Plantation Place London Ec3 4Th February 2009 on Behalf
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PLANTATION PLACE LONDON EC3 4TH FEBRUARY 2009 ON BEHALF OF N M ROTHSCHILD & SONS LIMITED CB Richard Ellis Indirect Investment Services Limited Kingsley House Wimpole Street London W1G 0RE Switchboard 020 7182 2000 Fax No 020 7499 9624 Direct Line 020 7182 2740 [email protected] N M Rothschild & Sons Limited Our Ref Your Ref New Court St Swithin's Lane 4th February 2009 London EC4P 4DU Attn: Dan Matthews Dear Sirs PLANTATION PLACE, LONDON EC3 In accordance with your instruction of 27th January (Appendix I) we have pleasure in providing our investment views regarding the current market value and marketability of Plantation Place, London EC3 (‘The Property’). This advice is subject to our standard terms and conditions as detailed in Appendix II and is solely for the benefit of those parties detailed in your instruction letter. As such we have provided summaries of the current market conditions in the City’s investment, occupational and development markets and thought has been given to future market forecasts. Consideration has been given to the asset profile and the future performance that this property should provide. Strategic options for a future disposal are discussed as are the estimated net proceeds that such a disposal could generate. 1. City of London Occupational Market a. Current Conditions By the end of 2007 the City of London office market had enjoyed four years of rental growth and vacancy rates had reached their lowest point since 2002. This, however, changed dramatically through 2008, City Office take up fell from 5.1m sq ft in 2007 to 3.6m sq ft in 2008 with only 600,000 sq ft of lettings in Q4 2008. This compares to a 10-year average of 4.9m sq ft annually. A marked illustration of the occupational market has been the lack of larger lettings, with the largest deal in Q4 being only 30,200 sq ft. Rental growth over the last three years in the City market has been substantial. Prime rents grew 19.60% throughout 2006 and 11.50% throughout 2007, but the lack of demand and an increase in supply of space resulted in a year on year prime rental growth of minus 17.69% for 2008. City rental levels thus peaked in mid 2007, with the top headline rental values being in the region of £65.00 per sq ft on new Grade A properties. This is at a similar level to the early 2001 peak, but still less than its peak of the late 1980’s where prime Grade A rents peaked at £72 per sq ft. On any inflation adjusted measurement, rental growth measured on a peak-to- peak basis has been negative for approaching 30 years. Registered in England No 02535405 Registered office St. Martin’s Court 10 Paternoster Row London EC4M 7HP CB Richard Ellis Indirect Investment Services Limited is authorised and regulated by the Financial Services Authority CB Richard Ellis Indirect Investment Services Limited, a part of CB Richard Ellis Limited. - 2 - City Office availability increased consistently throughout 2008. From a low point of approximately 6% in December 2007 availability rose to 8% by the end of 2008. City Office Availability Q4 2008 Secondhand New Completed New U/C 14.0 12.0 10.0 8.0 8.0 7.8 6.0 million sq ft million 4.0 2.0 0.0 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 Source: CB Richard Ellis CB Richard Ellis | Page 26 Prime City rental values1 currently stand at £53.50 per sq ft having fallen from their peak at the start of 2008 of £65.00 per sq ft. However, evidence is apparent that rents are now falling. Coupled with falling headline rents, the occupational market has seen an increase in overall incentives or other forms of inducement offered to prospective tenants. As such, the current total rent free period (or other equivalent incentive) granted on a new 10-year lease is now in the region of 24-months, whilst a 15-year lease would have the benefit of up to 36-months rent free. For reference in 2007, rent free periods (or other incentives) were 12-months on a 10-year term and 24-months on a 15-year letting. As a result, net effective rental values in the city have fallen considerably during the last 6 months. These incentives are continuing to increase as competition between landlords increases. There is now evidence that whilst headline rents for smaller units remain relatively stable, lettings for large units say in excess of 100,000 sq ft are being negotiated at heavy discounts. 