Q UK Research & Forecast Report

Transcription

1 London Offices Snapshot Q UK Research & Forecast Report

2 BARNET HARINGEY WALTHAM FORREST Q DEALS MAP ISLINGTON BRENT CAMDEN WESTMINSTER HACKNEY NEWHAM KENSINGTON CITY HAMMERSMITH TOWER HAMLETS SOUTHWARK GREENWICH LAMBETH WANDSWORTH LEWISHAM SIZE (SQ FT) 0 - UK 2,499 Research 2,500 & Forecast - 4,999 Report 5,000-9,999 10,000-24,999 25,000-49,999 50,000-99, ,000 plus

3 Figure 1: London Offices Grade A Absorption YEAR ON YEAR INDICATORS City West End Docklands Source: Colliers International LONDON Grade A Absorption 4.0 Availability 3.5 Take-up 3.0 Rents 2.5 CITY 2.0 Grade A Absorption 1.5 Availability 1.0 Take up 0.5 Rents 0.0 WEST END -0.5 Grade A Absorption Availability Take up Rents MARKET HIGHLIGHTS > > In the London office market in 2018 to date, the key feature has been the strength of the City of London submarket. In spite of marginally sub-trend West End activity, overall transaction levels rose to 16% above the ten-year average, surpassing 3 million sq ft for the fourth successive quarter. Pre-letting activity, which has been consistently above average over the past 18 months, surged to a four year high, aided by the purchase of Royal Mint Court by the Chinese Government. > > A blend of above average demand and insufficient supply, combined to turn absorption positive for the first time in 18 months (see Figure 1). Not only has the development pipeline reduced to unprecedented levels but, at the same time, the release of second-hand space has actually fallen in the West End and Docklands markets. Absorption is now no longer being solely driven by demand for Grade A product. > > London offices vacancy fell to a 12-month low in Q2 (5.3%) and although second-hand availability rose overall, take-up of second-hand space is still substantially above the ten-year average (+16%). At the same time, take-up of built new/refurbished space fell to a two-year low, emphasising the paucity of supply, rather than any lack of inclination on the part of occupiers for top quality product. > > While a further 4.2 million sq ft is set to complete in the second half of 2018, 66% has already secured occupiers. Speculative completions across London are projected to be 1.5 million sq ft in 2018, over one third below the ten-year average. > > Headline rents remained unchanged in Q2 2018, however, we anticipate further upward pressure if above average demand and constrained supply continue to be the prime drivers for market conditions in H > > London investment volumes in Q were substantially boosted by above trend activity in the City of London submarket. Once again, there was an overwhelming bias toward overseas capital, with non-uk investors accounting for 76% of transaction volumes. West End markets continued to struggle in the face of caution from investors over pricing for institutional grade product. While trophy assets continue to attract strong cross border interest, there is a growing portion of secondary product that is attracting attention from funds and prop co s, looking for refurbishment opportunities to launch into a constrained market. LONDON Q

4 CITY OFFICE Agency > > The City market continued to demonstrate its rude health as the quarterly transaction total accelerated once more, rising to 8% above the long term average (see Figure 2). The key driver of the uplift in take-up was, once again, pre-letting activity. Pre-commitments reached their second highest quarterly total since A major contribution to that was the deal by the Chinese Government to purchase Royal Mint Court (569,000 sq ft) for its own occupation. Nevertheless, there were a further eight deals to the likes of Berwin Leighton Paisner and Sidley Austin, the latter taking a further floor at 70 St Mary Axe. > > Absorption levels rose to an 18 month high, demonstrating that the improving demand picture is not merely about market churn, but is supported by occupier expansion strategies. Equally encouragingly, the market is being underpinned by activity in the sub 25,000 sq ft category, reinforcing the continuing attraction of conventional office space to scale-ups and expanding companies in the face of competition from flexible offices providers. > > Healthy demand is starting to translate into downward pressure on vacancy rates (see Figure 3). City vacancy fell for the second successive quarter and stands at a 12 month low. At 5.3%, the figure is now significantly below the 10-year average of 7.4%. While second-hand supply rose marginally, new and refurbished space fell further, down by close to 20% q-on-q. > > Future supply in the City Core is now at a record low. Up to 2020, 43% of all space under construction has now been pre-let. The largest scheme is 22 Bishopsgate (1,195,000 sq ft) which accounts for close to 50% of the speculative pipeline and the development is already featuring prominently on occupier shortlists. Just 720,000 sq ft is currently set to complete speculatively up to the end of 2019, which is over 65% below the long term average. > > Even allowing for the deal to the Chinese Government skewing take-up toward the other business grouping, media and tech re-emphasised is pre-eminent role as the key driver of demand across the wider City market (see Figure 4). > > Headline rents remained at psf in Q2 2018, but expectation of an upward movement in the top rent within the Core, is increasingly focussing on Q rather than the first half of Investment > > As in Q1, City investment volumes boosted overall London figures substantially, as well as swelling numbers for the City itself. Quarterly volumes were the second highest for 2.5 years, surpassing 3 billion, 50% above the 15-year quarterly average. Four of the top five deals were by Asia Pacific buyers, dominated by CK Asset Holding s 1 billion purchase of 5 Broadgate. > > While there were only five individual purchases by Asia Pacific investors and just two Hong Kong based, the region still accounted for 76% of investment activity in Q2 2018, sharply up from the 50% equivalent figure in Q The loosening of some of the more stringent legislation by the National Development and Reform Commission of the People s Republic of China (NRDC) allows for a recycling of capital and financing opportunities for UK-based lenders. UK Research & Forecast Report

