london office market update a guide to rents rent free periods market trends q3 2016

carterjonas.co.uk 1

LONDON OFFICE MARKET UPDATEGuide to rents, rent free periods & market trends

Q3 2016

RESEARCH

W11 W2

W8

W14W6

SW7

SW3SW1

W1

NW1

N1

WC1

WC2

EC1

SE1

EC4EC2

EC3 E1E14

GRADES OF OFFICE ACCOMMODATIONFor marketing purposes office accommodation is generally categorised into Grades which are defined as follows:

Grade A New or newly refurbished office space where the building specification includes suspended ceilings and fully accessible raised floors for data/telecoms cable management, passenger lift and air conditioning facilities.

Grade B Office space that may only incorporate under floor or perimeter trunking for data/telecoms cable management, rather than fully accessible raised floors, and/or air cooling facilities, instead of an air conditioning system that dehumidifies, filters and draws fresh air into the building. Grade B space also tends to be of a generally lower quality building specification.

“Refitted” Office space that is ‘as new’, having been completely refitted throughout, to include new fixtures and fittings to the common parts and reception area, new building services – including air conditioning and passenger lift facilities, electrical, plumbing and lighting systems, and new raised floors, suspended ceilings and sanitary ware. The specification of works will comply with the latest health and safety legislation and may also include re-cladding the exterior of the building.

“Refurbished” Space is defined as office accommodation where the landlord has redecorated and recarpeted the available office space (but not necessarily the common parts) and overhauled, but not renewed, the building services, such as the air conditioning and passenger lift facilities.

CITY/CITY FRINGE City Core

City Fringe (East)

Rest of East London

City Fringe (North/North West)

SOUTH BANK London Bridge/ Southwark/Waterloo

DOCKLANDS Canary Wharf

Rest of Docklands

MIDTOWN Strand/Covent Garden

Bloomsbury

Holborn/Fleet Street

King’s Cross (East)

WEST END Paddington/Kensington/Chelsea

Victoria/Westminster

Mayfair/St James’s

Haymarket

Soho/North of Oxford Street

Euston/King’s Cross (West)

WEST LONDON Hammersmith/Olympia/ West Kensington

LOCATIONS

2

carterjonas.co.uk 3

W11 W2

W8

W14W6

SW7

SW3SW1

W1

NW1

N1

WC1

WC2

EC1

SE1

EC4EC2

EC3 E1E14

MARKET READJUSTMENT

The Brexit vote is likely to result in a period of lower economic growth, reduced levels of job creation and, consequently, weaker demand for office space. The banking and finance sectors are most likely to be affected by Brexit, particularly if the UK does not retain the ability to ‘passport’ financial services into the European Union. Some banking functions – particularly those trading in Euro denominated assets, will be most vulnerable to a relocation to financial centres such as Paris, Frankfurt or Dublin. The City of London and Docklands are the sub-markets that are most likely to be affected by the referendum vote, given their exposure to the banking sector.

The London office market is, however, entering the post EU referendum world at a time when office vacancy levels across Central London are at historic lows. While it is likely that demand for London office space will weaken over the next 12-18 months, the undersupply of available floor space should underpin the market: it is more likely that there will be a gradual period of readjustment rather than a sharp correction in rents which are likely to decline by 5-10% over the next 1-2 years, with the largest reductions being in the City of London.

RENTS AND RENT FREE PERIODS

The incidence of landlords being prepared to offer longer rent free periods than could have been negotiated before 23 June is increasing – an additional 1-2 months rent free where a 5-10 year lease is to be granted is now not unusual. There has, so far, been little evidence of rent reductions – not surprising given

that property values are more sensitive to rental values than rent free periods. Landlords may, however, start to reduce advertised rents if vacant floor space continues to remain unlet by Q1 2017.

OPPORTUNITIES FOR TENANTS

A weakening in office demand brings with it opportunities for tenants as the balance of negotiating power ebbs away from landlords. We are, over the next 12 – 18 months, likely to see the following trends becoming established in the London office market:

• longer rent free periods

• reduced advertised rents

• larger discounts on advertised rents

• a greater willingness by landlords to offer leases with break options

A POSITIVE OUTLOOK FOR LONDON

London is one of the leading centres for financial innovation and offers international bank, finance and technology businesses the opportunity to tap into a highly skilled pool of labour. The city’s language is the international language of business and its vibrant culture, artistic and sporting heritage are factors that are likely to discourage employers from relocating large swathes of their workforce to EU member states.

London’s position in the Greenwich time meridian, and the need for banks to trade on the international capital and equities markets across the globe 24 hours a day, is also likely to anchor jobs in the banking sector.

TENA

NT

AD

VISO

R’S

“SO HOW WILL THE LARGELY UNEXPECTED VOTE TO LEAVE THE EUROPEAN UNION AFFECT THE CENTRAL LONDON OFFICE MARKET AND WHAT ARE THE IMPLICATIONS FOR TENANTS?”

