RESEARCH Q RESEARCH. Real Estate for a changing world.

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1 CENTRAL LONDON OFFICE & RETAIL MARKET RESEARCH RESEARCH Real Estate for a changing world

2 2016 key events timeline 2015 highlights and 2016 outlook Q Leasing activity ahead of the same period in 2015, with take-up level hitting 3.09m over the first quarter. Value of against $ falls to a level not seen since Overseas investors circle Central London assets to take advantage. $1.31 Q US Bank Wells Fargo buy new European HQ for 275m at 33 King William Street, EC4. Investors are undeterred by uncertainty surrounding impending EU referendum with investment levels 24% ahead of the long term average Q1 figure 24% h Vote to leave the EU catches many, particularly London by surprise! Media Tech giants, Google, Facebook & Amazon all express their commitment to Central London HQ s. Apple commits to 500k pre-let in Battersea, providing confidence in the future of London s Media Tech future. Thomson Reuters sublease 350,000 sq ft from Credit Suisse at 5 Canada Square. Q London No 1 in the 2016 Global Cities Index. Major discounts expected by investors do not materialise as West End and City prime yields move out marginally by 25bps. Overview & outlook The vote to leave the European Union was the biggest shock to the UK s political and economic landscape since the financial crisis. After an initial pessimistic outlook, UK economic data surprised on the upside, with 2016 GDP now expected around 2.00%, up from initial predictions of 1.70%. Given Central London s entwined links to the UK economy, predictions for its outlook were just as gloomy; occupiers halting expansion plans and investor demand drying up. The reality however was much diffe. Take-up levels exceeded our initial estimates reaching 11.39m sq ft, just 10% below the long term average and investment volumes were in-line with average levels reaching 13.33bn. The leasing market was driven by Media Tech demand accounting for 21% of take-up. As predicted supply did rise, a combination of buoyant levels of development completions last year and tenant space fuelled this movement, however levels are still 25% below the long term average. Perhaps the biggest story of 2016 was the continued attraction of London to overseas purchasers, who accounted for 68% of purchases. Asia Pacific investors have been particularly active accounting for 32% of total spend, the single largest share from any one region. Moving forward there is still significant capital circling Central London property assets and this at a time when assets looks increasingly attractive in exchange rate terms alone. We are in the early stages of the Brexit process and the uncertainty that defined 2016 is likely to see a continuation in 2017, particularly with a slower pace of expected this year. Despite this, Central London is set to see continued employment of 1.1% in Seven months on from the EU referendum, to the relief of occupiers and investors alike, Theresa May announced a 12-point plan for Brexit negotiations. Although details on the deal the UK would be seeking were sparse Theresa May did confirm that the UK will not remain in the single market. The question now is what deal, if any, can be struck to gain access, minimising the impact on businesses. The Financial services sector relies on passporting rights which impact the ability of banks authorised in the UK to offer products and services to EU clients. If lost this could potentially have a negative impact on headcount in London. Major investment banks are starting to make contingency plans for when we leave the single market, according to TheCityUK lobby group, 35,000 jobs could relocate, this of course is subject to the outcome of negotiations. A point to stress is how Central London has increasingly become less reliant on Banking & Finance to drive demand in recent years. Over the period of this sector dominated take-up levels accounting for 23%. The last five year period ( ) has seen this share diminish to 17%, with the Media Tech sector now dominating. Furthermore, news that Media Tech giants Google, Facebook and Apple have committed to growing their workforces in the capital and building their HQ s is positive for Central London s Media Tech future. Despite the uncertainty, the capital offers unrivalled infrastructure, due to be enhanced by the arrival of Crossrail and amenities which will continue to attract occupiers. Solid fundamentals including the English language, a