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 KENSINGTON WESTMINSTER HACKNEY NEWHAM HAMMERSMITH CITY TOWER HAMLETS SOUTHWARK GREENWICH LAMBETH WANDSWORTH LEWISHAM SIZE (SQ FT) 0-2,499 UK 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 Source: Colliers International LONDON Docklands * *to date Grade A Absorption Availability Take-up Rents CITY Grade A Absorption Availability Take up Rents WEST END Grade A Absorption Availability Take up Rents MARKET HIGHLIGHTS > London offices transaction levels remain consistent despite wider political uncertainty. That said, although quarterly take-up was in excess of that achieved in Q1 2017, it failed to surpass the ten-year quarterly average. Pre-letting activity was still considerably above trend (+40%), with five separate deals in excess of 50,000 sq ft. > Absorption levels betrayed the widening gulf between appetite for Grade A space and lesser quality product. Grade A absorption continued to be strongly positive (see Figure 1), only dragged down by the release of second-hand space in the Docklands. Canary Wharf has seen a steady downward trend in occupation levels since the start of All Grade absorption continued to be held back by non-grade A stock, as well as the vacating of built stock, now earmarked for redevelopment. > Despite below average take-up, London vacancy ticked downward for the first time in over two years. This was entirely driven by reduction in new/refurbished space, falling by 25% y-on-y. At the same time, release of second-hand space onto the market slowed to a trickle, increasing by just 0.2% q-on-q. This compares to an increase of 19% in Q Current London all Grade vacancy is 5.4%. > The spectre of a supply shortage continues to dominate the future horizon. City and West End speculative completions are set to be 1.2 million sq ft, some 56% below the ten-year average. The 2019 figure only climbs to 1.7 million sq ft, still over 20% below the longer term trend. This figure is likely to be eroded further as additional pre-lets are signed. > Overall headline rents rose modestly q-on-q by 1%, but it still represented the highest positive movement for over two years. Top West End rents rose to 120 psf, reaching an 18 month high. City Fringe locations also saw prime rents confirmed in excess of 70 psf compared to a headline figure of psf in the City core. > London investment volumes in Q disappointed, as activity struggled to reach 3.1 billion. This represented the lowest quarterly total for 18 months. A number of significant lots, such as Central St Giles and Verde, are generating interest with European capital, as anticipated, becoming more prominent. Prime yields remain unchanged across all core markets, although there is still an expectation that modest corrections may be forthcoming in the second half of the year. LONDON Q

4 CITY OFFICE Agency >> In contrast to London as a whole, City office market transactions surpassed the ten-year quarterly average for the third quarter in succession (see Figure 2). Pre-letting activity was buoyant, with over 1 million sq ft transacted in the past six months. Indeed, in Q1 2018, six of the top ten deals by size were precommitments from the likes of SMBC, Sidley Austin and Mimecast. >> Non-core locations continue to drive absorption of built space with Farringdon, Shoreditch and Holborn all seeing a rise in occupation levels. Grade A supply in Farringdon has dwindled to near zero, with City Fringe Grade A availability down by 25% q-on-q. >> Above average take-up aided a fall in overall vacancy for the first time in two years (see Figure 3). City second-hand availability fell, as much due to the reduction in release of secondary supply, as above average take-up. That said, the City Core actually saw a modest rise in second-hand Grade A space, in contrast to Fringe locations. Overall City vacancy is now at 5.4%. >> Strong pre-letting activity for the third successive quarter eroded the development pipeline further and, while 635,000 sq ft completed in Q1 2018, just 5% of that was delivered speculatively. A further 800,000 sq ft will complete before the half year, but again, over 70% of that is already let. >> Across the City as a whole, a resurgence in demand from Financial Services elevated the sector above Media and Tech (see Figure 4). Professional Services (Insurance and Legal) accounted for 26%, perhaps reflecting UK Research & Forecast Report growth in the sector, driven by the demand being placed on London by the ongoing Brexit process. Flexible offices fell to just 4%, however, with a number of units under offer, we expect the percentage to rise once more in Q2. >> City Core headline rents were confirmed at psf in Q City Fringe locations continue to achieve rents for smaller units in the mid 70s, with Farringdon, in particular, seeing healthy levels of occupier demand from a variety of sectors. Investment >> City investment volumes helped to bolster overall London figures and although they were 12% down on Q1 2017, volumes were still above the ten-year quarterly average. 2.1 billion was transacted from 34 individual deals, with the average lot size at 61 million. This compares to an average lot size of 148 million in 2017, underlining the lack of sales in excess of 400 million. >> While overseas capital still dominates, accounting for 79% of purchases at 1.7 billion, this is down on the average quarterly overseas transaction volume in 2017, which stood at 2.2 billion. Activity from Asia Pacific investors fell for the third successive quarter and reached an 18-month low, albeit at a still not inconsiderable 1 billion. Short and long term income continue to find favour with investors, but a lack of trophy assets in the City may contribute to volumes continuing to undershoot recent highs.