...POST BREXIT VOTE SOME

LANDLORDS ARE OFFERING LONGER RENT FREE PERIODS

BUT WIDESPREAD RENT REDUCTIONS

HAVE YET TO MATERIALISE.

4

THE TECHNOLOGY SECTOR

The technology sector has been one of the main drivers of demand for London office space following the 2008/09 banking crisis. London is often cited as the European capital of the technology industry – a point underscored by Google, Facebook and Twitter – all of which have established their European headquarters in London for many of the reasons set out above. The UK, and in particular London, is prominent in the global financial technology, or ‘fintech’, and cyber security disciplines.

In a vote of confidence in the UK’s future as a technology hub, Apple is, at the time of writing, reported to be in negotiations to lease up to 450,000 sq ft at Battersea Power Station.

Michael PainHead of Tenant Advisory Team

020 7016 0722 [email protected]

One of the challenges facing the continued growth of the UK technology sector is the ability to hire suitably skilled staff, particularly from Asia-Pacific and the Americas which have rich pools of talent. Following the completion of Brexit the UK government should be free to set its own immigration policy and it has been widely reported that it is likely to be more open than in the past towards those outside the EU that have the technology skills to sustain the growth of the UK tech sector.

Brexit therefore offers significant opportunities for occupiers – the prospect of lower rents, longer rent free periods, more flexible leases and the possibility of easier recruitment for employers from an international, rather than European-centric, talent pool.

THE TECHNOLOGY SECTOR HAS

BEEN ONE OF THE MAIN DRIVERS

OF DEMAND FOR LONDON OFFICE

SPACE FOLLOWING THE 2008/09

BANKING CRISIS

carterjonas.co.uk 5

6

Location Typical Quoting Rent per sq ft pa (UF = Upper Floors)

Grade A Grade B

City of London – Pt EC1, Pt EC2, Pt EC3 & EC4 New / Refitted Refurbished Refurbished

City of London - Prime locations e.g. Gracechurch Street, Lime Street / Fenchurch Street, Old Broad Street

£65.00 - £77.50 (UF = £85.00 - £95.00)

£52.50 - £62.50 (UF = £72.50 - £77.50)

£42.50 - £47.50

City of London - Secondary locations e.g. Blackfriars, Old Bailey, Barbican, Liverpool Street, Aldgate

£60.00 - £75.00(UF = £77.50 - £82.50)

£48.50 - £57.50(UF = £62.50 - £69.50)

£40.00 - £45.00

Fringe City of London – Pt EC1, Pt EC2, Pt EC3 & E1

City Fringe (North / North West) e.g. Clerkenwell, Farringdon, EC1, Finsbury Square & Shoreditch, EC2

£62.50 – £72.50 £55.00 – £62.50 £40.00 - £52.50

City Fringe (East) e.g. Spitalfields, Aldgate East, E1 & Tower Hill, EC3

£55.00 - £72.50 £45.00 - £52.50 £35.00 - £42.50

Midtown - WC1, WC2, NW1, Pt EC1 & Pt EC4

Holborn & Bloomsbury £62.50 - £75.00 £50.00 - £60.00 £42.50 - £49.50

Covent Garden / Strand (west) / Charing Cross £75.00 - £89.50 (UF = £90.00 - £92.50)

£55.00 - £72.50 £45.00 - £52.50

Kingsway / Strand (east) / Aldwych / Fleet Street £59.50 - £70.00 £47.50 - £55.00 £40.00 - £45.00

King’s Cross / St Pancras £67.50 - £85.00 £55.00 - £65.00 £45.00 - £52.50

West End - W1, W2 & SW1

Mayfair / St James’s - Prime locations e.g. Berkeley Square, St James’s Square

£110.00 - £150.00 £87.50 - £110.00 £67.50 - £77.50

Mayfair / St James’s - Secondary locations e.g. Albemarle Street, Jermyn Street

£92.50 - £107.50 £72.50 - £87.50 £57.50 - £69.50

North of Oxford Street (West) - Prime locations e.g. Portman Square, Cavendish Square

£82.50 - £92.50 £65.00 - £75.00 £50.00 - £57.50

North of Oxford Street (West) - Secondary locations e.g. Seymour Street, George Street

£67.50 - £80.00 £55.00 - £65.00 £47.50 - £55.00

North of Oxford Street (East) “Fitzrovia” / Great Portland Street

£72.50 - £87.50 £57.50 - £67.50 £47.50 - £55.00

Soho, Regent Street £77.50 - £90.00 (UF = £92.50 - £95.00)

£62.50 - £72.50 £50.00 - £57.50

Haymarket, Lower Regent Street £65.00 - £72.50 £55.00 - £62.50 £45.00 - £52.50

Victoria & Westminster £72.50 - £82.50 (UF = £85.00 - £87.50)

