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Central London office analysis

RESEARCH

OCCUPIER MARKETTake-up in Q2 was 10% up on the previous quarter, as availability and rents remain relatively stable, with some submarkets seeing an increase in incentives.

INVESTMENT MARKETInvestment for the second quarter totalled £4.1 billion, 5% up on the five-year quarterly average, with yields in some submarkets coming in 25bps.

Q2 | 2017

32

Welcome to GVA’s central London office analysis; our detailed view of the market in Q2 2017.

Before we start…One of the prevalent trends of the last few years has been the robust levels of pre-letting. This quarter saw pre-letting decrease, with just 383,000 sq ft transacting – the second lowest quarter since 2013.

However, what is perhaps the most notable is the lack of pre-construction letting during the quarter, with the only pre-construction deal of the year occurring in the first quarter of the year when Arup committed to 80 Charlotte Street (W1). Comparatively, 2016 saw six pre-construction lettings.

Heigh Ho–It’s off to WeWork, we goThe most eye catching deal of the second quarter was the continued expansion of co-working office space providers WeWork, who completed on the largest deal of the quarter at 2 Southbank Place, taking the entire 280,000 sq ft. This was the largest ever co-working deal in London.

During the quarter, WeWork also committed to 140,000 sq ft at another of Almacantar’s development sites, 125 Shaftesbury Avenue, as well as starting negotiations to take 50,000 sq ft at U+I’s Hammersmith Grove. The continued expansion of WeWork means that in the last year, they have single-handedly accounted for 7.7% of central London take-up.

Need a little patienceDepending on the particular submarket, headline rents have seen little to no upward movement, with some markets in the West End seeing significant decreases. At the same time, rent free periods have moved out across almost all markets, meaning that on a net effective basis, rents are now almost universally cheaper than this time in 2016.

However, whilst we have seen pressure on rents, we must not ignore the fact that these are still at historically high levels. There is still active demand from many sectors, although it seems generally event-driven rather than due to business expansion.

The real difference we have seen in the letting market is the amount of time it is now taking to identify tenants, negotiate terms and complete deals. In addition, landlords are increasingly agreeing to delayed completions in order to get deals done, with plenty of deals under offer for over six months.

Occupier market – in brief

Patrick O’Keeffe

Head of London Agency and Investment

pok@gva.co.uk 020 7911 2768

Cover photo : GVA are marketing the freehold interest in 22 King Street, St James’s (SW1).

The real difference in the letting market is the amount of time it is now taking to complete deals

54

Central London prime rental growth

Source: GVA

40

30

20

10

0

-10

-20

-30

Years (Q2)

Rental growth (%)

City

West End

Docklands

Central London

Space (million sq ft)

City

West EndDocklandsCompleted

Annual development completions

Source: GVA

Central London

Take-upCentral London take-up for Q2 2017 totalled 2.2 million sq ft, 10% up on the previous quarter, but 12% down on the five-year quarterly average of 2.5 million sq ft. This brings take-up for the first half of the year to 4.3 million sq ft, which, whilst 20% down on the second half of 2016, was 6% up on the corresponding period in 2016.

During the quarter the majority of the activity was in the City fringe, accounting for 1.1 million sq ft (46%) of take up, with the West End fringe seeing the second most activity at 681,000 sq ft (31%). The City fringe and West End core were the best performing markets, and the only markets to see take-up in excess of their respective five-year quarterly averages, at 17% and 21% respectively.

The largest deal of the quarter was on the Southbank where WeWork took 280,000 sq ft at Almacantar’s Two Southbank Place (SE1), due for completion at the end of 2018. The same serviced office operator was also responsible for the second largest deal of the quarter, when they agreed to take 150,000 sq ft at 125 Shaftesbury Avenue (WC1). At 28 Chancery (WC2), Framestore took 94,000 sq ft across eight floors.

Take-up of newly completed space made up 750,500 (34%) of the total for the quarter, with pre-letting making up an additional 383,100 sq ft (17%). Second-hand grade A space 821,300 sq ft (39%) and second-hand grade B space made up a further 283,000 sq ft (14%).

