released space in a bid to trim costs. 150 25,000 At the end of Q1 2009 availability totalled 100 22.3 m sq ft, which represents a vacancy 50 20,000 rate of 10.0%. This indicates an increase 0 of more than 60% over the last 12 months, -50 15,000 although this is still considerably lower than the 36.3 m q ft reached in 1991. -100 10,000 Importantly, the level of speculative -150 construction activity has fallen away -200 5,000 considerably over the last 12 months as funding remains difficult to secure and the Other Company Company Unit Fund Unit Insurance Institution Corporate/ 0 uncertainty in the occupational market Fund Equity Q1 Q2 Q3 Q4 Q1 Pensions/Life/ continues. The only major scheme to start Investor Private Private PropertyPrivate 2008 2009 Quoted Property in Q1 2009 was The Shard, SE1 which is due Opportunity/Private West End City Docklands for completion in 2012 and is pre-let in part Charities/Foundation/ Source: Knight Frank to Transport for London. Source: Knight Frank 2 www.KnightFrank.com their searches on hold. Significant market, accounting for 70% of purchases, West End requirements include occupiers such as with Sterling looking good relative value. The Omnicom, Bovis Lend Lease and Red Bull all threat of tenant default and the associated • Take-up was 0.54 m sq ft, 15% lower of whom will all be displaced by Crossrail. effect on performance is leading to a heavy than the previous quarter. These three requirements accounted for 28% discount on assets with higher risk tenants. of the total active demand in the West End. Long-term secure income therefore continues • Active demand totalled 0.8 m sq ft, to attract a premium. Prime yields have 66% below the same quarter last year. Supply & development moved out by 25 basis points and are now at 6.00%, although there are signs that market • Vacancy rate now stands at 9.2% Availability rose for the seventh consecutive sentiment is beginning to turn more positive. with availability increasing to quarter to 8.3 m sq ft, a 39% increase on the 8.3 m sq ft. previous quarter's level and 14% higher than the long-term quarterly average. This • Prime headline rents have fallen by Figure 2 19% to £75.00 per sq ft from £92.50 represents a vacancy rate of 9.2%, similar to West End availability by quarter per sq ft at the end of 2008. the levels seen in early 2005, but still well & market sub-area below the 12.4% reached in 1992. Over Q1 2008 - Q1 2009 (000’s sq ft) 400,000 sq ft of this increase is due to the 10,000 Figure 1 inclusion of British Land’s Regent’s Place in West End take-up by quarter our figures, which is due for completion & market sub-area 8,000 within the next six months. Q1 2008 - Q1 2009 (000’s sq ft) 1,500 The volume of space under construction 6,000 speculatively fell by 24% to 1.9 m sq ft in the 1,250 first quarter as a lack of funding and concerns 4,000 over the occupational market led to 1,000 developers placing schemes on hold where 2,000 possible. A significant amount of short-term 750 space came to the market as some landlords 0 and developers are now seeking income prior Q1 Q2 Q3 Q4 Q1 500 2008 2009 to economic recovery. 250 Mayfair/ Soho/North of Victoria Oxford Street Rental profile St James’s 0 Paddington/ Strand/ Bloomsbury Q1 Q2 Q3 Q4 Q1 Prime headline rents in the West End 2008 2009 Kensington Covent Garden continued to fall in Q1 2009 and are now Source: Knight Frank Mayfair/ Soho/North of Victoria £75.00 per sq ft, a 19% fall from the previous St James’s Oxford Street quarter’s level and a 32% fall over the last Paddington/ Strand/ Bloomsbury 12 months. Rent free periods are now Kensington Covent Garden Figure 3 estimated to be 12 months for each 5-year Source: Knight Frank West End investment by purchaser of term certain. Q1 2009 (£ m’s) Demand & take up Investment market Take-up in Q1 2009 totalled 543,000 sq ft, Turnover for the first quarter of 2009 totalled the lowest quarterly total for at least 17 years £263 m, 65% lower than the previous and 57% below the long-term average of 1.3 quarters figure of £760 m. There is £1.265 bn m sq ft. Particularly notable is the fall in the of investment stock currently available, of level of transactions involving second-hand which approximately £500 million (40%) is space. There were around 330,000 sq ft of under offer, with the American Embassy second-hand space deals across the West accounting for approximately 40%. The End in Q1 2009 compared to 550,000 sq ft largest transaction in Q1 was Times Place, in Q4 2008 and a long-term quarterly SW1 which exchanged for £56m, reflecting average of 800,000 sq ft. a NIY of 7.64%. Pension/Life/Insurance £67 m Active demand in quarter 1 fell over 17% to Private UK and overseas investors have Private Investor £186 m 820,000 sq ft as many occupiers have put continued to dominate the Core West End Source: Knight Frank 3 Q1 2009 CENTRAL LONDON Quarterly Figure 2 per sq ft three months earlier. We expect the City City availability by quarter prime rent to remain under pressure for the & market sub-area rest of this year. Q1 2008 - Q1 2009 (000’s sq ft) • Take-up fell to 733,000 sq ft, the lowest level since Q4 2002. 15,000 Investment market • Availability increased to 12.6 m Despite a disappointing first quarter 12,000 sq ft as upcoming developments investment transaction volume (£364 m, approach completion. down from £457 m the previous quarter), 9,000 confidence appears to have picked up in the • Prime City rent was £46.50 per City office investment market. We have left sq ft, compared to £53.50 per sq ft 6,000 our prime yield figure unchanged at 6.75%, three months earlier.