Savills World Research UK Commercial

Review and Outlook Central office February 2013

GRAPH 1 GRAPH 2 Central London office take-up picked up The vacancy rate has risen to 6.7% due to slightly in 2012 development and refurbishment activity

18% 14 16% 12 14% 10 12%

8 10% 8% 6 6% sq ft (million) 4 4% 2 2% 0 0% 2011 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Graph source: Savills Graph source: Savills

SUMMARY

■ Take-up in 2012 was broadly the ■ Prime rents rose by 4-5% in central same as the 2011 total. The City of London last year. We are expecting London saw take-up rise to average slower but steady rental growth over levels, while the West End and the next five years Docklands had a below average year. ■ Investment in central London offices ■ The overall central London vacancy rose to over £15bn in 2012, with more rate rose due to a slight pick-up in than 65% of the purchases being by development completions, and a more non-domestic investors. We expect robust rise in refurbishment activity. this trend to continue in 2013, albeit Despite this there are pockets of with some non-domestic investors undersupply in many size bands and becoming more adventurous on locations, and these are where rents location or security of income. “We expect to see a steady are beginning to rise. rise in leasing activity in the more affordable fringes.” Mat Oakley, Savills Research

savills.co.uk/research 01 Spotlight | Central London Offices

ft of which is pre-let to Debenhams) 15 Sackville Street, W1. West End and 100,000 sq ft at Development Securities/Scottish Widows 10 Outlook leasing Hammersmith Grove, W6. What can we expect from 2013? The market fundamentals of the West Take-up in Q4 12 reached 740,115 sq Grade A availability rose significantly in End market look healthy. The overall ft, up on both Q2 and Q3 12. Despite 2012, it stands at 68%, up from 54% vacancy rate remains low (one of the this end of year uptick in activity 2012 in December 11. This rise is the result lowest in Western Europe) and Google total take-up reached 3.1m sq ft, down of 1.5m sq ft of development and have provided an early boost to 2013 on the long term average of 3.3m sq refurbishment completions entering the take-up figures and more importantly, ft. More positively however, this was a supply figures over the course of 2012. occupier sentiment by committing better than expected outcome. to nearly 1m sq ft at King's Cross. Rents Furthermore, several deals in excess of Pre-letting activity drove take-up levels What did this mean for rental growth £100 per sq ft have completed or are last year, on average six pre-lets per last year? Shortages of Grade A stock under offer. annum are seen in the West End, in <10,000 sq ft size bands in the whereas 2012 saw 12. The largest West End's core continued to drive Rent frees have seen no movement pre-let was at 1a Page Street, SW1 rental growth. Over a 24 month period over the past 12 months and stand at where Burberry took 127,000 sq ft. the number of this type of property 8-9 months on a 5-year lease, up on available has decreased by 50%. This the average of 6 months. Much has been made about the TMT supported rental growth of 5% in 2012 boom and the rise in demand from this with the top rent reaching £107.50 sector. Indeed, the TMT sector had per sq ft in Q4 12 where Gulfstream the largest share of take-up in 2012, Management took circa 5,500 sq ft at accounting for 24%, marginally up on GRAPH 3 the long-term average of 21%. West End take-up The sector to witness the biggest rise in share of take-up was the Retail & Leisure sector accounting for 18%, up on the average of 7%. 2012 witnessed a direct correlation between retailer expansion, particularly from luxury brands and office demand from high end brands like Burberry, Jimmy Choo and Michael Kors, who accounted for 52% of overall Retail & Leisure take-up. This will continue to be the case in 2013 as international retailers are keen to set up London headquarters as a spring board to European markets and beyond.

A combination of below average Graph source: Savills levels of take-up and an increase in GRAPH 4 development activity levels led to a rise in the vacancy rate. As at end West End rental levels December 12 the vacancy rate stood at 4.2% or 5.1m sq ft of supply, up from 4% or 4.8m sq ft in December 11.

Despite this rise, the West End is still firmly an under supplied market with just 1.5 years of supply. A return to average levels of development activity over the next three years (2013-15) will offer some reprieve, we estimate 1.7m sq ft of completions per annum over this period.