During the quarter, five deals completed over 50,000 sq ft, down from the eight seen in the previous quarter.

AvailabilityThere is currently 10.3 million sq ft available across central London, increasing from 10.2 million sq ft as of the end of Q1 2017. Since this time last year, the amount of available space has increased by 27% with 2.2 million sq ft more on the market than this time last year.

The vacancy rate is stable at 5.3%, the highest it has been since Q1 2015, and in line with the five-year end-quarter average.

DevelopmentDuring the quarter, nine buildings totalling 543,500 sq ft completed, including two over 100,000 sq ft.

The largest building to complete in the City was Ocubis’ 115,000 sq ft Cannon Green (EC4), which was 70% let on completion. In the West End, work completed at British Land’s 146,000 sq ft 4 Kingdom Street (W2), with only one floor remaining just a week after completion. The remaining floor is likely to be offered by British Land under their new managed office concept ‘Storey’.

Six buildings totalling 1.4 million sq ft started during the quarter including GIC and British Land’s 530,000 sq ft 100 Liverpool Street (EC2) and the refurbishment of 290,000 sq ft 1 Finsbury Avenue (EC2). Work also started on additional buildings King’s Cross Central (N1).

There is currently 16.4 million sq ft under construction across central London, with 4.7 million sq ft (28%) due for completion before the end of 2017 and a further 7.1 million sq ft (44%) due before the end of 2018. Of the space currently under construction, 6.5 million sq ft (40%) has already been let, leaving 9.9 million sq ft of available space currently under construction.

Rental growthCentral London prime rents fell 0.9% during the quarter, the fourth successive quarterly decrease after a record 26 quarters of consecutive growth. Prime rents were down 6.7% on the year and are now down to levels last seen at the end of 2014. During the first half of the year, prime rents are down 1.5%.

By and large, prime rents in the City and Docklands were stable, although the West End saw rents fall by 1.4%.

2007 2009 2011 2013 2015 20172008 2010 2012 2014 2016

Central London office availability rates

Source: GVA / CoStar

10

8

6

4

2

Availability rate (%)

Years (Q2)

City

West End

Docklands

Central London

2007 2009 2011 2013 2015 20172008 2010 2012 2014 2016

Years

Take-up (million sq ft)

4

3

2

1

City

West EndDocklands

5 year quarterly average

Central London Take-up

Source: GVA / EGi / CoStar

2012 2013 2014 2015 2016 2017 2018 2019 2020

Q2

Q2Q2

Q2

Q2

Q2

2012 2013 2014 2015 2016 2017

(under construction)

7

8

9

10

6

5

3

2

1

4

CityWest End

Take-upTake-up during the quarter reached 840,700 sq ft. This was just 1% down on the previous quarter and 2.5% down on the five-year quarterly average of 862,600 sq. Take-up for the first half of the year totalled 1.7 million sq ft, in line with activity measured during the second half of 2016, but 35% up on the corresponding period last year.

WeWork did the largest deal in the West End when they agreed to take 150,000 sq ft at 125 Shaftesbury Avenue (WC1). At LSQ (WC2), Hearst committed to 71,000 sq ft across five floors, paying a rent of £85 per sq ft.

During Q2 2017 deals on new space accounted for 326,900 sq ft or 39% of the total take up across the West End. Second-hand grade A space accounted for a further 442,500 sq ft of activity (37%), with pre-letting accounting for just 2%. Second-hand grade B space made up 6% of take-up (53,200 sq ft).

AvailabilityAvailability increased from 3.8 million sq ft to 3.9 million sq ft during the quarter. The vacancy rate is now up to 4.7%, its highest since Q4 2013. Availability is 44% higher than this time last year, equating to 1.2 million sq ft more space. Available space is now 13% above the five-year end-quarter average.

DevelopmentDuring the second quarter of the year, 190,000 sq ft was delivered across just two buildings.

The largest of these was British Land’s 146,000 sq ft 4 Kingdom Street (W2). In Mayfair, New Estate International’s 10 Stratton Street (W1) completed. There is currently 3.5 million sq ft of development activity in the West End.

Rental growthThe second quarter saw prime rents decrease by 1.4% across the West End. The West End has now not seen positive rental growth since Q4 2015.

