Central London Office Market Report

Transcription

1 Central London Office Market Report Highest year to date investment volumes since 2007 Q3 2017

2 2 Central London Office Market Report Q Central London overview Bank of England signalling intent to raise interest rates The Bank of England has signalled that it is likely to raise the bank rate for the first time in over ten years in coming months. Recent speeches from Governor Mark Carney and other Monetary Policy Committee members reflect a change of tone; the Bank has cited a shifting balance between rising inflationary pressures and diminishing excess capacity and the need to support economic growth. This is partly a response to the continued fall in the unemployment rate, now standing at a 42 year low of 4.3% and the recent rise in consumer price inflation to 3.0%. The change in tone comes despite mixed economic indicators, which point to continued expansion, but at a subdued pace, with business investment and retail spending both facing headwinds in the near term. The pound has responded positively to the Bank s comments and recently hit USD 1.35, its highest level since the EU referendum, which will itself act to dampen inflationary pressures if it persists. West End drives buoyant take-up The London leasing market has so far remained resilient to slower economic growth. Q3 take-up hit 3.3, bringing the year to date total to 8.1, 18% up on the 2016 total to end Q3 and comfortably ahead of long-term average levels. Take-up has been boosted by the rapid expansion of flexible office space in London, which has accounted for 17% of take-up in the year to date, equating to 1.4. Flexible office space now comprises 3.4% of total London office stock and this figure is set to rise further in coming years as more buildings pre-let to flexible office operators are completed. The West End led the way in Q3 and saw the highest quarterly take-up on record, with 1.5 let across 69 transactions. Year to date take-up in the West End has reached 3.5, already equal to the full year total for 2016 and the market is on track for the highest level of take-up since Sharp drop in West End vacancy while City supply remains stable Supply across London was stable during the quarter, but the balance between different markets shifted. The surge in take-up in the West End, accompanied by a slowing rate of development completions, caused supply to drop, with the West End vacancy rate falling from 5.0% to 4.4% in Q3. With the West End development pipeline looking sparse over the next 12 months, we may see further falls in vacancy in coming quarters. City supply edged up slightly to 4.8%, while supply in East London rose further, with vacancy rising from 6.8% to 8.1%, due to an increase in the level of second hand space available in Canary Wharf. Prime rents were stable in Q3, remaining at 110 per in the West End core and 70 per in the City. Highest year to date investment volumes since 2007 Another quarter of strong investment activity with 4.4 billion traded in Q3 has taken year to date volumes to 12.5 billion; 44% up on the 2016 level and the highest total to end Q3 since The Q3 total was boosted by the sale of 20 Fenchurch Street for 1.3 billion, the UK s largest ever single asset sale. With a high level of tradable stock on the market, particularly in the City, London is set for annual turnover in line with the high levels achieved in , when over 18 billion was traded. The market continues to be dominated by cross border capital inflow, with demand from UK based investors more restrained. However, this broadened to encompass a wider range of buyers in Q3, with Middle Eastern capital particularly active after activity in H1 was predominantly driven by German and Hong Kong based investors. Prime yields remained stable at 3.5% in the West End and 4.25% in the City. Ben Burston Head of UK Office & Capital Markets Research

3 Central London Office Market Report Q Historic take-up by quarter s West End City East London Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Speculative development under construction () Vacancy rates 6.0m 4.2m City 2.4m 1.5m West End 0.7m 0.3m East London City up to 4.8% from 4.6% West End down to 4.4% from 5.0% East London up to 8.1% from 6.8% Prime rents stable (per ) Prime yields stable 140 City East London West End 7% City West End 120 6% % 4% 40 3% to date Purchaser origin 11% UK 89% Overseas 2% to date Investment volumes 8.6 billion (Q1-Q3 2016) 12.5 billion (Q1-Q3 2017) 44%

