RESEARCH The Big Nine Quarterly update of regional office activity Q3 2018

TOP PERFORMERS

MANCHESTER Occupier market There was a record level of activity across both Manchester markets during Q3. In the city centre Booking.com took 225,000 sq ft at Allied London’s Enterprise City development and there were two further exceptional deals in the out-of-town market to Royal London and Trafford Council.

BIRMINGHAM Investment market The Birmingham investment market accounted for the headline deal of Q3: the £95m sale of 2 Colmore Square to Railway Pension Trustees. In the out-of-town market Squarestone Growth purchased 2&3 Eagle Court in Solihull for £22m. Big Nine attracts Barclays and Booking.com in record quarter

The scale of transactions in the Big Nine office markets reached a new level in Q3 as Barclays agreed the largest ever deal across the Big Nine - 470,000 sq ft at Buchanan Wharf in Glasgow.

Overall take-up for the quarter was 64% above average, which included record activity across the out-of-town markets. This brings the total for the first three quarters of the year to over 8 million sq ft, well positioned to break last year’s record of 10 million sq ft for both the city centre and out-of-town markets.

Barclays was not the only exceptional deal of the quarter, as Booking.com agreed to take 225,000 sq ft at Enterprise City in Manchester. This inward investment is a further indication Charles Toogood of the confidence that occupiers are showing in the regional National Head of Offices markets. It is encouraging that both these exceptional deals come from the private sector, following the level of activity we have seen from the public sector over the last 18 months.

Having said that the public sector remains very active. There were three 60,000 sq ft deals to central Government and 97,000 sq ft to Trafford Council. This brings public sector activity to 390,000 sq ft for this quarter, almost double the long term average.

Other key activity in Q3 came from the insurance & asset management sub-sector (9%), with Royal London taking 190,000 sq ft in two deals in South Manchester and Edinburgh. Against recent trends the level of co-working office activity dropped off for the first time since the beginning of 2017, amounting to 80,000 sq ft. However we are starting to see the effect of the influx of co-working providers on the market as the number of independent sub 2,000 sq ft deals has fallen to 195, the lowest level in five years, down from an average of 245 over that time.

The Manchester market has again out-performed other cities, headlined by Booking.com, Royal London and Trafford Council, with a record total of over 900,000 sq ft for space taken. This year we expect city centre take-up to breach 1.5 million sq ft for the first time.

With this amount of activity concerns over the lack of prime stock persist. This has been the case for a number of years however levels have reached a new low over the past six months. While net effective headline rents continue to rise (4.3% pa), there are concerns that build cost inflation is impacting on scheme viability and therefore the appetite for speculative development. Market Data–Q3

City centre Out-of-town

TOTAL TAKE UP IN Q3 TOTAL TAKE UP IN Q3

compared to the ten compared to the ten 2,102,411 sq ft +63% year quarterly average 1,259,158 sq ft +64% year quarterly average

TAKE UP (sq ft) Q3 2018 TAKE UP (sq ft) Q3 2018 10 year quarterly average 10 year quarterly average

Birmingham 158,935 Birmingham 112,889 180,416 81,916 Bristol 166,829 Bristol 116,629 135,428 81,045 Cardiff 64,728 Cardiff 100,010 94,636 31,942 Edinburgh 232,669 Edinburgh 74 ,695 143,792 55,909 Glasgow 614,466 Glasgow 172,647 157,445 75,669 Leeds 191,464 Leeds 86,117 139,586 79,166 Liverpool 83,451 Liverpool 3,639 104,544 32,654 Manchester 479,637 Manchester 446,993 280,561 218,916 Newcastle 110,232 Newcastle 145,539 49,666 109,530

TOP FIVE DEALS TOP FIVE DEALS

City Property Occupier Sq ft City Property Occupier Sq ft

Glasgow Buchanan Wharf Barclays 470,000 Manchester Parklands, Alderley Park Royal London 140,000