5 Figure 2: City Take-up by Grade Q Q 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 10% Q Q Source: Colliers International 8% 6% Vacancy Rate 4% 2% 0% Southbank Shoreditch Holborn City Core Farringdon Canary Clerkenwell Docklands Figure 4: City Take-up by Business Sector 2018 to date 5% 1% 4% 3% Source: Colliers International Financial Services 7% 28% Media and Tech Legal 9% 5% Insurance Business Services 17% 6% 7% 26% Other Retail & Leisure Flexible Workspace Property LONDON Q

6 WEST END OFFICE Agency >> West End market take-up maintained its momentum and its determination to shake off any Brexit negativity by surpassing the 10-year average for the fifth successive quarter (see Figure 5). Pre-letting activity was marginally sub trend, but occupier appetite for Grade A product remains undiminished. Grade A takeup, both for new and second-hand space, has averaged 33% of total transactions since 2015, but Q saw its proportion surpass 40% for the third time in the past four quarters. >> Existing availability of new build/refurbished space in the West End reduced further in Q and now stands at a record low. Modest new supply and concerted pre-letting activity by occupiers over the past 18 months has reduced the development pipeline to unprecedented levels. >> West End development completions are set to be sharply below trend in 2018 and Total annual completions could indeed reduce further in 2019 should a number of drawing board schemes fail to commence on site in Q In addition, Derwent London is rumoured to be in negotiation with Sony Music for a substantial portion of its Brunel Building, which totals 237,000 sq ft and is being delivered speculatively in early >> Media and Tech increased its market share once, more returning close to levels last seen in 2015 when the sector accounted for close to 50% of total demand (See Figure 7). As anticipated, flexible office providers such as The Office Group, Instant Offices and i2 Offices remain acquisitive. While flexible providers continue to look at all submarkets across London, in the West End, there is a renewed focus on Core locations where the serviced office offering is in shorter supply UK Research & Forecast Report >> Headline rents have started to respond to the acute Grade A supply shortages in some submarkets, seeing upward pressure as shortage of stock impacts pricing. Core locations, such as Mayfair and St James s, Midtown submarkets Bloomsbury and Covent Garden and also non-core areas such as Paddington and Chelsea, all saw prime rents increase in Q off the back of occupier appetite for remaining Grade A product. Investment >> The first quarter of 2018 saw sub-trend investment volume, with 953m transacting. This is significantly down on the ten-year quarterly average of 1.5 billion. This is the first time volumes have dipped below 1 billion since That said, substantial lots are expected to have an impact upon volumes as the year progresses, with Legal & General putting its 50% stake in Central St Giles, WC2 for sale at c. 655 million. In addition, Blackstone has signalled its intent to bring The Adelphi to market at a similar price point. >> Overseas capital retains domination of the market, holding steady at 70% of market share in Q Asia-Pacific again has accounted for over 70% of that total but, going forward, we anticipate European investors becoming increasingly active as the year progresses, and the as attraction of relative pricing in comparison to other major European markets remains. However, concerted negative press surrounding Brexit continues to make European funds wary.