4 4 Central London Office Market Report Q Key transactions 80 Charlotte Street, W1 Tenant: Boston Consulting Group Ltd Size: 123,000 Rent: 85 per Adrian Crooks Director Office Agency Following on from the ARUP pre-let earlier in the year, the agreement by Boston Consulting Group takes 80 Charlotte Street to almost 100% pre-let, with more than two years until practical completion. This reinforces that demand remains strong for design led developments, in vibrant locations, near major transport hubs such as the Tottenham Court Road Crossrail station. 10 Hammersmith Grove, W6 Price: 112m Purchaser: Private family office Rob Corbett Director Capital Markets JLL advised a private family office on the acquisition of this best in class multi-let office with ground floor restaurant and leisure use. The purchase price of 112m reflects a NIY of 4.93% and a capital value of 912 per. The building is let off an average rent of 47 per and is considered highly reversionary with lease events in 2018, 2019 and Hammersmith has seen substantial rental growth in recent years with top rents now achieved at per. 21 Moorfields, EC2 Tenant: Deutsche Bank Size: Minimum of 469,000 Rent: Confidential Richard Norton Director Tenant Representation We advised Deutsche Bank on the pre-let of 21 Moorfields, EC2 on a 25-year lease. The agreement is conditional on planning permission and is targeting completion in Landsec has worked closely with Deutsche Bank on the design of the 564,000 building. The bank will retain flexibility over the amount of space it will occupy in the new building and has committed to take a minimum of 469,000 under the deal. 21 Moorfields is situated near Moorgate and Liverpool Street s Crossrail station and is part of Crossrail s wider regeneration of the area. 20 Canada Square, E14 Price: 410m Purchaser: Cheung Kei Holding Andrew Hawkins Director Capital Markets Acting on behalf of Brookfield Office Properties, JLL provided debt and equity re-capitalisation exit options on this mandate which culminated in the 100% sale of the shares in the SPV that held this landmark office. The property is let off a gross rent of pa, reflecting an overall passing rent of around per and a weighted average unexpired lease term to break of c. 7+ years. The sale stimulated strong interest, and was bought by a new entrant. The price was 410 reflecting a net initial yield of 5.35%.

5 Central London Office Market Report Q Issue to watch Rise of flexible office space Flexible office providers have expanded rapidly in London, with strong take-up over the past five years boosting the flexible office share of total stock to 3.4%. The rapid increase in supply, together with flexible office providers aspirations to attract larger occupiers, will result in more direct competition with traditional leasehold office space. Rapid expansion in London The pace of expansion of the flexible office sector in recent years has been remarkable, with take-up roughly doubling each year between 2011 and 2015 and representing over 17% of the leasing market in WeWork have been the largest driver of this trend, since their entry into the London market in 2014 and their aggressive expansion has put them on course to be London s largest occupier. At the same time, established providers have also expanded rapidly, new entrants have emerged and more recently a number of landlords have entered the market with their own flexible working concepts, including Storey (British Land), Level 39 (Canary Wharf) and Uncommon (Carlyle Group). Within London, the City market has the highest concentration of flexible office providers, representing 4.0% of all office stock and the West End is around a percentage point lower at 3.1%. The highest concentrations of flexible space is located in the City Core, Shoreditch and Northern submarkets. While some of London s smaller sub-markets have very high shares of flexible space relative to total stock, notably Aldgate (6.0%), Paddington (7.9%) and North of Oxford Street (5.3%). Flexible office take-up What impact does this have on the leasing market? Flexible office providers have traditionally accommodated smaller businesses, occupying anything from single desk to a few thousand square feet. However, the rapid expansion of stock suggests that they will increasingly be competing directly with traditional leasehold office space. This will be most keenly felt at the smaller end of the market, for deals of less than 10,000. Even for larger requirements, flexible space may play a role if occupiers choose to take some space on a traditional lease and augment this with flexible space, providing a greater level of flexibility to expand or contract as their space needs evolve. Indeed JLL recently predicted that by 2030 thirty percent of corporate portfolios will comprise flexible space.* While these transactions remain in the minority, there have been several recent examples of larger occupiers using flexible office space, including Centrica (400 desks), Deloitte (400 desks) and Cisco Meraki (150 desks). This is a trend we expect to continue given Brexit related uncertainty, new lease accounting rules that are likely to support the drive for flexibility and flexible office providers targeting larger occupiers. Flexible office space and share of stock Flexible office space Share of stock City 4.5 m 4.0% City Northern 0.7 m 5.6% City Eastern 0.4 m 5.5% s West End City East London Share of overall take-up % 16% 14% 12% 10% 8% 6% 4% 2% 0% West End 3.0 m 3.1% North of Oxford Street 0.3 m 5.3% Paddington 0.3 m 7.9 % *Workspace, Reworked, JLL / UNWORK