5 Figure 2: City Take-up by Grade Pre-let Grade A Grade B 10 year average Grade C Source: Colliers International sq ft (millions) Q Q Q Q Q Q Q Q Q Q Q Q Q Figure 3: City Vacancy Rates 12% Q Q Source: Colliers International 10% 8% Vacancy Rate 6% 4% 2% 0% Southbank Shoreditch Holborn City Core Farringdon Canary Clerkenwell Docklands All City Figure 4: City Take-up by Business Sector 2018 to date 5% 5% 2% 1% 1% Source: Colliers International Media and Tech 8% 24% Other Financial Services Legal Flexible Offices 13% Business Services Insurance 23% Retail & Leisure 18% Education Property LONDON Q

6 WEST END OFFICE Agency > > Concern over the level of current and future supply shortages is starting to impact West End market take-up (see Figure 5). Total transaction levels dipped below the ten-year average for the first time in 18 months, with take-up of built new/refurbished space at a two-year low. Major schemes such as Park House, Verde and Nova North are now fully occupied. In contrast, second-hand demand remained above average as it has done over the past 12 months. > > Absorption has recovered for all Grades of property, underlining the tighter supply environment. Grade A absorption has exceeded two million sq ft over the past two years, which when compared to the 1.3 million sq ft of speculative deliveries over the same time period, emphasises the demand/supply imbalance. > > West End vacancy has dipped below 5% for the first time since the start of New/ refurbished availability is fast approaching a record low and, in the past 12 months, has fallen by over 60%. Occupier choice is being severely hampered, evidenced by the fact that pre-letting activity exceeded built take-up by close to 50%. > > While 6.2 million sq ft is set to complete in the West End up to the end of 2020, 45% (2.8 million sq ft) of that has already been pre-let or pre-sold. Certainly, the acquisitive activity of flexible offices providers will lead to recycling of development space but, in the West End, pre-letting deals by serviced offices providers currently only account for 7% of the pipeline. > > In terms of demand, as in the City, the importance of the media and tech sector cannot be underestimated (see Figure 7). Media and tech accounted for 37% of transactional activity, with the Sony Pictures Entertainment pre-let at Derwent s Brunel Building, W2, the largest. > > Headline rents saw no further upward movement in Q2, but robust pricing is in evidence at newly delivered schemes in the core. It remains to be seen whether the shortage of prime stock, in some submarkets, begins to have an impact on pricing for the best secondary product. Investment > > Q mirrored the first quarter activity and reflected investor caution in tandem with limited availability of larger lot sizes. Blackstone s Adelphi Building looks set to provide more bulk to volumes in the second half of the year, but Legal and General has decided against selling its 50% stake in the Central Saint Giles development. > > The lack of product being brought to market, along with investors retaining core assets, is limiting opportunities for those looking to place capital. Overseas investors have invested over 1 billion in the West End in 2018 to date, but this figure is nearly 50% down on the 2017 equivalent. Equally, Asia-Pacific activity is down to 48% of overseas investment compared to 60% in Due diligence appears to be higher on the agenda than in previous years, suggesting that a new tier of investors, outside of Hong Kong, require slightly longer lead in times. UK Research & Forecast Report

7 Figure 5: West End Take-up by Grade Pre-let Grade A Grade B 10 year average Grade C Source: Colliers International sq ft (million) Q Q Q Q Q Q Q Q Q Q Q Q Q Figure 6: West End Vacancy Rates 12% Q Q Source: Colliers International 10% Vacancy Rate 8% 6% 4% 2% 0% Euston / KX Bloomsbury Fitzrovia Marylebone Soho Covent Garden Victoria Knightsbridge Mayfair St James's Paddington Figure 7: West End Take-up by Business Sector 2018 to date 3% 2% 2% 2% Source: Colliers International Media and Tech 8% Flexible Offices 37% Financial Services 9% Business Services Retail & Leisure Education 14% Energy & Utilities Healthcare 23% Other LONDON Q