In Mayfair and St James’s, prime rents were stable at £105 per sq ft with rent free periods increasing from 18 to 22 months. Net effective rents are now £85.75 per sq ft, the lowest since Q1 2013 and 18% cheaper than the corresponding period last year. Super-prime headline rents are £125 per sq ft, with rent free periods stable at 18 months.

Take-upTake-up during Q2 2017 totalled 1.4 million sq ft, which was 20% up on the previous quarter, but 8% down on the five-year quarterly average. Take-up for H1 2017 was 2.5 million sq ft, which whilst 14% down on the second half of 2016, despite being 4% up on the first half of 2016.

The largest deals during the quarter were to WeWork, who took 280,000 sq ft at Almacantar’s Two Southbank Place (SE1), Framestore who took 93,900 sq ft at 28 Chancery (WC2) and Bupa who committed to 56,300 sq ft across three floors at Angel Court (EC2). Other notable deals included ILM taking 46,900 sq ft at Lacon House (WC1) and Hermes’ acquisition of 46,300 sq ft at 150 Cheapside (EC2).

Take-up of new space accounted for 104,300 sq ft and 31% of total activity for the quarter, with pre-letting and take-up of second-hand grade A space both accounting for 365,100 sq ft 27% apiece. Second-hand grade B space made up 207,000 sq ft (15%).

AvailabilityAvailability in the City increased slightly from 5.6 million sq ft to 5.7 million sq ft, with the vacancy rate stable at 6.1%. Availability is 20% up on the corresponding quarter in 2016 but still 3% below the five-year end-quarter average.

DevelopmentDuring the quarter 353,500 sq ft completed across seven buildings, with the largest being Ocubis’ 115,000 sq ft Cannon Green (EC4), which was 70% let on completion. Other notable completions during the quarter included Network Rail and Brookfield’s 95,000 sq ft 1 Puddle Dock (EC4) and Amsprop’s 41,000 sq ft Crosspoint (EC2).

Construction started on 875,100 sq ft across three buildings during the quarter including British Land and GIC’s 530,000 sq ft 100 Liverpool Street (EC2) and the refurbishments of the 290,000 sq ft 1 Finsbury Avenue (EC2), and Frederick’s Place (EC2).

There is now 12 million sq ft under construction in the City. Of this, 3.7 million sq ft is due to complete in 2017, with 6.2 million sq ft earmarked for 2018. There is currently 2 million sq ft under construction due for completion in 2019. Of the total space under construction, 5.7 million sq ft is already let (48%), leaving just 6.3 million sq ft of available space in the pipeline.

Rental growthPrime rents in the City remained stable for a fourth successive quarter.

Prime rents remained stable across all submarkets during the quarter, whilst rent free periods also saw no movement. On a net effective basis, prime rents are now cheaper than they were this time last year in all submarkets.

Prime headline rents in the City core remain at £70 per sq ft, where they have been since Q1 2016, with rent free periods at 22 months. Net effective rents in the City core are now at £57.17 per sq ft.

KEY STATS THIS QUARTERKEY STATS THIS QUARTER

1.4 m840,700

0%-10.3%

sq ftlet

sq ftlet

annualrental growth

annualrental growth

6.1%4.7%

£70£105

12 m3.5 m

vacancy rate

vacancy rate

per sq ftprime rent

per sq ftprime rent

sq ft underconstruction

sq ft underconstruction

8% down on 5-year quarterly average2.5% down on 5-year quarterly average

76

Docklands & Stratford Midtown

Take-upThere was very little activity in the quarter with take up in the Docklands reaching just 30,500 sq ft. Coupled with a very slow first quarter of the year, it means that take-up for the first half of 2017 totalled just 69,400 sq ft, just 10% of the volume transacted during the second half of 2016.

Only two deals completed during the quarter, at Quay House (E14) and The Columbus Building (E14), with the latter to an occupier from the Level 39 incubator space.

AvailabilityAvailable space increased slightly from 750,000 sq ft to 795,000 sq ft during the quarter, with most of this available on a sublet basis. The vacancy rate increased from 3.9% to 4.1% during the quarter, with vacancy now above 4% for the first time in six quarters.