Significant developments to complete is 2013 include; 260,000 sq ft at Land Securities 62 Buckingham Gate, SW1, 310,000 sq ft at British Land's 10 Brock Street, NW1 (175,000 sq Graph source: Savills

02 February 2013

completions and lettings. Six London West End REIT’s alone accounted for over Outlook £500m across 14 deals; with the same The West End investment market in investment group accounting for £340m and 10 2013 will at worst be a rather boring deals in 2011. "more of the same" with the market The West End investment market had characterised by improving values, its third consecutive year of turnover Another factor behind the high level strong competition and limited quality of more than £5.5bn in 2012 (£6.1bn). of turnover last year was a rise in the opportunities. There seems little Indeed, last year was one of only four number of larger deals towards the scope for questioning this hypothesis years ever that investment turnover end of the year, with six transactions especially when one reviews the West was over £6bn. of £100m or above completing in the End’s 2012 performance in the context final quarter. This brought the total to of the wider economic uncertainty Once again, the main driver behind 19 deals over £100m for the entire and then reflects on the positive end the high level of turnover was non- year and accounted for nearly £3bn of outcome. domestic investor interest in the turnover. Of these, only two UK parties market, with 67% of the purchases by (British Land and Almacantar), were With Euro-worries easing and the value being by international investors. domestic buyers. leasing market seemingly as robust as The most active non-domestic ever it’s arguable there is even more investors in the West End last year Yields upside risk considering rents have were from Europe, who accounted for Our monthly index of prime West End to date failed to take off, other than £1.55bn of purchases, though they office yields has remained stable at across the retail sector. were also active sellers, with Deka in 3.75% throughout 2011 and 2012. particular disposing of several West However, the final few months of last In terms of buyers non-domestic End assets in 2012. year saw a change in the temperature, investors will continue to account for and as a result of this we have the majority of purchases, particularly UK investors were more active in the hardened our typical prime yield to at the lower yielding end of the market. West End than in the City last year, 3.50%. However scarcity, and an improvement acquiring 33% of the investments in wider business confidence and sold reflecting £2bn. Indeed, while This is the lowest level that the prime rents, will encourage some of move the UK institutions were net sellers West End yield has been since 2006, up the risk curve and compromise on in 2012, the final quarter of the year and is a reflection of the strength location or income security. saw a strong pick-up in requirements of demand in this market for small, from the domestic funds - perhaps a prime assets that offer both wealth If the pick up in requirements from the recognition that the West End might be preservation and upward rental growth UK institutions that we saw at the end one of the few markets where they can prospects. of last year is sustained, then they too expect to give their investors above could be net acquirers of West End average returns? Away from the prime and secure end offices this year for the first time since of the market, there has also been a 2010. Further, even with UK property Another group of domestic investors pick-up in investor activity, and this is companies likely to be less active that were fairly active in 2012 was reflected in the steady hardening of the overall but still hunting opportunistic the property companies. In general, IPD average initial yield which ended deals, then the market could be even most of these acquisitions were to 2012 at 4.25%; a 37bp improvement more crowded than before! refill their longer term development on the year. pipelines following a spate of recent GRAPH 5 GRAPH 6 West End investment volume West End office yields

9 8 7 6 5 4 % 3 Average initial yield 2 Average equivalent yield 1 Prime yield 0 11 11 02 03 04 05 06 07 08 09 10 12 03 04 05 06 07 08 09 10 12 ------Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Graph source: Savills Graph source: Savills, Investment Property Databank

