Q1 | 20171

Central office analysis 2 3

Occupier market – in brief

Welcome to GVA’s central London office analysis; our detailed view of the market in Q1 2017.

Moving on up, moving on out? The mood during the first quarter was generally positive amidst strong stock market performance, robust domestic economic growth and growth in the PMI Business activity index. Despite this, the build-up to the triggering of Article 50 has led to a new wave of speculation on the businesses likely to leave London, with Goldman Sachs, JP Morgan, HSBC, UBS, AIG, Barclays, Lloyds, Citigroup, Daiwa, Nomura and the European Banking and Medicines agencies, just a few of the great and good who were linked with moving at least some of their operations outside of London. However, some large occupiers are using this time of evaluation to Patrick O’Keeffe commit once again to London, with Deutsche Bank in talks to take a 25 year lease at Land Securities’ 21 Moorfields from 2023. In another piece of Head of London Agency good news, NEX agreed to let 115,000 sq ft of Ashurst’s space at Fruit & and Investment Wool Exchange, which is due to complete in 2018. [email protected] Prime and Top 020 7911 2768 The quarter has by and large seen stable rental levels. However, in what has been a quite inconsistent quarter, there have been a few examples of record rents being achieved. At 30 Broadwick Street, GPE have achieved a new record rent for Soho of £110 per sq ft on the top floor, whilst at the Adelphi, Blackstone let the top floor to Finsbury PR at a rent in excess of £100 per sq ft. Meanwhile, Ocubis’ refurbishment of 5 St James’s Square is rumoured to have a c.2,000 sq ft unit under offer at a rent in the region of £190 per sq ft to a Canadian billionaire family, These three deals contrast enormously with the general tone of the market which has been one of stability and ‘re-based’ pricing levels, with The general tone the West End now notably cheaper than this time last year, and rent-free periods seeing an increase in almost all submarkets during this period. of the market has Where we work Last month at MIPIM I had the pleasure of launching our new report been one of stability London: where we work at the opening panel on the London Stand. The report examines how London’s workspace has changed over the last and ‘re-based’ decade and how occupiers are demanding more than ever before. pricing levels We believe that the old adage of location, location, location has now evolved into LUCK: Location, Utilisation, Cost and Knowledge. Taking into account the significant shifts in occupier demand, the report looks at the changes in the city’s submarkets and the drivers underpinning them. If you’d like to discuss anything in either this, or the above report, please don’t hesitate to get in touch.

Photo on the cover: GVA disposed of 14,989 sq ft to BuzzFeed at t 40 Argyll Street (W1) 4 5

Central London

Take-up Development Central London take-up for the first quarter of 2017 totalled 2 Central London Take-up City During the quarter, 22 buildings totalling 2.4 million sq ft of development Annual development completions City million sq ft, 32% down on the previous quarter, and 20% down on the West End completed, including seven buildings over 100,000 sq ft. West End five-year quarterly average of 2.5 million sq ft. Docklands Docklands 5 year quarterly average The largest building to complete in the City was Mitsui Fudosan’s Completed During the quarter the bulk of activity was in the West End fringe, which Take-up (million sq ft) 312,000 sq ft Angel Court (EC2). In the West End, work completed at Space (million sq ft) made up 677,900 sq ft and 33% of take-up. The best performer was the 4 Land Securities’ 480,000 sq ft Nova (SW1) scheme. 10 (under construction) West End core, which saw 174,100 sq ft transact, 37% up on the five-year 10 buildings totalling 1.2 million sq ft of development started during quarterly average. 9 the quarter including the 400,000 sq ft One The Thames (WC2) and The largest deal of the quarter was in the City Core to Freshfields 288,100 sq ft at 1 Braham Street (E1) in Aldgate. Work also started on 8 Bruckhaus Deringer who committed to 256,500 sq ft at 100 Bishopsgate 3 Q1 the 137,500 sq ft Bracken House, where the FT took a pre-let in the Q1 (EC3). Elsewhere, Expedia.com committed to 136,600 sq ft at The Angel Q1 previous quarter. 7 Building (EC1) and in the West End, the largest deal was to Arup who There is currently 14.7 million sq ft under construction across central took 133,000 sq ft at 80 Charlotte Street (W1). Q1 6 Q1 London, with 6.1 million sq ft (42%) due for completion before the end of Take-up of second hand grade A space made up 39% of activity for 2 Q1 2017 and a further 5.9 million sq ft (40%) due before the end of 2018. 5 the quarter, totalling 792,900 sq ft, with pre-letting on space under Of the space currently under construction, 5.7 million sq ft (39%) has construction totalling 446,200 sq ft and 22% of take-up. Take-up of already been let, leaving 9 million sq ft of available space in the pipeline. 4 newly completed space made up a further 367,100 sq ft (18%). Rental growth 3 During the quarter, 8 deals completed over 50,000 sq ft, half of 1 that seen in the previous quarter. Three of those deals were over Central London prime rents fell on average 0.7% during the quarter, the 2 100,000 sq ft. third successive quarterly decrease following 26 quarters of consecutive growth. Prime rents were down 5.8% on the year and are back to the 1 Availability same levels they were at in during Q1 2015. There is currently 10.2 million sq ft available across central London, 2012 2013 2014 2015 2016 2017 By and large, prime rents were stable during the quarter, with the fall 2012 2013 2014 2015 2016 2017 2018 2019 2020 increasing from 9.3 million sq ft as of the end of Q4 2016. Since this time Years Source: GVA / EGi / CoStar attributable to the West End which saw a fall of 1.1%. last year, the amount of available space has increased by just under Source: GVA 20%, with 1.6 million sq ft more on the market. The vacancy rate is now up to 5.3%, the first time it has been over 5% since Q1 2015, suggesting that bottom of the cycle has now passed. Central London office City Central London prime City availability rates West End rental growth West End Docklands Docklands Central London Central London Availability rate (%) Rental growth (%)