Manchester Enterprise City Booking.com 225,000 Manchester Talbot Road Trafford Council 96,765 Cardiff & Vale University Newcastle Civic Centre HMCTS 63,350 Cardiff Woodland House 84,750 Local Health Board Glasgow 123 St Vincent Street HMRC 60,556 Glasgow Maxim Office Park Sitel 58,744

Leeds 3 Wellington Place HMRC 60,000 Bristol 800 Aztec West Edvance 30,670

HEADLINE RENTS (£psf) HEADLINE RENTS (£psf)

Rent free (mths Net effective Net effective Location Rents (£) Location Rents (£) on 10 yr term) rent*(£) rent (£) Q3 2017 Edinburgh 35.00 18 30.63 29.75 Birmingham (Solihull) 25.00

Bristol 34.00 18 29.75 26.69 Leeds 22.50

Glasgow 32.50 18 28.44 25.50 Bristol 22.50

Manchester 33.50 24 27.64 27.64 Manchester (South) 22.00

Birmingham 33.00 24 27.23 26.00 Newcastle 16.95

Leeds 30.00 24 24.75 24.75 Edinburgh 22.00

Cardiff 26.00 12 24.05 23.40 Glasgow 16.50

Newcastle 24.00 18 21.00 20.13 Cardiff 15.00

Liverpool 21.50 24 17.74 17.74 Liverpool 14.00

Average 29.94 20.00 25.69 24.62 Average 19.61

*including rent free period less three month fit-out. Market activity

Birmingham Glasgow The relatively subdued level of take-up during Q3 does not present a Glasgow’s extraordinary year of take-up activity continues. Barclays have clear picture of sentiment and activity in Birmingham city centre. Viewing purchased 470,000 sq ft office headquarters at Drum Property Group’s enquires and pent-up demand belies transactional activity as there are a Buchanan Wharf site, the largest deal across the Big Nine since we started number of large deals expected to complete before the end of the year. recording the data ten years ago. This is partly relocation and partly These include the 130,000 sq ft letting to Birmingham City University inward investment as the bank aims to accommodate a further 2,500 for an innovation centre at Eastside Locks where contracts have been employees in Glasgow. This is the second large banking deal of the year exchanged. We therefore expect Q4 activity to bring 2018 figures in line and HMRC have also taken a further 60,000 sq ft following GPA’s 187,000 with the five year average of 800,000 sq ft. sq ft transaction in Q1. The public sector has been the most active this quarter with two central This means that city centre take-up is already over twice the long-term government deals to the Secretary of State at Norfolk House (36,000 sq ft) annual average, with a quarter still to go. However the two largest and Network Rail at Baskerville House (14,000 sq ft). The 22,000 sq ft deal transactions this quarter have made up over 80% of take-up, indicating to the General Dental Council at 1 Colmore Square demonstrates the that a two tier market has established in Glasgow with the sub 10,000 sq growing trend of inward investment from London and the South East. ft not as buoyant in the run up to Brexit.

