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CENTRAL OFFICE MARKET UPDATE Q1 2018

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Real Estate for a changing world CENTRAL LONDON OFFICE MARKET UPDATE CONTACTS Brexit & the economy (which acquired record levels of Investment With further clarity emerging on a Central London office space in 2017) Q1 2018 Central London investment Daniel Bayley Head of City Agency Brexit transition deal, agreement on got off to a muted start with just volumes reached £2.35bn, down on daniel.bayley@realestate. citizens rights and the UK’s financial 150,000 sq ft of take-up recorded in the long term average quarterly figure bnpparibas STATS AT A GLANCE settlement, the result has been a Q1 2018. of £2.95bn. However, we do estimate a +44 (0)20 7338 4444 boost to business confidence. The pick-up in activity in Q2 with £4.30bn latest Deloitte CFO Survey reported Despite high levels of development currently under offer. SImon Knights an increase in optimism and positive completions both last year and this Head of West End Agency simon.knights@realestate. sentiment about the long-term effects year, large volumes of pre-letting A lack of large trophy asset sales, bnpparibas £2.35BN £4.30BN of Brexit. This has translated into an activity has kept the vacancy rate which bolstered 2017 volumes, can +44 (0)20 7318 5041 increase in demand for Central London below the long term average at 5.60%, be attributed to lower levels seen Q1 2018 office investment Currently under offer in volumes Central London offices. Indeed, levels are nearly 50% down from 6.15% in Q4 2017. We do in Q1. This type of stock which is ahead of the same period last year. not foresee any substantial rises in high on overseas buyers shopping Aidan Meynell vacancy this year despite occupiers lists, is in tight supply. Despite this, Head of City Investment aidan.meynell@realestate. The Bank of ’s survey shows continuing to rationalise their office investor demand remains strong with bnpparibas hiring intentions are at above average needs. Second hand tenant space significant capital circling Central +44 (0)20 7318 5018 levels, suggesting buoyant levels of continues to increase in relevance, London. Indeed, the latest INREV demand are set to continue despite accounting for 30% of total supply, up Investor Intentions Survey puts the Simon Glenn slow economic growth. Initial Q1 2018 from 20%, 12 months ago. UK as preferred European destination, Head of West End Investment 3.50% 4.00% [email protected] GDP estimates point to 0.4% growth. with a large proportion of that Prime yields in the West City prime yields saw no +44 (0)20 7318 5045 End remain stable in Q1 movement in Q1 2018 BNP Paribas forecast a steady upward Prime rents are being maintained by targeting London. 2018 trajectory over the next year. low levels of new development and refurbished available space which The MSCI Central London initial yield Kuldeep Gadhary Leasing have fallen by 16% over the quarter. continues to move in from 3.56% Research kuldeep.gadhary@realestate. Take-up figures in Q1 2018 reached The City and West End prime rent in Q4 2017 to 3.49% in March 2018, bnpparibas 3.71m sq ft, up 20% on the long term remains at £67.50/ sq ft and £115.00/ underpinning our view that prime +44 (0)20 7338 4844 % quarterly average and 46% up on the sq ft, respectively. yields remain at 4.00% in the City and 5.56% 30 same period last year. Unlike 2017, 3.50% in the West End. Central London Q1 2018 Tenant space accounts Fiona Don which saw >100,000sq ft deals boost Research vacancy rate, -59bps for 30% of total supply, up [email protected] down on Q4 2017 from 20% in Q1 2017 demand, the first quarter of 2018 has Central London take-up vs vacancy rate

+44 (0)20 7338 4156 seen just three deals within this size 6.00 12% band complete. Deals of <5,000 sq ft Quarterly take-up Vacancy Rate

are up 25% on the previous quarter 5.00 10% suggesting small to medium sized enterprises are reactivating property 4.00 8% requirements after a year of adopting a ‘wait and see’ approach. We expect 3.00 6% 3.71M 22% M sq ft Q1 2018 take-up is 20% Media Tech accounted momentum to continue into Q2 with 2.00 4% ahead of the long term for the largest share around 3m sq ft currently under offer. average quarterly figure of take-up in the first and nearly 50% ahead of quarter of 2018 1.00 2% Q1 2017 The Media Tech sector drove demand

with large lettings to Google and 0.00 0% Mimecast. The Serviced Office sector Q1 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1

3 www.realestate.bnpparibas.com CENTRAL LONDON OFFICE MARKET UPDATE CENTRAL LONDON OFFICE RENTS & VACANCY RATES BY SUBMARKET