business friendly time-zone and world renowned legal system will ensure Central London continued attractiveness to investors across the globe. Global uncertainty and M&A activity pushes up tenant space to 2.32m sq ft or 18% of total supply. Largest deal of the year signed with The Cabinet Office taking 536,000 sq ft at 20 Cabot Square. BNP PRE acquired. As a result of positive economic data BNP Paribas revise 2016 GDP upwards from 1.70% pre vote to 2.00% in October. Central London stats... at a glance Total West supply End Prime Rent Vacancy rate 12.33m sq ft 5.73% City West prime End Prime Rent West End prime /sq ft /sq ft 2017 Government confirms plan to withdraw from the single market, providing occupiers and investors with some clarity forecasts suggest that the UK will slow however the UK will avoid recession. Central London employment and GDP is set to outperform the wider UK and Eurozone average. p 29% on Q take-up 3.47m p 24% on Q p 4.33% in Q Take-up 11.39m sq ft q -10% on LT ave p 2.2% on Q Investment 3.85bn p 54% on Q q -5.6% in Q Investment 13.33bn u 0% on LT ave 3

3 West End (W1, SW1, NW1, W2, SW3, SW7 & W8) City (EC1, EC2, EC3, EC4 & E1) Office s & vacancy rates Unlike the usual flurry of demand experienced in the last quarter of the year, saw muted levels of takeup in the West End. Levels reached just 0.55m sq ft, the lowest quarterly level of Unsurprisingly, annual take-up struggled reaching 2.5m sq ft, the lowest annual total since The Media Tech sector drove demand accounting for 18% of total take-up followed by the Services Sector who took a 17% share saw the highest levels of development activity in the West End since m sq ft was delivered, the majority of which was in Victoria. This has pushed up supply to 3.24m sq ft, a 27% rise on 12 months ago. Despite this, supply is still 20% below the long term average. The West End has not suffered from the same levels of tenant space as the City or Docklands, primarily due to the lack of large Banks located in the submarket. We estimate approximately 480,000 sq ft of space available is tenant space, up 10% on the same period last year. With limited evidence of Mayfair & St James s deals achieving in excess 130/sq ft in, we have reduced our prime to / sq ft, representing annual al decline of -5.6%. INVESTMENT MARKET It was encouraging to see investment levels in reach 1.22bn, the highest quarterly volume last year. This brings annual volumes to 3.91m, 25% down on 2015 but positively in-line with the long term average. The largest office deal in Q4 was Ashby Capital s 50% acquisition of 1 & 2 Fitzroy Place for 217m. This deal demonstrates purchasers appetite for assets with long term secure income and good quality tenants. Lease lengths for purchases by Middle Eastern investors averaged 10.7 years in In comparison lease lengths on assets acquired by Asia Pacific investors averaged 6.5 years, suggesting these investors are moving further up the risk curve for more favourable returns. 55% of West End purchases were from overseas investors with the largest proportion of those from the Asia Pacific. Notable deals from this region include 14 St George Street, W1 acquired by Chinese Estates for 121m and Ryder Street, SW1 acquired by Vanke for 120m. WEST END Vacancy rate: 4.81% Annual change 100bps Location Mayfair & St % James s Victoria % Soho % Noho East % Noho West % Paddington % West End Stats Total supply 3.24m sq ft p 27% on Q Investment 3.91bn u 0% on LT ave MIDTOWN Vacancy rate: 7.52% 284bps Location Covent % Garden Holborn % Vacancy rate 4.81% p 100bps on Q Take-up 2.50m sq ft q -27% on LT ave NORTHERN FRINGE Vacancy rate: 2.90% 200bps Location King s % Cross SOUTHBANK Vacancy rate: 2.83% -96bps % City Stats Total supply CITY Vacancy rate: 6.64% 212bps Location City % City % Tower City Fringe % STRATFORD Vacancy rate: 14.3% -699bps 5.74m sq ft p 43% on Q Investment 6.77bn p 5% on LT ave % DOCKLANDS Vacancy rate: 4.66% 52bps Location Canary Wharf % Rest of Docklands % Vacancy rate 6.64% p 212bps on Q Take-up 5.13m sq ft q -9% on LT ave City take-up ended on a high in reaching 1.59m sq ft, the highest quarterly take-up figure in This brings annual 2016 take-up to 5.13m sq ft, 21% below 2015 however just 9% below the long term annual average. The Banking & Finance sector drove demand in 2016, accounting for a quarter of all take-up. The largest deal by this sector in the last quarter was Fidelity s 107,000 sq ft pre-let of 4 Cannon Street, EC4. In total, 33 pre-lets were seen in the City