National Voice Q1 2011

UK National Voice - Q1 2011

Office Market Conditions Across the UK

Building on improved leasing activity over the second half of 2010, 2011 has seen continued interest from occupiers, although this has not yet translated into deals. Q1 take-up activity was down 9% compared with the equivalent period last year, although performance remains mixed across the UK.

Supply constraints resulted in further polarisation between Grade A and Grade B space. Rents continue to be heavily supported by incentives. While we expect to see further prime rental growth averaging around 1.1% for 2011, the Grade B market carries significantly more downside risk.

Investment volumes were relatively weak this quarter as buyers continued to focus on Central London and the South East markets. Increased competition for the best space as well as strengthening market fundamentals may drive increased investor activity outside of London this year.

2 On Point • UK National Voice • Q1 2011

UK Summary

Change* 12 Month Summary Statistics Q1 11

Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 906 -30.6 % -8.7 %

Supply (000s sq ft) 23,067 2.8 % -3.1 %

Vacancy Rate (%) 12.6 % 0 bps -20 bps

Prime Rent (£ psf) £27.08 0.8 % 1.7 %

U/C (000s sq ft) 488.6 8.3 % -20.7%

Investment Vol. (£m) £185.5 27.3 % -70.8 %

* % Change for Prime Rents, Investment Volumes and Capital Values calculated using local currency

UK Office Rental Clock

For information on the Central London market, please see the Jones Lang LaSalle Central London Market Report

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Edinburgh, LeedsEdinburgh, Leeds

Birmingham,Glasgow, Thames ValleyBirmingham,Glasgow, Thames Valley

London CityLondon City

London West EndLondon West End

West LondonWest LondonManchesterManchester

On Point • UK National Voice Q1 2011 3

National Overview2011 witnessed continued interest from occupiers, however this failed to translate into a substantial amount of take-up activity. The gradual erosion of Grade A supply continued, and with very little in the development pipeline we expect a return to preletting activity in some markets. Investment volumes were relatively weak this quarter as buyers continued to focus on Central London and the South East. However, increased competition and strengthening market fundamentals for prime space should drive increased investor activity outside of London this year. Continued interest from occupiers, but conversion to deals remains slow UK office take-up reached around 906,000 sq ft over the first quarter of 2011, down 9% compared with the equivalent period last year and down 36% compared with the five year quarterly average. Performance was down year-on-year in all markets with the exception of the Thames Valley and Glasgow where take-up increased, but remained below their respective five year averages. In the Thames valley take-up increased from a very low base and was boosted by several large deals of more than 25,000 sq ft. There was no single sector driving activity in Q1. In line with the previous quarter, activity was driven by a broad range of companies, particularly from within the Business services sector, including recruitment consultants, IT companies and Media firms. Although occupier demand will continue to be dominated by structural events this year, we anticipate a growing number of companies launching requirements in the coming months. While we expect demand to pick up, given the outlook for the economy remains mixed, we expect occupiers to remain cautious. The annual consumer price index (CPI) inflation rate fell to 4.0% in March, down from 4.4% in February, however this downward trend is likely to be temporary. Inflation is expected to remain well above the official target of 2% year-on-year for the rest of 2011 and will remain a key concern for occupiers this year as costs remain inflated. Economic activity is expected to recover from its end 2010 dip, but expectations are now at, or slightly below, trend growth in Q1. In the absence of significant economic growth we therefore expect take-up this year will be at similar levels to 2010. Dwindling Grade A supply continued over the first quarter In almost all markets Grade A vacancy rates are now below 4% and trending downwards - albeit approximately in line with their five year averages. There is currently nothing under construction speculatively in either Glasgow or Manchester. Across the remaining UK Regional Markets there is only around 488,000 sq ft of space under construction speculatively, of which only 38,000 sq ft is scheduled to complete this year. We therefore anticipate further gradual erosion of Grade A supply. Conversely, we expect further influxes of Grade B space as a result of public sector cutbacks although this could well drive interest in the conversion of secondary stock to alternative uses such as residential, as supported by announcements made in the Chancellor’s recent Budget. With the exception of the Western Corridor and Manchester, the response to the impending supply shortage remains limited, with no