STRATFORD MIDTOWN Vacancy rate: 9.51% WEST END NORTHERN FRINGE Vacancy rate: 4.69% Location Q1 2018 Annual % Vacancy rate: 4.52% Vacancy rate: 1.64% 10 yr avg vacancy rate: 6.21% rent growth Stratford £45.00 5.9% 10 yr avg vacancy rate: 5.89% 10 yr avg vacancy rate: 7.78% Location Q1 2018 Annual % rent growth Location Q1 2018 Annual % Location Q1 2018 Annual % Despite continued supply rent growth rent growth Covent Garden £77.50 -3.1% pressures the vacancy rate Stratford & St £115.00 -9.8% King’s Cross £75.00 -1.3% £65.00 -3.7% fell to 5.56%, representing James’s quarterly contraction of 59 Northern Victoria £80.00 -3.6% bps. £85.00 -3.4% Fringe Noho East £82.50 3.1% The majority of submarkets Noho West £85.00 -8.1% CITY £67.50 5.5% experienced falls in vacancy, King’s Cross St Pancras Vacancy rate: 6.16% Stratfordtratfordtrattf with the City market seeing the 10 yr avg vacancy rate: 8.18% largest fall of 103bps to 6.16%. Midtown Location Q1 2018 Annual % rent growth Stratford was the only The Silicon City Fringe City £67.50 -2.2% submarket to record a rise Roundabout City Fringe £65.00 4.0% in rents in Q1 2018, reaching City Tower £77.50 -3.1% key£45.00/ stats sq can ft. Rentsgo here remained West End City static in all other submarkets. Paddington Holborn Docklands Soho Covent Bank Bond Street Garden Tenant supply has risen to 30% of total supply, which Mayfair Canary equates to 3.75m sq ft. 12 Wharf months ago tenantShepherd’s supply London West Londonrepresented 20%.Bush Bridge Buckingham Palace Robust levels of demand The O2 for new development and refurbished stock has kept Park vacancy rates below average. Victoria SOUTHBANK HammersmithOver the next three years Vacancy rate: 2.67% (2018-20) we estimate space 10 yr avg vacancy rate: 5.34% Chiswick Chelsea Nine under construction totals 17m Elms Location Q1 2018 Annual % sq ft, of which 54% is already rent growth committed. Southbank £65.00 3.2% DOCKLANDS Vacancy rate: 9.88% The majority of new 10 yr avg vacancy rate: 7.51% development stock delivered Location Q1 2018 Annual % Power Station in Central London this year rent growth will be in the City. 5.60m sq Canary £42.50 -5.6% ft is due to complete, 60% is Wharf pre-let. Rest of £30.00 -6.3% Docklands

5 www.realestate.bnpparibas.com CENTRAL LONDON OFFICE MARKET UPDATE

THE WEST END (W1, SW1, W2, SW3, SW7, W8, NW1) THE CITY (E1, EC1, EC2, EC3, EC4)

West End take-up levels rose to constrained in Victoria with vacancy supply can be attributed to healthy The City saw strong levels of take-up in Q1 2018 reaching 1.76m sq ft, the City take-up by business sector 0.98m sq ft in Q1 2018, a 50% rise on dropping to 3.83% from 5.08% in Q4 demand for existing stock; as well highest level of quarterly take-up since Q4 2014. Boosting levels were five

Services Sector Association 2% Q1 2017 and a 22% rise on the 10- 2017. as a reduction in schemes beginning lettings under construction including SMBC acquiring 161,151 sq ft at 100 Serviced Office 8% 1% Banking & Finance year average. No deals over 100,000 construction. Indeed, from Q1 2017 Street, EC2 and Sidley Austin taking 135,545 sq ft at the Can of Retailer & Leisure 27% 4%

sq ft were recorded this quarter and The Banking & Finance and Media to Q1 2018 under construction Ham, 70 St Mary Axe, EC3. Public Sector 2%

buoyant levels of demand were the Tech sector’s made up the majority supply in the West End fell 94%, Property & Construction 1% result of smaller deals. Deals in the of demand during the quarter, buoyed by a number of pre-lets, The Banking & Finance sector demonstrated their commitment to the City

