January 2018 UK Research & Forecast Report

London Offices Snapshot January 2018 UK Research & Forecast Report

BARNET HARINGEY Figure 1: London Offices Take-up YEAR ON YEAR INDICATORS WALTHAM FORREST New/Refurb Second-hand Pre-let Average LONDON Grade A Absorption DEALS MAP 16 14 Availability Take-up Rents 12 CITY ISLINGTON 10 Grade A Absorption BRENT CAMDEN 8 6 Availability Take up Rents 4 WEST END KENSINGTON WESTMINSTER HACKNEY NEWHAM 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Grade A Absorption Availability Take up HAMMERSMITH CITY TOWER HAMLETS Rents SOUTHWARK GREENWICH MARKET HIGHLIGHTS > > London Offices take-up surged in 2017 to exceed the 10-year average once more (see Figure 1). Appetite for quality product has been evidenced by the growth in pre-letting activity. London pre-lettings rose by 1.3 million sq ft (+87%) in 2017 to reach 2.8 million sq ft. > > Absorption of office space in 2017 saw a sharp contrast between Grade A and secondary accommodation. While overall absorption was negative, driven down by release of space in the Docklands market, Grade A occupation levels rose by 2.3 million sq ft, tripling year-on-year. > > Flexible offices take-up accounted for 22% of overall demand, eclipsing Financial and Business Services. While much of the space acquired is yet to come on stream, the impact upon conventional leasing strategies is set to be accentuated throughout 2018 and into 2019. > > Prime rents appear to have stabilised, bolstered as they have been by demand for top quality product. While a small number of submarkets saw downward pressure in, Grade A supply shortages are continuing to insulate many locations from negative growth. WANDSWORTH LAMBETH LEWISHAM > > Although, overall vacancy has continued to rise across London, its pace of increase has slowed markedly in the past three months. London vacancy now stands at 5.6%, a four-year high. City and West End vacancy stands on a par with that figure. Availability has reached 12.2 million sq ft, compared to 8.5 million sq ft at the start of 2017. > > Regardless, there is increasing concern about potential supply shortages in 2018 and 2019. The scale of schemes which have been pencilled in for completion over the next 24 months, but have yet to start on site, is considerable. Anticipated completions for 2018, although above average, show that 60% of schemes have already been pre-let. > > London investment volumes in 2017 totalled approximately 15.6 billion, which was on a par with 2016. Numbers were held down by shortage of supply in West End markets, down by 2 billion over the course of the year. In contrast, City volumes surged, as increasingly healthy levels of product were offered for sale. Canary Wharf and Southbank saw yields harden during the course of the year, as investor appetite and competition increased. 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 Q4 2014 - Pre-let Grade A Grade B 10 year average 2.0 Grade C 1.6 1.2 sq ft (millions) 0.8 0.4 0.0 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 CITY OFFICE Agency > > The City Office market saw annual transaction levels significantly up year-on-year (see Figure 2), rising to 6.4 million sq ft, a rise of 43% compared to 2016. Encouragingly, pre-letting activity was over double the figure recorded in 2016, demonstrating both occupier resilience in the face of wider market uncertainty and evidence of substantial long term commitments to the City of London by major entities, such as Deutsche Bank. While political uncertainty persists, anecdotal evidence suggests that occupiers are unable to delay relocation plans any longer and are now being forced to initiate moves. > > While new / refurbished availability rose slightly in Q4 due to the completion of over 600,000 sq ft of speculative space year-on year, new Grade A supply remains substantially below trend. New Grade A availability represents just 20% of current marketed space, which compares to over 40% at the start of 2016. Sub-trend new supply is also impacting on demand for secondhand space. Second-hand take-up rose by 30% during the course of 2017 and was also 27% above the 10-year average. > > In the City Core, despite healthy demand for space, headline rents for 10,000 sq ft units have held at 68-50 psf. Investment > > City investment volumes rebounded in 2017 to reach 10.2 billion. 