LONDON FLOOR REVIEW A floor-by-floor analysis of the London office market Q2 2016

QUARTERLY SUMMARY • EU referendum casts shadow over London office market • Take-up in London drops 21% during Q2 • Space under offer rises 21% as occupiers ‘pause’ before referendum result • However several large high profile deals complete early in Q3 • London availability rises 31% driven by H2 2016 development completions in the East • Trophy space attracts higher rents, but prime headline rents flat in Q2

SECOND QUARTER REVIEW

Q2 2016

Q on Q

Y on Y

Take-up

• Q2 take-up down on 3 year quarterly average of 2.5 million sq ft • No deals agreed over 50,000 sq ft

2.0m sq ft

taken-up during Q2, over 531 floors YTD 4.6m sq ft

-21% by sq ft -14% by floors

-23% by sq ft +2.5% by floors

Under Offer

• Space under offer increases in Q2 • Occupiers held out for referendum outcome and revisit terms of deals

1.97m sq ft

under offer at the end of Q2, over 325 floors

+21% by sq ft +6% by floors

-1% by sq ft -14% by floors

Supply

• Availability increased sharply in Q2 due to addition of space in the East development pipeline • Availability in the West broadly static

7.6m sq ft

available across 1,392 floors

+31% by sq ft +34% by floors

+41% by sq ft +49% by floors

West

• Occupiers in a position to wait for space demand better terms • Outlook for rental growth downgraded

£125 per sq ft Prime headline rent

£125 per sq ft

£117.50 per sq ft

East

• Trophy space attracts higher rents but prime rents remain flat • Outlook for rental growth downgraded

£70 per sq ft Prime headline rent

£70 per sq ft

£64.00 per sq ft

We will go through a period of market recalibration following the referendum. Tenants will push harder on terms, especially as the development pipeline expands, but only those with occupational flexibility can legitimately adopt these tactics. Stephen Peers, Partner

www.geraldeve.com

Comment

LONDON OFFICES BREXIT SWOT ANALYSIS

As the largest financial hub in the European Union, London has the greatest exposure to the implications of any deal with the EU, particularly how the issue of ‘passporting’ is resolved. Here we take a look at the strengths and weaknesses of the London office market in the light of the referendum result. Strengths

Opportunities

• Recent strong letting activity has

• Occupiers will be able to negotiate for

reduced built supply to historically low levels, which affords some protection against any reduction in demand.

• The increased number of tech and media occupiers, particularly in the East, has diversified the tenant base away from the finance sector. This diversity increases the resilience of the market against sector-specific impacts.

• Many financial institutions seek to be in London for access to the UK and non-EU markets and all occupiers place a high value on the highly skilled workforce, time zone and transparency of the London office market.

Weaknesses • The greatest risk of relocation comes from occupiers in the financial and services sectors. However, according to MSCI, by origin of the lessee, 70% of this sector’s office space (by contracted rent) is domestic.

• Whilst London’s tenant base has diversified in the current cycle, it is still exposed to international occupiers in the financial services sector and is susceptible to any drop off in demand.

• The performance of London is strongly linked to the performance of the economy and consumer spending, the outlook for both of which have been downgraded.

improved terms on deals, both financially and in terms of lease flexibility.

Concentration of office tenancies by financial and services business, by region and origin of lessee

• As several funds and institutions suspend trading, we are likely to enter a period of these investors being net sellers. The properties owned by these funds are largely well located, well-let properties providing secure income which will be highly attractive to overseas investors who are encouraged by the devaluation of sterling.

Outer London

West End

• There are sectors which will benefit from the UK’s decision to leave the EU. For instance law firms and accountancy firms may need offices to deal with the additional work provided by the UK’s renegotiation, serviced office providers may benefit from occupiers’ need for flexibility and even hedge funds and insurance occupiers may benefit from deregulation outside of the EU.

City

Midtown 0

10

20

Threats • Some large banking and finance occupiers may reconsider London’s position in their European strategy, particularly if the UK’s exit negotiations become protracted and its ‘passporting’ rights become marginalised.

