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Q4 2012 M25 OFFICES Investment, development & occupier markets

Highlights • The resilience of the M4 corridor was reflected in total take-up of 1.67m sq ft in 2012, marginally ahead of the 10-year annual average. In contrast, activity in the M25 region and the M3 corridor was more subdued in 2012, with total take-up 20% and 29% below the 10-year average respectively.

• Active named demand stood at 6.32m sq ft at the end of Q4 2012, 3% above Q4 2011. Financial & Business Services continue to retain the greatest share of unsatisfied demand, accounting for 23% of the total.

• Speculative development in the M25 stands at 480,000 sq ft across seven schemes. Four new developments commenced in Q4, largely offsetting the 215,000 sq ft of completions seen in the quarter.

• Despite limited investment turnover of £173m, Q4 saw more deals than any other quarter in 2012. Yields for prime 15-year income remained stable at c.6.0% in Q4, unchanged since Q3 2011. Q4 2012 M25 OFFICES Investment, development & occupier markets

Demand and take-up • M25 take-up was 546,958 sq ft in Q4, taking their total occupation in the building Figure 1 taking the annual total for 2012 to 2.02m to 75,000 sq ft. M25 take-up sq ft, 20% below the 10-year annual • M3 activity improved in Q4 with take-up of 4.0 average. Q4 was characterised by an 204,372 sq ft, 93% above Q3’s subdued 3.5 absence of any major deals, with the one

total. The standout transaction in the M3 Forecast exception comprising Hasbro’s 50,000 3.0 10 year was Lastminute.com’s 18,313 sq ft lease at average sq ft pre-let refurbishment at 4 The Square, 2.5 One Church Road, Richmond. The deal set a Stockley Park, Heathrow. 2.0 new headline rent for the Richmond market • While Q4 take-up in the M4 was down 51% at £37.50 per sq ft, and reflects the robust 1.5 on Q3’s level, the annual total for 2012 was millions sq ft net conditions in the west area. 1.0 a resilient 1.67m sq ft, marginally ahead of 0.5 the 10-year annual average. Hammersmith • Active named demand remained stable 0.0 7 3 was particularly active in Q4, accounting for throughout 2012 and stood at 6.32m sq ft 9 11 12 10 13F 20 20 20 2005 200 200 2004 200 2006 seven of the M4’s 24 deals, the largest of at the end of Q4 2012, 3% above the same 2008 20 which was Medidata’s 22,961 sq ft lease at period in 2011. While Financial & Business the Metro Building. Pre-let New Second-hand Second-hand Services continue to retain the greatest Grade A Grade B share of demand (23%), Retail, Distribution • The only transaction in Chiswick accounted Figure 2 for Q4’s highest achieved rent. Viasat & Transport demand has increased by M4 take-up acquired a further 14,529 sq ft at Chiswick 37% since Q4 2011 to account for 19% of 3.0 Green at a headline rent of £39.00 per sq ft, the total.

2.5 Forecast 2.0 10 year average 1.5

1.0 millions sq ft net

0.5

0.0 7 3 9 11 12 10 13F 20 20 20 2005 200 200 2004 200 2006 2008 20

Pre-let New Second-hand Second-hand Grade A Grade B

In Q4 2012, Viasat acquired a further 14,529 sq ft at Chiswick Green, West London, at a headline rent of £39.00 per sq ft. Figure 3 The building was also Q4’s headline investment deal, purchased by PRUPIM from BAM Properties for £47.8m. M3 take-up

1.6 Supply and development 1.4 1.2 • Three schemes totalling 215,000 sq ft are located in Staines, namely Exton & Forecast 10 year completed in Q4 – The Stanza Building, Rockspring’s Flow at The Causeway (60,000 1.0 average Uxbridge (82,403 sq ft), Velocity 1 & 2, sq ft), LaSalle IM and Bell Hammer’s Strata 0.8 Weybridge (106,400 sq ft) and St Johns (89,232 sq ft) and Aberdeen’s 5 Pine Trees House, Crawley (26,189 sq ft). Speculative (57,000 sq ft). 0.6 millions sq ft net construction activity in the M25 reduced by 0.4 • Availability edged up in Q4 having been on only 10% in Q4 to stand at 480,000 sq ft, a downward trend through much of 2012. 0.2 with four new development starts largely The M4 vacancy rate increased to 10.1%, 0.0 7 3 9 11 12 offsetting the three completions. 10 rising from a four year low of 9.6% in Q3, 13F 20 20 20 2005 200 200 2004 200 2006 2008 • Developers are targeting key markets in while the M25 vacancy rate ticked up from 20 the where demand is resilient 7.9% to 8.1% during Q4. In contrast, the M3 Pre-let New Second-hand Second-hand and New and Grade A space is in short vacancy held at 8.7% during Q4, unchanged Grade A Grade B supply. Notably, three of Q4’s new starts for three consecutive quarters. Source: Knight Frank Research