Available space is 12% higher than this time last year and at its highest since Q4 2015. Despite this, available space is still 33% below the five year end-quarter average.

Development 695,000 sq ft is under construction at 1 Bank Street (E14), due to complete in 2019. Elsewhere, Canary Wharf Group have submitted new plans for 10 Bank Street (E14), which would see a further 700,000 sq ft delivered to the market.

At Canary Wharf’s New District, phase 1 is to be delivered in 2020, with the 150,000 sq ft 15 Water Street (E14) and 210,000 sq ft 20 Water Street (E14). The former is rumoured to be under offer.

Rental growthIn Canary Wharf, prime rents remained stable at £42.50 per sq ft, with rent free periods stable at 22 months.

Outside the Wharf, prime rents remain at £35 per sq ft with rent free periods at 20 months, whilst in Stratford prime rents are now at £47.50 per sq ft, with 22 months rent free.

Take-upTake-up in Midtown during Q2 2017 was muted, totalling just 240,000 sq ft which was 59% down on the previous quarter and 35% down on the five-year quarterly average. Quarterly take-up was the lowest since Q4 2014. However, a strong first quarter means that take-up for H1 was 825,700 sq ft – 63% up on the last half of 2016, and 54% up on H1 2016.

The largest deal of the quarter was at 28 Chancery (WC2), where Framestore took 93,900 sq ft. Elsewhere, Industrial Light & Magic acquired 46,900 sq ft at Lacon House (WC1).

Take-up of new space accounted for 185,000 sq ft and 77% of total activity for the quarter. Take-up of second-hand space totalled 55,000 sq ft and 22%.

Take-up of newly completed space accounted for 185,000 sq ft, (77%) of take-up, with second-hand grade B space making up 49,000 sq ft (20%), and second-hand grade A space just 3%. There was no pre-letting during the quarter.

AvailabilityAvailability in Midtown was stable at 1.6 million sq ft, with the vacancy rate also remaining stable at 4.1%. Availability is in line with the corresponding quarter in 2015.

DevelopmentDuring the quarter 137,000 sq ft completed across three buildings – all refurbishments, with the largest being Network Rail and Brookfield’s 1 Puddle Dock (EC4).

The other completions during the quarter included the City of London and City Bridge Trust’s 18,000 sq ft Bridge House (EC4) and Boultbee Brooks’ 25,000 sq ft Black Bull Yard (EC1). There were no new starts during the quarter.

There is now 2.1 million sq ft under construction across Midtown.

Rental growthPrime rents across all Midtown submarkets remained stable during the quarter, with prime rents up 1.2% on the corresponding period last year.

KEY DEALS THIS QUARTER KEY DEALS THIS QUARTER

30,500 240,000sq ftlet

sq ftlet

4.1% 4.1%

£47.50 £75

886,350 2.1 m

vacancy rate

vacancy rate

per sq ftprime rent

per sq ftprime rent

sq ft underconstruction

sq ft underconstruction

85% down on 5-year quarterly average 35% down on 5-year quarterly average

98

11

We are now more than a year since the decision was made to leave the European Union, in which time the UK has experienced further political turmoil through a hung parliament. However, every cloud has a silver lining and with the threat of a hard Brexit receding, in Q2 the City investment market has seen a hardening of net initial yields.

The weakening of the pound continues to present opportunities to overseas investors looking to benefit from stronger local currencies and investors seem to be confident in London remaining as a global business destination. Goldman Sachs has continued building their £350m European headquarters totalling 850,000 sq ft and Deutsche Bank is still in detailed negotiations with Land Securities for a new HQ at Moorfields.

We have seen capital value growth, with a lot deals over £100 million now exchanging for over £1,100 per sq ft on average. The bigger picture sees the rolling 12-month total turnover for City deals at £8.3bn, 11% up on the long-term average. The stats seem to dispel the rumours that the market is slowing down but it would seem that the breadth of buyers is thinner than for some time.