£59.50 - £72.50 £47.50 - £57.50

Knightsbridge £82.50 - £97.50 £70.00 - £79.50 £52.50 - £62.00

Paddington / Bayswater £57.50 - £68.50 (UF = £70.00 - £72.50)

£49.50 - £57.50 £40.00 - £47.50

Euston £65.00 - £77.50 £52.50 - £62.50 £42.50- £47.50

South West / West London, SW3, SW6, W4, W5, W6, W8, W11, W14

Chelsea £70.00 - £92.50 £57.50 - £67.50 £42.50 - £52.50

Kensington / Queensway / Notting Hill £55.00 - £65.00 £45.00 - £52.50 £40.00 - £42.50

Fulham / Hammersmith / West Kensington / Olympia £52.50 - £58.50 £45.00 - £52.50 £37.50 - £42.50

Chiswick £48.50 - £55.00 £42.50 - £47.50 £32.50 - £40.00

South Bank - SE1

Waterloo / Southwark / London Bridge £62.50 - £67.50 (UF= £85.00 - £95.00)

£52.50 - £60.00 £39.50 - £49.50

Docklands - E14 & Stratford – E15 & E20

Docklands - Prime locations e.g. Canary Wharf / Heron Quays

£42.50 - £47.50 (UF = £48.50 - £50.00)

£39.50 - £42.50 (UF = £43.50 - £45.00)

£32.50 - £37.50

Docklands - Secondary locations e.g. South Quay, Limeharbour, Marsh Wall, East India Dock

£32.50 - £37.50 £25.00 - £31.50 £20.00 - £25.00

Stratford - E15 & E20 £37.50 - £49.00 £27.50 - £35.00 £19.50 - £25.00

Table 1 London O¤ce Market – Typical Landlord Quoting Rents – Q3 2016 (space over 5,000 sq ft) Source: Carter Jonas Research

carterjonas.co.uk 7

Location Typical Rent Free Period Agreed (lettings over 5,000 sq ft)

5-year lease 10-year lease

City of London Prime e.g. Gracechurch Street, Lime Street / Fenchurch Street, Old Broad Street

8 - 11 17 - 22

City of London Secondary e.g. Blackfriars, Old Bailey, Barbican, Liverpool Street, Aldgate

9 - 12 18 - 23

City Fringe (North / North West) Clerkenwell, Farringdon, EC1, Finsbury Square & Shoreditch, EC2

4 - 7 10 - 16

City Fringe (East) Spitalfields, Aldgate East, E1 & Tower Hill, EC3

9 - 11 17 - 22

Midtown (Central) Holborn / Bloomsbury

7 - 10 16 - 19

Midtown (North) King’s Cross

7 - 10 16 - 19

Midtown (South) Covent Garden / Strand

7 - 10 16 - 19

West End (Central) Mayfair, W1 / St James’s, SW1

6 - 8 14 - 17

West End (North) Fitzrovia

7 - 9 15 - 18

West End (South) Westminster, Victoria, SW1

8 – 10 18 – 24

West End (East) Soho, W1

7 - 9 15 - 18

West End (West) Paddington, W2

7 - 9 15 - 18

West London Hammersmith, W6, Olympia, W14

6 - 9 14 - 18

South Bank Waterloo / Southwark / London Bridge

6 - 9 14 - 18

Docklands Canary Wharf, E14

11 - 14 22 - 26

Stratford E15 & E20

10 - 13 21 - 25

Table 2 Rent Free Periods By Sub-Market – Q3 2016 Source: Carter Jonas Research

8

RENT DISCOUNTSPost Brexit vote there is little evidence of landlords reducing advertised rents and, as yet, no widespread cases of a widening in the discounts that landlords are willing to offer on advertised rents which are currently up to 3%. The status quo may, however, change over the next 6-9 months if demand for office space weakens significantly.

RENT FREE PERIODSThe underlying value of an income producing property is more sensitive to the level of headline rent than the quantum of rent free period agreed on new lettings, which explains the reluctance of landlords to reduce rents in the wake of the Brexit vote.

Although not yet a widespread trend, there is evidence of some landlords offering longer rent free periods than could have been negotiated before the EU Referendum – typically an additional 1-2 months on leases of up to 10 years.

carterjonas.co.uk 9

Table 3 Typical O¤ce Costs Q3, 2016 - Prime Located New / Refitted Grade A Space Central, Greater London & Thames Valley Locations (£ per sq ft pa) Source: Carter Jonas Research

Location Rent Business Rates Service Charge Total

City of London Prime e.g. Gracechurch Street, Lime Street / Fenchurch Street, Old Broad Street

£70.00 £20.00 £10.00 £100.00

City of London Secondary e.g. Blackfriars, Old Bailey, Barbican, Aldgate

£65.00 £18.00 £10.00 £93.00

City of London Prime Upper tower floors

£90.00 £22 .00 £10.00 £122.00

City Fringe (North / North West) Clerkenwell, Farringdon, EC1, Finsbury Square & Shoreditch, EC2