6 6 Central London Office Market Report Q West End overview Strongest quarterly take-up ever recorded Take-up in the West End reached record highs during the third quarter. At 1.5, this was the strongest quarterly total ever recorded, putting into question the notion that occupiers are exercising caution as a result of the uncertain economic climate. Year to date take-up stands at 3.5 and is on track to surpass the 4 mark, something which has not been done since The TMT sector had the largest share of take-up accounting for 37% of the total. This was followed by the services sector which had a share of 24% although around half of this was made up of flexible office providers. Pre-leasing was a key theme with two of the largest transactions taking place over the quarter being pre-let deals. The largest of these involved Aegis Group who pre-let 310,000 at British Land s development Triton Square, NW1. Development works have not yet started but the building is likely to become available from the first half of Under offers have fallen during the quarter due to the high level of take-up but they remain above average at 770,000. The largest unit under offer is at 5 Merchant Square, W2 which amounts to 160,000 and is available on a sub-lease from Marks & Spencer. Overall demand stands at 4.2 and has fallen quite significantly since last quarter as large requirements which have now taken space have not yet been replaced with new requirements during the quiet summer period. Active demand has also fallen but remains above average suggesting that leasing momentum will be sustained in coming quarters. Key active requirements in Q3 included LEK Consulting LLP (30,000-40,000 ), B.heard (30,000 ), Sony Games (12,000 ) and Work Life, which is a serviced office provider (9,000-12,000 ). Supply falls as take-up soars Overall supply fell by a significant 11% in Q3 to 4.2 as almost 1 of the take-up during the quarter was of existing rather than pre-let stock. The fall in supply equates to an overall vacancy rate of 4.4% which is just above the 10 year average of 4.3%. Grade A vacancy decreased from 4.5% to 4.0%. Supply is expected to remain tight this year as 70% of the stock yet to be delivered in 2017 has already been pre-let. Looking ahead to 2018, there is only 950,000 due to complete speculatively and this total is likely to reduce as more of this space gets let ahead of completion. Prime rent forecast increased Prime rents in the core were unchanged in Q3 at 110 per where they have remained since the final quarter of 2016 (assuming a 10,000 floor plate and a 10 year term). Letting conditions in this market appear to have stabilised and we have therefore amended our rental forecast for the core in 2017 and 2018 to 110 per, up from 105 per last quarter. Middle Eastern investors take largest share of investment volumes Investment volumes reached 1.4 billion in Q3 which was below last quarter s total but above the 10 year average of 1.3 billion. Middle Eastern investors had the largest share of investment volumes in the third quarter, spending around 600 across five transactions and accounting for 42% of the market share. Five of the deals transacted during the quarter amounted to over 100 and two of these were purchases made by Middle Eastern investors with the remaining three involving US, Hong Kong and Norwegian investors. Key deals include: the acquisition of Lacon London, WC1 by a private Middle Eastern investor for 285, a net initial yield of 4.48% and a capital value of 1,293 per ; 100 Oxford Street, WC1 which was acquired by Thor Equities and AEW from Tishman Speyer for 180, a net initial yield of 3.77% and a capital value of 1,712 per and 10 Grosvenor Street, W1 which was purchased by a private Hong Kong investor for 152, a net initial yield of 3.70% and a capital value of 2,244 psf. Prime yields remained unchanged in Q3 at 3.5% for sub 10, 3.75% for lot sizes and 4.0% for lot sizes over 80.