30

40

50

60

70

80

90

100

% UK

EU (Excluding UK)

Rest of the world

Source: MSCI, based on % of total contracted rent as at March 2016

• This could result in an increase in secondhand space being returned to the market at a time when there is also an enhanced delivery of grade A development.

• We expect some new office developments to be delayed as developers take stock of occupier demand and development finance becomes more restricted.

3

Q2 2016 AVAILABILITY WEST

Here we detail our findings on the supply of floors by each submarket, indicating the number of available floors for each size category as well as their respective quality. This includes space under construction which is due to be delivered to the market within 6 months. Supply

Under Offers 650 floors 8% on Q1

3.2m sq ft 2% on Q1

158 floors -1% on Q1

0.71m sq ft 29% on Q1

Regents Park

30,310 sq ft

Warre

S 49,862 sq ft

M 126,030 sq ft

L

Marylebone

Great Portland Street

Regents Park

Baker Street

XL

No. of floors

0

25

50

75

100

125

150

Marylebone

Availability fell by 11% in this sub-market. Following a handful of large floorplates being placed under offer, there were no floors over 10,000 sq ft available at the end of the quarter.

Marble Arch

Oxford Circus Bond Street

142,463 sq ft

S 316,536 sq ft

M

Mayfair & St James’s

177,479 sq ft

Mayfair & St James’s

L 112,404 sq ft

Green Park

XL

No. of floors

St James’s Park

0

25

50

75

100

Hyde Park

125

150

At the end of Q2, the volume of availability in this sub-market was 6% down on Q1. The sharpest drop in supply was on offices with floorplates over 10,000 sq ft. In the absence of significant development or refurbishment activity, it continues to be the case that 49% of all space on the market is unrefurbished. 31,211 sq ft

S 62,562 sq ft

M 58,621 sq ft

L

Soho No. of floors

143,433 sq ft

XL 0

25

50

75

100

125

150 Victoria

Casting agencies, advertising agencies, retailers and property firms all committed to space in Soho in Q2. Despite this diverse occupier interest, the overall volume of supply rose by 7% following the addition of large floorplates on Leicester Square and Shaftesbury Avenue.

www.geraldeve.com

Small Floorplate (S)

500 sq ft to 2,000 sq ft

Medium Floorplate (M)

2,001 sq ft to 6,000 sq ft

Large Floorplate (L)

6,001 sq ft to 10,000 sq ft

Extra Large Floorplate (XL)

10,001 sq ft +

New Refurbished Kings Cross St Pancras

Unrefurbished Angel

Source: Gerald Eve

Euston

Fitzrovia & Bloomsbury

Euston Square

en Street

Old Street 64,626 sq ft

S 240,647 sq ft

Russell Square

M 185,967 sq ft

Fitzrovia & Bloomsbury

Goodge Street

Farringdon

Barbican

L 384,311 sq ft

XL

No. of floors

0

25

50Liverpool Street 75

100

125

150

Moorgate Chancery Lane

Holborn

Tottenham Court Road

In spite of relatively strong levels of occupier interest from professional services, tech and media firms, availability in this sub-market rose by 35% in Q2. This follows on from the addition of The Harley Building on New Cavendish Street and medium floorplates on Newman Street and Whitfield Street. St Pauls

Covent Garden

Soho

Covent Garden

City Thameslink Bank

Aldgate

30,310 sq ft

S Leicester Square

Blackfriars

Temple

Mansion House

M

Monument

Fenchurch Street

49,862 sq ft Cannon Street

126,030 sq ft Piccadilly Circus

Covent Garden

Charing Cross

Tower Hill

L 238,710 sq ft

XL

No. of floors

Waterloo

0

25

50

75

100

125

150

The volume of supply increased by 19% during Q2 following the return of several unrefurbished floors between 5-10,000 sq ft back to the market. There are very few opportunities for occupiers requiring ‘new’ space with only the upper floors at The Adelphi able to satisfy these types of requirements. 6,233 sq ft

S

St James’s Park

40,213 sq ft

M 7,000 sq ft

L

Victoria No. of floors

Victoria

502,773 sq ft

XL 0

25

50

75

100

125

150

Following several quarterly increases in supply, availability fell by 25% in Q2. There are however still several large, good quality floorplates at Nova North and Verde on Bressenden Place and Nova South on Victoria Street available.