Whilst the Chinese wave continues there have been a number of high profile deals by German investors. DEKA purchased 78 Cannon Street for £500m reflecting a NIY of 4.46% and Deustche AM purchased 2 & 3 Bankside SE1 for £310m reflecting a NIY of 5%, Union Investments purchased 160 Aldersgate for £203m reflecting a NIY of 4.73% from Mercer Real Estate The Copyright Building 30 Berners Street for £165 at a NIY of 4.2% from Derwent London. It is not all one way traffic though, as German owners are also selling in this market. Commerz Real has triggered the sale of Athene Place for £120m.

However there is no denying that the Far East is the dominant force which has seen Chinese and other Asian money accounting for over half of 2017 transaction volume to date. Notable 2017 Q2 overseas deals include the purchase of 33 Old Broad Street for £260m at a NIY of 3.9% by the Hong Kong listed investor SEA Holdings and 20 Gresham Street to Colony North Star and China Resources Land for £310m at a NIY of 3.9%. Singaporean Steam Field Investments purchased 67 Lombard Street for £140m reflecting a NIY of 4%, and it was Thai group Utopia Properties who purchased Pinners Hall, Old Broad Street for £98.6m at a NIY of 4%. Despite being at the start of 2017 the purchase of The Leadenhall Building for £1.115bn for a NIY of 3.5% by Chinese CC Land is symbolic of the current investment tone and where the bulk of the money is coming from.

Who else should we watch? The advance of serviced office operators continues. This has been taken a step further; WorkSpace Group acquired Salisbury House for £159m NIY 6% in the back end of Q2 and US co-working group WeWork are set to acquire 120 Moorgate for c£40m and 51 Eastcheap.

Investment market – in brief

Chris Gore

Head of City Transactions Senior Director

chris.gore@gva.co.uk 020 7911 2036

The weakening of the pound continues to present opportunities to overseas investors

GVA are advising on the sale of 52-65 Carter Lane (EC4)

12

Central London investment

Transaction volumesDuring Q2 2017, central London investment totalled £4.1 billion across 37 deals, 3% down on the first quarter but 5% up on the five-year quarterly average.

The West End saw £1.7 billion transacted, 27% down on the previous quarter but 30% up on the corresponding period last year. Q2 2017 was 3% up on the five-year quarterly average. The largest deal in the core was Chinese Estates’ purchase of 11-12 St James’s Square (SW1) for £175 million, representing a yield of 4.25%. Elsewhere, Wanda paid St Modwen for the Nine Elms Square (SW8) mixed use development site, due to complete later in the summer, but there are rumours abound this deal may not proceed as the Chinese authorities are currently investigating Wanda.

In the City, £2.0 billion was transacted across 18 deals during Q2, in line with the previous quarter. Investment for Q1 was 7% down on the five-year quarterly average but 4% up on the corresponding quarter last year. The largest deal of the quarter was DEKA Immobilien’s £485 million purchase of Cannon Place (EC4) from Hines, representing a yield of 4.46%. On the Southbank, Deutsche Assets and Wealth Management paid M&G £310 million for Bankside 2&3 (SE1).

This quarter overseas money accounted for £2.9 billion (72% of total investment). UK property companies accounted for £610 million of investment for Q2 2017 (15%), whilst UK institutional investors were responsible for 11% of total investment for the quarter (£450 million).

During the quarter, there were 15 purchases of over £100 million, with six of these in excess of £200 million.

Yields Q2 2017 saw prime yields remain stable in all but two of our submarkets, with Paddington and the City core both coming in 25 basis points. Prime yields in Mayfair and St James’s remain at 3.5%, with City core at 4.25%. The market seems to have readjusted post-Brexit.

