October 2017 UK Research & Forecast Report

London Offices Snapshot October 2017 UK Research & Forecast Report

BARNET HARINGEY WALTHAM FORREST Completed Pre-let/sold 10 Under Construction Permitted Not Started YEAR ON YEAR INDICATORS LONDON Grade A Absorption DEALS MAP 8 Availability Take-up Rents BRENT CAMDEN ISLINGTON sq ft (million) 6 4 CITY Grade A Absorption Availability Take up 2 Rents WEST END WESTMINSTER HACKNEY NEWHAM 0 Grade A Absorption Availability KENSINGTON HAMMERSMITH CITY TOWER HAMLETS 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Figure 1: London Offices Developments and Pipeline 2001-2021 2017 2018 2019 2020 2021 Take up Rents WANDSWORTH LAMBETH SOUTHWARK LEWISHAM GREENWICH MARKET HIGHLIGHTS > > heralded the fifth consecutive rise in London quarterly offices take-up, reaching 3.1 million sq ft. This was the highest quarterly total since Q1 2016 and pushed transaction levels above the ten-year average. Although absorption levels were inconsistent across the whole of London, they have returned to positive territory, broadly due to a significant improvement in the City market. > > Pre-letting activity continued to surge, reaching a 36 month high, boosted by Deutsche Bank, who despite open concerns about the brexit process, has signed a pre-commitment with Land Securities for a new City HQ at 21 Moorfields (470,000 sq ft). Additionally, Boston Consulting signed for 123,000 sq ft at Derwent s 80 Charlotte Street scheme and Metrobank took the final 60,000 sq ft at Blackstone s 20 Old Bailey prior to practical completion. > > Overall vacancy has continued to rise across London, although its pace of increase has slowed markedly in the past three months. London vacancy now stands at 5.5%, a four year high. City and West End vacancy stands on a par with that figure. Availability has reached 11.9 million sq ft compared to 8.5 million sq ft at the start of 2017. > > Despite upward movement in vacancy, there is increasing concern about potential supply shortages in 2018 and 2019. Figure 1 shows the scale of schemes which had been pencilled in for completion over the next 24 months, but have yet to start on site. > > Landlords and developers will be encouraged that take-up has risen above the 10-year quarterly average for the first time in 18 months but there is still caution over pricing. While the availability of new space has continued to decline, occupiers remain focussed on value and on maintaining a cost control as a priority. > > London investment volumes in Q3 totalled approximately 3.4 billion, which was a significant improvement on Q3 2016, although a marginal reduction quarter-on-quarter. While post referendum uncertainty held down volumes in Q3 2016, 12 months on, shortage of supply in the West End is now frustrating demand. Regardless, projections for this year s volumes suggest that 2017 should eclipse the totals achieved in 2016. 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 50,000-99,999 100,000 plus LONDON 3