10 40

30

8 20

10 6

0

4 -10

-20 2

-30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Years (Q1) Source: GVA / CoStar Years (Q1) Source: GVA 6 7

West End City

Take-up KEY STATS THIS QUARTER Take-up KEY STATS THIS QUARTER Take-up during the quarter reached 852,100 sq ft. This was 1.2% up Take-up during Q1 2017 totalled 1.1 million sq ft, which was 38% down on on the five-year quarterly average of 837,800 sq ft and 53% up on the previous quarter, and 23% down on the five-year quarterly average. the previous quarter, despite there being a similar number of deals. The big deals in the City were Freshfields Bruckhaus Deringer taking The quarter saw occupiers committing to more space than the previous sq ft 256,500 sq ft at 100 Bishopsgate (EC3) and Amazon.co.uk taking sq ft quarter, with large deals to Mckinsey & Company at The Post Building let 89,300 sq ft at Principal Place (EC2). There were four deals in excess of take–up (WC1) for 97,000 sq ft, Arup at 80 Charlotte Street (W1) for 133,600 sq 852,100 50,000 sq ft this quarter, compared to 12 deals in the previous quarter. 1.1 m ft, and 70,000 sq ft to at 84 Eccleston Square (SW1). 1.2% up on 5-year quarterly average Pre-letting for the quarter made up 345,900 sq ft, 31% of the total 23% down on 5-year quarterly average During Q1 2017 deals on pre-let space accounted for 323,300 sq ft take-up, with take-up of new space accounting for a further 128,500 or 38% of the total take up across the West End and 16% of sq ft (11%). Second-hand letting totalled 659,000 (58%), with second- take-up for the quarter. Take-up of second-hand Grade A space hand Grade A space making u 491,500 sq ft of this (43% of take-up). made up 273,900 sq ft of take-up, 14% of the total take-up. Availability Availability vacancy Availability increased slightly from 5.2 million sq ft to 5.6 million sq ft, vacancy Availability increased from 3.4 million sq ft to 3.8 million sq ft during with the vacancy rate increasing from 5.6% to 6.1%. Availability is 10% the quarter. The vacancy rate is now up to 4.6%, its highest since Q4 4.6% rate higher than two years ago. 6.1% rate 2013. Availability is 41% higher than this time last year, equating to Development 1.1 million sq ft more space. Whilst this is a substantial increase, the availability rate is still low when compared to long-term historic levels. During the quarter 1.2 million sq ft completed across 13 buildings, with the largest being Mitsui Fudosan’s Angel Court (EC2). During the quarter, Development work also completed at ’s 237,000 sq ft White Collar During the first quarter of the year, 1.2 million sq ft was delivered sq ft under Factory (EC1) and the joint venture between and Aerium sq ft under across nine buildings. This was 57% of the total development construction on 114,000 sq ft at Herbal House (EC1). construction delivered during all of 2016. 3.2 m 10.8 m Construction started on 712,800 sq ft across six buildings during the The largest building to complete during Q1 was Land Securities’ quarter including Aldgate Developments’ 288,100 sq ft 1 Braham Street 296,000 sq ft Nova South (SW1), with other major completions (E1) and Obayashi’s development of the 137,500 sq ft Bracken House during the quarter including the 184,000 sq ft Nova North (SW1), (EC4). Universal Music’s new HQ at 4 Pancras Square (N1) and Facebook’s There is now 10.8 million sq ft under construction in the City. Of this, new office at One Rathbone Square (W1), which was also sold during per sq ft per sq ft 4.2 million sq ft is due to complete in 2017, with 5 million sq ft earmarked the quarter. 522,200 sq ft went under construction during the quarter, prime rent for 2018. There is currently 1.5 million sq ft of space under construction prime rent with the largest being PCP Capital Partners’ One The Thames. There £105 £70 due for completion in 2019. Of the total space under construction, 5.1 is now 3.2 million sq ft of development activity in the West End. million sq ft is already let, accounting for 47% of the pipeline. Rental growth Rental growth The first quarter of the year saw prime rents decrease by 1.1% across the Prime rents were stable for a third successive quarter, although they West End. The West End as a whole has not seen positive rental growth annual remain marginally up on this time last year. annual since Q4 2015, with rental levels 9% down since the peak of the cycle. rental growth Prime rents were stable across all submarkets during the quarter, whilst rental growth In Mayfair and St James’s, prime rents were stable at £105 per sq ft -9.1% 0.3% rent free periods increased in eight of our ten submarkets. On a net with rent free periods at 18 months. Net effective rents are now effective basis, prime rents are now cheaper than they were this time £89.25 per sq ft, the lowest since Q1 2013 and 15% cheaper than at the last year in all submarkets. end of 2015. Super-prime headline rents are £125 per sq ft, with rent free periods stable at 18 months. The big faller during the quarter was Prime headline rents in the City core remain at £70 per sq ft, 4% up on Marylebone, where prime rents fell from £90 per sq ft to £85 per sq ft. the year. During the quarter, rent free periods increased from 20 to 21 months. Net effective rents in the City core are now at £57.17 per sq ft. 8 9