7 Figure 5: West End Take-up by Grade Q Q 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 5% 4% 4% 3% Source: Colliers International Media and Tech Financial Services 10% 12% 48% 13% Flexible Workspace Retail & Leisure Education Business Services Other Healthcare 14% LONDON Q

8 OUTLOOK >> Demand for office space is consistent, with further major lettings anticipated for Q >> Continued stabilisation in vacancy levels, aided by dearth of new speculative supply. >> Fringe locations will continue to entice mainstream occupiers where competitively priced product is available. >> Submarkets where Grade A availability has tumbled towards record lows will continue to see some upward pressure on headline rents. >> Brexit uncertainty, while having diminished, still remains a concern for occupiers and expansion plans. >> Prime yields are stable for the time being, but we still expect a modest pricing correction in H >> A further reduction in Asia-Pacific capital inflows signals a return to marginally sub trend volume levels. 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 Q Q Q Q WEST END (WHOLE) New / Refurbished Secondhand ,041 3,863 TOTAL* 1,188 1,097 4,643 4, % Bloomsbury % Covent Garden / Strand % Euston / King's Cross % Fitzrovia % Knightsbridge % Marylebone % Mayfair % Paddington % Soho % St James's % Victoria % CITY (WHOLE) New / Refurbished 1, ,136 4,510 Secondhand ,070 4,382 TOTAL* 1,976 1,626 5,646 5, % City Core 1,002 1,176 3,472 3, % Holborn % Farringdon % Clerkenwell % Shoreditch % Aldgate % DOCKLANDS New / Refurbished Secondhand TOTAL % CANARY WHARF New / Refurbished Secondhand ,094 TOTAL , % SOUTHBANK Source: Colliers International *Includes additonal locations **Net Stock Absorption New / Refurbished Secondhand TOTAL % LONDON Q

10 GRADE A TAKE-UP BY SECTOR (sq ft) (IDENTIFIED TAKE-UP) Figure 9 GRADE A TAKE-UP AVG DEAL SIZE (sq ft) Figure 10 25,000 7,502 3,064 8,450 4,328 Financial Legal 20,000 89,242 56, ,752 Media and Tech Insurance Business Services Property Healthcare sq ft 15,000 Energy & Utilities Retail & Leisure 10, ,670 5, ,593 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 LONDON OFFICES 2018 SUBMARKET DEMAND PERFORMANCE Figure 11 Projected Annual Take-up levels vs 10-year average based on current demand % above / below long term average take-up > > 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 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. > > In Q1 2018, Central London, as a whole, saw marginal over performance in comparison to the 10-year average, exceeding it by just 1%. Just under half the London submarkets matched or outperformed the longer term trend. The City and City Fringe saw healthy demand for product in Q1, but the West End was modestly down on trend despite strong performances from Victoria and Euston. > > While overall vacancy rose in Victoria due to release of tenant space, the final deals at Verde and Nova North and lettings at 80 Victoria Street significantly elevated transaction levels. Core locations in the City and Mayfair in the West End also performed well Victoria Euston City Core City (Whole) Mayfair City Fringe Docklands Marylebone London (Whole) Southbank West End (Whole) Soho Bloomsbury Holborn Fitzrovia St James's Knightsbridge Paddington Covent Garden Canary Wharf > > A number of centres may be beginning to suffer reduced demand as a direct result of a shortage of new/refurbished supply. Bloomsbury, Covent Garden, Fitzrovia, Holborn, Paddington and Soho have just sub 51,000 sq ft of new Grade A vacancy between them. In contrast, Canary Wharf is suffering oversupply problems, with availability currently 30% above the ten-year average. UK Research & Forecast Report

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12 CONTACT US West End Agency Paul Smith City Agency James Walker City Fringe Agency Shaun Simons West End Investment Rob Hayes Tenant Representation Stuart Melrose Lease Advisory Charles Cowley Research & Forecasting Guy Grantham City Investment Dominic Amey This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. April 2018 Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with registered number OC385143) and its subsidiary companies, the full list of which can be found on Our registered office is at 50 George Street, London W1U 7GA UK Research & Forecast Report