savills.co.uk/research 03 Spotlight | Central London Offices

meant the TMT sector also took a £50 per sq ft, and just two instances of City leasing higher than usual share (20%), and it Banks doing the same. was only increased activity from these Take-up returned to the ten year sectors that helped to compensate for Although there was no growth in average during 2012, the 4.63m lack of Banking activity during 2012. average Grade A rents during 2012, sq ft total being 18% up on 2011. top and prime rents were enhanced However, a number of factors indicate Thirdly; many high rents and large deals by pre-completion lettings and deals that although performance improved, were induced by an increase in tenant for tower space in the City core. In occupiers continue to act cautiously. incentives; whereas in a very good fact, with the exception the Payden year like 2007 the average of all rent & Rygel at 1 Bartholomew Lane, the Firstly, there was an increased free periods at Grade A premises lies top ten rents (none of which fall short preference for small units. Typically six at nine months, the average for 2012 of £62 per sq ft) were negotiated for or seven transactions for over 100,000 was 16 months (a figure which is also tower space in either EC2 or EC3. sq ft can be expected to complete in up on 2011’s 14 months), and an even As a result, the top rent achieved the City annually, representing around higher average rent of 25 months could during 2012 was 4.4% above that 1m sq ft. But during 2012 only three be expected at prime office space. This achieved during 2011 and the average such deals completed; the cumulative increase in tenant friendly terms does prime rent was £54.30 per sq ft, also total of these being 568,000 sq ft. In not signal an indubitable recovery. representing growth (of 2.8%) on the contrast, space taken at units no more previous year. than 15,000 sq ft was 27% above Lastly, the effects of increased take- trend, and the average amount of up have been limited by a steady Outlook space acquired in a single transaction stream of availability. The periodic Searches that translated into deals was just 13,100 sq ft. So, although entry into supply figures of refurbished during 2012 are yet to be replenished the overall number of deals done in offices (such as 33 Holborn and 10 by new demand. As a result active the City was high, more often than not Aldermanbury) along with continued demand fell by 23% in Q4 2012 to units transacted were small. availability at large units (such as the 2.5m sq ft. However, at the time Shard) mean the vacancy rate went of writing, there is evidence that a Secondly, letting activity resulted up successively during the first three number of large requirements are from shifts in the pattern of sectoral quarters of 2012, and supply currently starting to appear, and it is hoped take-up rather than real recovery in the stands at around 8m sq ft. It therefore that some impending sub-40,000 sq sectors most susceptible to economic clear that, despite the City's relatively ft transactions at landmark buildings challenges. Whereas Banks leased a restrained development pipeline will bolster occupier confidence during predictably low 2% an increased share for 2012 (the 2.05m sq ft of new 2013. was taken by the Insurance & Financial completions fell 33% below long term Services sector, those companies average levels), even large deals were Further development activity (such taking a third more space than usual only capable of making a short term as at the Place, Alban Gate and Sixty (1.5m sq ft). Notably robust to cyclical dent in supply figures. London) mean 2013's completions changes in the economy were insurers, will be 11% above average. This such companies being responsible for Rents continued supply of Grade A offices, multi-floor acquisitions at the "Walkie- The highest rents in 2012 were paid along with relatively subdued demand, Talkie", the and 70 by the Insurance & Financial Services means any rental growth in the first Mark Lane. Large acquisitions such sector (they agreed 64% of all rents half of 2013 will be muted. As a result, as those by Skype (89,000 sq ft at 2 over £50 per sq ft). However, there were prime rents are expected to rise by just Waterhouse Square) and Pushbutton only two recorded instances of TMT 0.8% and top rents are likely to remain (48,000 sq ft at Glasshouse Yard) sector companies negotiating rents over flat. GRAPH 7 GRAPH 8 City of London office rents City of London take-up

Graph source: Savills Research Graph source: Savills Research

04 February 2013

City The UK fund and property companies Outlook were more focused on fringe and The City investment market in 2012 investment value-add opportunities, and this is clearly demonstrated that investor probably the area of the market that demand is currently less motivated The second half of 2012 saw the City has seen a biggest rise in investor by rental growth prospects than by of London investment market continue interest over the last six months. income protection. to attract strong interest, particularly from international investors. This The availability of both prime and Given that our outlook for the City translated into £4.3bn of transactions, value-add investments remained tight leasing market in 2013 is broadly flat which though it was lower than the first throughout the year, and tightened in terms of take-up, supply and rents, half of the year drove the market to a further in the final quarter. This limited we don't expect many investors to be significantly above average year with a stock supported pricing, and may well attracted to the City by its strong rental total of £8.9bn of turnover. be a factor that will contribute to a growth prospects. However, continued lower investment volume in 2013. turbulence in the Eurozone and Middle As Graph 9 shows, this made 2012 the East, as well as rapid growth in Asia- third most active year in our history. Yields Pacific will support similarly strong Given the relative weakness of the The end of 2012 saw the first change demand for office investments across leasing market, as well as the overall in our City prime yield index for more London in 2013. pessimism about the banking and than 12 months. The combination of financial services sectors throughout strong demand and restrained supply Once again we expect that bulk of the western world, this is a pretty has led to several new benchmark purchases will be by non-domestic surprising out turn. deals being transacted in the final investors, with a heavy bias towards quarter of the year, and as a result of prime. However, this type of asset A number of factors combined to this we have moved our prime yield will remain in short supply. We deliver this strong level of activity. The benchmark down to 4.75% do expect to see a steady stream first, and by far the most important, of sales by the banks and special was the continued belief amongst The most notable transaction of servicers, particularly as some of the international investors that the UK and the final quarter was the sale of 1 CMBS deals start to mature. But, it is London property markets represent Threadneedle Street by SEB to a questionable whether these sources a safe-haven. Only 24% of the client of Deutsche Bank for £63m. will release the type of stock that purchases of office investments in This represents a net initial yield of the typical, risk-averse international the City last year were by domestic 4.5%, one of the keenest yields on a investor is looking for. investors, with the Asia-Pacific region significant deal in the City since the alone accounting for 25.7%. sale of 30 St Mary's Axe in early 2007. Falling yields and the inability to find 'dry' deals may well push some non- The second reason why trading The City has also seen a recent flurry domestic investors towards fringe volumes were so strong last year was of owner-occupation deals, with ITV locations, or value-add assets, and the average size of deal, which rose and Southwark Council both buying these may well be the next segments to £57m. Non-domestic investors their own headquarters buildings of the market to see a slight hardening were generally more active at larger on the South Bank. We believe that in yields. lot sizes, with the average deal size this is primarily a function of the for non-european investors being in comparatively low cost of money at excess of £100m. present. GRAPH 9 GRAPH 10 City of London investment volume City office yields