£67.50 £14.50 £11.00 £93.00

City Fringe (East) Spitalfields, Aldgate East, E1 & Tower Hill, EC3

£67.50 £14.50 £10.00 £92.00

Midtown (Central) Holborn / Bloomsbury

£67.50 £25.50 £10.00 £103.00

Midtown (North) King’s Cross

£82.50 £22.00 £10.00 £114.50

Midtown (South) Covent Garden / Strand

£82.50 £28.50 £10.00 £121.00

West End (Central) Mayfair, W1 / St James’s, SW1

£125.00 £50.00 £11.00 £186.00

West End (North) Marylebone, Fitzrovia

£85.00 £32.50 £10.00 £127.50

West End (South) Westminster, Victoria, SW1

£77.50 £29.00 £11.00 £117.50

West End (East) Soho, W1

£90.00 £33.50 £11.00 £134.50

West End (West) Paddington, W2

£65.00 £25.00 £11.00 £101.00

West London Hammersmith, W6, Olympia, W14

£57.50 £18.50 £9.00 £85.00

South Bank Waterloo / Southwark / London Bridge

£65.00 £17.75 £10.00 £92.75

Docklands Canary Wharf, E14

£48.50 £16.50 £13.00 £78.00

Stratford E15 & E20

£45.00 £12.00 £10.00 £67.00

Brentford £27.50 £8.00 £9.00 £44.50

Heathrow £25.00 £7.00 £6.00 £38.00

Uxbridge £32.50 £8.00 £7.75 £48.25

Ealing £37.50 £8.00 £7.50 £53.00

Croydon £28.00 £7.50 £6.50 £42.00

Watford £27.50 £7.50 £7.50 £42.50

Slough £27.00 £6.50 £7.00 £40.50

Maidenhead £32.50 £9.50 £7.00 £49.00

Reading (Town Centre)

£35.00 £7.50 £7.50 £50.00

Staines £35.00 £8.00 £6.50 £49.50

ELIZA

BETH

LINE

Typical o¤ce costs for new/refitted Grade A mid-rise floor space over 5,000 sq ft (per sq ft per annum)

Source: Carter Jonas ResearchTravel times source: Crossrail

10

READING£35.00

SLOUGH£27.00

MAIDENHEAD£32.50

Rent £35.00Business Rates £7.50Service Charge £7.50Minutes to Bond Street 53Minutes to Liverpool Street 60




Rent £95.00Business Rates £40.00Service Charge £11.00Minutes to Bond Street n/aMinutes to Liverpool Street 7



Rent £67.50Business Rates £21.00Service Charge £11.00Minutes to Bond Street 7Minutes to Liverpool Street n/a

PADDINGTON BOND STREET

TOTTENHAM COURT ROAD FARRINGDON

LIVERPOOL STREET

carterjonas.co.uk 11

EALING BROADWAY£37.50

PADDINGTON£65.00

TOTTENHAM COURT ROAD£80.00

LIVERPOOL STREET£67.50

FARRINGDON£67.50BOND STREET

£95.00

HEATHROW£25.00

STRATFORD£45.00

CANARY WHARF£48.50Rent £27.00

Business Rates £6.50Service Charge £7.00Minutes to Bond Street 32Minutes to Liverpool Street 38





BOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREETBOND STREET£95.00£95.00£95.00£95.00

£67.50£67.50£67.50£67.50£80.00£80.00

12

The City of London, North City Fringe and Victoria are the areas of Central London that will have the highest volumes of vacant floor space over the course of the next 18 months as o¤ce developments that were started in 2014/15 begin to reach completion. Rents in these sub-markets are therefore likely to be more sensitive to weaker economic growth.

FUTU

RE R

ENTA

L

Graph 1 & Table 4 Typical Current and Forecast Rents For New and Refitted Grade A Space

Q3 2016 Q3 2017 Q3 2018

£ per sq ft per annum

Mayfair/St James's £125.00 £120.00 £115.00

Fitzrovia £85.00 £82.50 £80.00

Victoria £77.50 £75.00 £70.00

Holborn £67.50 £65.00 £63.00

King's Cross £82.50 £80.00 £78.50

Covent Garden £82.50 £80.00 £78.00

City Prime £70.00 £67.50 £62.50

Clerkenwell & Spitalfields £67.50 £65.00 £60.00

Southwark £65.00 £62.50 £60.00

Hammersmith £57.50 £55.00 £52.50

Canary Wharf £48.50 £45.00 £42.50

Stratford £45.00 £42.50 £42.50

Vacancy levels across London, particularly in the City and Docklands markets, could be further boosted, depending upon the extent to which banking and finance jobs are transferred to the European Union, post Brexit, as tenants o®oad space that becomes surplus by sub-letting. It is quite likely, therefore, that over the next 18-24 months the City will once again become the magnet for West End occupiers seeking better value for money, as rents decline and vacancy levels increase.