8 OUTLOOK > > Core markets, with a greater choice of product, will benefit from healthy levels of demand. > > Secondary supply will continue to plateau as occupiers accept the need to compromise. > > Scale-ups typify the buoyant nature of midlevel demand, keen to progress brand identity and graduate from commoditised space. > > Constraint, will remain a feature of the wider market in terms of supply, choice and overall rental growth. > > Wider investment volumes are below average, but with a number of trophy assets still in play we expect a strong second half to the year. > > Despite a loosening of Chinese regulatory restrictions, we still expect the geographical profile of overseas capital to widen as the year progresses. UK Research & Forecast Report

9 Figure 8: London Market Summary TAKE-UP (000S) SQ FT AVAILABILITY (000S) SQ FT ALL GRADES **NSA (000S) SQ FT VACANCY RATE PRIME RENTS PSF PRIME YIELDS % Q Q Q Q Q1-Q Q Q Q WEST END (WHOLE) New / Refurbished Secondhand ,863 3,793 TOTAL* 1,097 1,040 4,230 4, % Bloomsbury % Covent Garden / Strand % Euston / King's Cross % Fitzrovia % Knightsbridge % Marylebone % Mayfair % Paddington % Soho % St James's % Victoria % CITY (WHOLE) New / Refurbished 784 1,082 4, Secondhand 842 1,002 4,382 4,566 TOTAL* 1,626 2,084 5,452 5, % City Core 1,176 1,386 3,669 3, % Holborn % Farringdon % Clerkenwell % Shoreditch % Aldgate % DOCKLANDS New / Refurbished Secondhand TOTAL % CANARY WHARF New / Refurbished Secondhand ,094 1,064 TOTAL ,176 1, % SOUTHBANK Source: Colliers International *Includes additonal locations **Net Stock Absorption New / Refurbished Secondhand TOTAL % LONDON Q

10 GRADE A TAKE-UP BY SECTOR 2018 to Date Per Sq Ft GRADE A TAKE-UP AVERAGE DEAL SIZE 115,710 56,464 20,613 28,034 Media and Tech 25,000 Other 20, , ,637 Financial Legal 300,140 Flexible Offices Business Services 15,000 Insurance sq ft 334, ,000 Retail & Leisure Property Energy & Utilities 10, ,798 5,000 0 Q2/2015 Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 Q3/2017 Q4/2017 Q1/2018 Q2/2018 LONDON OFFICES 2018 TO DATE > Submarket Demand Performance 50 > An analysis of demand across the key London submarkets in 2018 to date, allows us to assess the current market health in relation to transactional activity. Analysing annual take-up based on 2018 figures, we can see which submarkets are ahead of the 10-year average and which locations are lagging the longer term trend. % above / below long term average take-up City Core Victoria City (Whole) Paddington Covent Garden Mayfair City Fringe London (Whole) Soho Southbank Euston West End (Whole) Docklands Marylebone Fitzrovia St James's Holborn Canary Wharf Knightsbridge Bloomsbury > > 2018 figures to date, confirm the impact of supply shortages across Central London s key submarkets. The bottom ten performing submarkets have an average of just 25,000 sq ft of new Grade A product per location, which is equivalent to just 1% of the total Grade A stock. For the top five performing submarkets the figure is significantly higher at 197,000 sq ft. > > The City Core reinforces its robust demand profile with take-up running at 45% above average. Equally, in Victoria, vacancy is currently back down at 4.4%, compared to a figure of 5.4% in Q However, supply is becoming constricted as Grade A vacancy is now sub 4% compared to 11% at the end of > > Lack of prime product in many locations is not only holding back demand but impacting headline rents. Non-availability of new Grade A units means that there are no buildings able to push the rental envelope. Lack of suitable product is allowing non-core locations, like White City, to benefit from high profile relocations, such as Publicis, who can centralise a number of fragmented subsidiaries under one roof. UK Research & Forecast Report

11

12 CONTACT US West End Agency Paul Smith City Agency James Walker City Fringe Agency Shaun Simons City Investment Dominic Amey West End Investment Rob Hayes West End Tenant Representation Stuart Melrose City Tenant Representation Stuart Commins Lease Advisory Charles Cowley Research & Forecasting Guy Grantham Colliers International Group Inc. (NASDAQ:CIGI) (TSX:CIGI) is a top tier global real estate services and investment management company operating in 69 countries with a workforce of more than 12,000 professionals. Colliers is the fastest-growing publicly listed global real estate services and investment management company, with 2017 corporate revenues of $2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide, and through its investment management services platform, has more than $20 billion of assets under management from the world s most respected institutional real estate investors. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice to accelerate the success of its clients. Colliers has been ranked among the top 100 global outsourcing firms by the International Association of Outsourcing Professionals for 13 consecutive years, more than any other real estate services firm. Colliers is ranked the number one property manager in the world by Commercial Property Executive for two years in a row. Colliers is led by an experienced leadership team with significant equity ownership and a proven record of delivering more than 20% annualized returns for shareholders, over more than 20 years. For the latest news from Colliers, visit Colliers.com or follow us on and LinkedIn. UK Research & Forecast Report