2 www.KnightFrank.com

Market statistics

Table 1 Key town prime rents & forecasts A1(M) Stanstead M1 Welwyn M11 Town Q4 prime Rent free Hemel Garden City A41 A10 rent (psf) (months) Hempstead St Albans Harlow

Basingstoke £17.50 36 21 22 4 4 20 19 23 24 £20.00 4 36 4 25 26 27 A12 High 18 Watford Enfield Wycombe M25 Brentwood Brentwood £21.00 4 244 17 Chiswick £46.50 18 28 5 6 Romford M40 A127 29 Croydon £24.50 5 18 6 16 Uxbridge M4 A13 Gatwick £22.50 4 30 4 Hayes Hammersmith 30 15 Chiswick Guildford £27.50 27 31 4 6 M4 14 Reading Heathrow 1 Hammersmith £43.00 18 13 Dartford 5 6 Staines 2 Richmond A2 Heathrow £29.50 5 27 6 Wokingham 12 Bromley Bracknell 3 Maidenhead £32.00 4 21 4 M3 Weybridge Croydon 11 Reading £30.50 4 24 4 Camberley 4 10 Woking M25 9 M20 Slough £21.00 4 32 4 5 Basingstoke Farnborough A3 Leatherhead 8 M25 West Staines £32.00 21 7 6 Sevenoaks Malling 5 4 Redhill St Albans £22.50 4 24 4 Guildford A21 A24 A22 A23 Uxbridge £32.00 5 21 4 Gatwick Watford £22.50 4 30 4 M3 M23 West Malling £20.00 4 27 6 Crawley Based on new/Grade A building: M3 region boundary M4 region boundary 10,000 sq ft, 10 yr lease with no breaks Note: 5= forecast for next 12 months

Table 2 Demand & Supply

Take-up M25 NW SW NE SE M3 M4 Sq ft 546,958 317,172 205,359 0 24,427 204,372 291,957 Change Q4 12 vs Q3 12 -1% 6 -3% 6 91% 5 -100%6 -61% 6 93% 5 -51%6 Change Q4 12 vs Q4 11 -26% 6 -30% 6 -20% 6 -100% 6 124% 5 22% 6 -53%6 Q4 pre-let (sq ft) 54,062 0 0 0 0 54,062 54,062 Q4 % New & Grade A (inc. pre-lets) 60% 40% 85% NA 100% 76% 84% Forecast 2013 take-up (m sq ft) 2.10 1.00 0.85 0.10 0.15 0.85 1.75

Availability M25 NW SW NE SE M3 M4 Sq ft 10,459,528 4,608,552 3,939,945 474,027 1,437,004 3,700,187 6,547,238 Change Q4 12 vs Q3 12 2%5 4% 5 0% 34 -7% 6 2%5 1%5 5% 5 Change Q4 12 vs Q4 11 -3%6 -3% 6 -6% 6 -10% 6 9%5 -9%6 -6% 6 Q4 % new 14% 13% 20% 11% 4% 14% 21% Q4 % second-hand Grade A 51% 62% 49% 43% 23% 59% 60% Q4 % second-hand Grade B 35% 25% 31% 46% 73% 27% 19% Q4 vacancy rate 8.0%5 9.1% 5 9.6% 34 2.7%6 7.1% 5 8.7%3 4 10.1% 5 (5/6 movement from Q3 12) Under construction M25 NW SW NE SE M3 M4 Sq ft (net approx) 765,911 360,351 306,477 0 99,083 306,477 469,908 Change 12 months 26%5 -4% 6 32% 5 – 100% 34 153% 5 3%5 Pre-let 285,755 215,755 70,000 0 0 70,000 215,755

