OFFICE MARKET BULLETINLondon, Autumn 2017

Headline rents begin to retreatMany locations in Central London have seen headline office rents hold steady for the better part of two years. However, as we have been reporting for several quarters now, rent free periods have been moving out in order to sustain this. That said, we appear to be at a critical rent free level, which is driving some landlords to consider alternative incentives, such as delayed completions.

Consequently, net effective rents have been continuing to decline gradually, having first started just after the Brexit referendum. The prolonged period of apparent stability has however given way to an unspoken adjustment of headline asking rents on existing building stock, as reflected in the reduction of rents in 5 of the 18 submarkets we monitor.

For the Central London market as a whole, the vacancy rate continues to hover at around 6.4%; down slightly on the five year average of 6.7%.

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The relatively low vacancy rates have in part aided the stability in headline asking rents and string of major pre-letting deals.

However, with uncertainty around the outcome of the Brexit talks arguably intensifying and the UK seemingly missing out on the rising level of global trade, and GDP growth remaining lacklustre at an estimated 0.4% in Q3, many firms remain nervous about committing to more space, bolstering demand for lease flexibility.

The exception to this of course remains the TMT sector, with requirement levels from this cohort remaining healthy. In general, large requirements in excess of 100,000 sq ft are limited, particularly when compared to 18-24 months ago.

One of the largest requirements in the market at the moment is JLL’s 180,000 sq ft search for a new central headquarters by 2022 which highlights the weak development pipeline,forcing businesses to start the process earlier.

Q3 vacancy rate

Source: PropertyDataSource: CoStar

6.4% £3.08 billionQ3 Central London office investment activity

Performance of rents in Central London

Challenges ahead for landlords?The quieter conditions suggest that landlords will need to demonstrate greater flexibility in order to attract new tenants, whilst also preparing for what appears to be the start of a period of a softening in office rents across London. We have been reporting on the declining length of lease tenures for almost a year and these currently stand on average at 3.2 years; the lowest level ever recorded in London.

For commercial office developers, the challenge is slightly more acute, especially where space is being developed speculatively. While pre-lets are arguably the strongest feature of the market, occupier expectations and demands continue to evolve, putting greater pressure on the specification and design of new buildings which have cost implications. In addition, some existing stock has now become obsolete.

Spike in investment market activityWhile rents have edged lower in some locations, implied capital values have also followed suit in these areas, although in real terms the declines are marginal at best, with locations such as Canary Wharf and the City Core (down £15 psf CV), for instance, softening slightly in Q3. In general, equivalent yields in Central

London have held stable at 5% throughout Q3, according to IPD, however pressure may build on yields should rents edge lower in the months ahead.

Overall investment activity has continued to surge, in part supporting stability in capital values, which are being underpinned by the sheer weight of capital entering the market. Central London recorded £3.08 billion worth of deals during Q3, compared to £1.7 billion during Q2. Investors from the Far East accounted for £1.96 billion worth of deals, while Middle East investors pumped £446 million in to the Central London office market in the three months to the end of September.

In general, with the low rate and weak GDP environment persisting, investors remain focussed on secure longer-lease income deals that offer index-linked rent rises.

Beyond the office market, industrial assets around the UK remain in high demand. With yields for this asset class compressing to 6% at the end of September (from 6.6% a year earlier), the upward pressure on warehouse rents is likely to persist, especially if online retailing continues to boom.

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West End Midtown The City HammersmithSouth Bank Docklands

Source: Cluttons

Landlords will need to prepare for what appears to be the start of a period of a softening in office rents across London.

Cluttons Office market bulletin, Autumn 2017

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Market Submarket Prime headline

rent* (£ psf)

Q/Q % change

12 month % change

Prime capital values (£ psf)

Q/Q % change

12 month % change

Hammersmith 1. Hammersmith 55 -4.3% -4.3% 885 -1.7% -1.7%

West End 2. Kensington & Chelsea 77.5 0.0% 0.0% 1,275 0.0% 0.0%

3. Paddington 60 0.0% 9.1% 1,030 -1.9% 7.3%

4. Marylebone 90 0.0% 0.0% 1,750 -1.4% -1.4%

5. Mayfair 120 0.0% 0.0% 2,750 0.0% 5.8%

6. Noho, Soho & Covent Garden 85 0.0% 0.0% 1,600 -3.0% 6.7%

7. St James’s 120 0.0% -4.0% 2,700 0.0% 3.8%

8. Victoria, Westminster, Knightsbridge & Belgravia 80 -3.0% -3.0% 1,390 -0.7% 6.9%

Midtown 9. King’s Cross 75 -6.3% -3.2% 1,245 -0.4% 3.8%

10. Midtown 66 -5.7% -5.7% 1,170 -0.4% 1.7%

Southbank 11. Southbank 65 0.0% 0.0% 875 0.0% 2.9%

12. Vauxhall & Nine Elms 55 0.0% -4.3% 725 0.0% -3.3%

City 13. Clerkenwell & Farringdon 65 0.0% 0.0% 1,065 -0.9% -3.2%

14. Old Street & Shoreditch 55 0.0% 0.0% 960 -1.5% -8.6%

15. City Core 67.5 -3.6% -3.6% 1,285 -1.2% 2.8%

16. Eastern City Fringe 55 0.0% 0.0% 850 0.0% 3.0%

Docklands 17. Canary Wharf 47.5 0.0% 0.0% 760 -1.9% -1.9%

18. South Quay 35 0.0% 0.0% 500 0.0% 0.0%

Central London office market heat map (Q2 2017)

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Rent psf

*Rents quoted are headline, not net effectivePrime rents are defined as the top quartile of headline rents: excluding penthouses and floors with large terraces, as well as suites in large, iconic towers.

Key deals

80 Charlotte Street W1 Boston Consulting Group (pre-let) 123,500 sq ft

Adelphi Building, WC2 Spotify 104,150 sq ft

Seven Dials Warehouse, WC2 Red Bull Studios (pre-let) 37,855 sq ft

Verde, SW1 TP ICAP 34,163 sq ft

The Point, W2 FirstGroup 18,125 sq ft

Source: Cluttons, EGi, CoStar

Source: Cluttons

Cluttons Office market bulletin, Autumn 2017

© Cluttons LLP 2017. This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

For further details contactFaisal DurraniHead of research+44 (0) 20 7647 7166faisal.durrani@cluttons.com

Freddie Pritchard-SmithHead of commercial agency +44 (0) 20 7647 7094 freddie.pritchardsmith@cluttons.com

Ralph PearsonPartner – Commercial office agency+44 (0) 20 7647 7037ralph.pearson@cluttons.com