market in 2016, the highest annual number ever recorded. Interestingly, four out of the top five pre-lets were acquired by Banking & Finance occupiers which include 118,000 sq ft to Jefferies at 100 Bishopsgate and 105,000 sq ft to Barings at 20 Old Bailey, EC4. Supply as at end stood at 5.74m sq ft, up from 4.00m sq ft 12 months ago. Despite this significant rise, supply is still 20% below the long term average. A combination of above average levels of development completions and an increase in tenant returns last year contributed to this rise. Despite City s flat lining at 69.00/sq ft in 2016, this represents annual of 2.2%. More positively, al in the City Fringe recorded 8.3% in Lettings by WeWork at The Bower and Splash at the Paramount Building underpin our view that s rose to 65.00/sq ft in from 62.50/sq ft in Q INVESTMENT MARKET Mirroring the occupational market, the investment market saw strong levels of investment volumes in totalling 2.41bn. Boosted by this end of year performance total 2016 investment volumes reached 6.77bn, 25% below 2015 but 5% ahead of the 10 year annual average. Undeterred by uncertainty, overseas investors took advantage of exchange rate movements and slight pricing adjustments to splurge 5.49bn on City assets in 2016, representing 81% of the total. Following the shock of a Brexit vote, City office capital values did see some initial falls. For this reason prime yields moved out marginally by 25bps in Q to 4.25%. They remain at this level in however there is evidence to suggest these could harden in With some large City assets curly for sale and strong overseas appetite for this type of product, we estimate healthy levels of investment volumes to kick off Brookfield has sold a 50% stake in Principal Place for 763m representing a yield of 4.00%. British Land has put its 50% stake in The Leadenhall Building up for sale which has attracted strong interest and is likely to set new benchmark levels of yield on capital values per sq ft. 5

4 Midtown (WC1 & WC2) Canary Wharf & Docklands (E14) Major leasing deals PROPERTY SQ FT TENANT RENT PSF PROPERTY SQ FT TENANT RENT PSF Midtown has witnessed a period of muted take-up, with four consecutive quarters since Q failing to reach the long term quarterly average of 0.26m sq ft. However, during Q take-up did in fact exceed this by 28%, to reach 0.38m sq ft. Furthermore, if we consider activity in the first few weeks of 2017 it seems as though we are beginning to feel the uptick in demand. Encouragingly, we have already witnessed 2 large pre-lets in the submarket with Mckinsey committing to take 100,000 sq ft at The Post Building along with Skyscanner who have pre-let 24,000 sq ft at The Avenue. Furthermore, ITV are rumoured to be under offer on 90,000 sq ft at Waterhouse Square which should provide a boost to take-up figures. Vacancy rates are curly 167bps above long term average due to an influx of new stock over the year and due to a number of corporate occupiers releasing space back to the market as they consolidate their operations. Declining development activity during 2017 and 2018 however, along with good levels of demand will no doubt help bring vacancy rates down. The area continues to be attractive to its tradition Professional Services occupiers as well as the Corporate sector. However, continuing dominance has been felt from the Media Tech sector during Q4, where it accounted for 28% of total take-up. The largest deal was to Argus, who acquired 53,242 sq ft at Lacon London, a new development which is now nearly 60% let. In a submarket famous for its skyline and impressively large infrastructure, it is no wonder that generally good years of takeup are driven by large deals. Indeed, take-up reached 0.63m sq ft in the final quarter of 2016, 147% above the long term quarterly average. It must be noted that only 27,906 sq ft of this take-up occurred in the wider Docklands area with the remainder materialising in Canary Wharf. This boost helped the annual total take-up reach 1.27m sq ft, the second highest level since Admittedly, this figure was achieved owing to the years most notable and largest deal to The Cabinet Office (The Government Property Unit), who acquired an imposing 536,398 sq ft at 20 Cabot Square. They join the likes of Thomson Reuters, who took 350,000 sq ft at 5 Canada Square earlier in the year. Supply as of the year end stands at 0.89m sq ft, 59% of which is in Canary Wharf with the remaining supply falling in the Docklands and South Quay areas of the submarket. This is lowest supply figure seen during 2016 and coupled with the increased level of take-up, vacancy rates have been pushed down 43 bps from the previous quarter to 4.66%. After a year of muted development, Docklands is set to receive 2.25m sq ft of new space over the period of , with over half being delivered in Notable deliveries include 700,000 sq ft at One Bank Street, 350,000 sq ft at 25 North Colondale and 100,000 sq ft at 15 Westferry Circus. 