Source: Knight Frank Research

3 Figure 4 M25 active named enquiries by sector Forecast At a glance

Take-up: Supply and rents: • With consensus forecasts indicating muted • 2012 saw strong growth in prime headline UK economic growth of sub-1% in 2013, rents in selected markets in west London, short-term occupier activity will remain with record highs achieved in Chiswick driven predominantly by churn, as opposed and Richmond. Over the year ahead, we to business expansion. Positively, Knight anticipate this growth to extend westwards Frank’s analysis reveals that the market is to other key markets along the Thames moving towards a spike in lease event-driven Valley, with headline rental values in the demand, starting in 2013 and peaking in early £30s per sq ft being more readily 2015, as a raft of historic leases expire. Active demand is 6.32m sq ft at Q4 2012 achieved in markets such as Maidenhead • In the M25 area, Knight Frank forecast and Uxbridge. Financial & Business Services 23%6 take-up of 2.1m sq ft in 2013, a modest 5% Manufacturing & FMCGs 18%6 improvement on 2012 but 15% below the • The continuing erosion of good quality Retail, Distribution & Transport 19%5 10-year average. However, our 2013 forecast supply is fuelling this anticipated rental ICT 15%6 for the M4 corridor is more bullish at 1.75m growth. While the M25 as a whole has Construction & Engineering 5%6 sq ft, or 5% above the annual average, with 3.5 years’ worth of New and Grade A Public Sector 6%5 the Thames Valley markets set to continue supply available, levels are critically low in Energy & Utilities 2%6 to outperform the wider region. M3 take-up a number of markets, such as Chiswick Pharmaceutical/Healthcare & Medical 3%5 is forecast to rebound from 2012’s subdued (0.5 years), Staines (0.9 years), Richmond, Other 9%5 performance, with 0.85m sq ft anticipated Hammersmith (1.4 years) and Uxbridge in 2013. Note: % = current share of demand (1.7 years). 5= change last 12 months (absolute terms) • Take-up is forecast to see further • Developers with access to funding are improvement beyond 2013, as lease event well-placed to consider speculative activity gathers momentum and UK economic development or refurbishment projects in growth returns to trend. With its resident pool of talent and significant improvements established markets where forthcoming to infrastructure underway – such as lease breaks and expiries are high relative Crossrail – the Thames Valley is well-placed to current Grade A supply. Croydon is one to continue to attract inward investment, such example, where the ratio of Grade B particularly from software and hardware lease events (up to 2016) to current Grade The largest deal in Q4 was Hasbro’s pre-agreement to lease 50,000 sq ft at 4 the Square, Stockley Park, Heathrow. Knight technology companies. A supply stands at 4:1. Frank acted on behalf of the landlord, Legal & General.

Figure 5 Figure 6 Figure 7 Vacancy rates Space under construction in the M25 New & Grade A supply in key markets

14 3.5 3.5 8

3.0 3.0 7 12 6 2.5 2.5 10 10.1 5 2.0 2.0 4 % 8.7

1.5 1.5 ars of supply* 8 8.0 3 Ye

millions sq ft net 1.0 1.0 2 6 0.5 0.5 1 0

4 0.0 0.0 d ing 7 3 2 or 9 7 3 nell 9 11 11 k idge 12 wick 10 12 10 at Hemel Slough 20 Staines 20 20 20 Wo 20 20 2005 200 200 200 2004 200 2005 2006 Reading 2008 200 200 200 2004 2006 Croydon 2008 Chiswick eybridge Brack Uxbr Guildf Heathrow Richmond Camberley W Basingstoke Maidenhead

M25 M3 M4 Pre-let Speculative Hammersmith Crawley/G

Source: Knight Frank Research Source: Knight Frank Research Source: Knight Frank Research * Based on average New & Grade A take-up vs current New & Grade A availability

4 Q4 2012 M25 OFFICES Investment, development & occupier markets

Investment market

Table 3 Transaction Mean Mean Key investment transactions Q4 2012 volume lot size NIY Building Size Price Net Initial Vendor/ (sq ft) Yield Purchaser Q4 £173.00m £9.11m 8.26% Chiswick Green, West London 82,307 £47.84m 6.28% BAM Properties / PRUPIM 2012 P&G, The Heights, Weybridge 109,000 £33.68m 7.49% Gatehouse / Private Change -49% 6 -52% 6 -101bps6 Lakeside House, Stockley Park, 71,129 £15.10m 8.24% Royal London / 3 mths Heathrow Threadneedle Change -80% -76% -8bps 1 Arlington Square, Bracknell 82,215 £8.10m 16.75% / Threadneedle 6 6 6 12 mths Bishops Wharf, Guildford 15,600 £4.90m 8.50% Private / CBRE GI

INVESTMENT VIEW • Q4’s limited turnover of £173m reflected a throughout 2012. While demand for lack of large lot-size deals as opposed to prime stock will remain buoyant, buying negative investor sentiment, with Q4’s 19 opportunities are likely to remain in short transactions the highest number seen in any supply which is likely to preserve pricing at quarter during 2012. its current level throughout 2013. • Q4’s notable deals included PRUPIM’s • Knight Frank expects demand for secondary £47.8m purchase of Chiswick Green, west London and a Middle Eastern investor’s product to strengthen in 2013, as investors £33.68m purchase of Proctor & Gamble’s HQ increasingly target opportunities higher at The Heights, Weybridge. The transactions up the risk curve. There are a number of reflect the strength of appetite among both institutions who now have both the capital UK institutions and overseas investors for and the appetite to invest in shorter-income good quality office stock in robust locations. stock in the South East, albeit their focus will In Q4, Threadneedle purchased Lakeside House in • Yields for prime 15-year income held be on well-located assets, at a price which Stockley Park, Heathrow from Royal London for £15.1m, at c.6.00% in Q4, a level unchanged reflects sensible re-letting prospects. reflecting a net initial yield of 8.24%. Knight Frank acted for the vendor.