Docklands Midtown

Take-up KEY DEALS THIS QUARTER Take-up KEY DEALS THIS QUARTER Take up in the Docklands totalled 38,900 sq ft, a slow start to the year Take-up in Midtown during Q1 2017 totalled 585,720 sq ft which was after an impressive end to 2016, where we saw the largest deal of the 128% up on the previous quarter and 55% up on the five-year quarterly year transact. Take-up was down 85% on the previous quarter and 81% average. Midtown performed best out of all the markets, seeing the down on the five-year quarterly average. sq ft highest take-up since Q2 2013. sq ft Four deals completed during the quarter. The largest was at The let The largest deal of the quarter was to Expedia.com at the Angel let Forge, 397-411 Westferry Road (E14) to Craft Central who committed 38,900 Building (EC1) for 136,600 sq ft. Other signficant deals were to ITV at 585,720 to 11,500 sq ft. Two deals were completed at 40 Bank Street (E14) to 2 Waterhouse Square (EC1) for 88,800 sq ft and at The Post Building DeVry Education Group and Delta Group who occupy 7,360 sq ft and 85% down on 5-year quarterly average (WC1) who welcomed COS Stores who committed to 60,500 sq ft. 55% up on 5-year quarterly average 5,000 sq ft respectively. At Stratford, Cancer Research and the British Pre-letting for the quarter totalled 157,500 sq ft (27%) of take-up, with Council went under offer during the quarter on a combined 150,000 letting of new space accounting for a further 35,200 sq ft (6%). Second- sq ft at S9 in the International Quarter (E15). hand grade A space made up 345,100 sq ft (59%) with second-hand Availability grade B space a further 47,900 sq ft (8%). Available space increased slightly from 731,000 sq ft to 750,000 sq ft vacancy vacancy Availability during the quarter, with most of this space available on a sublet basis. 3.9% rate Availability in Midtown increased slightly from 1.4 million sq ft to 4.1% rate The vacancy rate increased from 3.8% to 3.9% during the quarter, with 1.6 million sq ft, with the vacancy rate increasing from 3.9% to 4.1%. vacancy now below 4% for five successive quarters. Availability is in line with the corresponding period in 2015. Development Development 695,000 sq ft is under construction at 1 Bank Street (E14), due to During the quarter 381,600 sq ft completed across six buildings, with complete in 2019. Elsewhere, Canary Wharf Group have submitted new sq ft under the largest being Allied London and Aerium’s Herbal House (EC1). Other sq ft under plans for 10 Bank Street (E14), which would see a further 700,000 sq ft construction completions during the quarter included Threadneedle’s 73,300 sq ft construction delivered to the market. 695,000 Saffron House (EC1) and Bedford Estates and Exemplar’s 70,000 sq ft 2 m 1 Bedford Avenue (W1). Rental growth In Canary Wharf, prime rents were stable at £42.50 per sq ft, with rent There was one new start during the quarter, with Viridis’ 95,600 sq ft free periods stable at 22 months. The Wave (EC1) starting. Outside the Wharf, prime rents remain at £35 per sq ft with rent free per sq ft There is now 2 million sq ft under construction across Midtown. per sq ft periods at 20 months, whilst in Stratford prime rents increased to prime rent Rental growth £40 per sq ft, with 22 months rent free. £42.50 £75 prime rent Prime rents across Midtown submarkets were stable during the quarter meaning they are up 1.8% on the corresponding period last year. 11

