Real Estate for a changing world CENTRAL LONDON OFFICE & RETAIL MARKET Overview The vote to leave the European Union has caught many, particularly Central London, by surprise. The full implications of what this means for the capital and the wider UK economy are yet to be entirely felt and or known. Factors such as passporting rights, our access to the single market and our ability to attract the best and brightest workforce could be under question. After three consecutive years of above average take-up in Central London, the consensus was that take-up would fall in 2016, even before a referendum was announced. To half year take-up has reached 5.08m sq ft, which is only 11% down on the average for H1 levels and on track to reach our target for 2016. With 2.1m sq ft of space currently under offer and rumours of Apple close to signing a large amount of space at Battersea, there is the prospect of good activity in Q3. Positively, activity in July has been buoyant with approximately 0.78m sq ft leased so far. Interestingly, average lease lengths are at their lowest level in 11 quarters, at 7.8 years in from 9.5 years in. For those occupiers in search of greater flexibility this may be a good time to secure more flexible lease terms. Average rent frees are yet to show any sign of change but we expect that these might lengthen where landlords are insistent upon leases of 10 years or more. We expect to see some upward movement of vacancy in the coming months as occupiers rationalise surplus office Q2 Stats... At a Glance RESEARCH space and 2016 developments enter supply. Any further substantial rises in the longer term are likely to be subdued as developers delay starts on new developments and funding for development becomes harder to secure. Investment levels also fared well in light of recent events, highlighting the sheer weight of money targeting Central London assets. Volumes reached 6.88bn to half year, 12% ahead of the 10 year H1 average. Asia Pacific investors have accounted for the largest share of turnover purchasing 2.64bn of assets, 40% of the total. There is no denying that London still offers a safe haven for investors, especially for those looking at the longer term picture and returns performance compared to other asset classes. Despite negative news flow, there is little sign of distressed sellers in the market, as a result pricing will not see the falls experienced in the previous cycle. Prime yields on core stock are likely to hold up relatively well but anything perceived as more risky, i.e. high vacancy/ development and refurbishments will face pressure of softening yields. The coming months will be characterised by some investors becoming more risk averse and reviewing strategies. Whereas some investors may see opportunity if price movements and currency perform favourably. Total supply Vacancy rate West End Prime rent City Prime rent 11.75m sq ft p 14% on 5.43% p 4.72% in 137.50/sq ft u 0% on 69.00/sq ft u 0% on take-up 2.02m sq ft H1 2016 take-up 5.08m Investment 3.74bn H1 2016 Investment 6.88bn q -34% on q -11% on LT ave p 19% on p 12% on LT ave
CENTRAL LONDON OFFICE & RETAIL MARKET - WEST END (W1, SW1, NW1, W2, SW3, SW7 & W8) Office rents & vacancy rates CITY (EC1, EC2, EC3, EC4 & E1) Following the trend seen across Central London, take-up levels have been subdued in Q2 reaching 0.64m sq ft, down on the previous quarter and the quarterly 10 year average. Three deals in excess of 50,000 sq ft in Q1 helped push H1 2016 take-up to 1.35m sq ft, only 3% below the same period last year. In Q2 just one deal in this size band was recorded, Shern Clinic took 54,885 sq ft at 66 Wigmore. The addition of 220,000 sq ft at Verde scheme in Victoria has pushed up the vacancy rate to 4.55% (3.94% in Q1 2016). The scheme is approximately 50% pre-let or under offer, ahead of its completion date later this year. Across the wider West End, development completions are expected to hit their highest level this year reaching 1.60m sq ft and then will fall away to average levels. For this reason, we do see vacancy rates inching upwards however not to levels seen in previous downturns. A reduction in development and refurbishment activity and the