1 Units of 15,000 sq ft of Grade A accommodation let for a term of 15 years. - 3 - City Top Prime Rents vs Rent Free Periods Q4 2008 Rent Free Periods Rent (RHS) Net Rent (RHS) 35 70 65 30 60 25 55 Rents £ psf Rents 20 50 45 15 40 10 35 Rent Free Period Months Period Free Rent 30 5 25 0 20 1994 Q2 1994 Q4 1995 Q2 1995 Q4 1996 Q2 1996 Q4 1997 Q2 1997 Q4 1998 Q2 1998 Q4 1999 Q2 1999 Q4 2000 Q2 2000 Q4 2001 Q2 2001 Q4 2002 Q2 2002 Q4 2003 Q2 2003 Q4 2004 Q2 2004 Q4 2005 Q2 2005 Q4 2006 Q2 2006 Q4 2007 Q2 2007 Q4 2008 Q2 2008 Q4 Note: The net effective rent is calculated using a DCF over 10 years @7% and assumes a 3 month fitting out period Source: CB Richard Ellis CB Richard Ellis | Page 27 b. City Development Pipeline Development completions are set to peak in 2008, with 12 of the 15 largest Central London schemes being located in the City market. However a number of large schemes are also currently under construction and will be delivered in 2009, such as Watermark Place, Ropemaker Place and The Walbrook, all of which will each provide over 400,000 sq ft of new Grade A accommodation. The total level of supply of new Grade A office space in 2008 was 4.0 million sq ft, with 2.4 million sq ft of space in 2009 and 2.0 million sq ft of space in 2010 being delivered. There are very few schemes which are being proposed for 2011 onwards at this time with only 1.0 million sq ft estimated to be completed during 2011 of which the Heron Tower accounts for approximately half of the 2011 total supply. Not surprisingly, a number of high profile UK developers and property companies have put on hold plans for development activity in the City market which could lead to a shortage of newly completed stock in the City after 2010. Several high profile, proposed schemes such as Arab Investment’s ‘The Pinnacle’, British Land’s The Leadenhall Building and Land Securities’ 20 Fenchurch Street have all been put on hold whilst the date of completion for schemes such as Metrovecesa’s Walbrook Square is currently unconfirmed. The graph below provides a guide of developments currently forecast to be completed up to 2011, and highlights City development completions back to 1985. This graph highlights the peak of development completions during previous cycles which includes in excess of 5.8 million sq ft delivered in 1991 and 3.3 million sq ft delivered in 2003. - 4 - City Developments 1985 - 2011 Completed U/C Let/Under Offer U/C Available Proposed Let/Under Offer Proposed Available 7.0 6.0 5.0 4.0 3.0 million sq ft 2.0 1.0 0.0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: CB Richard Ellis, December, 15/01/2009 CB Richard Ellis | Page 28 c. Market Rental Forecasts The implications of recent events in the banking and finance sector will undoubtedly have a major impact on the City occupational market. It is expected that the levels of supply of second hand or Grade B space could increase dramatically either as a result of business failure or consolidation of banks and other financial institutions. For example, following the takeover of both HBOS and Merrill Lynch by Lloyds TSB and Bank of America respectively, it is expected that some of their existing office accommodation will be surplus to requirements and that they may seek to co-locate in the medium term. This could increase the level of availability going forward, having a further short term negative affect on rental levels in the City. In an economic scenario dominated by progressive de-leveraging in credit and financial markets, business activity in Central London is likely to be severely impacted. The City of London, as one of the key global financial centres, with a high degree of specialisation in finance and business services is highly exposed to this current trend. On the occupational demand side, the most likely effect will come through weaker take up throughout 2009 and potentially into 2010. In the short term, the increased market uncertainty and weaker economic growth will inevitably produce greater caution and reluctance to make significant leasing commitments. Recent announcements of job losses at a number of major investment and clearing banks combined with general consolidation across the Financial Services sector have lead to forecasts of approximately 63,000 job losses in the City spread over 2008 to 2010.