Bristol Leeds Above average activity in Bristol made Q3 the strongest quarter of the It has been another strong quarter in both the city centre and out-of-town year. This is thanks to a handful of 10 to 30,000 sq ft deals in both the city markets in Leeds, bringing the total after only three quarters in line with centre and out-of-town markets; headlined respectively by 31,200 sq ft to the long term annual average. Activity was headlined by a 60,000 sq ft investment managers Parmenion Capital at Aurora and 30,600 sq ft to deal to HMRC at 3 Wellington Place, where there was a further 13,000 sq ft Edvance, a subsidiary of EDF at Aztec West. deal to accountants Mazars. Of the other key transactions there were two medium sized deals to In the out-of-town market BUPA signed for 23,700 sq ft at Kirkstall Forge HMRC and a 28,000 sq ft letting to co-working sector provider DeskLodge and Wates signed for 10,275 sq ft at Thorpe Park, where there were three at Unum House. This follows the headline letting to Runway East in the further deals totalling 10,000 sq ft. Grade A space is becoming scarce in previous quarter. The out-of-town market was dominated by healthcare the out-of-town market as well as the city centre. providers as IVC took 17,000 sq ft at the Chocolate Factory and the NHS and Bupa agreed 10,000 sq ft deals. Liverpool Overall take-up in Liverpool is in line with the long term average this year, Pre-let 3 Glass Wharf is the only building under construction, which will with the city centre and city fringe making up for quieter activity out-of- help to explain another leap in headline rents to £34 psf. town. The largest deal in Q3 was a 10,000 sq ft deal to Arup at the Plaza along with a handful of deals around 7,000 sq ft. These include shipping Cardiff company Hapag Lloyd at No 1 Tithebarn, Willson Grange at 12 Princes Cardiff take-up figures were given a boost during Q3 with the highest level Dock and Liverpool John Moores University at Exchange Station. of activity in both the city centre and out-of-town markets this year. The stand-out deal was to Cardiff & Vale University Local Health Board who Shortly after the quarter end betting company SportPesa took 18,400 sq took 84,750 sq ft at Woodland House, Maes-y-Coed Road. Otherwise ft at the Royal Liver Building, setting up a strong final quarter. Sentiment there were a handful of smaller deals in the out-of-town market at Cardiff in the market remains positive as there are a number of significant Gate Business Park and Eastern Business Park. requirements all of whom should acquire space within the next 12 months. In the city centre EasyHotel and Howells Solicitors agreed to deals around Manchester 10,000 sq ft and take-up in Cardiff Bay consisted of six transactions, Total activity of over 900,000 sq ft in all Manchester markets is a record amounting to 16,500 sq ft. for a single quarter and includes 460,000 sq ft of take-up in only three deals. Booking.com has taken 225,000 sq ft at Allied London’s Enterprise Edinburgh City development as the new global headquarters for its ground Edinburgh city centre take-up was well above average in Q3, headlined transportation division. This is the largest deal in Manchester since 2010 by two high profile lettings to lawyers Brodies (43,000 sq ft) and Pinsent and means that the city centre is expected to reach over 1.5 million sq ft of Masons (25,300 sq ft) at Capital Square, Edinburgh’s largest speculative activity for the first time this year. office development due for completion in 2020. There were two further exceptional deals in the out-of-town market; The strength of the asset management sector continues in Edinburgh 140,000 sq ft to insurers Royal London and 96,760 sq ft to Trafford Council. as Royal London and Artemis Fund Management have taken key deals. Of the other key deals there were seven transactions in both the city There are also a number of live requirements from co-working companies. centre and out-of-town markets between 10,000 sq ft and 25,000 sq ft. Grade A supply has eroded further despite the completion of 2 Semple Q4 is likely to see further activity from We Work with their Amazon tie up Street, while the recently refurbished 29,000 sq ft Orchard Brae House has at NOMA’s Hannover House (90,000 sq ft) and the acquisition of Tesco also been launched to the market. Pension Fund’s Dalton Place (60,000 sq ft). In addition we expect the long Out-of-town activity was dominated by a 30,000 sq ft deal to Charles running requirements from Money Supermarket (20,000 sq ft) and General River at Clearwater House on Heriot Watt Research Park as well as a Medical Council (20,000 sq ft) to find a home. number of smaller deals in Leith, an area which appears to be benefitting from the lack of supply in the City Centre. Newcastle Newcastle has recorded the highest level of take-up for three years, with strong activity in both the city centre and out-of-town markets. The largest deal was to HM Courts and Tribunal Service which took over 63,000 sq ft at the Civic centre. Newcastle University also agreed a 15,000 sq ft deal at Great North House. In the out-of-town market ten deals transacted over 5,000 sq ft, the largest of which was 20,300 sq ft at Cobalt Business Park to Morrisons Data Services. Market at a glance

Big Nine take-up City Centre Big Nine CC and OOT take-up Ten year average Q1 to Q3 Out-of-Town 2018 Q1 to Q3