new speculative commencements due this year outside of these two locations. While we expect developers to begin positioning themselves strategically to take advantage of the impending shortage of Grade A supply, the lack of speculative development funding will mean that the pipeline will remain severely limited. As Grade A supply reduces further we therefore expect to see a return to preletting activity. Q1 witnessed further polarisation between Grade A and Grade B space. Prime rents increased in Birmingham, Glasgow and the Western Corridor, while rents in the remaining regional centres were stable. Prime rents continue to be supported by significant incentives, with up to 30 months rent free achievable on a 10 year term in most markets. We expect to see further prime rental growth averaging at around 1.1% for 2011, driven by the anticipated shortage of Grade A space. In contrast the Grade B market carries significantly more downside risk with landlords continuing to compete for occupiers. While we have not yet seen any significant release of Grade B space onto the market, we do expect the level of Grade B supply to remain inflated. Strengthening market fundamentals likely to encourage investment activity outside of London Investment activity remained relatively subdued in the UK regional markets as most investors have continued to seek assets in London and the South East. Prime yields have been stable at 6.00% in the Scottish and regional markets and at 6.50% in the South East. Purchasers continued to focus on good quality, well let properties and a clear divergence between prime and secondary has emerged. According to the IPD monthly index, UK offices recorded capital value growth of just 0.47% over the three months to March with a yield impact of 0.50% compared to 1.3% in the second half of last year. With yields forecast to remain stable in the medium term investment performance will be dependent on income return and rental growth. Local occupier conditions will be vital to performance. Competition for prime core lots in Central London, and a lack of supply, has created a very competitive market that is pricing many investors out to alternative areas. Combined with the strengthening market fundamentals for prime space, which will result in improved rental growth, this has the potential to encourage increased investment activity outside of London this year. The biggest concern for 2011 within the UK investment market is likely to be the restriction placed on transactional activity as a result of a lack of product. Volumes will be limited by tight supply as opposed to a weakening in sentiment. While we anticipate more product deriving from banks seeking to reduce their exposure to real estate, a significant influx remains unlikely. We expect to see continuing demand from a range of investors with the best space continuing to trade well but there is concern for pricing on secondary space.

4 On Point • UK National Voice • Q1 2011

Birmingham

Change* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook Take-up (000s sq ft) 101.6 -16.3% -44.5

Supply (000s sq ft) 3,182 0.9 % 6.1 %

Vacancy Rate (%) 18.2% 10 bps 60 bps

Prime Rent (£ psf) £28.50 1.8 % 3.6 %

U/C (000s sq ft) 129.2 -59.3 % -73.1 % Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) % £475 1.8 % -0.7 %

Investment Vol. (£m) £7.9 -54.6 % -95.2%

Prime Yield (%) 6.00 % 0 bps 25 bps


Market Overview

Building on improved leasing activity over the second half of 2010, 2011 has seen continued interest from occupiers, however this has not necessarily translated into deals. Take-up exceeded 100,000 sq ft in Q1, down 45% compared with the equivalent period last year and still 25% below the five year quarterly average for Q1 take-up. The average deal size remains relatively small and there were only seven deals greater than 5,000 sq ft in the quarter. Activity was driven primarily by the services sector which accounted for 64% of total take-up. Supply in Birmingham city centre remained relatively stable compared with the previous quarter. No speculative completions are scheduled for this year and as a result even modest levels of take-up will absorb supply. Availability of Grade A supply remains relatively healthy, but given occupier preference for Grade A Space we expect this to gradually decline. Looking ahead there is just 129,000 sq ft due to complete speculatively over 2012-13. As a result, occupiers seeking larger units of Grade A space may have to consider preletting options. Prime rents increased slightly, up 1.8%, to £28.50 per sq ft in the first quarter. This was driven by demand for arguably the best quality space in Birmingham, which is more limited in supply. Incentives remain generous at around 36 months based on a 10 year term. The rest of the market is still competing hard for occupiers with the gap between prime and secondary widening further. Just one investment transaction completed in Q1: Capital Trust purchased The Stock Exchange from Stoford for £7.95 million, reflecting a net initial yield of 6.40%. Prime yields have stabilised at 6.00%, but with upward pressure.

