West End Office Update

cluttons.com WEST END OFFICE UPDATE Winter 2013 West end office market outlook over the last quarter we have seen firm evidence that the central london occupier market has caught up with the investment market. Business sentiment within the capital has continued to improve, with evidence of all important business investment generating a further uplift in job creation. the london markit kPmG/rec “uk report on Jobs” recorded the sixth straight monthly increase in permanent job placements in london during november, albeit with the pace of growth slowing. The improved business confidence reflected in this recruitment activity has been seen in letting activity which has accelerated throughout the past six months. Take up in the year to date across Central London has now reached 863,970 sq m (9.3 million sq ft), significantly ahead of the 761,800 sq m (8.2 million sq ft) full year total for 2012. The core West End market however, has seen a diminishing proportion of this activity, falling to 20% of all Central London lettings, down on the 30% of 2011 and 2012; a function of constrained supply of quality office stock which has added to rental inflation. With tenants remaining cost conscious and increasingly footloose, an eastward migration continues, with fringe submarkets taking a 22% market share of letting activity. The City core, which represents a one third stake in current take up, does appear to now be offering fairer rental values, however, with much of the core City office stock at present falling short of the quality demanded, market boundaries are being squeezed as occupiers seek out the right “package” when it comes to balancing both cost and space criteria. The importance of the choice of location and nature and quality of space is also having broader implications. The London Markit KPMG/REC “UK Report on Jobs” found a further sharp reduction in the number of candidates available for permanent positions in London, while also reporting a sharp increase in permanent starting salaries, growing at the fastest rate in nearly three-and-a-half years. The capital’s businesses are therefore facing imminent recruitment and retention pressures for highly skilled staff demanded by the range of business areas experiencing expansion. This is placing greater responsibility on what the workplace can deliver in terms of a suitable environment, able to meet the accessibility and Prime rents set to increase further particularly service provisions desired by staff. This is being reflected in letting commitments within the within the market fringes occupier market. The recent transaction to SAV Credit demonstrated this with the finance services firm relocating from smaller offices in Kent to 1,395 sq m (15,500 sq ft) on the annualised average forecast Source: Cluttons research rental growth 2014/2015 fifth floor at the under construction Two Pancras Square at King’s Cross Central. SAV chief West End 5-6% executive James Corcoran said: “It is an ideally located and accessible headquarters that City core 5-6% brings our teams together into one location and provides strong transport links.” Midtown 7-8% Fringe 9% The rise in activity is placing further upward pressure on rental pricing. Prime West End rents reached £105 per sq ft (£1,125 per sq m) at the end of Q3, with a handful of deals West end office submarkets completing at significantly higher prices. This reflects a 10% increase over the last 12 months. In the core City market prime rents averaged £57 per sq ft (£614 per sq m) at the end of Q3, up by a shallower 4% on 2012. Looking forwards we anticipate rental value growth of approximately 5% in the core West End and City markets over the forthcoming five years. However, a more dynamic story can be found in the market fringes, where prime rents have risen by an average of 25% since the market trough of 2009 and are anticipated to rise by close to 10% over the next few years, with a corresponding decline in availability rates in the City fringe in particular. This is narrowing the rental gap between the varied Central London office sub markets, presenting a financial challenge for businesses seeking space although also focusing minds towards the nature, location and brand appropriateness of the space required. Cluttons West End office update The core City market, despite its traditional corporate image, has proved a beneficiary of this Winter 2013 rental band narrowing with lettings by TMT businesses occurring alongside the traditionally at home finance sector. One example of this was telecommunications firm Avanti Communications which took 3,085 sq m (33,200 sq ft) at Cobham House, 20 Blackfriars. Meanwhile, at the Heron Tower, e-commerce firm Bright Station has earmarked the top two