Pimlico

Current letting policies may dictate some floors are not available in isolation Source: Gerald Eve

5

SUPPLY AND DEMAND WEST

Availability by sub-market 5.0

Under offers by sub-market

Million sq ft

0.9

4.5

Million sq ft

0.8

4.0

0.7

3.5

0.6

3.0

0.5

2.5 0.4

2.0

0.3

1.5

0.2

1.0 0.5

0.1

0.0

0.0 Q2 16

Q1 16

Q4 15

Q3 15

Q2 15

Q1 15

Q4 14

Q3 14

Q2 14

Q2 16

Q1 16

Q4 15

Q3 15

Q2 15

Q1 15

Q4 14

Q3 14

Q2 14

Q1 14

Q4 13

Q3 13

Mayfair & St James Victoria Soho Marylebone Fitzrovia/Bloomsbury Covent Garden

Victoria Soho Mayfair & St James’s Marylebone Fitzrovia/Bloomsbury Covent Garden

Supply remains restricted Despite the small quarterly increase in the volume of supply, it is important to point out that in an historical context, supply and overall availability rates in the West End are very low. This is in contrast to previous periods of economic uncertainty.

Occupiers revisit terms of deals The amount of space under offer at the end of Q2 increased substantially on that at the end of Q1, as occupiers reviewed their position on buildings placed under offer pre-referendum. Occupiers are clearly considering the cost implications of the referendum on their own businesses before committing.

Q2 take-up by occupier sector

Quarterly take-up and 3 year average 3%

26% TMT

1.6

Million sq ft

Associations 1.4

29%

Banking & Finance

1.2 1.0 0.8

2%

Serviced Office

0.6 0.4

13% Retail

Q2 16

Q1 16

Q4 15

Diverse mix of tenants take space Whilst take-up was down in Q2, the space that was let was taken by a diverse range of occupiers. Banking & finance occupiers were the single most active sector following the letting of large floorplates in Victoria, but technology and professional services firms also engaged.

Q3 15

Take-up

Q2 15

Q1 15

Q4 14

Professional Services

0.0 Q3 14

Corporate

Q2 14

12%

0.2

15%

3 Year Average

Take-up falls for third consecutive quarter After a fairly robust Q1, Q2 take-up fell by 4% to a level below the 3 year average. During Q2, we didn’t see the large scale pre-completion lets agreed in recent quarters and the market has slowed since the announcement of the referendum.

Source: Gerald Eve

www.geraldeve.com

SUPPLY AND DEMAND EAST

Availability by sub-market 5.0

Q2 Under offers by sub-market and floor size

Million sq ft

1.4

4.5

Million sq ft

1.2

4.0 1.0

3.5 3.0

0.8

2.5 0.6

2.0 1.5

0.4

1.0 0.2 0.5 0.0

0.0 Q2 16

Q1 16

EC3

Q4 15

EC2

Q3 15

Q2 15

Q1 15

Q4 14

Q3 14

Q2 14

EC1

Total

EC1

EC4

Floor size:

EC2

Small

Medium

EC3

Large

EC4

Extra Large

Supply back to levels recorded in Q2 2014 The addition of 1.33 m sq ft of development supply, due for delivery to the market in H2 2016, has significantly increased the volume of supply in the East back to the same volumes recorded as being on the market in Q2 2014. Space at 1 Angel Court, One Creechurch Place and the Cursitor Building on Chancery Lane are all currently due to complete by the end of the year.