Figure 1: Take-up

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Figure 2: Supply and Vacancy Rates

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Figure 3: Prime Rents and Rental Growth

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Figure 4: Prime Yields

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Source all Charts: Jones Lang LaSalle

Pulse • UK National Voice • Q1 2011 5

LeedsChange* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 36.8 -54.5% -56.5 %

Supply (000s sq ft) 1,342 7.7 % -2.6%

Vacancy Rate (%) 10.8 % 70 bps -30bps

Prime Rent (£ psf) £26.00 0.0 % 0.0 %

U/C (000s sq ft) 38.0 -51.3% -5.1 % Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) £433 0.0 % 0.0 %

Investment Vol. (£m) £14.4 160 % -79.1%



Market Overview

Office supply increased 8% over the first quarter, pushing overall vacancy rates up to 10.8% and 5.8% for Grade A space. Despite this, there is very little space in the development pipeline. Just 38,000 sq ft of space remains under construction speculatively, with no further speculative starts anticipated this year. As result we expect supply to fall gradually over the coming year. The most significant risk to this is the potential for the Public sector to release space back onto the market. However, we have not yet seen any dramatic changes with the public sector still trying to utilise their existing space. Despite an increase in the number of enquiries, take-up was disappointing with just 36,670 sq ft let during the first quarter. Take-up was down 57% compared with the equivalent period last year and remains 66% below the five year quarterly average. The majority of activity was generated by deals of less than 2,000 sq ft, with only two deals greater than 5,000 sq ft. Occupiers remain cautious with the majority continuing to assess the impact of the current economic conditions on their business. As a consequence activity remains driven largely by lease events and market churn. Prime rents were stable at £26.00 per sq ft. Incentives remain stable but generous with around 30 months rent free achievable on a 10 year term. Rents for Grade B space remain under greater pressure with landlords continuing to price competitively in order to attract tenants. The investment market remained fairly subdued over the first quarter. Just £14.4 million was traded this quarter across one deal. Prime yields were stable at 6.00%.

Figure 5: Take-up

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ManchesterChange* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 134.7 -59.4% -28.7 %

Supply (000s sq ft) 2,555 8.5 % -5.1 %

Vacancy Rate (%) 11.9 % 100bps -80 bps

Prime Rent (£ psf) £28.50 0.0 % 1.8 %

U/C (000s sq ft) 0 0.0 % n/a Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) £475 0.0 % -2.5 %

Investment Vol. (£m) £22.8 n/a -92.0%



Market Overview

Take-up volumes were disappointing over the first quarter of 2011, with less than 135,000 sq ft let, 29% below the equivalent period last year and 41% below the five year quarterly average. The largest deal was to The London School of Business & Finance who took 25,100 sq ft at Linley House, Dickinson Street. The majority of transactions were for deals of less than 2,500 sq ft with the average deal size falling from around 5,500 sq ft to just 3,300 sq ft. Activity was generated by a variety of sectors, however the majority came from the Services & Professional Services sectors which together accounted for over half of Q1 take-up. There were no new completions within the City centre in Q1. Nevertheless, overall supply increased 8% driven by the release of second hand space. Overall vacancy rates currently stand at 11.9%, slightly above the five year average of 11.1%. Grade A supply remains much more constrained at just 2.4%, compared with a five year average of 1.9%. Looking ahead the development pipeline remains constrained with nothing under construction speculatively. Around 150,000 sq ft is expected to start speculatively this year, however, delivery is not expected before 2013. Consequently, we expect supply for Grade A space will continue to decline over the coming year. Prime rents remained stable over the first quarter at £28.50 per sq ft. Incentives were also stable at around 30 months rent free achievable on a 10 year term. While occupiers were still being driven primarily by cost and not quality there was continued evidence of tenants acting opportunistically to take advantage of market conditions to secure good quality space on tenant favourable terms. As a result 86% of take-up in the final quarter was comprised of new or refurbished units. Just one investment transaction took place over the first quarter. Himor Group purchased Ship Canal House for £22.8 million, reflecting a net initial yield of 6.70%. Prime yields remained unchanged at 6.00%.