£150

£120

£90

£60

£30

£0

Q3 2016

Q3 2017

Q3 2018

May

fair/

St J

ames

’s

Fitz

rovi

a

Vict

oria

Holbo

rnKi

ng’s

Cros

sCo

vent

Gar

den

City

Prim

eCl

erke

nwel

l &

Sout

hwar

kHam

mer

smith

Cana

ry W

harf

Stra

tford

£ psf pa

Spita

lfiel

ds


APRIL 2017

The government’s Valuation Office Agency (VOA) will be informing occupiers over the next few months of the new rateable values that have been ascribed to their premises for business rates assessment purposes, taking effect from 1 April 2017. The new rateable values will be based on rental values as at April 2015 which is likely to result in significant increases in rateable values in some areas of London where rents have risen sharply since the 2010 rates revaluation. Locations that are most likely to be affected include the City fringe – in particular Farringdon, Clerkenwell and Shoreditch, the City core, Covent Garden, Victoria, Mayfair and St James’s.

However, as with the 2010 business rates revaluation, it is likely that the government will introduce transitional relief under which business rates increases will be phased in under a graduated capping mechanism. It should also be possible to lodge an appeal where it can be demonstrated that the new rateable value is appreciably higher than the 2015 rental value of the property.

An announcement from the VOA on transitional relief and appeal procedures is expected in the autumn.

EU HUBS: OFFICE & HOUSING CONSTRAINTSIt is widely expected that Paris, Frankfurt and Dublin will benefit from Brexit if significant numbers of banking and financial services jobs are transferred to the European Union. Berlin could also build on its foundation as one of Europe’s most successful hubs for tech start-ups if venture capital funding in the UK dries up in response to Brexit. However, recent studies reveal that the stock of good quality, operationally suitable, office space in each location is limited. Even co-working / serviced office space, which is the staple of the tech sector, is in short supply in Berlin.

Constraints to relocating from London are further compounded by the fact that Frankfurt, in particular, is unlikely to have sufficient housing to cater for a significant increase in the city’s workforce.

14

CITY OF LONDON

The banking and financial services sectors are the backbone of the London economy – and the main drivers of demand for City office space. They also represent an area of commerce that is the most sensitive to the terms of the UK’s exit from the European Union. Over the next 12-18 months, and in the face of economic uncertainty associated with Brexit, it is likely that demand for office space in the City will weaken more than in other areas of the London office market – just at a time when new office developments that were started 12-18 months ago will be reaching completion. The combination of likely weakening demand and increasing office vacancy during 2017-19 will most probably result in a greater decline in City office rents than in other London office

sub-markets – see Graph 1. However, as happened in the wake of the 2008-09 credit crisis, the gap in demand left by the banking and financial services sectors is likely to be filled, in part, by occupiers from the media, creative and business services sectors from the West End and Midtown areas – attracted by newer, better specified, buildings, more choice, lower rents, longer rent free periods and space with larger floor plates that can offer occupiers the opportunity to operate more efficiently from one floor.

Ironically, the City has, during Q3, witnessed two lettings where the highest ever headline rents have reportedly been agreed: £120 per sq ft per annum on 1,000 sq ft on the 26th floor of 125 Old Broad Street, EC2 to social networking company, Mallow Street, on a short term sub-lease and over £100 per

SUB

-MA

RK

ET THE VARIOUS SUB-MARKETS THAT FORM THE LONDON OFFICE MARKET EACH HAVE VERY DIFFERENT SUPPLY, DEMAND, RENT AND RENT FREE PERIOD DYNAMICS. AN OVERVIEW, AS AT Q3, 2016, IS PROVIDED HERE.


sq ft on 7,000 sq ft at level 43 of The Leadenhall Building, EC3, let to Kames Capital which already occupies level 26.

In a display of commitment to London by the US banking sector, post Brexit vote, Wells Fargo has purchased 33 Central, King William Street, EC4, comprising 227,000 sq ft, for its own occupation.

CITY FRINGE

The east City fringe, in particular Aldgate, has witnessed a raft of 10,000 sq ft plus lettings of Grade A space during Q3 – at the 96,800 sq ft Relay Building, adjacent to Aldgate East station and at Derwent London’s 185,000 sq ft Whitechapel Building located at the junction of the Whitechapel Road and Mansell Street where four pre-completion lettings, totalling 84,600 sq ft,

have completed. The remaining Grade A space at both buildings is being offered at rents in the mid £50.00s per sq ft per annum. Closer to the City core, at Spitalfields, a rent of £72.50 per sq ft per annum was achieved earlier in the year at The Steward Building on a letting of 9,558 sq ft to Currency Cloud Services – a new record for the east City fringe.

A significant proportion of lettings in the east City fringe have been to occupiers migrating from higher cost locations in the West End and Midtown submarkets. The north City fringe has become synonymous with the technology and creative sectors – the area around Old Street roundabout having been successfully promoted as an international centre of excellence for tech ‘start-ups’. The ready availability of venture capital, its reputation for design

and creativity, rich cultural history, a well-educated workforce and the availability of co-working space have all contributed to London becoming an international technology hub to rival centres such as Berlin and Dublin.