amount of space already pre-let (31% in 2016 & 2017) will limit any substantial rise. WEST END Vacancy rate: 4.55% Change on ave: -132bps Mayfair & St 137.50 137.50 James s Victoria 83.00 83.00 Soho 88.00 88.00 Noho East 8 8 Noho West 92.50 92.50 Paddington 64.00 64.00 MIDTOWN Vacancy rate: 7.49% +163bps Covent Garden 8 8 Holborn 67.50 67.50 NORTHERN FRINGE CITY Vacancy rate: 2.43% -524bps Vacancy rate: 5.81% -261bps King s Cross 76.00 76.00 City 69.00 69.00 City Tower 8 8 City Fringe 62.50 62.50 STRATFORD Vacancy rate: 14.94% +1281bps Q4 15 rent Q1 16 rent 42.50 42.50 Given the City s exposure to the Banking & Finance and the sectors sensitivity to political and economic uncertainty it comes as no surprise that demand levels has struggled this quarter. Take-up reached just 0.90m sq ft in Q2, the lowest level in 17 quarters. H1 levels however have fared better reaching 1.94m sq ft, 11% ahead of the 10 year H1 average. The largest deal of the quarter was Amazon s 47,100 sq ft of Beaufort House, St Botolph, EC3. No deals in excess of 50,000 sq ft were recorded and smaller deals, in the >5,000 sq ft size band dominated. This reflects the cautious nature of larger occupiers who, in a period of uncertainty are likely to defer making property related decisions. Despite this, approximately 500,000 sq ft has been let in the City since the Brexit vote, including 84,000 sq ft at The Whitechapel Building and Wells Fargo s purchase of 33 Central for their own occupation. City prime rents held steady in Q2. City (non tower) rents remain 69.00/ sq ft, City Tower at 8/ sq ft and in the City Fringe remain at 62.50/ sq ft. Due to the cautious approach adopted by some occupiers pre and post Brexit our Q2 prime rents saw no movement. Our Mayfair & St James s rent remains at 135.00/sq ft, representing 10% annual growth ( to ). Net effective rents are likely to experience a slight fall due to an increase in incentives on offer. The vacancy rate saw upward movement of 80 bps in Q2 to 5.81% due to the addition of several development schemes, namely 295,000 sq ft at One Angel Court, EC2 and 270,000 sq ft at 1 Creechurch Place, EC3. Vacancy is still well below the 10 year average of 8.42% so risk of oversupply will be an unlikely threat in the short to medium term. Q2 investment volumes reached 0.91bn, the lowest total in 14 months. A buoyant Q1 however provided a boost to H1 levels reaching 1.94bn which encouragingly has pushed levels to 8% ahead of the long term average. The anticipated summer lull fuelled by market conditions will see levels fall away in H2 but pricing on prime product will remain steady due to the lack of available product in supply. Overseas investors made up 64% and 62% of 2014 and 2015 investment volumes and 2016 levels should still receive a notable boost from foreign capital searching long income. Vacancy rates SOUTHBANK Vacancy rate: 3.28% -233bps Q1 16 rent Q2 16 rent 63.00 63.00 DOCKLANDS Vacancy rate: 5.52% -198bps Canary Wharf 45.00 45.00 Rest of Docklands 32.00 32.00 City investors undeterred by pre-brexit nerves splashed out 2.24bn in, up on the 1.05bn deployed in Q1. This brings investment volumes to 3.28bn in H1, 6% ahead of the 10 year H1 average and in a good position for H2, where more subdued levels of activity are likely. Overseas investors have made up the majority share of capital deployed so far this year accounting for 92%. A lack of evidence showing any substantial price movement underpins our view that prime yields have held at 4.00%. The coming months will certainly test this view as opportunist investors look to take advantage of market conditions. West End take-up and vacancy rate 1.40 1.20 12% 10% 8% WEST END : 4.55% CITY : 5.81% City take-up and vacancy rate 3.00 2.50 2.00 12% 10% 8% 0.80 6% 1.50 6% 4% 2% 0% 132bps ion LT ave 61bps hon 261bps ion LT ave 80bps hon 0.50 4% 2% 0% 3