Sq ft 12.0 2,500,000

10.0 2,000,000

8.0

1,500,000 6.0

1,000,000 4.0 Annual take-up (million sq ft) 2.0 500,000

0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 Manchester Glasgow Leeds Edinburgh Birmingham Bristol Liverpool Newcastle Cardiff to Q3

Big Nine quarterly take-up Out-of-Town Big Nine take-up by sector - Q3 2018 City Centre

Million Banks– 20% Sq ft Public sector – 15%

4.0 Consumer services – 14% Professional – 12% 3.5 Health & Education – 11% 3.0 Insurance & asset management – 9%

2.5 TMT – 7% Business services – 5% 2.0 Manufacturing – 4%

1.5 Serviced offices – 3%

1.0

0.5

2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Domestic purchases Overseas investor Ten year quarterly average

Grade A office supply / demand ratio (years’ supply) Big Nine headline and net effective rents Net effective rents Headline rents

Years’ Years’ supply - spec under construction supply Years’ supply - current availability £ psf 3.0 35.00 2.5

30.00 2.0

25.00 1.5

20.00 1.0

0.5 15.00

0.0 10.00 Bristol Liverpool Leeds Cardiff Edinburgh Glasgow Newcastle Manchester Birmingham

Q3 2013Q4 2013Q1 2014Q2 2014Q3 2014Q4 2014Q1 2015Q2 2015Q3 2015Q4 2015Q1 2016Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017Q4 2017Q1 2018Q2 2018Q3 2018 INVESTMENT

Positive sentiment tempered by Brexit caution

The total volume of office investment across the Big Nine cities during Q3 amounted to £682m. While this is 30% up on the 10 year quarterly average, levels have fallen back this year compared to peak activity during the second half of last year. Birmingham, Bristol and Manchester all transacted over £140m this quarter and it was a second successive strong quarter for Leeds (£96m). The headline deal in Q3 was the £95m sale of 2 Colmore Square, Birmingham to Railway Pension Trustees. While Manchester continues to lead volumes this year, these other cities have gained share compared to Manchester’s strong activity in 2017. Overseas money continues to show significant interest in the Mark Frampton regions as investors benefit from a relatively weak pound. The share of transactions by overseas investors has picked up Senior Director, Investment over the past two quarters, in line with the long term average of a third of activity. Key buyers this year have been from the Middle East and Europe, whilst volumes from German investors are significantly down on long term averages. The most significant deals in the out-of-town market this year have occurred in Q3. Kuwaiti investor Dimah Capital bought 190,000 sq ft Manchester office campus near the airport for £54m, at a yield of 6.15%. Elsewhere regional overseas investment fund Squarestone has purchased two offices at Eagle Court Business Park near Solihull for £22m. There has been increasing polarisation in the investment market between prime and secondary. Competition remains strong for prime office stock, and yields continue to harden. This is highlighted by Palmer/Cubex’s recently completed Aurora at Finzels Reach, bought by Royal London at a 4.8% yield. The average equivalent yield for the regional office market according to the MSCI index fell 5 basis points during Q2 to 6.86%, which compares to 7.16% a year ago. The yield gap between prime and secondary property has however begun to widen over the last two quarters reflecting a change in attitude towards the increased risk, larger voids and capital expenditure associated with secondary property. With no material ‘distress’ in the market this will likely result in stagnation in this part of the market in the short term. Sentiment does remain positive although it has become increasingly cautious as we approach the Brexit deadline. We expect this caution to be reflected in market volumes over the coming two quarters. Market Data–Q3

TOTAL INVESTMENT VOLUMES IN Q3 2018

Compared to £682 million £562m (previous quarter – Q2 2018) £1,127m (a year ago – Q3 2017) £525m (ten year quarterly average)