Investment market – in brief

A robust market The post-referendum investment market in Central London remains extremely robust. A stronger than expected occupational market has undoubtedly helped but with little or no rental growth anticipated, in normal circumstances, we would expect this to have had some negative effect on the market. It hasn’t and the market has shown great resilience with pricing levels in general, reflecting where the market left off at the beginning of 2016, immediately prior to the referendum. One area of slight weakness has been further up the risk curve where the market is primarily reliant on UK buyers. Even so there are investors for most types of product, with interest levels not far off early 2016 levels. Bigger is better In terms of well let, investment grade stock, availability remains the overriding issue, in both the West End and City markets, although in Justin James the West End this shortage is particularly severe. For the right type of ‘institutional’ style product there remains strong demand from overseas Senior Director and particularly Asia. The number of individual investment transactions being traded is significantly down on this time last year. However, the lot [email protected] sizes of these fewer transactions have on the whole been considerably 020 7911 2678 larger meaning values traded have still been approaching near-record levels. Enormous deals such as 1 Kingdom Street and the Leadenhall Building are seemingly representative of the current investment climate where bigger and fewer deals keep the figures looking buoyant. Wealth preservation seems to be the key rationale for investors and since the likes of Pontegadea started the latest wave of defensive buying in the West End back in 2012/2013, overseas investors have followed suit, buying up scarce West End freeholds and iconic City freeholds with the intention of holding such assets hold for an indefinite time period. Overseas and over ‘ere Overseas buyers dominate the market with Far Eastern investors particularly benefitting from London’s transparent real estate market, significant currency advantage as a result of the weak £ sterling, low There seems to be interest rates and the continued ‘safe haven’ characteristics. It hasn’t been entirely Far Eastern interest driving the market though with DEKA relentless demand making one of the most significant West End purchases in One Rathbone Square and even the UK institutions represented, with Aviva’s purchase for central London of Warwick Building in Kensington Village. There seems to be relentless demand for Central London commercial commercial real real estate, despite the uncertainties following the triggering of Article 50 and the UK having an unknown economic and political future. estate Some investors clearly see this as an opportunity and are not put off by low returns and a perceived lack of rental growth in the near future. Risk free freeholds in the best locations will continue to attract strong demand and even riskier prospects are finding buyers at not far off pre-referendum levels. 12

Central London investment

Transaction volumes City During Q1 2017, central London investment totalled £4.3 billion Central London office West End across 39 deals, the largest volume of investment since Q4 2015, investment transactions Docklands and a 9% increase on the previous quarter, where £3.9 billion was 5 year quarterly average transacted. Investment was 8% up on the five-year quarterly £ billion average and 13% up on the corresponding quarter in 2016. 8

The West End saw £2.3 billion transacted, 61% up on the previous 7 quarter and 32% up on the corresponding period last year. Q1 2017 was 44% up on the five-year quarterly average. For the second 6 successive quarter, a GPE development was the largest sale in the West End, with WestInvest and DEKA purchasing One Rathbone 5 Q1 Square (W1) for £435 million, representing a yield of 4.25%. Q1 Q1 In the City, £1.9 billion was transacted across 19 deals during the 4 Q1 quarter, 21% down on the £2.4 billion seen during the previous Q1 Q1 quarter. Investment for Q1 was 7% down on the five-year quarterly 3 average but 38% up on the corresponding quarter last year. The largest deal of the quarter was CC Land’s’s £1.15 billion purchase 2 of The Leadenhall Building (EC3) from and Oxford Properties, representing a yield of 3.25%. 1 This quarter overseas money accounted for £3.4 billion (76% of total investment). UK property companies accounted for £427 million 2012 2013 2014 2015 2016 2017 of investment for Q1 2017 (10%), whilst Owner occupiers were Years Source: GVA / PropertyData responsible for 9% of total investment (£410 million).