3.53.75 3.75

4.25 4.25 4.25

4.75 4.75 4.754.5

Central London prime office yields

Source: GVA

Years

£ billion

City

West EndDocklands

5 year quarterly average

Central London office investment transactions

Source: GVA / PropertyData

GVA are disposing of 28,498 sq ft on behalf of REM at 48 Pall Mall (SW1)

7

8

5

4

3

6

2

1

Q2

Q2

Q2Q2

2012 2013 2014 2015 2016 2017

Q2

Q2M

ayfa

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M’b

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Fitz

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Soho

/Cov

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Cit

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Hol

born

Vic

toria

Padd

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Cit

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Cit

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rthe

rn fr

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Sout

hwar

k

Hammersmith

Fulham

Kensington

Chelsea

Hyde ParkMayfair

Paddington

Marylebone

Regent’s Park Euston

Fitzrovia

Soho

WaterlooLondon Bridge

City Core

Aldgate – Whitechapel

Canary Wharf

FringeDocklands

Victoria

Belgravia/ Knightsbridge

Battersea Park

Vauxhall/ Battersea

Covent Garden

Clerkenwell

Chancery Lane

Shoreditch/ Spitalfields

StratfordKing’s Cross

West City

Northern City

Green Park /St. James’s Park

White City

Camden

Bloomsbury

St James’s

Central London Markets

ParksDocklandsCityWest End

West End Prime headline rent (£ per sq ft)

Rent free period (months)

Business rates (£ per sq ft)

Total occupancy costs (£ per sq ft)

Belgravia / Knightsbridge £90.00 20 £39.50 £129.50

Bloomsbury £75.00 20 £30.25 £105.25

Camden £55.00 20 £26.75 £81.75

Chelsea £90.00 20 £37.00 £127.00

Covent Garden £85.00 20 £30.00 £115.00

Euston £75.00 20 £27.75 £102.75

Fitzrovia £77.50 20 £33.75 £111.25

Fulham £45.00 20 £20.00 £65.00

Hammersmith £50.00 18 £21.00 £71.00

Kensington £60.00 18 £44.00 £104.00

King’s Cross £80.00 20 £31.50 £111.50

Mayfair £105.00 22 £48.75 £153.75

Mayfair/St James’s “super-prime” £125.00 18 £51.00 £176.00

Marylebone £80.00 20 £39.50 £119.50

Paddington £69.50 20 £26.75 £96.25

Soho £90.00 20 £41.50 £131.50

St James’s £105.00 22 £46.50 £151.50

Vauxhall, Nine Elms, Battersea £57.50 22 £15.25 £72.75

Victoria £77.50 20 £33.50 £111.00

White City £50.00 20 £8.50 £58.50

City Prime headline rent (£ per sq ft)

Rent free period (months)

Business rates (£ per sq ft)

Total occupancy costs (£ per sq ft)

City Core £70.00 22 £25.75 £95.75

Holborn £65.00 22 £27.75 £92.75

Aldgate/Whitechapel £57.50 21 £20.00 £77.50

Clerkenwell £67.50 20 £23.25 £90.75

EC3 £65.00 22 £26.50 £91.50

London Bridge £62.50 22 £26.00 £88.50

Northern City £65.00 22 £19.75 £84.75

Shoreditch/Spitalfields £67.50 21 £18.00 £85.50

Waterloo £65.00 20 £22.75 £87.75

West City £70.00 22 £25.75 £95.75

Docklands Prime headline rent (£ per sq ft)

Rent free period (months)

Business rates (£ per sq ft)

Total occupancy costs (£ per sq ft)

Canary Wharf £42.50 22 £12.75 £55.25

Other Docklands £32.50 20 £10.00 £42.50

Stratford £47.50 22 £8.50 £56.00

For further information please contact:

GVA 65 Gresham Street, London EC2V 7NQ

This report has been prepared by GVA for general information purposes only. Whilst GVA endeavours to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. GVA assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation GVA excludes all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from GVA to reproduce material contained in this report. GVA is the trading name of GVA Grimley Limited. ©GVA 2017.

11475

Patrick O’Keeffe Head of London Agency and Investment Regional Senior Director – West End +44 (0)20 7911 2768 pok@gva.co.uk

Justin James Senior Director, West End Investment +44 (0)20 7911 2678 justin.james@gva.co.uk

Chris Gore Head of City Transactions +44 (0)20 7911 2036 chris.gore@gva.co.uk

Jeremy Prosser Senior Director, City and Docklands Agency +44 (0)20 7911 2865 jeremy.prosser@gva.co.uk

Daryl Perry Associate Research +44 (0)20 7911 2340 daryl.perry@gva.co.uk

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