floors for occupation at approximately £70 per sq ft (£754 per sq m). On lower floors, Powa Technologies has already let the 34th and 35th floors, at a rent believed to be £57.50 per sq ft (£619 per sq m) alongside a host of finance and legal neighbours. The heightened activity by “FinTech” organisations is strengthening TMT take up, both in the fringe and City core, in part reflecting an increasing number of businesses in the sector willing to pay higher quartile rents. In its consolidation of five offices Worldpay Limited, an online payment services organisation, has let just short of 9,300 sq m (100,000 sq ft) at £57.50 per sq ft (£619 per sq m) at the Walbrook Building. As a result we believe quality refurbished space in some fringe sub markets will approach rental parity with the City core in 2014. The broadening occupier profile and consequent rental uplifts has spurred developers such as Helical Bar and British Land to venture fringe-side, to join trailblazers such as Derwent London whose business model prioritises SME’s that hold synergist value. Across Central London, efforts to pre-empt further rent rises and secure the size and importantly quality of space demanded, not least by staff, has driven a sharp upturn in pre- lets, with activity in 2013 over double that of the levels seen in 2012. In particular, ‘true’ pre-lets, that is those agreed prior to the start of construction, have shown marked growth, Development pipeline set to stall almost quadrupling the level of transactions recorded throughout 2012, with 40% of pre- 140 lets in 2013 agreed prior to construction. 120 Investor profit-taking 100 Investment activity across Central London has seen a sharp upturn over the last year with 80 an estimated £16 billion worth of property transacted to year end, approximately 20% 60 up on that of 2012 while the number of off market deals has also risen. The increase in 40 part reflects a couple of significant transactions, including St Martin’s recent £1.7 million acquisition of More London and Sirosa’s £610 million purchase of Shell Mex House, Strand 20 adding to its wider London portfolio investment. The high levels of activity and pressure of Completions (sq m 000s) 0 demand have resulted in a further fall in yields, reaching sub 3% in the prime West and 4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 in the City in some instances. Completed Speculative Pre-let Source: Cluttons research However, the apparent continued strengthening of the capital’s investment market, Vacancy rate tightens reflected in both transaction activity and prices, masks an underlying shift in dynamics. While international investors continue to dominate inward investment, accounting for 8.0 55% of all transactions within the Capital, they have also become active sellers within the 7.0 London market during 2013. On the domestic front, home based investors have upped their 5 year average foothold in the highly competitive south eastern office market but despite the upturn in 6.0 sentiment, banks are continuing to offload debt ridden portfolios as net investment by the 5.0 banking sector has hit a five year UK low. 4.0 Since 2010, the investment market has tended to perform stronger during the first half of 3.0 the calendar year, with suppressed volumes of Q3 and Q4 transactions. Quite a contrast West End vacancy rate (%) 2.0 to that of pre-peak years where second half transactions buoyed investment volumes. However, the turnaround has almost come full circle following the heightened activity of Q3 Oct 06 Oct 07 Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 and Q4 this year. In fact transactions during the second half of 2013 were so buoyant that Source: Cluttons research they represented the strongest H2 performance since 2007. Investment volumes at an annual high 1,500 10 year average 1,000 500 Investment transactions (£m) 0 Jul 11 Jul 12 Jul 13 Jan 12 Jan 13 Apr 11 Apr 12 Apr 13 Oct 11 Oct 12 Oct 13 Source: Cluttons research West end market statistics rental values and take-up • Take-up reached a yearly high during Q3 up by 77% on Q2 but still slightly down on the long term average. A total of 53,500 sq m (575,900 sq ft) has been let with 86% of deals being of new or good quality Grade A space. • The largest lettings were at the recently completed 62 Buckingham Gate, where Schlumberger plc and Rolls Royce plc have taken a combined total of 9,350 sq m (100,500 sq ft) at rents believed to be in excess of £70 per sq ft (£753 per sq m). Elsewhere, in Mayfair Highbridge Capital Management (UK) Limited is paying £105 per sq ft (£1,130 per sq m) for 670 sq m (7,200 sq ft) at Devonshire House, 1 Mayfair Place, setting the tone for current prime rental values.

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