Occupiers revisit terms of deals The amount of space under offer increased by 13% in Q2 as occupiers seemingly took stock of their position and held off committing ahead of the referendum result. Those businesses under offer in Q2 have attempted to take advantage of the uncertainty and are closely evaluating the cost implications of taking or vacating space.

Q2 take-up by occupier sector

Quarterly take-up by sub-market and 3 year average 4%

31%

Associations

2.0

8%

1.8

Corporate

TMT

Million sq ft

1.6 1.4

19%

Finance & Banking

1.2 1.0 0.8 0.6

9%

Serviced Office

1%

10%

Insurance

Q2 16

Q1 16

EC4

Q4 15

EC3

Q3 15

Several TMT occupiers commit to the City We have highlighted that one of the main threats is the potential for financial institutions to relocate to alternative locations in the EU. However, as evidenced by take-up in Q2, the TMT sector has been a large and growing share of demand for several years. Companies such as Nippon Telegraph and Telephone Corporation, Booking.com and Colt Technologies all committed to take space in Q2.

EC2

Q2 15

EC1

Q1 15

Q4 14

Professional Services

0.0 Q3 14

18%

0.2

Q2 14

Retail

0.4

3 Year Average

Occupier demand slowed in lead-up to the referendum Take-up in the East fell by 29% in Q2 and no deals over 50,000 sq ft in size were agreed. This meant that demand in the East ended the quarter 23% down on the 3 year average quarterly take-up figure. The outlook for occupier demand in the near term is subdued as businesses revisit headcount and real estate strategies.

Source: Gerald Eve

7

Q2 2016 AVAILABILITY EAST

Here we detail our findings on the supply of floors by each submarket, indicating the number of available floors for each size category as well as their respective quality. This includes space under construction which is due to be delivered to the market within 6 months. Supply

Under Offers 742 floors 71% on Q1

4.46m sq ft 68% on Q1

167 floors 13% on Q1

1.26m sq ft 17% on Q1

Angel

386,329 sq ft

S 142,198 sq ft

M 124,638 sq ft

L

EC1

30,498 sq ft

XL

No. of Floors

0

25

50

75

100

125

150

175

It was the addition of several smaller floors from the development Euston Square pipeline and the return of secondhand space which significantly increased supply in this market. Conversley, the supply of the largest Warren Street floors over 20,000 sq ft in size has fallen on the quarter.

EC1

Portland Street

197,694 sq ft

S

Farringdon

313,090 sq ft

Barbican

M 373,032 sq ft

L

EC4 No. of Floors

114,742 sq ft

XL

Chancery Lane

Tottenham Court Road

0

Oxford Circus

25

50

75

100

125

150

175

Supply increased in this sub-market due to the addition of several mid-sized floors from the development pipeline. This remains the market with the highest quality of space on offer, as 78% of all Covent Garden space is either new or refurbished.

St Pauls

EC4 Blackfriars

Leicester Square

Temple

Piccadilly Circus

Green Park

Small Floorplate (S) Medium Floorplate (M) Large Floorplate (L)

Charing Cross

1,000 sq ft to 5,000 sq ft 5,001 sq ft to 10,000 sq ft 10,001 sq ft to 20,000 sq ft

Extra Large Floorplate (XL)

20,001 sq ft +

New Refurbished Unrefurbished Source: Gerald Eve

Waterloo

www.geraldeve.com St James’s Park

278,311 sq ft

S 346,091 sq ft

M 529,693 sq ft

L

EC2

172,747 sq ft

XL

No. of floors

0

25

50

75

100

125

150

175

It was the addition of several floors over 10,000 sq ft in size which meant this sub-market saw supply increase in Q2. Riverplate House, 99 Gresham Street and 70 Wilson Street all add large new floorplates to the market.

Old Street

376,172 sq ft

S 222,694 sq ft

M 674,008 sq ft

L

EC2

EC3

177,003 sq ft

XL

No. of floors

25

50

75

100

125

150

175

Supply increased across all floor size categories in Q2 and 69% of all space on the market is either new or refurbished. One Creechurch Place and the Monument Building offer new, large floorplates.