During the quarter, there were 12 purchases of over £100 million, with six of these in excess of £200 million. Central London prime office yields Yields Q1 2017 saw yields remain stable in all but two of our submarkets, with Victoria and Soho/Covent Garden both coming in 25 basis 4.75 4.75 4.75 4.75 points. Prime yields in Mayfair and St James’s are now at 3.5%, 4.5 4.25 4.25 with City core at 4.5%. The market seems to have readjusted 3.75 3.75 post-Brexit. 3.5 Mayfair/ St James’s M’bone/Fitzrovia Holborn Victoria City Core City eastern finge City northern finge Southwark Soho / Cov Gdn Paddington

Source: GVA

Derwent London’s White Collar Factory (EC1) completed during the quarter. Central London Markets

West End Camden City Stratford Docklands King’s Parks Cross

Regent’s Park Shoreditch/ Euston Spitalfields Clerkenwell Bloomsbury Northern City West City Marylebone Fitzrovia Paddington Chancery Aldgate – Lane City Green Park / Covent Whitechapel Soho Core St. James’s Park Garden White City Mayfair Hyde Park St James’s London Bridge Waterloo Canary Belgravia/ Wharf Knightsbridge Kensington Hammersmith Victoria Fringe Docklands

Chelsea

Battersea Park Fulham

Vauxhall/ Battersea

West End Prime headline rent Rent free period Business rates Total occupancy costs City Prime headline rent Rent free period Business rates Total occupancy costs (£ per sq ft) (months) (£ per sq ft) (£ per sq ft) (£ per sq ft) (months) (£ per sq ft) (£ per sq ft)

Belgravia / Knightsbridge £90.00 18 £45.39 £145.64 Central City Core £70.00 22 £21.52 £101.77 Bloomsbury £75.00 18 £25.50 £110.75 Chancery Lane / Midtown £65.00 22 £25.14 £100.39 Camden £55.00 18 £17.3 4 £82.59 City Eastern fringe £57.50 21 £17.24 £84.99 Chelsea £90.00 18 £33.15 £133.40 Clerkenwell £67.50 20 £14.28 £92.03 Covent Garden £85.00 18 £28.56 £123.81 Insurance Sector £65.00 22 £22.29 £97.54

Euston £75.00 18 £28.56 £113.81 London Bridge / More London £62.50 22 £19.02 £91.77 Fitzrovia £80.00 18 £26.01 £116.26 Northern City £65.00 22 £17.4 4 £92.69 Fulham £45.00 18 £16.32 £71.57 Shoreditch £67.50 21 £11.88 £89.63 Hammersmith £52.50 15 £18.87 £81.62 Waterloo / Bankside £65.00 20 £19.02 £94.27 Kensington £65.00 18 £23.46 £98.71 West City £70.00 22 £19.18 £99.43 King’s Cross £82.50 18 £23.46 £116.21 Mayfair £105.00 18 £46.92 £162.17 Mayfair/St James’s “super-prime” £125.00 18 £52.02 £187.27 Docklands Prime headline rent Rent free period Business rates Total occupancy costs North of Oxford St £85.00 18 £40.80 £136.05 (£ per sq ft) (months) (£ per sq ft) (£ per sq ft)

Paddington £69.50 18 £26.15 £105.90 Canary Wharf £42.50 22 £16.17 £68.92 Soho £90.00 18 £33.15 £133.40 Other Docklands £32.50 20 £11.63 £54.38 St James’s £105.00 18 £46.92 £162.17 Stratford £42.50 22 £7.50 £60.25 Vauxhall £57.50 22 £15.10 £82.85 Victoria £80.00 18 £30.09 £120.34 White City £50.00 20 £20.62 £80.88 For further information please contact:

Patrick O’Keeffe Head of London Agency and Investment Regional Senior Director – West End +44 (0)20 7911 2768 [email protected]

Jeremy Prosser Senior Director, City and Docklands Agency +44 (0)20 7911 2865 [email protected]

Justin James Senior Director, West End Investment +44 (0)20 7911 2678 [email protected]

Chris Gore Head of City Transactions +44 (0)20 7911 2036 [email protected]

Daryl Perry Associate Research +44 (0)20 7911 2340 [email protected]

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