SOUTH BANK

The South Bank office market is one of the most under-supplied London sub-markets across all size ranges.

THE SOUTH BANK OFFICE MARKET IS ONE OF THE MOST UNDER-SUPPLIED LONDON SUB-MARKETS ACROSS ALL SIZE RANGES.

16

The majority of the upper and mid-rise floors of The Shard have now been let, mainly to a mix of new entrants to the South Bank market - from the media, professional and financial services sectors. Supply side constraints are slowly being addressed with the redevelopment of the Shell Centre at Waterloo which will provide 570,000 sq ft of Grade A space at Nos. 1 and 2 Southbank Place. The former has been pre-let to Shell and No. 2, comprising 297,500 sq ft, is being developed speculatively and will be ready for occupation in 2018.

DOCKLANDS

The government’s Property Unit is reported to have agreed terms to lease circa 400,000 sq ft at 20 Cabot Square, E14 for several government departments, including Ofgem, which is relocating operations from 9 Millbank, SW1. The move is part of the strategy to relocate government administrators from Westminster to lower cost areas. Once completed, the deal will represent one of the largest London office lettings this year. Docklands (areas south of Canary Wharf) and Stratford are now the only two established inner London office locations that can offer Grade A refurbished space at rents below £40.00 per sq ft per annum.

As a consequence of the high volumes of second hand space that is being offered to let by existing tenants on sub-leases, compared with available new and refitted space being offered direct by Canary Wharf Group, there is a two-tier market at Canary Wharf – rents for tenant sub-let space tend to be £1.00 – £2.50 per sq ft per annum lower and rent free periods 1 – 2 months longer on leases of 5 – 10 years.

This point has not been lost on occupiers in the more expensive central business districts as the volume of lettings to those migrating into the area has increased over the last few years. Examples include: market research firm GFK’s relocation from Southwark to 50,000 sq ft at 10 Upper Bank Street and Wolters Kluwer’s move from Waterloo to 19,600 sq ft at 25 Canada Square.

Canary Wharf has also established itself as an international centre of excellence for financial technology and cyber-security innovation with the establishment, several years ago, of the ‘fintech’ incubator centre ‘Level 39’ at 1 Canada Square.

EAST LONDON – STRATFORD

Stratford, like Docklands, is one of the few London office sub-markets capable of offering refurbished, Grade A, office space at rents below £40.00 per sq ft per annum. Development activity at Stratford’s International Quarter is very visible - the office buildings currently under construction have been pre-let – 425,000 sq ft to the Financial Conduct Authority (completion due Q2, 2018) and 265,000 sq ft to Transport For London (completion due Q4, 2017), although up to 75,500 sq ft of option space may become available on completion of the FCA building.

The former Olympic Press and Broadcast Centres, comprising over 890,000 sq ft of mixed use retail, data centre, office, incubator and co-working space are being promoted as ‘Here East’ at a guide rent of £45.00 per sq ft per annum. Major occupiers include BT Sport and Loughborough University.

MIDTOWN

The 65 acre mixed use King’s Cross Central development, located in the north Midtown sub-market, continues to be a magnet for large space users, including global communications group, Havas and Universal Music – attracted by the combination of new buildings offering large, column-free floorplates, an attractive, vibrant,

THE DEVELOPMENT OF NEW GRADE A STOCK HAS RESULTED IN NEW RENT BENCHMARKS BEING ACHIEVED IN MAYFAIR AND ST JAMES’S.


environment, well served by restaurants and shops, and good transport connectivity to London and the UK, and the continent, via Eurostar.

Last year Google continued its expansion at the scheme following the leasing of an additional 200,000 sq ft of space at 6 Pancras Square – previously occupied by BNP Paribas – and the pre-letting of Building S2 in its entirety, comprising 180,000 sq ft. Demand for office space at King’s Cross Central has been such that buildings that were being developed speculatively, with no tenant in place, have ended up being fully or substantially let before completion of the construction programme. Rents have, consequently, increased from £65.00 per sq ft per annum two years ago, to over £80.00 per sq ft today for prime located new Grade A space.

Elsewhere in Midtown, US management consultant McKinsey is reported to be in advanced negotiations to lease 120,000 sq ft at The Post Building, New Oxford Street, WC1, comprising 320,000 sq ft, which is being redeveloped and is due for completion during Q1, 2018. If a deal can be agreed, the letting will represent one of the largest in the Bloomsbury / Holborn district this year and represents another significant relocation from the more expensive West End.

WEST END CENTRAL – MAYFAIR & ST JAMES’S

The erosion of the stock of office buildings to residential conversion and the development of new Grade A stock has resulted in new rent benchmarks being achieved in Mayfair and St James’s. The highest rents of £150.00 and £185.00 having been achieved at the newly developed 8 St James’s Square during Q1 2015.