Liverpool Street

Moorgate

0

Development supply pipeline by postcode 2.5

EC3

Bank

Aldgate

Fenchurch Street Monument

2.0

Million sq ft 141 floors

133 floors

85 floors

2017

2018

2019

1.5 1.0

Cannon Street

0.5 Tower Hill

0.0

EC1

EC2

EC3

EC4

There is just over 2 million sq ft of space currently in the development supply pipeline due to be delivered to the market in 2017. This space is fairly evenly spread over the submarkets although much will depend on the levels and nature of demand next year as to how quickly this space is absorbed.

Current letting policies may dictate some floors are not available in isolation Source: Gerald Eve

9

LONDON OFFICE RENTS Q2 2016

Covent Garden

Mayfair & St. James’s

Fitzrovia/Bloomsbury

Soho

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

£80.00 £125.00

£80.00

£90.00

Victoria

Marylebone

Paddington

Knightsbridge

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

£80.00

£93.00

£59.50

£90.00

King’s Cross

Midtown

City

Aldgate

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

£80.00

£65.00

£70.00

£55.00

Clerkenwell/Shoreditch

Canary Wharf

E14

Southbank

Prime rent rent (per sq ft) Primeheadline headline per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

Prime headline rent per sq ft

£65.00

£50.00

£35.00

£62.50 Source: Gerald Eve

www.geraldeve.com

DEFINITIONS Availability

Floor / Floorplate

Marketed floorspace over 500 sq ft in size (in the West) and over 1,000 sq ft (in the East) and available to move into within 6 months that may or may not be vacant but which is actively marketed by an appointed agent. We monitor available floorspace in central London at an individual floor level. Each floor is assigned a floor size category and an individual grade for quality. The availability data covered in this report represents buildings within the boundaries outlined in the maps in this report. We monitor availability by the number of floors being marketed as well as the total size. The floor area in sq ft adopted throughout is the net internal area. Floors which are under offer are not included in our availability statistics. Availability is accurate two weeks before the end of the calendar quarter.

As well as the total volume of space being marketed as available, we also monitor the number of floors which account for this total volume. We monitor whether it is a full floor or part floor which is being marketed, although for our statistics, we treat an individuallymarketed ‘part’ floor as ‘one’ floor. If a floor is capable of sub-division to accommodate two suites, but can likewise be occupied together, we use the total floorplate for that floor.

Newly available space Space on the open market including developments which are within 6 months of completion. This includes units of secondhand space which are undergoing refurbishment.

Floor quality New: Floor in a newly-developed or newly-refurbished building, including sub-let space in new buildings which have not been previously occupied Refurbished: A floor which has been comprehensively refurbished and is of good specification, floorplate efficiency and image, but is in a building which is not new or been comprehensively refurbished. Unrefurbished: Poorer quality space, usually offered for occupation ‘as is’.

London Offices

Under offer

Reference to London offices in this report refers to floors over 1,000 sq ft the East (comprising the postcodes EC1, EC2, EC3 and EC4) and floors over 500 sq ft in the West as depicted on the map (comprising West End submarkets Soho, Covent Garden, Mayfair & St James’s, Victoria, Marylebone and Fitzrovia & Bloomsbury).

Space which a prospective occupier has agreed in principle to occupy but is most likely to be under no legal or contractual obligation to do so.

Requirement Named entities with appointed agents and a declared requirement for office accommodation which the named entity wishes to satisfy in the foreseeable future. If the requirement has a preferred size range, the average size of the requirement is used. Given requirements often include a range of targeted sub-markets, we have included the requirement for each of the sub-markets when analysing individual sub-markets, but, when calculating overall London requirements, duplicates are removed.

Prime headline rents The rent being paid which does not take account of concessions such as rent free periods. The references to both headline rents and incentives in this report are a reflection of the best office space in that submarket which is taken on an assumed 10 year term. We use the ‘best achieved’ method of recording prime rents. Where there is recent evidence of transactions, then our data is representative of it. In cases where there is no recent evidence, then the rent is recorded on the basis of the best hypothetical transaction which could be achieved as at the end of that quarter. In the East, prime headline rents refers to low-rise buildings.