Figure 2: City Take-up by Grade Q3 2014-2.4 Pre-let Grade A Grade B Grade C 10 year average 2.0 1.6 sq ft (millions) 1.2 0.8 0.4 0.0 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 CITY OFFICE Agency > > The City office market saw transaction levels bounce back sharply in Q3. To achieve a 30-month high (see Figure 2). Take-up rose by 38% quarter-on-quarter, the highest threemonth rise for three years. Numbers were boosted by a three-year high in pre-letting activity which was dominated by Deutsche Bank s (470,000 sq ft) deal at 21 Moorfields. This included a 25-year lease as well as an option on additional space. The strength of the bounce-back in demand for office space since the immediate uncertainty experienced after last year s referendum, is evident. This was reinforced by the quarterly absorption figures which were strongly positive at +847,000 sq ft compared to -438,000 sq ft in H1 2017. > > New / refurbished availability rose slightly due to 300,000 sq ft of speculative completions, including the balance of space at 2 London Wall Place, EC2. Nevertheless, availability of new space within the City Core remains at close to 70% below the 15-year quarterly average. Demand for product does not yet appear to be constrained by sub trend availability, with total take-up of new space in the City in the year to date close to 50% higher than in Q1-Q3 2016. > > The trend of rising vacancy, but also improving demand for product, continues to confound analysis. Vacancy rates across the majority of wider City submarkets are up year-on-year, as second-hand and tenant space continues to grow (see Figure 3). Second-hand stock has grown in each of the past five quarters, although saw uplift of less than. Tenant-release space remains confined to units effected by mergers and acquisitions, general market churn and opportunism. Brexit related occupier movements remain few and far between. > > The lack of EU fallout related impact upon the City of London is exemplified by a sharp increase in demand from the financial services sector (see Figure 4). Take-up from financial services more than doubled quarter-on-quarter, with Deutsche, Metrobank, Hermes and Credit Agricole all active. Equally, Fintech, a major component of demand in 2016, remains a staple of City demand. The number of media and tech deals in Q3 surpassed 50, with an average size of 5,560 sq ft, typified by the smaller end of the market. > > Despite healthy demand for space, headline rents for 10,000 sq ft+ units have still softened slightly, with the prime figure down to 68.50 psf. Tower floors and premium quality units under 10,000 sq ft are still achieving in excess of 70.00 psf. Investment > > City investment volumes rebounded, to stand at 2.3 billion in. While numbers were boosted by the UK s largest ever single property deal, as LKK purchased 20 Fenchurch Street, EC3, for 1.28 billion, there was consistent activity from other overseas buyers. 70 Gracechurch Street, EC3, was bought by the Tenacity Group for 271 million at a yield of 4.. Also trading was Blackstone s fully occupied Lacon development. This was purchased by Al Ain Properties for 285 million at an initial yield of 4.48%. > > Overseas money continues to saturate the market, with the only exceptions UK property companies, such as Anglezark and Motcomb Estates. Asia-Pacific capital still accounts for close to 75% of purchases by volume but concerns about capital flow restrictions are still mooted. However, in investment terms, Chinese capital controls are not expected to slow the market. The controls target large transactions of 1 billion+ being aimed at firms not specialising in real estate. Should Chinese investment slow, a new tier of South Asian and Middle Eastern investors are likely to step in and with healthy availability of new lots in Q4, there is potential for the City market to see further improvement in volumes. Figure 3: City Vacancy Rates Figure 4: City Take-up by Business Sector 2017 to date Vacancy Rate 10% 8% 6% 0% 7% Q3 2016 Southbank 21% City Core 3% Aldgate Shoreditch Canary 57% Holborn Clerkenwell Farringdon Docklands Financial Services Media and Tech Legal Business Services Other Insurance Flexible Workspace Retail & Leisure UK Research & Forecast Report LONDON 5