The appetite of occupiers to pay ‘super-prime’ rents has, however, waned since Q4, 2015 and the economic uncertainty created by Brexit has weakened demand still further. As a consequence, there have been some isolated cases of landlords reducing advertised rents on prime located buildings.

THE APPETITE OF OCCUPIERS TO PAY ‘SUPER-PRIME’ RENTS FOR MAYFAIR AND ST JAMES’S SPACE HAS WANED SINCE Q4 2015.

WEST END SOUTH – VICTORIA

The Victoria office market has witnessed one of the largest lettings in the West End during the third quarter of the year – 58,600 sq ft to PA Consulting at the 317,000 sq ft Verde development at Bressenden Place. The transformation of Victoria from a low cost, low quality, overspill office location for those occupiers that could not afford to be in the W1 postcode area, into a modern, vibrant, established business district continues as Land Securities’ mixed use Nova scheme, incorporating 480,000 sq ft offices reaches completion in the next few months – a significant proportion of the development has already been let.

The regeneration of the area, and the replacement of low grade office buildings comprising small floorplates, with Grade A space typically offering floors of 10,000 sq ft plus has resulted in an influx of new, larger, occupiers into the area including Egon Zehnder (24,000 sq ft) from Mayfair and Deutsche Bank (92,000 sq ft) from the City.

Regeneration and the conversion of some buildings to residential use, has, however, resulted in a significant loss of small-mid size office suites, under 7,000 sq ft, and a consequent increase in rents, with many small businesses being forced to relocate to lower cost areas including Southwark and the City.

WEST END WEST – PADDINGTON

Historically, the Paddington office market has suffered from a limited variety of shopping and restaurant facilities to serve the local workforce and poor transport connectivity with other Central London business districts. These twin issues are gradually being addressed – the City / Liverpool Street will be just 10 minutes away by Crossrail / the Elizabeth Line when it comes into service at the end of 2018, Bond Street 3 minutes and Heathrow 24 minutes.

Recognising the imminent, strategic, benefits of locating to Paddington, there has been a sizeable migration of new occupiers into the area, the latest being Citrix which has

just taken 10,900 sq ft at 20 Eastbourne Terrace where over 85% of the 92,000 sq ft total has been let a matter of months after completion of the building refurbishment programme. Serviced / co-working operators have also invested heavily in the area since the beginning of the year, ahead of Crossrail / Elizabeth Line services starting – WeWork has taken 108,500 sq ft at 2 Eastbourne Terrace and The Office Group has taken 45,000 sq ft at 20 Eastbourne Terrace.

WEST LONDON

Hammersmith is the prime business district in West London although its pre-eminence is being challenged by White City where regeneration initiatives are transforming the area into an attractive place to live and work, with improved transport connectivity. The mixed use redevelopment of the BBC’s Television Centre at Wood Lane, W12 will incorporate 560,000 sq ft of refurbished office space, which is being promoted at a rent of £50.00 per sq ft per annum, in three buildings which are due for phased completion from Q4 2016 to Q2 2017. The BBC campus will also include a new office building of 275,000 sq ft which is to be completed during Q1, 2018.

Nearby, Imperial College is developing its White City campus which will include a molecular science research facility totalling 452,000 sq ft, due for completion imminently. Circa 185,000 sq ft will comprise a translation and innovation hub, incorporating office, co-working and laboratory space which is intended to attract science and technology entrepreneurs and researchers from across the globe.

18

The government is understood to be holding discussions with investment banks and other key stakeholders in the financial services sector on the best route forward for the City.

Despite some concerns that investment activity would fall away sharply in the run-up to the EU referendum, transactions in H1 2016 amounted to £5,436 million – around 10% down on H1 2015. While the Brexit effect has been cited as a major cause of the weaker deal volumes, the market was arguably slowing regardless, following a long run of buoyant activity and strong price growth. However, interest from international investors has remained undiminished, with foreign players accounting for just over 80% of total transaction volumes in H1.

On a quarterly basis, Q2 recorded just over £2.5 billion of deals – more than £1 billion higher than in Q1, which was an exceptionally weak start to the year. The two largest deals of Q2 were both in the City and involved international investors. ENPAM, the Italian doctors’ pension fund, bought a 50% stake in the forthcoming Principal Place scheme for £352 million from Brookfield, while China Life Insurance and Brookfield acquired the Aldgate Tower for £346 million. Pricing for prime stock has come under pressure in the capital, with office yields

IN THE AFTERMATH OF THE REFERENDUM RESULT, MUCH OF THE FOCUS HAS CENTRED ON THE POSSIBLE IMPACT ON THE CITY, SHOULD THE UK LEAVE THE SINGLE MARKET AND LOSE ITS ABILITY TO “PASSPORT” FINANCIAL SERVICES ACROSS THE EU.

drifting out to 3.50% in the West End and to 4.25% in the City. However, while yields have softened, the recent 0.25% cut in the UK base rate will help to support capital values, with property yields continuing to look attractive compared with other asset classes, particularly against 10-year government bonds which briefly fell to 0.5% in mid-August.