Incentives This refers to the concessions offered by a landlord to a tenant as part of the negotiation process. Incentives usually adopt the form of rent free periods, but can also be in the form of capital contributions or the fit-out of the building.

Take-up Occupational transactions including offices let or sold to an occupier, developments pre-let or pre-sold to an occupier or an owner occupier purchase of a freehold or long leasehold. We analyse take-up at individual floor level and in terms of the overall volume.

Quality of choice This is a subjective measure holistically assessing the appropriateness of current availability to modern office requirements. Whilst our figures may represent a large number of floors available in particular size categories or postcode geographies, the floorplates efficiencies or amenities on offer within this supply may not meet all the expectations of modern office tenants and the quality of choice would be lower.

Development Supply / Future Supply Office space which is under refurbishment or development, without a tenant and which is actively being marketed and has a known delivery date. It does not include space bought to the market in the future due to lease expiries or the natural churn of stock. The same floor size categories are used as defined in ‘Availability’.

Net absorption This measures the net overall balance of occupied space over a prescribed time period. We calculate net absorption by subtracting the change in available space (both by the number of floors and the overall volume of space) between two time periods from the amount of development completions added to the market within the same time period. For our calculation we assume that all available space is ‘vacant’ on the premise that space that is marketed as being available is underused and likely to be vacated. Known sub-let space and lease renewals are not factored into net absorption except where the lease renewal includes the leasing of additional space, and then that additional space is counted. Pre-letting of space in non-existing buildings is not counted in net absorption until the development is completed and the tenant takes occupation.

11

CONTACTS Gerald Eve’s London office team provides specialist advice across the spectrum including agency, investment, lease consultancy, rating, valuation, planning and development and project management. To find out more about us and what we could do for you please visit our website www.geraldeve.com or contact the following people direct.

London Agency

London Lease Consultancy

Stephen Peers Partner Tel. +44 (0)20 3486 3450 Mobile +44 (0)7771 607 057 [email protected]

Graham Foster Partner Tel. +44 (0)20 7653 6832 Mobile +44 (0)7774 823 663 [email protected]

Fergus Jagger Partner Tel. +44 (0)20 7653 6831 Mobile +44 (0)7787 558 756 [email protected]

Tony Guthrie Partner Tel. +44 (0)20 3486 3456 Mobile +44 (0)7585 960 695 [email protected]

Steve Johns Partner Tel. +44 (0)20 7653 6858 Mobile +44 (0)7833 401 249 [email protected]

London Planning & Development

London Investment Lloyd Davies Partner Tel. +44 (0)20 7333 6242 Mobile +44 (0)7767 311 254 [email protected]

Lisa Webb Partner Tel. +44 (0)20 7333 6225 Mobile +44 (0)7747 607 309 [email protected] Nick Brindley Partner Tel. +44 (0)20 7333 6362 Mobile +44 (0)7944 584 743 [email protected]

Office Locations London (West) 72 Welbeck Street London W1G 0AY Tel. +44 (0)20 7493 3338 London (East) 46 Bow Lane London EC4M 9DL Tel. +44 (0)20 7489 8900 Birmingham Bank House 8 Cherry Street Birmingham B2 5AL Tel. +44 (0)121 616 4800 Cardiff 32 Windsor Place Cardiff CF103BZ Tel. +44 (0)29 2038 8044 Glasgow 140 West George Street Glasgow G2 2HG Tel. +44 (0)141 221 6397 Leeds 1 York Place Leeds LS1 2DR Tel. +44 (0)113 244 0708 Manchester No1 Marsden Street Manchester M2 1HW Tel. +44 (0)161 830 7070

Disclaimer & copyright This brochure is a short summary and is not intended to be definitive advice. No responsibility can be accepted for loss or damage caused by reliance on it. © All rights reserved The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP.

www.geraldeve.com