7 Central London Office Market Report Q Take-up Under offer Key deals Refurbished Second hand Pre-let/Under construction Aegis Group , , s HSBC Private Banking Spotify 1,4 & 7 Triton Square, NW1 Pre-let deal 10 year average 3.0 Adelphi, WC2 Refurbishment 37, per 7 Cork Street. W1 Pre-let deal to date Active demand Pre-leasing TMT Under construction 25% 24% % 1.0 Manufacturing 10% Public & administrative 9% 45% Pre-leasing 34% of total take-up in 2017 YTD s Banking & finance 10% Share of overall take-up 1.6 Service Professional Off site 40% 35% 30% 25% % % % 0.2 5% to date 0% Purchaser origin UK Middle East: 594m US: 228m Hong Kong: 182m Norway: 113m Switzerland: 55m 9% Overseas 91% UK Overseas 123m 1.3bn Turkey: 41m Germany: 36m China: 20m Other: 35m

8 8 Central London Office Market Report Q City overview Robust take-up bolstered by major pre-lets Take-up volumes fell quarter-on-quarter but remained ahead of average, with 1.5 transacted in 61 deals. This brings year to date take-up to 4.3. With a further 1.6 under offer, take-up is on course to exceed both the 2016 total of 5.3 and the 10 year annual average of 5.4. Quarterly take-up was boosted by Deutsche Bank s 469,000 pre-let of 21 Moorfields, EC2 on a 25 year lease. The long term commitment of one of Europe s largest banks is a positive outcome for the City given the uncertainty surrounding financial services in the capital following Brexit. The size of the Deutsche Bank deal meant the banking and finance sector account for the largest share of take-up, with 40% of the quarterly total. This was followed by the TMT sector, with a 21% share and most active by number of transactions, accounting for 18 of the 61 deals completed in Q3. Robust take-up led to a 14% fall in overall demand, which ended the quarter at 8.4, compared to 9.8 in Q2. Active demand recorded the largest fall, declining 24% quarter-on-quarter to 4.5 and now 24% below the 10 year average of 5.9. However, above average levels of under offers mean take-up is likely to be robust in the short term. The completion of the Deutsche Bank transaction and subsequent removal from the demand figures, is a major contributor for this fall. Active demand is currently being driven by the 50, ,000 size bracket where demand is around a third higher than the 10 year average. Vacancy increase limited by strong take-up of existing supply Overall supply increased marginally to 5.4, compared to 5.2 at the end of Q2. This saw the vacancy rate tick up to 4.8%, but at this level, supply remains constrained by historic standards and well below the 10 year average of 6.4%. supply remains limited; unchanged in Q3 at 1.0, reflecting a new build vacancy rate of 0.9%. The quarterly increase in supply was limited by high levels of take-up of existing supply which totalled 910,000 in Q3, as well as strong pre-leasing of recent development completions. The level of speculative supply currently under construction increased 12% in Q3 to 6, following major development starts at 60 London Wall, EC2; 135 Bishopsgate, EC2; and 1 Finsbury Avenue, EC2. While this level of completions is ahead of the long term average, it is less likely to lead to an oversupply than in previous cycles, due to the low starting point of the vacancy rate, together with current healthy level of pre-let demand. Prime rents stable City prime rents and incentives remained unchanged at 70 per, with 24 months free on an assumed 10 year term. While there is continued evidence to support the prime rent, these transactions are reducing in frequency and are building specific. There is also a greater level of lease flexibility returning to the market, with occupiers increasingly seeking lease breaks, as well as the ability to expand or contract the amount of space occupied. Strong quarter driven by UK s largest ever single asset sale The sale of 20 Fenchurch Street, EC3 dominated the quarter s activity, accounting for more than half of Q3 investment turnover. The 1.3 billion purchase by Hong Kong buyer LKK Health Products is the UK s largest ever single asset transaction, with the price paid reflecting a net initial yield of 3.4% and capital value of 1,883 per : a significant premium over the current City prime yield level of 4.25%. Buoyed by the 20 Fenchurch Street transaction, Hong Kong and China based buyers accounted for 70% share of investment volumes, totalling 1.9 billion. Year to date investment volumes total 7.2 billion and will significantly exceed the 2016 full year total of 7.4 billion, especially given the large amount of buyable stock in the market. We estimate the total value of buyable City investments is currently circa 10 billion, including 12 assets of over 250 each. This is likely to support strong activity in Q4 and could push full year volumes close to the highs when turnover averaged circa 10 billion. Prime yields remained unchanged in Q3 at 4.25% across all lot sizes.