Professional services <5,000 sq ft size bracket made up the accounting for 15% and 17%, further constraining supply. The West in Q1 and dominated demand levels accounting for 27% of take-up. The 22% Insurance 3% majority of take-up with 62% of deals respectively. Interestingly, the End vacancy rate (including under Media Tech sector, which was joint top with Banking & Finance in 2017, Media Tech 17% recorded in the band. Serviced Office sector that accounted construction space due to complete made up 17% of take-up. Other/Undisclosed 13% for 4% of take-up in 2017, took a 14% within six months) was 4.52% in Q1 On a submarket basis, the majority share in Q1 2018. This demonstrates 2018, significantly below the long Noticeably absent were Serviced offices, who accounted for 15% of last saw take-up rise. Q1 2018 levels in the increased importance of Serviced term average of 5.89%. year’s take-up, in Q1 that diminished to just a 1% share. With the likes High levels of pre- letting activity has Mayfair and St James’s totalled 0.26m Offices as a key occupier in the market. of WeWork still very much in expansion mode, we expect to see more resulted in vacancy rate sq ft, an increase on Q1 2017 of 40% The continuing importance of Media West End prime rents remained at activity from this sector over the coming 12 months. falls and 20% on the 10-year average. In Tech and Banking & Finance sectors £115.00 per sq ft, a -9.8% annual fall. Victoria, take-up reached 0.40m sq shows the resilience of the West We expect rental growth to return 2018 is expected to see 5.60m sq ft of development completions in the 6.16% ft, up 113% on Q1 2017 and 151% End market in the face of economic by 2020. Rental growth has become City, the highest on record. This may signal the signs of an oversupply Q1 2018 vacancy rate on the 10-year average. High levels headwinds. increasingly polarised between in the pipeline however on closer inspection 60% is already committed of take-up can largely be attributed submarkets, streets and buildings, so leaving only 2.20m sq ft available. As a result, the vacancy rate has fallen to final deals at Nova North, Nova West End overall supply fell from rental growth in certain submarkets to 6.16%, its first substantial fall in nine quarters. City under construction development South and Verde of which only 10,700 3.25m sq ft in Q1 2017 to 3.08m sq may return earlier than in others. pipeline sq ft now remains. As take-up has ft in Q1 2018, a significant fall on the The majority of new stock being delivered this year is in the City Core; Completed Future supply Pre-let Long-term avg risen considerably, supply is now 4m sq ft 10-year average. The fall in Investment volumes in the West End 100 , and Can of Ham will dramatically change 6.00

market totalled £0.39bn in Q1 2018, the skyline of the City. The City fringe accounts for just a quarter of 5.00

falling 431% on Q1 2017 and 160% on completions contributing to a current undersupply in this submarket. As a 4.00

the 10-year average and West End result, the value proposition in comparison to the City core has diminished 3.00 West End take-up vs vacancy rate M sq ft with rents in the two submarkets both standing in the high to mid £60’s. The Banking and Finance 2.00 1.40 12% and Media Tech sectors made up the majority of 1.00 Quarterly take-up Vacancy Rate Following the trend seen across Central London, City Investment volumes take-up. 1.20 0.00 10%

were down on the long term average reaching £1.13bn, representing 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 a 26% fall. Encouragingly however, £3.30bn is under offer which will 1.00 8% 15 & 17% contribute to stronger volumes in Q2. Overseas investor appetite for City Banking & Finance and Media Tech 0.80 sector take-up shares. assets shows no signs of abating with non-domestic capital making up 6% M sq ft three quarters of Q1’s total. 0.60

4% Q1 2018 saw vacancy 0.40 drop on previous Despite continued Brexit worries, the ’s standing as a top London remains top quarters and the global financial centre 2% global financial centre remains. Indeed, the capital retained its number in 2018 0.20 10-year average of 5.89%. one spot in the latest Z/Yen Global Financial Centres report. Furthermore, Z/Yen Global Financial Centres Index, 0.00 0% in a survey of senior financial professionals by Duff & Phelps, London stole January 2018 4.52% New York’s crown as world’s top financial centre. Both are major votes Q12010 Q22010 Q32010 Q42010 Q12011 Q22011 Q32011 Q42011 Q12012 Q22012 Q32012 Q42012 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q1 2018 West End vacancy rate. of confidence in the City of London’s long term future as a key global financial hub.

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MIDTOWN (WC1, WC2) Q1 2018 DEALS TABLES

Midtown take-up reached 0.26m sq saw supply drop off with new existing respectively. On an annual basis, Key leasing deals ft in Q1 2018, a 35% decline on Q1 supply dropping most dramatically rents have fallen 3-4% in both Address (Floor) Sq Ft Approx rent Term (Break) Tenant Landlord 2017 and a 12% decline on the 10- reflecting strong interest for Grade A Midtown locations. (per sq ft) year average. The largest deal of Midtown offices, during Q1. the quarter was to Regus at 60 St Midtown investment volumes totalled 100 Liverpool Street, EC2 (3, 4, Part 5) 161,151 £63.00 20 Years SMBC British Land / GIC Martins Lane where the Serviced Under construction supply dropped £0.59bn in Q1 2018, an 88% rise on Can of Ham, 70 St Mary Axe, EC3 (12-21) 135,545 Conf 15 Years Sidley Austin TH Real Estate Office operator took 31,820 sq ft. As 10% from Q4 to Q1 reflecting pre-lets the 10-year average. a result the sector took the largest at the Post Building where McKinsey The vacancy rate has R7 Handyside Street, N1 (Bldg) 123,189 £70.00 12.5 Years Google New Look (Assignor) share of take-up, accounting for took a further 26,540 sq ft on their fallen from 8.90% 12 months ago to 4.69% 1 Avenue, EC2 (3-4) 78,628 £56.50 10 Years Mimecast British Land / GIC 23%, up from the 2017 level of 13%. previous option; as well as a muted