Figure 5: West End Take-up by Grade Q3 2014- Pre-let Grade A 1.6 1.4 Grade B Grade C 10 year average 1.2 1.0 sq ft (million) 0.8 0.6 0.4 0.2 0.0 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Figure 6: West End Vacancy Rates 1 Q3 2016 WEST END OFFICE Agency > > West End take-up in the year to date has reached 3.3 million sq ft, which is 25% up on the equivalent period in 2016 (see Figure 5). However, the 2017 improvement in transaction activity is off a low base, given the sub trend nature of take-up in 2016. The market still experienced modest downward pressure on occupation levels in Q3, even though quarteron-quarter take-up was up by 3%. > > As in the City, the largest deal was a pre-let. Boston Consulting Group is set to relocate from Marylebone to Derwent s scheme at 80 Charlotte Street, W1. BCG will take 123,000 sq ft which enable them to centralise London operations and allow for additional expansion space. In addition, Spotify signed for 104,000 sq ft at Blackstone s Adelphi Building, WC2. > > Supply issues were highlighted by the fact that, while take-up of new/refurbished space was broadly flat quarter-on-quarter availability of new space fell by 45% compared to just 1 in Q2 2017. This in part was explained by the fact that just 32,000 sq ft of new speculative space came to market in Q3, in contrast to the 601,000 sq ft that was delivered in H1 2017. Q4 is set to see a further 290,000 sq ft delivered but in 2018, the overall speculative figure is set to be 15% down on the 2017 total and likely to compound supply shortages. > > The upward movement in overall availability experienced in H1 2017 has subsided in Q3, albeit aided by a shortage of new deliveries. Tenant space has risen marginally, with the key example being Marks and Spencer s decision to divest of 148,000 sq ft at 5 Merchant Square, W2. The move is purely a restructuring process and brexit had no bearing upon the decision. In Marylebone and Mayfair, vacancy has ticked up to a three year high (see Figure 6), partly due to below trend take-up but also due to above average levels of churn. > > Media and tech remains the largest source of demand, although flexible workspace providers continue to be highly acquisitive, accounting for 18% of market share in 2017 to date (See Figure 7). Regardless, the West End market continues to show a highly diversified level of demand across all major business sectors. > > Paddington and Bloomsbury both exhibited prime rental growth in, as demand for new Grade A product exceeded supply. These two submarkets remain the exception, not just across the West End, but London also. Broadly, prime rents remain stable, with downward pressure far less than was expected 12 months ago. Incentives remain at between 22-24 months per 10-year term certain. Investment > > Investment activity in the West End in Q3 followed a similar trajectory to the previous two quarters, as supply constraints remained to the fore, dragging down volumes. Despite Q3 volumes coming in at 1.1 billion, a fall of 8% quarter-on-quarter, average deal size remained consistent at 98 million. Q3 still saw five deals in excess of 100 million, to a broader range of overseas money including Asia-Pacific, North America and Europe. > > The search for suitable opportunities remains challenging, with the anticipated environment of forced sellers never materialising. Major property players such as Tishman Speyer and Blackstone look set to bring trophy product to market, as developments such as Verde, SW1 and The Adelphi Building, WC2, reach full occupancy. We anticipate continued stability in terms of pricing and yield profile, although investors will continue to monitor occupier markets closely, as well as events in Brussels. Figure 7: West End Take-up by Business Sector 2017 to date Vacancy Rate 10% 8% 6% 0% Knightsbridge 10% 1 Euston / KX 6% Marylebone 18% Soho Mayfair Fitzrovia Victoria 25% 21% Bloomsbury Covent Garden Paddington St James's Media & Tech Business Services Flexible Workspace Financial Services Retail & Leisure Other Energy & Utilities Healthcare Legal UK Research & Forecast Report LONDON 7

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 % Q2 2017 Q2 2017 2017 to date OUTLOOK > > Transaction levels remain relatively robust despite wider political uncertainty. > > Vacancy is still rising modestly but set to plateau in 2018. > > Grade A supply shortages remain to the fore and are likely to accentuate over the next 6-9 months. > > Demand is spread across a widening variety of business sectors. > > Supply constraints and competition for new product is actually helping to elevate prime rents. > > Despite sub trend investment activity in the West End, London volumes should come in above average in 2017 and up year-on-year. WEST END (WHOLE) New / Refurbished 476 457 961 581 Secondhand 622 672 3,553 3,974 TOTAL* 1,098 1,129 4,514 4,555-95 5. Bloomsbury 31 40 163 75 117 3. 69.50 4.50 Covent Garden / Strand 337 215 660 636-197 6.8% 83.50 4.25 Euston / King's Cross 74 95 257 264 284 2.9% 77.50 4.50 Fitzrovia 94 214 430 438 16 5.3% 86.00 4.50 Knightsbridge 25 23 97 111-214 3. 95.00 4.00 Marylebone 34 34 269 326-66 5. 95.00 4.00 Mayfair 127 100 692 752-226 6. 118.00 3.50 Paddington 68 80 450 359 74 12. 73.50 4.50 Soho 59 73 255 225-3 4.1% 92.50 4.25 St James's 83 60 431 365 158 7.3% 118.00 3.50 Victoria 82 109 671 672 80 4.9% 75.00 4.25 CITY (WHOLE) New / Refurbished 499 740 815 987 Secondhand 730 953 4,400 4,483 TOTAL* 1,229 1,693 5,215 5,470 408 5.5% City Core 506 1,116 2,956 3,215 718 4.8% 68.50 4.00 Holborn 262 169 593 545-17 6.9% 69.50 4.00 Farringdon 76 61 357 361-112 7.7% 69.00 4.75 Clerkenwell 15 45 222 241-30 8. 67.50 4.75 Shoreditch 201 74 284 310 249 4.6% 65.00 4.75 Aldgate 73 18 215 123 256 3. 60.00 4.75 DOCKLANDS New / Refurbished - - - - Secondhand 31 30 308 300 TOTAL 31 30 308 300 13 7.7% 30.00 5.50 CANARY WHARF New / Refurbished - - 146 146 Secondhand 14 14 765 787 TOTAL 14 14 911 933-481 6.1% 47.50 4.75 SOUTHBANK Source: Colliers International *Includes additonal locations **Net Stock Absorption New / Refurbished 285 49 190 122 Secondhand 215 172 419 506 TOTAL 500 221 609 628 70 3.1% 67.50 4.75 UK Research & Forecast Report LONDON 9