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 throughout the year. saw volumes reach the highest quarterly total for 24 months, at 3.1 billion, with 24 lots trading hands. > > The three largest deals in Q4 were all to overseas buyers, including WeWork s purchase of the Devonshire Square Estate from Blackstone for 580 million and Asia-Pacific investor, Kingboard Investments acquiring 15 Canada Square for 400 million. In terms of City Fringe activity, the most notable deal in Q4 was German fund Union RE s 220 million purchase of 160 Aldersgate Street, EC1. The 208,000 sq ft office is let to law firm DLA Piper on a 20-year lease. Figure 3: City Vacancy Rates Vacancy Rate Q4 2016 10% 8% 6% 4% 2% 0% Southbank Holborn Shoreditch City Core Canary Farringdon Aldgate Docklands Clerkenwell > > Overall vacancy ended the year at 5.6% (see Figure 3), compared to 3.8% at the end of 2016. That said, upward movement has slowed considerably in the second half of 2017 as demand improved and the development pipeline yielded below average new supply. While 3.8 million sq ft completed in 2017 compared to 2 million sq ft in 2016, less than 50% of that was delivered speculatively. > > Take-up by business sector was broadly in line with 2016, with Media and Tech and Financial Services accounting for close to 50% of demand across the City market (see Figure 4). However, flexible workspace providers were responsible for 22% of total take-up and this figure does not include WeWork s purchase of the Devonshire Square Estate. The largest deal in the City in Q4 was a pre-let at Cain Hoys Bard scheme, in Shoreditch, where WeWork signed for 137,000 sq ft. Figure 4: City Take-up by Business Sector 2017 6% 7% 9% 5% 2% 1% 5% 18% 25% 22% Media and Tech Flexible Workspace Financial Services Legal Business Services Retail & Leisure Other Insurance Healthcare Public Sector UK Research & Forecast Report LONDON 5

Figure 5: West End Take-up by Grade Q4 2014 - Pre-let Grade A Grade B 10 year average 1.6 1.4 Grade C 1.2 1.0 sq ft (million) 0.8 0.6 0.4 0.2 0.0 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Figure 6: West End Vacancy Rates 12% Q4 2016 WEST END OFFICE Agency > > As across London, the West End market saw a healthy rise in office take-up year-on-year (see Figure 5). Annual transaction levels rose by 36%, with numbers almost double the equivalent period in 2016. Deals were dominated by the 311,800 sq ft pre-let to Dentsu Aegis at British Land s final phase of Regent s Place, NW1. Nevertheless, pre-letting activity and demand for built Grade A space was a consistent feature of 2017. > > Reflecting the healthy demand for prime product, Grade A absorption across the West End in 2017 dwarfed numbers for 2016. Grade A occupation rose by 1.4 million sq ft compared to just 0.3 million sq ft in 2016. Bloomsbury, Covent Garden, Fitzrovia, Paddington and St James s all saw Grade A absorption turn from negative in 2016 to strongly positive in 2017. > > While West End development completions increased by 30% in 2017, speculative supply actually fell year-on-year as over 1 million sq ft was pre-let prior to delivery. The 2018 pipeline appears even more constrained, with supply of speculative space potentially falling to a record low, compounded by likely slippage of a portion of schemes. Even in the optimistic scenario, speculative completions are set to be over 50% below the 20-year average. > > Media and Tech increased its market share in comparison to 2016, accounting for over one third of demand. As in the City and London wide, flexible offices providers were highly acquisitive, accounting for 19% of market share in 2017 (See Figure 7). > > Headline rents remained steady in the final quarter of 2017 as demand for Grade A product held firm. Across the West End, Marylebone apart, which has seen a modest price correction, average prime rents have only decreased by 1.2% year-on-year. In addition, tenant marketed space across the West End remains over 20% below the 10-year average, helping to further mitigate any downward pressure on rents. Investment > > While investment activity was above average in the City of London, the West End suffered, throughout 2017, from a shortage of investment product. As a result, volumes have remained stubbornly below the 10-year average for the past nine months, although Q4 saw some moderate uplift, boosted by the Ho Family s purchase of 10 Grosvenor Street ( 152m) and Unity purchasing 24 Old Bond Street ( 142m). UK institutions remain broadly absent from the market, with West End purchases falling to 300m from 938m in 2015 and 587m in 2016. > > In terms of market share, overseas investment remained consistent with 2016 numbers, representing 63% of activity. More significant was the reduction in non-uk investor activity in the second half of 2017. Overseas investment volumes fell by 35% in H2 2017, with Asia- Pacific investment in the West End, over the equivalent period, falling further, down by 45%. That said, a bias towards the City and Docklands markets is clear, where trophy assets and larger lot sizes saw Asia-Pacific activity increase in H2 2017. Figure 7: West End Take-up by Business Sector 2017 Vacancy Rate 10% 8% 6% 4% 2% 0% Euston / KX 8% 13% Fitzrovia 4% Knightsbridge Bloomsbury 3% 2% 1% 1% Soho Victoria Marylebone Covent Garden St James's Mayfair Paddington Media and Tech Flexible Workspace 34% Business Services Financial Services Retail & Leisure Other Healthcare 19% Energy & Utilities 15% Property 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 % 2016 2017 2016 2017 2017 OUTLOOK > > Appetite