Q1 Q2 Q3 Q4 10 9 12,000 8 10,000 7 6 8,000 5

6,000 % 4

£ (million) 3 Average initial yield 4,000 2 Average equivalent yield Prime yield 2,000 1 0 0 11 11 02 03 04 05 06 07 08 09 10 12 03 04 05 06 07 08 09 10 12 ------Jun 2011 Jun Jun Jun Jun Jun Jun Jun Jun Jun 1995 1997 1999 2001 2003 2005 2007 2009 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

Graph source: Savills Graph source: Savills, Investment Property Databank

savills.co.uk/research 05 Spotlight | Central London Offices

new 1.9m sq ft HQ on Canary Riverside Grade A rents range from £28 per sq Docklands South and remains ft at refurbished buildings in fringe the sole building under construction (pc areas to £43 per sq ft at landmark Levels of take-up in the Docklands have mid 2014). skyscrapers situated within the Canary been decreasing rapidly since the close Wharf Estate. And there is currently a of 2010 and the 351,000 sq ft reached Although 48% of space at 25 Churchill widening gap between rents achieved during 2012 was well down on the 1m sq Place has been pre-let to EMA and in the City and rents achieved in the ft average, as well as being 50% down various companies, including Deutsche Docklands; at 39% the gap between on 2011. Bank, have shown an expression of top rents is the widest we have ever interest in the remaining 525,000 sq recorded and the gap between prime The largest new letting was a 165,000 ft it is positive that the development rents is currently around 24%. sq ft acquisition by the Financial pipeline remains controlled. This is Ombudsman Service at the Exchange especially pertinent when considering Although a restrained development Tower. But, aside from the Economist’s the adverse effect oversupply will have pipeline and low rents capable of acquisition of 45,000 sq ft at 10 Cabot on rents; top rents have already fallen attracting budget-conscious tenants Square, all remaining transactions were by 7.5% in the last twelve months, and may go some way to controlling for no more than 30,000 sq ft, the average prime rents for tower floors - which are vacancy rates, the biggest challenge size of units leased in the sub-30,000 sq currently between £41.50 and £42.50 for this market will continue to be on ft size bracket being 8,100 sq ft. per sq ft - are on the more modest side the tenant supply side. Take-up at of the £40.00-£45.00 per sq ft range either current or annual average rates It is positive that the Bank of New York described in the latter half of 2011. will take time to absorb even existing Mellon decided this year to remain at their supply, and this leaves the prospects 152,000 sq ft 1 offices for short term rental growth limited. and cost conscious occupiers such as GRAPH 11 Renaissance Capital and the Ministry of Justice are focussing their requirements Docklands availability on . It is clear, however, that tenants will find feasible alternatives in 4.0 affordable City Fringe locations. This is evidenced by at least one large occupier - 3.5 advertising and marketing agency Ogilvy 3.0 & Mather – who is planning to exit Canary 2.5 Wharf upon expiry of an existing lease. 2.0 The release of space by Clifford Chance, 1.5 LOCOG, MF Global and Citigroup means sq ft (million) the amount of vacant offices on the 1.0 market in the Docklands has risen from 0.5 1.2m sq ft to 1.7m sq ft over the last 12 0.0 months. Tenant controlled space now accounts for 57% of total supply on 2011 1995 1997 1999 2001 2003 2005 2007 2009 the Estate itself, and the overall vacancy rate in the Docklands has increased from 9.1% to 12.2%. Graph source: Savills GRAPH 12 The amount of space available at 1 Docklands take-up Canada Square and 25 Canada Square has risen by over 20% to 250,000 sq ft and 230,000 sq ft respectively since mid-2012, and 205,000 sq ft remains on 2.5 the market at 30 North Colonnade. It is estimated that no less than 80% of space 2.0 available is of Grade A quality. ) Despite planning permission being in 1.5 place for 2.39m sq ft offices at North Quay, 4.9m sq ft at , 1.28m 1.0

sq ft at Heron Quays West and consent sq ft (million for a 37-storey tower at the adjacent 0.5 Newfoundland site, there are yet to be any advances on JP Morgan’s instruction to proceed with final construction of their 0.0 2011 1995 1997 1999 2001 2003 2005 2007 2009