GRADE A TAKE-UP BY SECTOR (sq ft) GRADE A TAKE-UP AVG DEAL SIZE (sq ft) 50,011 40,094 37,518 25,000 24,083 52,142 88,052 Media & Tech 20,000 303,229 Flexible Workspace 356,322 1,079,584 Business Services Financial 15,000 Legal sq ft 606,924 931,932 Retail & Leisure Healthcare Public Sector Energy & Utilisies 10,000 5,000 649,819 Insurance Manufacturing 0 Q2/2015 Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 Q3/2017 LONDON OFFICES 2017 SUBMARKET DEMAND PERFORMANCE Projected Annual Take-up levels vs 10 year average based on current demand 120 100 80 60 > > An analysis of demand across the key London submarkets in 2017 to date, allows us to assess the current market health in relation to transactional activity. Projecting annual take-up based on 2017 Q1 figures to date, figures, we can see which submarkets are ahead of the 10-year average and which locations are lagging the longer term trend. % above / below long term average take-up 40 20 0-20 -40-60 -80-100 Holborn Covent Garden Fitzrovia City Fringe Southbank St James's Victoria Bloomsbury Paddington West End (Whole) City (Whole) City Core Soho Eastern City Mayfair Euston Knightsbridge Marylebone Canary Wharf > > Despite the overall improvement in transactional activity across London, a portion of centres (47%) still saw activity slow compared to the longer term trend. City Fringe in particular, saw activity down, although the submarket is still on track to best its 10-year average annual take-up figure by over 40%. > > Markets such as Paddington and Bloomsbury have seen a steady improvement throughout the past six months and it is no coincidence that these are the two submarkets where headline rents have been most resilient. While Paddington s vacancy rate for all Grades remains in double figures, headline rents have still grown by 8.9%. Bloomsbury is the only other submarket to see upward movement in prime rents during 2017 to date. Competition for prime product continues to bolster headline rents. > > The number of centres projected to exceed the 10-year average for take-up remained steady in Q3. This reflects the projection for London overall, which suggests that the total take-up for 2017 will surpass the longer term trend by just over 1%. That said, consistent underperformers throughout 2017 have been Canary Wharf, Marylebone, Knightsbridge and Euston. The latter two have suffered from supply shortages throughout the year but Canary Wharf and Marylebone have only experienced modest demand for product. UK Research & Forecast Report

CONTACT US West End Agency Paul Smith +44 20 7487 1767 paul.smith@colliers.com City Agency James Walker +44 20 7487 1802 james.walker@colliers.com City Fringe Agency Shaun Simons +44 20 7871 7422 shaun.simons@colliers.com London Investment Rob Hayes +44 20 7487 1766 rob.hayes@colliers.com Tenant Representation Stuart Melrose +44 20 7344 6909 stuart.melrose@colliers.com Lease Advisory Charles Cowley +44 20 7344 6818 charles.cowley@colliers.com Research & Forecasting Guy Grantham +44 20 7344 6793 guy.grantham@colliers.com 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. October 2017 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 www.colliers.com/ukdisclaimer. Our registered office is at 50 George Street, London W1U 7GA. 17399 UK Research & Forecast Report