For retail meanwhile, shops with “uppers” remain in demand, notably in the key shopping thoroughfares such as Bond Street and Oxford Street, with yields still at sub-3% for the best stock. Retail yields are expected to remain at or about this level given the continued rental growth and seemingly endless queue of retailers seeking space in the capital. Q2 saw several large retail deals in the West End, most notably the £210 million acquisition of 50 New Bond Street by Richemont/The Crown from Aberdeen Asset Management.

While transaction volumes for this year are expected to be down on 2015, the ongoing weakness of Sterling will help to entice international buyers back into the market. The Pound is still around 10% down against the major currencies following the referendum, which should give a boost to activity in the coming months. Indeed, activity in Q3 so far has been encouraging, with a number of significant deals involving international investors being finalised.

Q2 20

16


Property Buyer Vendor Price (£m) Yield (%)

Principal Place ENPAM (Italy) Brookfield Property Part 382 4.00

Aldgate Tower China Life Insurance Co/ Brookfield O¤ce Prop

Aldgate Developments Ltd 346 4.86

88 Wood Street Shaw Foundation KWAP (Malaysia) 270 4.60

6 Bevis Marks Citibank Private Bank AXA REIM/ BlackRock UK Property 218 4.59

50 New Bond Street Richemont Holdings UK Ltd/ Crown Acqusitions

Aberdeen Asset Management 210 2.75

17 Columbus Courtyard HNA Investment Holding Partners Group/Vico Capital 131 4.59

161-167 Oxford Street Sports Direct Intl Plc CIP Property (AIPT) Ltd 108 n/a

20 Grosvenor Street Shaftesbury AMG Grosvenor Ltd 96 3.77

80 Cheapside Wing Tai Properties Ltd/ Crosby Investment Holding

Royal London Asset Man 93 5.15

138 Cheapside Nan Fung Group Hermes REIM/CPPIB 83.5 5.25

Table 5 Major Central London Investment Deals in Q2 Source: Propertydata

Graph 2 Prime Central London O¤ce Yields

Graph 3 Central London O¤ce Investment Volumes*

7.0%

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

3.5%

3.0%

Jun 0

5

Jun 0

6

Jun 0

7

Jun 0

8

Jun 0

9

Jun 10

Jun 11

Jun 12

Jun 13

Jun 14

Jun 15

Jun 16

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

City West End

Source: Carter Jonas

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

20072008

20092010 2011

20122013

20142015

H1 2016

Overseas Domestic

Source: Propertydata

*West End, City & Docklands

£ m

illio

n

© Carter Jonas 2016. The information given in this publication is believed to be correct at the time of going to press. We do not however accept any liability for any decisions taken following this report. We recommend that professional advice is taken.

36 OFFICES ACROSS THE COUNTRY, INCLUDING 12 IN CENTRAL LONDON

Follow us on Twitter, LinkedIn and Instagram

CASE STUDIES Lease negotiations and relocations 10,000 sq ft+

37,000ft

33,000ft

28,000ft

23,000ft

17,500ft

16,000ft

15,000ft

11,000ft

Frank Hirth 236 Gray’s Inn Road, WC1

UK Payments Administration 2 Thomas More Square, E1

Warner Bros / Shed Media 85 Grays Inn Road, WC1

Nursing & Midwifery Council Two Stratford Place, E20

Hackett Limited The Clove Building, SE1

Circle Housing Two Pancras Square, N1

Hitachi Rail Europe 40 Holborn Viaduct, EC1

Salamanca Group 50 Berkeley Street, W1

Michael Pain Partner, Head of Tenant Advisory 020 7016 0722 [email protected]

Jeremy Gidman Partner, Head of Investment 020 7016 0727 [email protected]

Greg Carter Partner 020 7518 3303 [email protected]

Ed Caines Associate Partner 020 7016 0724 [email protected]

Luke Wild Associate Partner 020 7016 0725 [email protected]

Darren Yates Head of Research 020 7518 3343 [email protected]

Andy Williams Head of Mapping & GIS 01865 404439 [email protected]

KEY CONTACTS

One Chapel Place, London W1G 0BGcarterjonas.co.uk/officesearch

For more data on the Central London office market, office availability, rents and rent free periods and information on budgeting and planning for a lease renewal, rent review or office relocation please contact one of the team.

THE CARTER JONAS TENANT ADVISORY TEAMOur tenant representation services include:

• Office search and relocation management

• Relocation budgeting and planning

• Lease and rent review negotiation

• Repairs/dilapidations assessment and negotiation

• Building, air conditioning and passenger lift surveys

• Business rates analysis and appeal

• Service charge audit

COMMERCIAL OFFICES• London• Bath• Cambridge• Leeds• Oxford• Winchester

london office market update a guide to rents rent free periods market trends q3 2016

Documents