for quality product to remain to the fore. > > Supply of new development space will continue to be sub-trend, further impacted by likely delays to major construction projects. > > Increasing influence of flexible offices product as new centres come on stream. > > Wider political events will continue to dictate decision making amongst major Financial Services and banking occupiers. > > Rental levels set to be stable, although may see further modest downward pressure depending upon external events. > > Prime yields and pricing set to remain stable in 2018, with continued enthusiasm for trophy products. > > Asia-Pacific capital flows set to continue, but wider overseas investment base should continue to evolve. WEST END (WHOLE) New / Refurbished 1,293 2,009 710 602 Secondhand 2,038 2,514 2,743 4,041 TOTAL* 3,331 4,523 3,453 4,643-95 5.5% Bloomsbury 77 129 130 98 117 4.2% 69.50 4.50 Covent Garden / Strand 438 923 508 623-197 6.6% 83.50 4.25 Euston / King's Cross 309 672 203 205 284 2.2% 77.50 4.50 Fitzrovia 290 664 294 462 16 3.2% 86.00 4.50 Knightsbridge 144 59 59 143-214 4.1% 95.00 4.00 Marylebone 330 201 228 344-66 5.4% 90.00 4.00 Mayfair 343 456 559 949-226 7.9% 118.00 3.50 Paddington 156 174 166 379 74 12.9% 73.50 4.50 Soho 419 260 238 270-3 4.9% 92.50 4.25 St James's 235 257 523 362 158 7.2% 118.00 3.50 Victoria 456 498 458 681 80 5.0% 75.00 4.25 CITY (WHOLE) New / Refurbished 1,979 2,808 872 1,136 Secondhand 2,525 3,613 2,950 4,510 TOTAL* 4,504 6,421 3,822 5,646 408 5.6% City Core 2,518 3,309 2,376 3,472 718 5.2% 68.50 4.00 Holborn 358 635 455 356-17 4.6% 69.50 4.00 Farringdon 270 362 131 353-112 7.5% 69.00 4.25 Clerkenwell 107 340 171 272-30 9.2% 67.50 4.75 Shoreditch 525 813 274 333 249 4.9% 65.00 4.75 Aldgate 427 210 184 297 256 7.7% 59.50 4.75 DOCKLANDS New / Refurbished - - - - Secondhand 162 126 200 307 TOTAL 162 162 200 307 13 7.8% 32.50 5.50 CANARY WHARF New / Refurbished - 66 36 101 Secondhand 1,084 44 416 885 TOTAL 1,084 110 452 986-481 6.4% 45.00 4.50 SOUTHBANK Source: Colliers International *Includes additonal locations **Net Stock Absorption New / Refurbished 330 371 228 81 Secondhand 554 666 427 621 TOTAL 884 1,037 655 702 70 3.6% 67.50 4.25 UK Research & Forecast Report LONDON 9

GRADE A TAKE-UP BY SECTOR (sq ft) (IDENTIFIED TAKE-UP) GRADE A TAKE-UP AVG DEAL SIZE (sq ft) 25,000 52,142 88,052 111,806 190,948 51,560 37,518 27,122 15,984 Media and Tech Financial Flexible Workspace 20,000 369,763 Business Services 15,000 423,499 1,558,872 Retail & Leisure Legal sq ft Insurance Energy & Utilities 10,000 690,804 Healthcare Public Sector 1,489,038 Property Transport 5,000 1,333,123 Education Manufacturing 0 Q2/2015 Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 Q3/2017 Q4/2017 LONDON OFFICES 2017 SUBMARKET DEMAND PERFORMANCE Projected Annual Take-up levels vs 10-year average based on current demand % above / below long term average take-up 100 80 60 40 20 0-20 -40-60 -80 > > An analysis of demand across the key London submarkets in 2017, allows us to assess the current market health in relation to transactional activity. Analysing annual take-up based on 2017 figures, we can see which submarkets are ahead of the 10-year average and which locations are lagging the longer term trend. > > In 2017, Central London as a whole, saw modest over performance in comparison to the 10-year average, exceeding it by 2%. Reflecting a buoyant end to 2017 for the occupational markets, slightly over half the London submarkets similarly outperformed the longer term trend. > > Wider Midtown market locations such as Holborn, Covent Garden and Fiztrovia coupled with City Fringe locations such as Farringdon and Shoreditch, proved attractive to occupiers throughout 2017. The Elizabeth Line effect may well be contributing to occupier appetite in specific locations, creating additional competition for product. -100 Holborn Fitzrovia Covent Garden City Fringe Euston Victoria St James's City (Whole) Southbank Bloomsbury West End (Whole) City Core Paddington Soho Mayfair Eastern City Marylebone Knightsbridge Canary Wharf > > The number of centres that exceeded the 10-year average for take-up fluctuated again in Q4, but a strong final quarter lifted the City and West End markets as a whole into positive territory. Canary Wharf and Marylebone, both of which saw price corrections in, ended the year significantly down on the longer term trend. While Mayfair has seen headline rents remain stable, an increase in sub 3,000 sq ft availability has been symptomatic of a softening of the market for small suites. 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 West End 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 City Investment Dominic Amey +44 20 7344 6604 dominic.amey@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. January 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 www.colliers.com/ukdisclaimer. Our registered office is at 50 George Street, London W1U 7GA. 18004 UK Research & Forecast Report