Figure 8 Figure 9 Figure 10 £m investment volumes and lot size Mean initial yield & finance Yield forecasts

900 50 10 20

800 18 18.50 40 8 8.26 700 16

600 Mean lot size 14 30 Forecast acted 500 6 12 % 400 % 10.75 k trans 20 10 4 300 Stoc 8 7.25 200 10 2 6 6.00 100 1.08 4 0 0 0.51 Q1-Q4 Q1-Q4 Q1-Q4 Q1-Q4 Q1-Q4 0 2 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 20092010201120122013

Stock transacted Mean lot size Mean net 5 Year 3 month Rack rented, prime, Rack rented, prime, (£m) (£m) initial yield SWAP well let 15-year income 5-year income

Secondary, over Secondary, over Source: Knight Frank Research rented, 10-year income rented, 5-year income

5 RESEARCH

Americas Commercial Research South East Offices USA Oliver du Sautoy Associate Emma Goodford Bermuda +44 (0) 20 7861 1592 Partner, Head of South East Offices Brazil [email protected] +44 (0) 20 7861 1144 Canada [email protected] Investments Caribbean Peter MacColl Will Foster Partner Chile Partner, Head of Investments +44 (0) 20 7861 1293 Australasia +44 (0) 20 7861 1211 [email protected] Australia [email protected] Ryan Dean Partner New Zealand +44 (0) 20 7861 1672 Partner Tim Smither [email protected] Europe +44 (0) 20 7861 1227 UK [email protected] Lease Advisory Belgium John Woolsey Partner Czech Republic Simon Rickards Partner +44 (0) 20 7861 1142 France +44 (0) 20 7861 1158 [email protected] [email protected] Germany Ashley Drewett Partner Hungary +44 (0) 20 7861 1156 Ireland [email protected] Italy Monaco Poland Technical Note Portugal Romania • Knight Frank define the M4 market as extending from Hammersmith, west to Newbury, incorporating Uxbridge and High Wycombe to the north and Staines and Bracknell to the south. Reading is also included. Russia Existing built office stock in the M4 market totals 62,392,070 sq ft. Spain • The M3 market incorporates the main South West London boroughs and encompasses Leatherhead, The Netherlands Guildford and Basingstoke extending north to the M4 boundary described above. Farnborough and Ukrai­­­ne Camberley are also included. Existing built office stock in the M3 market totals 41,927,373 sq ft. Africa • The figures in this report relate to the availability of built, up-and-ready office/B1 accommodation within Botswana the M25 market. Vacant premises and leased space which is being actively marketed are included. Kenya • The market definition used, shown in the map on page 3, is based on Local Authority District boundaries. Malawi • All floorspace figures are given on a net internal area basis (as defined by the RICS). Nigeria • A minimum 10,000 sq ft (net) cut-off has been employed throughout. Major and minor refurbishment have South Africa been treated as new and second-hand respectively. Data is presented on a centre and quadrant basis. Classification by centre relates to the locational details contained within the marketing material for available Tanzania properties. Classification in this manner is clearly somewhat arbitrary. Vacancy rate data is based on a total Uganda M25 stock measure of 128m sq ft (net), an M4 market stock of 63m sq ft (net) and an M3 market stock of Zambia 42m sq ft (net). Zimbabwe • Second-hand floorspace has been sub-divided into A and B grade accommodation, reflecting high and Asia low quality respectively. Whilst subjective, this categorisation is based on an assessment of each property’s age, specification, location and overall attractiveness. Cambodia China • Pre-let = The letting of proposed schemes not yet under construction and those let during the construction process. Hong Kong India • All data presented is correct as at December 31st 2012. Indonesia Front cover image: The Stanza Building, Uxbridge (internal shot) Macau Malaysia © Knight Frank LLP 2013 Singapore This report is published for general information only. Although high standards have been used in the Thailand preparation of the information, analysis, views and projections presented in this report, no legal responsibility Vietnam can be accepted by Knight Frank Research or Knight Frank LLP for any loss or damage resultant from the The Gulf contents of this document. As a general report, this material does not necessarily represent the view of Abu Dhabi, UAE Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank Research. Bahrain Dubai, UAE Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Qatar Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.