Figure 9: Take-up

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Western CorridorChange* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 393.1 -4.3% 48.4 %

Supply (000s sq ft) 12,516 2.7 % -3.9 %

Vacancy Rate (%) 14.6 % 40 bps -50 bps

Prime Rent (£ psf) £26.00 0.8 % 2.2 %

U/C (000s sq ft) 131.6 77.1 % -30.6 % Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) £400 0.8 % 2.0 %

Investment Vol. (£m) £111.7 53.2 % 9.2 %



Market Overview

Over 393,000 sq ft of office space was let in Q1, an increase of 48% year on year and broadly in line with the previous quarter. Despite clear improvement, take-up fell short of the 10 year average, down 36%. Activity remains driven by lease events rather than any single growth sector. Occupiers continued to favour Grade A space, with many taking of the opportunity to upgrade. Grade A take-up accounted for nearly two thirds of the total compared with an average of nearer half.

Overall supply increased slightly reflecting a vacancy rate of 14.6%. This was driven by an increase in the level of Grade B supply. In contrast, Grade A vacancy rates remained stable at 6.0%. Just 130,000 sq ft of office space is under construction speculatively, none of which is due to complete this year. Developers and investors are becoming aware of this historically low level of stock replacement and there are signs of a development market re-emerging. As the level of Grade A supply reduces further we will see more pre-lets. Conversely, we expect further influxes of Grade B space which could drive interest in the conversion of secondary stock to alternative uses such as residential, as supported by announcements made in the Chancellor’s recent Budget.

Across the Western Corridor market, rents increased 0.8% over the quarter driven by Windsor and Chiswick. Incentives were also stable at up to 30 months rent free on a 10-year lease in the Thames Valley and 24 months in West London. We anticipate annual growth of 3.6% taking average prime rents to around £28.42 by the end of this year.

Investment activity picked up in Q1 with £111.7 million traded, reflecting an increase of 9% compared with Q1 2009. UK investors were net buyers of £31.1 million, while UK institutions were the primary vendors, selling £42.1 million. Prime yields were stable at 6.50% in both West London and the Thames Valley.

Figure 13: Take-up

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EdinburghChange* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 149.1 -33.8% -18.5%

Supply (000s sq ft) 1,738 -3.4 % -14.3 %

Vacancy Rate (%) 7.3 % -20 bps -120bps

Prime Rent (£ psf) £27.50 -1.8 % -1.8 %

U/C (000s sq ft) 190.0 0.0 % n/a Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) £458 0.0 % -1.9 %

Investment Vol. (£m) £11.1 -57.2 % -69.0 %



Market Overview

In terms of occupier take-up, activity was down compared with the previous quarter. Occupier take-up in Q1 reached around 150,000 sq ft, down -33.8% compared with Q4 2010 and -18.5% compared with the same period in 2010. The majority of transactions were small, with around 80% of deals in units of less than 5,000 sq ft. Despite the drop in take-up there remains a good level of enquiries within the market. While we expect to see increased activity in the second half of the year, growth will remain limited with deals driven largely by lease events. Supply continued to decline gradually over Q1. Overall vacancy rates fell to 7.3%, driven largely by declining Grade B space. The Grade A market remains constrained however, with vacancy rates stable at just 3.5%. Speculative development remains turned off, with just one scheme currently under construction speculatively, due to complete in 2013. We therefore predict supply will continue to decline as existing space is gradually absorbed. Developers are beginning to position themselves strategically to take advantage of the impending shortage of Grade A supply and the anticipated increase in lease events expected in the next 2-3 years. Prime rents remained stable at £27.50 per sq ft. Incentives were also stable with between 32-36 months achievable on a 10 year term. Despite the impending supply shortages, overall demand remains fairly weak. While rents are forecast to remain stable throughout 2011, there is a slight downside risk to this scenario depending on the speed with which demand recovers. Investment volumes picked up slightly in Q1, with volumes totalling £11.1 million. Volumes were up 35% compared with the previous quarter. Prime yields remained stable at 6.00% and are expected to remain flat for the remainder of 2011.