20 Cabot Square, E14 Bracken House, 1 Friday Street, EC4 4 Cannon Street, EC4 Major investment deals PROPERTY City Point, 1 Ropemaker Street, EC2 (50%) Moor Place, 1 Fore Street, EC2 536,398 The Cabinet Office mid 30 s 180,000 The Financial Times Conf. 106,802 Fidelity Conf. 20 Old Bailey, EC4 104,961 Barings Conf. Cannon Place, EC4 84,199 CAPITAL VALUE M CMS Cameron McKenna PURCHASER (asking) YIELD 560 Brookfield 4.50% 271 Kingboard 4.86% Southbank Central, SE1 The Blue Fin Building, SE1 5 Strand, WC2 61, Broadwick Street, W1 The Adelphi Building, WC2 PROPERTY CAPITAL VALUE M 30 Crown Place, EC Moorgate, EC ,710 WeWork ,413 HSBC Digital Westminster City Council PURCHASER Beijing Capital Development Holdings Asian Growth Properties ,587 Yagex ,081 A.T Kearney YIELD 4.41% 4.30% Following a quarter of robust investment levels, Q4 volumes fell 77% to 146.5m. This brings the annual investment volumes for Midtown to 1.48bn, 9% above the 10 year long term average. Midtown Public Sector 4% Property & Construction 2% Retailer 2% Services Sector 3% Association 18% Docklands Quarterly take-up Vacancy Rate 14.00% 12.00% 120 Holborn, EC Blackstone 5.74% 1&2 Fitzroy Place, W1 (50%) King Edward Court, Paternoster Sq, EC4 (50%) Ashby Capital 4.30% 215 Madison International 4.48% The Peak, 5 Wilton Road, SW1 Regis House, 41 King William Street, EC4 10 Fenchurch Street, EC3 145 Wolfe Asset Management 4.27% 105 Al Ain 4.46% 80 Chuang s China Investment 4.44% Professional services 17% Million sq ft % 8.00% 6.00% % Data CENTRAL LONDON WEST END CITY DOCKLANDS MIDTOWN SOUTHBANK N1 Take-Up (m sq ft) Other/Undisclosed 26% Media Tech 28% MIDTOWN : 7.52% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % 2.00% 0.00% Change Q-on-Q 24.00% -6.72% 36.22% % 65.71% % Change Y-on-Y 8.46% % 9.34% % 51.86% 20.71% % Availability (m sq ft) Change Q-on-Q 6.41% 6.80% 17.02% -8.49% % % 9.58% Change Y-on-Y 29.40% 26.57% 7.10% 11.66% 63.75% % % Vacancy Rate (%) Change Q-on-Q (bps) bpsichange Q-on-Q 166 bpshon LT ave Change Y-on-Y (bps)

5 West End Retail Market (W1, SW1, SW3, SW7, W8, WC1 & WC2) INVESTMENT MARKET Retail s & vacancy rates The retail leasing market has remained resilient post Brexit thanks to unparalled levels of consumer demand in London. Following the drop in the value of the pound in the months subsequent to the vote to leave EU, we witnessed a sharp increase in foreign spending with shoppers spending over 725m in the last month of 2016, an increase of 22% on Rents therefore are being driven by a whole range of occupiers who continue to view London as arguably the most significant retail destination in the world. The MasterCard Global Destinations Cities Survey 2016 placed London as the city with the highest levels of both spend and visitor numbers in Europe for the third year running and the second globally for both measures. Bond Street saw its top al level broken three times in 2016 by Nirav Modi (Indian jeweller) & Hublot and consolidated by way of the Polo Ralph Lauren review with the record level now at around 2,225 psf ZA. Covent Garden has also seen its top al level increase significantly, with the area becoming a real focal point for emerging fashion labels and cosmetic brands in particular. Investment in the West End retail market remained strong in Q4 with 608.8m transacted, taking the total for 2016 to 2.29bn. Despite economic uncertainties, 2016 has seen annual West End retail investment 27% above the long term average, with Q seeing an increase of 6% on the same period a year ago. Once again, overseas investors have dominated activity. 