9 Central London Office Market Report Q Take-up Refurbished Second hand Pre-let/Under construction Under offer s year average 5.0 YTD take-up YTD take-up to date Active demand 4.5 s 5.9 Q Q year average +33% year average >200, , ,999 50,000-99,999 Key deals Deutsche Bank 469,000 Confidential rent 21 Moorfields, EC2 Pre-let 25,000-49, ,000-24,999 5,000-9,999 Speculative under construction Withers LLP Redington Partners 65 per 20 Old Bailey, EC4 Under construction per One Angel Court, EC2 60,000 19, total 900, total 2 1% 99% 67% 33% Refurbished 2019 total % 24% Refurbished Refurbished Investment volumes Purchaser origin UK Overseas 12 billions Hong Kong: 1,343m Overseas share to date 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% China: 271m Qatar: 144m Singapore: 65m Israel: 48m US: 43m Middle East: 41m UK Overseas 351m 2.6bn Other: 107m

10 Central London Office Market Report Q East London Overall demand increased to 4.6 and remains well ahead of the 10 year average of 2.8. The rise was driven by potential demand, which increased 59% to 2.4, compared to 1.5 at the end of Q2. Active demand fell quarter-on-quarter to 2.3, but remains 28% ahead of the 10 year average. The high level of active demand is not a guarantee of stronger take-up, as over half of East London requirements have a wider search area. Increase in vacancy driven by tenant controlled supply Overall supply increased 19% to 1.7, compared to 1.4 in Q2. The quarterly increase was driven by newly marketed second hand space in Canary Wharf, notably 170,000 at 15 Westferry Circus, E14. The overall vacancy rate increased to 8.1% and is now ahead of the 10 year average of 6.4%. Construction started at International Quarter London, following pre-let deals which leaves 60,000 of speculative space available and scheduled to complete in Canary Wharf remains three tiered rental market Prime rents are unchanged in Q3 at per, however there is currently a lack of recent market evidence to support this. Tenant controlled supply, which accounts for the majority share of Canary Wharf availability, is being marketed at rents from per and continues to restrict rental growth. While pre-let supply is being marketed at rents of per. Largest investment transaction of year There was a single investment transaction in Q3: 20 Canada Square, E14 was purchased by Chinese investor Cheung Kei Holdings from Brookfield for 410, reflecting a net initial yield of 5.35% and a capital value of 705 per. Take-up Refurbished Second hand Pre-let/Under construction Under offer s Stronger take-up bolstered by major pre-lets Take-up volumes improved in Q3, reaching 235,000 in five transactions, boosting year to date take-up to 287,000. The majority of quarterly take-up was comprised of two major pre-lets at International Quarter London, E20 to Cancer Research (110,000 ) and British Council (85,000 ). overview 2 10 year average to date Active demand Banking & finance 29% Public administration & institutions 24% Service industries 21% 2.3 Professional services 12% Active demand TMT 1.7 9% 10 year average Manufacturing 5% Landlord and tenant controlled supply 29% 48% 52% 71% East London Landlord controlled Canary Wharf Tenant controlled

11 Central London Office Market Report Q Rental conditions in Central London Stratford Camden Regent s Park King s Cross Bloomsbury North of Oxford Street Clerkenwell Fitzrovia Mayfair Hyde Park Euston Marylebone Paddington Soho Shoreditch Northern Covent Garden City Midtown Western Central Southern Eastern Aldgate St. James s Waterloo Canary Wharf Southbank Belgravia & Knightsbridge Hammersmith Victoria Kensington & Chelsea Vauxhall Battersea Prime rents Occupancy costs

12 Contacts Leasing Neil Prime Head of Central London Markets +44 (0) Dan Burn Head of City Agency +44 (0) Adrian Crooks Head of West End Agency +44 (0) Capital Markets Julian Sandbach Head of Central London Capital Markets +44 (0) Andrew Hawkins Head of City Capital Markets +44 (0) Simon Beckett Head of West End Capital Markets +44 (0) Research Jon Neale Head of UK Research UK Research +44 (0) Ben Burston Head of UK Office Research UK Research +44 (0) Alex Devitt Director UK Marketing +44 (0) Amy Birdee Associate Director UK Research +44 (0) James Norton Director UK Research +44 (0) jll.co.uk/london-office-markets 2017 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.