Figure 17: Take-up

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GlasgowChange* 12 Month Summary Statistics Q1 11 Q-o-Q Y-o-Y Outlook

Take-up (000s sq ft) 91.1 -32.9% 3.7 %

Supply (000s sq ft) 1,683 3.4 % 12.4 %

Vacancy Rate (%) 10.5 % 30 bps 110 bps

Prime Rent (£ psf) £27.00 1.9 % 3.8 %

U/C (000s sq ft) 0 n/a n/a Change* 12 Month Q1 11 Q-o-Q Y-o-Y Outlook

Cap. Value (£ psf) £450 1.9 % -0.5 %

Investment Vol. (£m) £17.6 -55.4 % -52.1 %



Market Overview

The addition of some Grade B space pushed overall supply up slightly over the first quarter of the year. Conversely, the squeeze on Grade A supply continued with Grade A vacancy rates falling to 3.2%. The development pipeline remains switched off with no space under construction in the City centre and no speculative starts anticipated in the coming year. As a result we expect the gradual erosion of Grade A supply to continue. In contrast there is still a significant amount of Grade B space which is expected to remain inflated over 2011. Unsurprisingly, take-up fell in comparison to the previously strong fourth quarter, which was boosted by the 57,000 sq ft deal to Scottish and Southern Energy. There were no deals over 40,000 sq ft, with the average deal size falling to around 4,100 sq ft. Despite this, Q1 take-up improved in comparison to the equivalent period last year, up by 3.7%. Notable deals included the 34,000 sq ft deal to Mercer at George Square and the acquisition by Ernst & Young of 11,600 sq ft at Pacific House. Activity was driven primarily by the Services sector which accounted for 60% of activity. The level of new enquiries was down slightly over the first quarter. While we do not expect to see a significant bounceback in demand, we do anticipate an increasing number of new enquiries over the coming year. Prime rents increased 1.9% to £27.00 per sq ft with incentives remaining high at between 24-30 months on a 10 year term. We expect this to increase further over the course of the year, driven by the gradual decline of Grade A space. In contrast the Grade B market remains competitive with landlords competing for occupiers. The investment market remained relatively quiet over the first quarter with £17.6 million transacted across two deals. Prime yields remained stable at 6.0%. We do not anticipate any further movement in prime yields over the remainder of the year.

Figure 21: Take-up

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Definitions Take-up

Floorspace acquired for occupation by lease, prelease, freehold or long leasehold sale. All deals are included with the exception of Western Corridor, where a 500 sq m threshold is applied.

Supply Floorspace on the market and available for occupation. It includes space that is under offer.

Under Construction Speculative development of new building or substantial refurbishment where construction activity is ongoing.

Prime Rent The Jones Lang LaSalle view of the highest rent achievable for a hypothetical 10,000 sq ft unit of Grade A space in a prime location, without any adjustment for incentives.

Business Sectors Broad business sectors are classified as: Banking & Finance: Banks and other financial institutions Professional Services: Accountants, legal, management consultants etc Service Industries: Advertising and PR, broadcasting, internet services, printing and publishing, software houses and data processing, telecommunications services, transport, retail, leisure etc Manufacturing Industries: Pharmaceuticals, computer hardware, electronics, construction, mining, engineering, food and drink etc Public Administration & Institutions: Central and local government, institutions, charities, quangos, health and social etc

Jones Lang LaSalle contacts

James Finnis Head of National Offices National Offices Stockley Park +44 (0)20 8283 2534 [email protected]

Chris Hiatt Chairman of National Offices National Offices London West End +44 (0)20 7399 5323 [email protected]

Mark Wilson Director – Joint Head of National Investment London West End +44 (0)20 7399 5874 [email protected]

Kenny Waitt Director Edinburgh Investment Edinburgh +44 (0)131 301 6706 [email protected]

Jonathan Fear Director National Offices - Birmingham Birmingham +44 (0)121 634 6564 [email protected]

Cameron Stott Director Edinburgh Agency Edinburgh +44 (0)131 301 6715 [email protected]

Mike Buchan Director Glasgow Agency Glasgow +44 (0)141 567 6623 [email protected]

Jeff Pearey Director – Head of Leeds Office National Offices - Leeds Leeds +44 (0)113 261 6236 [email protected]

Trevor Sloan Director National Offices - Manchester Manchester +44 (0)161 828 6430 [email protected]

Karen Williamson Senior Analyst EMEA Research Canary Wharf +44 (0)20 3147 1197 [email protected]

Bill Page Head of Offices Research EMEA Research Canary Wharf +44 (0)20 3147 1212 [email protected]

UK National Voice – Q1 2011 OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends.

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National Voice Q1 2011