BIG NINE INVESTMENT VOLUMES (£ million) PRIME CITY CENTRE YIELDS

Trend for last 2018 Q3 Location Q2 2018 Q3 2018 Peak (2007) 12 months quarterly average 12 months Ten year quarterly average 146 Birmingham 4.75 4.75 4.5 Birmingham 112 99 Bristol 5.00 4.75 5 140 Bristol 104 64 42 Cardiff 5.50 5.50 5 Cardiff 48 27 77 Edinburgh 4.75 4.75 4.75 Edinburgh 104 61 10 Glasgow 5.00 5.00 4.75 Glasgow 77 54 96 Leeds 5.00 4.75 4.75 Leeds 75 41 8 Liverpool 6.00 5.75 5.5 Liverpool 41 17 148 Manchester 222 Manchester 4.75 4.75 4.5 135 15 Newcastle 16 Newcastle 5.75 5.75 5.25 24

TOP FIVE CITY CENTRE DEALS – Q3 2018

Date Property City Purchaser Vendor Price (£m) NIY (%)

Jul-18 2 Colmore Square Birmingham Railways Pension Trustees Nurton Developments 95.0 6.4

Sep-18 Aurora, Finzels Reach Bristol Royal London Asset Man Palmer Capital 62.1 4.8

Sep-18 1 Sovereign Street Leeds Artmax Properties Gatehouse Bank plc 49.6 5.4

Sep-18 Capital Tower, Kingsway Cardiff Trinova Real Estate Topland Group Plc 25.0 7. 5

Aug-18 Torphican Street Edinburgh M&G Real Estate Triuva 22.2 5.97

TOP FIVE OUT OF TOWN DEALS – Q3 2018

Date Property City Purchaser Vendor Price (£m) NIY (%)

Aug-18 Manchester BP Manchester Dimah Capital TPG Real Estate 54.0 6.15

Aug-18 2&3 Eagle Court Solihull Squarestone Growth LLP Aviva Investors 21.6 8.73

Aug-18 7 Lochside View Edinburgh Undisclosed RDI REIT Plc 13.1 5.9

Aug-18 Thorpe Park Leeds Charitable Trust Scarborough Inv Group Ltd 12.1 N/A

Sep-18 Cranmore Boulevard Solihull Wyre Forest Council Eskmuir Properties Ltd 6.87 6.1 Market at a glance

Big Nine investment volumes 2009 to 2018 Big Nine investment volumes by city

£m Newcastle Manchester Liverpool Leeds Glasgow Edinburgh 6,000 Cardiff Bristol Birmingham £m Big Nine % of all office investment

4,000 16% 5,000 3,500 14%

4,000 3,000 12%

2,500 10% 3,000 2,000 8%

2,000 1,500 6%

1,000 4% 1,000 500 2%

0% 2005 2006 2007 2008 UK2009 Property2010 2011 2012Company 2013 2014 2015 Overseas2016 2017 2018 Q1Investor Manchester Birmingham Bristol Edinburgh Glasgow Leeds Newcastle Cardiff Liverpool to Q3 UK Institution Occupier Private Individual

Big Nine investment volumes Big Nine investment volumes by investor type - 2018

Domestic purchases

Overseas investor UK Property Company Overseas Investor Ten year average UK Institution Occupier £m Private Individual UK Property Company Overseas Investor 1,400 UK Institution Occupier Private Individual 1,200

1,000

800

600

400

200

2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Domestic purchases Overseas investor Ten year average

Average Big Nine prime yield Regional office yields vs 10 year gilts 10-year gilt yield Prime regional office yield (25th percentile) % Secondary regional office yield (75th percentile) % 7.00 16

6.50 14

12 6.00 10

5.50 8

6 5.00

4 4.50 2

4.00 0 Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: GVA, Property Data, MSCI Outlook

——We expect total 2018 take-up for the Big Nine to ——Average annual regional office rental growth exceed last year’s record of 10.1 million sq ft, as 8.2 was 1.3% to September 2018. We expect a similar million sq ft has already been recorded to Q3. level of growth over the next two years.

——With this amount of activity concerns over the ——We expect the investment market to become lack of prime stock continue. Increased build cost increasingly cautious as we approach the Brexit deadline inflation is beginning to impact on scheme viability and this is to be reflected in transaction volumes. and the appetite for speculative development. An already low level of standing quality stock means pre-let activity will continue to be the main option for large deals across most cities.

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