CENTRAL LONDON OFFICE & RETAIL MARKET - MIDTOWN (WC1 & WC2) SOUTHBANK (SE1) Major leasing deals Leasing activity during the second quarter of 2016 has been below average. Take-up at end Q2 stood at 0.18m sq ft which is 23% below the same period last year. The Southbank market has seen a reasonable amount of take-up during H1 2016, with 0.30 sq ft transacting which is over 21% more than the same period last year. PROPERTY SQ FT TENANT RENT PSF PROPERTY SQ FT TENANT RENT PSF The largest deal was recorded at Weston House, 246 High Holborn where Mishcon de Reya acquired 37,446 sq ft over the 1st-3rd floors. Moreover, Arriva agreed Lacon London s first deal during the quarter, where they are taking 25,665 sq ft However, in comparison to the 5 year average, Q2 was well below with a take-up figure of 0.13 (47% below 5-year average). Occupiers heightened cautiousness about new lease commitments leading up to the EU referendum meant take-up slowed during the second quarter. 66 Wigmore Street, W1 54,885 Shern Clinic 77.00 Beaufort House, EC3 47,101 Amazon Conf. The Whitechapel Building, E1 26,704 Perkins + Will UK Ltd 45.00 Lacon London, WC1 25,665 Arriva 67.50 The addition of newly developed 28 Chancery Lane (c.99,000 sq ft) along with a number of substantial available space (7 Savoy Court) has increased the vacancy rate to 7.49%, up from 6.84% in. Media Tech sector has dominated Midtown take-up so far this year accounting for 35% of take-up in H1 2016. Similarly Q2 figures alone show the sector s force in the market with a 34% share, followed by Professional Services (20%) and Services Sector (16%). Investment volumes were lower than the 5 year average, with Q2 figures standing at 241m. The largest deal of the quarter occurred at 110 High Holborn where UBS sold the building for 98.75m to UOL Group at a 5% yield. Subdued levels of leasing activity can also correlate with the severe lack of available supply which is limiting occupier choice. A period of muted development activity has led to a significant reduction in available space in Southbank, with supply as at standing at 0.59m sq ft, equivalent to a vacancy rate of 3.07%. This is a fall of almost 36% from the same period in 2015. Investment volumes were 112% above figures with 174.2m transacting in Q2. The largest transaction of the quarter was 62m at Friars House 55 Bishopsgate, EC2 46,564 Charles Stanley 54.00 33 Queen Street, EC4 39,189 WeWork 6 Weston House, WC1 37,446 Mishcon de Reya 62.00-72.00 Major investment deals PROPERTY CAPITAL VALUE M Cottons Centre, SE1 25,252 Zopa Ltd 55.00 Nova South, SW1 24,990 BHP Billiton 86.50 1 New Burlington Place, W1 PROPERTY 14,333 Hikma Pharma 107.00 CAPITAL VALUE M Midtown take-up and vacancy rate Southbank Supply Aldgate Tower, E1 346.00 China Life/Brookfield 4.88% Academy House, W1 108.00 Sports Direct NQ 0.70 0.50 12.00% 1% 8.00% 1.60 1.40 1.20 Supply 5 year average 88 Wood Street, EC2 27 Shaw Foundation 4.60% 71 Queen Victoria Street, EC4 22 Pacific Eagle 4.25% 110 High Holborn, WC1 Asticus Building, SW1 98.75 UOL Group 5.00% 8 AXA Core Europe Fund 4.00% 0.30 0.10 6.00% 4.00% 2.00% M illion Sq Ft 0.80 Holborn Gate, 330 High Holborn, WC1 138.00 6 Bevis Marks, EC3 218.00 Westmount Real Estate Private Middle Eastern 4.90% 4.47% 7-10 Chandos Place, W1 Friars House, SE1 62.00 68.00 Howard De Walden NQ Angelo Gordon/ Ensurance Land 5.59% % 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q1 2016 Q2 2016 Data CENTRAL LONDON WEST END CITY DOCKLANDS MIDTOWN SOUTHBANK N1 MIDTOWN : 7.49% 65bpshchange Q-on-Q 142bpshon LT ave Take-Up (m sq ft) 2.02 0.64 0.90 0.17 0.18 0.13 7 Change Q-on-Q -33.98% -11.11% -37.93% -55.67% 17.95% -2% -96.22% Change Y-on-Y -51.44% -12.33% -46.54% -71.62% -5.15% 45.56% -96.55% Availability (m sq ft) 11.75 3.06 5.13 1.01 1.51 0.10 Change Q-on-Q 13.75% 15.47% 16.33% 5.21% 10.22% -4.76% 233.33% Change Y-on-Y 1.38% 15.47% 2.40% -33.55% 21.77% -36.17% -33.33% (%) 5.43 4.55 5.81 5.52 7.49 3.28 2.43 Change Q-on-Q (bps) 71 61 80 49 65-19 156 Change Y-on-Y (bps) 14 65 9-242 121-153 -132 5