Graph source: Savills

06 February 2013

should be making landlords feel more on the domestic and global economies Outlook confident, and tenants feel more under will have started to improve, and pressure to make decisions as the this should result in an improvement The biggest surprise about the central market tightens. in business confidence. This could London office market in 2012 was translate fairly quickly into a rise probably not how strong it was, but The key, we believe is the word in leasing activity (at least outside how subdued it was. "confidence". Graph 13 shows the the Banking sector), as companies recent trends in the national service realise that not only are they facing an A few basic statistics on the market sector confidence survey, and it is impending lease event, but they are and the economy help support this clear from this that while businesses occupying their premises at its highest slightly counter-intuitative theory: might be less pessimistic than they possible density. were in the 2008 and 2009, there is still ■ The FTSE 100 is at its highest level some way to go before they return to Furthermore, as the economy recovers, since 2007; optimism. the desire to control property costs will give way to a focus on growing ■ British companies are holding more Thus, while employment might be the business. For many service sector cash on their balance sheets than they rising, many CEO's and property companies in London this will lead to have done for more than 30 years; directors are still mirroring the a pick-up in hiring. As unemployment consumer's newly acquired habit of falls, and competition for the best staff ■ Both City and West End office- "precautionary saving", and avoiding intensifies, we will see a return of office based employment has regained all its deploying any of their capital on any moves being driven by the desire to losses from the downturn of 2008/9; new investment such as a new offices. attract and retain staff.

■ The central London vacancy rate is So, what will it take to change This economic and property market lower now than it has been at the start business's minds from pessimistic recovery will undoubtedly be weaker of any the last three market recoveries. to optimistic? For those businesses than those we have seen before, with whose own company is performing the word austerity weighing heavily So, why aren't rents rising faster? If ok, all that might be needed is a on both. We believe that the next five we look at average annual rental cessation in the regular supply of years will see a rise in austerity-led growth in the recovery phase post bad news about internal and external office moves, with companies looking the dotcom boom, and after the early shocks to the UK. This will probably to achieve great working environments 1990's recession, the rates of growth not be in 2013, as we believe the UK at less than prime rents. This doesn't in both the City and the West End economy will be pretty flat this year. mean that the core markets of Mayfair office markets were more than double This will combine with concerns about and St James's will be deserted, but what we have seen over the last few the rating of our sovereign debt, the as the rents rise in these and other years. US debt ceiling, and the lack of a core submarkets, we expect to see credible solution to the Eurozone crisis, a steady rise in leasing activity in the While the leasing market is by no to ensure that businesses remain more affordable fringes. CEO's will means buoyant, the low levels of cautious well into the second half of be looking for clever property deals, vacancy that we are seeing across 2013. and what could be better than a prime the West End, as well as in some building at a less than prime price? submarkets and size bands of the City, However, by early 2014, the newsflow

GRAPH 13 GRAPH 14 Service sector business confidence Outlook for prime headline office rents

W E To p WE Avg Prime C ity To p City Avg Prime 60 £160.00 40 £140.00

20 £120.00

0 £100.00 £80.00 -20 £60.00 -40 £40.00 -60 £20.00 -80 £0.00 2000 2002 2004 2006 2008 2010 2012 2014 2016 01/11 09/11 01/97 09/97 05/98 01/99 09/99 05/00 01/01 09/01 05/02 01/03 09/03 05/04 01/05 09/05 05/06 01/07 09/07 05/08 01/09 09/09 05/10 05/12 01/13

Graph source: Thomson Reuters Graph source: Savills

savills.co.uk/research 07 Spotlight | Central London Offices

Survey Area

Monthly market data

We also produce monthly reports on the City and West End leasing and investment markets that include key statistics and comparables on each of these markets. If you would like to be added to the mailing lists for these, or any other research reports, then please e-mail your request to [email protected]

Savills Central London Offices Please contact us for further information

Stephen Down Philip Pearce Tracy Collins James Crawford Paul Cockburn Investment Leasing Leasing Investment Investment (0)20 7409 8001 (0)20 7409 8917 (0)20 7409 8958 (0)20 7409 8927 (0)20 7409 8788 [email protected] [email protected] [email protected] [email protected] [email protected]

Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 500 offices and associates throughout the Mat Oakley Americas, Europe, Asia Pacific, Africa and the Middle East. Research This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as (0)20 7409 8781 a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and [email protected] reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

08