62% of acquisitions in Q4 came from this group, with 32% coming from UK property companies. In contrast, 84% of vendors were UK domiciled weighted by transaction price; highlighting an ongoing shift of ownership to international investors in the main retail locations in the West End. In % of investment has come from overseas, up marginally from 68% last year. Oxford Street attracted 64% of overseas capital in The acquisition of Oxford Street by Norges Bank Investment Management marks a continuation of this trend. The building was purchased for from Great Portland Estates at a 3.2% yield. The building has a weighted average unexpired lease term of 17 years and is pre-let to New Look and Moneysupermarket. com, among others. The building is still under construction and is due to complete in Q Key Rent / vacancy Knightsbridge 860 psf ZA (4.5%) Oxford Street 1,113 psf ZA (4.4%) Bond Street 2,225 psf ZA (3.5%) Regent Street 900 psf ZA (3.06%) Covent Garden 1,400 psf ZA (8.4%) Vacancy rates have remained almost static for Q4, a trend seen during most of Covent Garden was the most fluid market as usual due to its diverse tenant mix which is constantly updating. Its fashion prominence has continued with occupiers such as Duke & Dexter, Levis and Il Bisonte taking space during Q4. Other notable new occupiers during the final quarter of the year include Kiko who have taken space at Oxford Street as well as Watches of Switzerland, Patek Phillipe and Hugo Boss all taking space at the northern end of Brompton Road. Norges Bank has also been involved in the acquisition of the long leasehold interest of 10 Piccadilly, in partnership with the Crown Estate. Known as the Regent Street Partnership, in which Norges has a 25% stake, the pair has purchased the building from Standard Life Assurance Ltd for 129m. The sale of 10 Southampton Street by Derwent London for 67.5m is particularly noteworthy as the building transacted at a price that was in line with its June valuation, indicating the resilience of capital values in the West End during the second half of the year. Capital and Counties purchased the building with an annual income of 3.1m which equates to an initial yield of 4.3%. Kings Road 450 psf ZA (5.8%) Investment volumes Investment deals m Volume ( m) 3 year Average ADDRESS Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Oxford Street, W1 PRICE ( M) YIELD (%) , Piccadilly, W , Southampton Street, WC2 1 Dover Street, W1 143 New Bond Street, W ,800 SIZE PURCHASER VENDOR Norges Bank IM Regent Street Partnership Capital and Counties Plc 65-23,300 Private Qatari 32-11,900 Undislosed Great Portland Estates Standard Life Derwent London Plc Thor Equities Plc Middle Eastern Investor LEASING Daniel Bayley Head of City leasing daniel.bayley@bnpparibas.com +44 (0) David Herzog Head of West End leasing david.herzog@bnpparibas.com +44 (0) Rob Hargreaves Director - Central London retail agency robert.hargreaves@bnpparibas.com +44 (0) INVESTMENT Richard Garside Head of City investment richard.garside@bnpparibas.com +44 (0) Steven Skinner Head of West End investment steven.skinner@bnpparibas.com +44 (0) RESEARCH Kuldeep Gadhary Associate Director kuldeep.gadhary@bnpparibas.com +44 (0) Robert Taylor Associate Director robert.j.taylor@bnpparibas.com +44 (0) Nick Robinson Retail Analyst nick.robinson@bnpparibas.com +44 (0) Taffy Harries Data Analyst taffy.harries@bnpparibas.com +44 (0)

6 6 BUSINESS LINES in Europe A 360 vision WEST END Main locations EUROPE FRANCE Headquarters 167, Quai de la Bataille de Stalingrad Issy-les-Moulineaux Tel.: BELGIUM Boulevard Louis Schmidtlaan 2 B Brussels Tel.: CZECH REPUBLIC Pobřežni 620/ Prague 8 Tel.: GERMANY Goetheplatz Frankfurt Tel.: HUNGARY Alkotas u. 53. H-1123 Budapest, Tel.: IRELAND 20 Merrion Road, Ballsbridge, Dublin 4 Tel.: ITALY Via Carlo Bo, Milan Tel.: JERSEY 3 Floor, Dialogue House 2-6 Anley Street St Helier, Jersey JE4 8RD Tel.: +44 (0) LUXEMBOURG Axento Building Avenue J.F. Kennedy Luxembourg Tel.: Investment Management Tel.: NETHERLANDS Antonio Vivaldistraat HP Amsterdam Tel.: POLAND Al. Jana Pawła II 25 Atrium Tower Warsaw Tel.: ROMANIA Banul Antonache Street n Bucharest Tel.: SPAIN C/ Génova Madrid Tel.: UNITED KINGDOM 5 Aldermanbury Square London EC2V 7BP Tel.: MIDDLE EAST / ASIA ABU DHABI Hazza a Bin Zayed Street Area 19/02 plot n 186 P.O. Box 2742 Abu Dhabi Tél. : DUBAI Emaar Square Building n 1, 7th Floor P.O. Box 7233, Dubai Tel.: HONG KONG 25 /F Three Exchange Square, 8 Connaught Place, Central, Hong Kong Tel.: Alliances ALGERIA * NORWAY AUSTRIA PORTUGAL CYPRUS SERBIA DENMARK SWEDEN ESTONIA SWITZERLAND FINLAND TUNISIA * GREECE TURKEY HUNGARY * USA IVORY COAST * LATVIA LITHUANIA MOROCCO NORTHERN IRELAND * In Transaction, Valuation & Consulting Contacts Alliances Florence Hesse Tel.: +33 (0) florence.hesse@bnpparibas.com Research Christophe Pineau Tel.: +33 (0) PROPERTY DEVELOPMENT TRANSACTION CONSULTING VALUATION PROPERTY MANAGEMENT INVESTMENT MANAGEMENT Real Estate for a changing world