Professional services also took up a development pipeline. Indeed, there 3 Minster Court, EC3 (UG, G, 1) 70,591 £57.50 20 Years Charles Taylor Ivanhoe / Greycoat / FREO large proportion of take-up during are currently three developments the quarter at 17%, in line with the (The Post Building, 29 Floral Street 4.69% Nova North, SW1 (3-5) 65,909 Conf 12 Years Atkins & Co Landsec market’s historic association. and 44 Eagle Street) projected to Q1 2018 vacancy rate Cooper & , SE1 (Bldg) 78,584 £65.00 (approx) 15 Years CBRE Facilities Management HB Reavis complete by the end of Q3 2018, of

Supply levels in the Midtown market which 39% is pre-let. One Angel Court, EC2 (Part 3, 4, 23, 24) 59,298 £64.00 / £84.50 10 Years Prudential Stanhope/Mitsui Fudosan totalled 0.96m sq ft and were down on Serviced Offices account for 23% of take-up, up Q1 2017 and the 10-year average by Rents have remained stable in Covent from 13% in 2017 10 Bishops Square, E1 (Part 4) 58,708 Conf. 8.5 Years Improbable Worlds Allen & Overy (Sublessor) 83% and 42% respectively. Every grade Garden and Holborn submarkets Aurum, 30 Lombard Street, EC3 (Bldg) 56,350 £65.00 overall 15 Years St James’s Place WM McKay Securities at £77.50 and £65.00 per sq ft 23% Q1 2018 Serviced Office take-up share Key investment deals SOUTHBANK (SE1) Address Lot Size Capital Value Yield Purchaser Vendor SE1 take-up totalled 0.22m sq ft Supply levels in Southbank were Prime rents stand at £65.00 per sq (per sq ft) in Q1 2018, a 106% rise on Q4 2017 up marginally on Q4 2017 levels ft, in line with Q4 2017 levels but an and in line with the 10-year average. at 0.52m sq ft, however, supply has annual increase of 3.2%, reflecting Riverbank House, Swan Lane, EC4 £355m £1,109 4.39% Oxygen Evans Randall A large proportion of take-up in the followed a steady declining trend good demand within a supply Cannon Bridge House, 25 Dowgate Hill, EC4 £248m £865 5.18% Mirae / NH Securities Blackstone market was attributed to the deal at with levels currently 99% below constrained submarket. Cooper & Southwark to CBRE Facilities the 10-year average. This decline is 90 , WC1 £200m £1,088 4.59% Lab Tech Investments Permodalan Nasional Berhad Q1 2018 saw vacancy Management who took 78,584 sq ft. primarily due to strong take-up for drop on previous quarters and the 10- First Avenue House, High Holborn, WC1 £154m £1,372 3.14% Japanese Investor Topland Group Plc Grade A stock, as well as a reduction year average. The Property sector made up the in under construction availability 55 Mark Lane, EC3 £127.7m £790 5.19% Hao Tian Development Reignwood Group China majority of demand making up 34%. as fewer schemes enter the market. Centro Buildings, NW1 £109m £831 4.20% Workspace Group Plc Columbia Threadneedle Following closely behind was the Indeed, One and Two Southbank 2.67% Q1 2018 Southbank Vacancy Rate. Media Tech sector which made up Place are currently the only two 5 Chancery Lane, WC2 £76m £896 4.93% Lee Kim Tah Private Swiss 32%. The high proportion of Media under construction schemes in the Tech companies within the Southbank submarket over 100,000 sq ft and Property & Construction 60 Gresham Street, EC2 £70.75m £1,161 4.07% Bank of China Aberdeen Standard took the largest share market demonstrates the market’s both are fully pre-let. The vacancy of take-up in the quarter. 15-19 Way, WC2 £70m c.£850 n/a Lab Tech Investments BUPA resilience and its ability to attract rate currently stands at 2.67%, down smaller start-ups to a modern and on the 10-year average of 5.34% and vibrant setting. the Q1 2017 level of 3.15%. 34% Percentage share of Property & Construction in Southbank take-up.

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