CENTRAL LONDON OFFICE & RETAIL MARKET - WEST END RETAIL MARKET - OCCUPIER MARKET Activity in the London retail occupier market remained strong despite increased uncertainty post EU referendum. For the most part, vacancy levels across our West End submarkets saw little movement in. However, Covent Garden witnessed a slight decrease in occupation where vacancy rates rose from to 7.5% to 9.32%, as a result of the 7 newly vacated units. INVESTMENT MARKET Q2 saw activity pick up within the Central London retail investment market in Q2, similarly to Central London office volumes. 553m was invested in the period, with the majority occurring on Oxford Street. The volume represented a 47% increase on Q1 and was also 17% above the long run quarterly average. Retail rents & vacancy rates Key Rent / vacancy Key Rent / vacancy Achieved rents remain somewhat unchanged throughout the West End. However, a record rent was set during the quarter, with an LVMH brand signing a new lease on at 14 New Bond Street at circa 2,000/sq ft ZA. Another notable deal was the relocation of Gant s flagship store on Regent Street. The American fashion retailer, which currently occupies 185-191 Regent Street, has signed a 10 year lease at a unit across the street, 184-186 Regent Street where they will be paying a rent of 600/sq ft ZA. Lulu Lemon, the premium active wear brand has since confirmed that it will be opening its European flagship store at 187-189 Regent Street once Gant has relocated. These lettings form part of The Crown Estate s continuing 1bn investment into the street, reforming the area to become a world class retail destination which now boasts an impressive array of flagship stores, including Burberry, Michael Kors and Longchamp. Q2 investment 47%hon Investment Volumes Oxford Street remained a focal point for investment in Q2, with three large deals on the street in the period. The largest deal of the quarter was Chinese Estates purchase of 61-79 Oxford Street. The unit which includes a 35,000 sqft Zara flagship was bought for 183m at a 2.5% initial yield. Also on the eastern section of Oxford Street, 161-167 Oxford Street was acquired by Sports Direct for 108m from CIP Property. Sports Direct are planning on redeveloping the building with the retail element as a new 20,000 sq ft Flannels flagship unit. The purchase also included nearby 36 Poland Street. Continued investor interest in Bond Street in Q2 saw two properties traded. A private UK investor purchased Piaget s flagship at 169 New Bond Street from a Saudi Arabian family office for 65m, reflecting a 1.61% initial yield. The deal represented the highest ever capital value per square foot for a UK real estate asset. 31 Old Bond Street, the UK flagship of diamond store Leviev, was bought by Ian Ng from Leviev KLG in Q2. The Hong Kong based investor paid 36m for the unit, at a 2.59% yield. Overseas buyers remained the most dominant investor type in Q2, representing just shy of 40% of the total volume. Whilst noticeably below the average contribution, foreign buyers are expected to make up a larger percentage of the volume in Q3, with two large transactions having already taken place in July 2016. Major investment deals CONTACTS LEASING Knightsbridge 800 psf ZA (7.0%) Kings Road 450 psf ZA (5.5%) Oxford Street 1,015 psf ZA (3.6%) Bond Street 1,750 psf ZA (2.1%) INVESTMENT Regent Street 650 psf ZA (2.9%) Covent Garden 700 psf ZA (9.2%) RESEARCH m 800 700 600 500 400 Volume ( m) 3 year Average ADDRESS 61-79 Oxford 161-167 Oxford PRICE ( M) (%) SIZE (000S SQFT) 183 2.5 49 Chinese Estates VENDOR BA Pension Fund 108 n/a 35 Sports Direct CIP Property Daniel Bayley Head of City leasing daniel.bayley@bnpparibas.com +44 (0) 207 338 4444 David Herzog Head of West End leasing david.herzog@bnpparibas.com +44 (0) 207 338 4292 Richard Garside Head of City investment richard.garside@bnpparibas.com +44 (0) 207 338 4034 Steven Skinner Head of West End investment steven.skinner@bnpparibas.com +44 (0) 207 338 4229 Alistair Kemp Director alistair.kemp@bnpparibas.com +44 (0) 207 338 4348 Kuldeep Gadhary Associate Director kuldeep.gadhary@bnpparibas.com +44 (0) 207 338 4844 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2012 2013 2014 2015 2016 73-89 Oxford 169 New Bond 31 Old Bond 71 2.1 99.6 GPE 65 1.61 3.5 Private UK Investor Private UK Investor Saudi Arabian Family 36 2.59 2.83 Ian NG Leviev KLG Rob Hargreaves Director - West End retail leasing robert.hargreaves@bnpparibas.com +44 (0) 207 338 4490 Nick Robinson Associate Director nick.robinson@bnpparibas.com +44 (0) 207 338 1016 Taffy Harries Data Analyst taffy.harries@bnpparibas.com +44 (0) 207 338 4000 7
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