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(1)

Central London Office

Market Report

Supply falls to lowest level since 2008

(2)

Supply falls to lowest level

since 2008

• Central London supply continues to trend down and fell a further 11% in Q3 to 10.5 million sq ft, compared to 11.8 million sq ft at the end of Q2. The current vacancy rate of 4.7% is the lowest since 2008.

• The continued strength of occupier demand has put upward pressure on rents. Prime headline rents in the City core increased to £61.50 per sq ft in Q3, up from £60.00 per sq ft at the end of Q2. Prime rents in the Docklands increased to £40.00 per sq ft from £38.50 per sq ft; the first increase since Q3 2011.

• Q3 investment volumes reached £4.3 billion, which takes the year to date total to £9.9 billion. This is behind the equivalent periods in 2013 and 2012, which were particularly strong years, but marginally ahead of the 10 year average. City prime yields moved in 25 basis points to 4.25% and are now at their lowest since 2007, while West End yields remained stable at 3.75%, although an inward bias remains.

Sizes in 000 sq ft Q3 2014

(QoQ) West End City Docklands

Take-up 990ã 2,340 ã 153 ä

Supply 2,371ä 6,948 ä 1,179 ä

Overall Vacancy Rate 2.6% ä 6.2% ä 5.6% ä

Grade A Vacancy Rate 1.9% ä 4.6% ä 5.5% ä

Occupier Demand 4,819 ä 11,634 ã 3,719 ã Prime Rent £105.00â £61.50 ã £40.00 ã

Under Construction 2,297 ä 2,813 ã 0 â

(3)

Economic overview

Expansion continues

The UK has seen exceptionally strong GDP growth of late, with 3.1% forecast for the year. This has been driven by a resurgence in consumer and business confidence that is now being felt broadly across sectors and regions, and has placed the UK as the fastest growing large developed economy this year.

The growth spurt began in London, and has continued to gather strength here, with rapid growth of 3.7% expected for this year. Over the forecast period, growth is expected to remain solid, albeit moderating slightly from its current pace to average 3.4% from 2014-18.

Rapid growth has propelled surging employment growth well above expectations. Nationally, the unemployment rate has now fallen to 6.0%, and in London employment growth is at a 15 year high, mirroring the surge in employment we last saw in the late 1990s.

Several positive indicators

Besides the formal measures of economic growth, there is a host of anecdotal and survey evidence to suggest that businesses are confident. Surveys of financial businesses are now reporting a strong bounceback, in terms of business turnover and profitability; London continues to cement its reputation as a major tech hub; IPO and capital raising activity has grown rapidly this year; and, surveys of CFOs report that credit conditions are easing with debt becoming more freely available.

Global uncertainties

In sharp contrast to the UK, recent data from the Eurozone has been very weak and served as a reminder that there are still downside risks to growth. Italy is in recession, France is at best stagnating and the latest indicators from Germany point to a significant slowdown over the summer, and this has triggered a negative reaction from equity markets. Risks are also apparent in current geopolitical tensions in the Middle East and elsewhere, concerns over financial stability in China, and in the recent Ebola outbreak.

Forecast GDP growth in 2014 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Eurozone United States World United Kingdom London 2014 2014-18 average

Source: Oxford Economics

Bank rate & CPI inflation

0% 1% 2% 3% 4% 5% 6% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Bank rate CPI inflation rate

Source: Oxford Economics

While there is nothing to suggest an immediate halt to the current strong momentum in London and the wider UK, the pace of expansion is likely to moderate in coming quarters. Along with subdued inflation, these global risks are now likely to see base interest rates on hold until well into 2015.

“Rapid growth has propelled

surging employment growth”

(4)

The Central London market

Take-up on course for another strong year

Strong leasing activity continued in Q3 with 3.5 million sq ft let across Central London, the highest quarterly total since Q4 2010. Year to date take-up is now 8.5 million sq ft, slightly ahead of the equivalent period in 2013, which was a very strong year. As a result of the robust take-up, the volume of floorspace under offer fell 25% to 3.0 million sq ft, from a recent high point of 3.9 million sq ft in Q2. However it remains 50% higher than the same point in 2013, which indicates leasing activity will continue at above average levels into 2015.

Large transactions underpin strong take-up

High quarterly take-up was underpinned by large lot sizes with 13 transactions of over 50,000 sq ft, accounting for a combined 1.7 million sq ft, (around half of Q3 take-up). Leasing volumes in the City market were particularly strong, due to two large pre-lets totalling 760,000 sq ft, which boosted quarterly take-up to 2.3 million sq ft; the highest total since Q4 2006.

Continuing the recent trend, pre-leasing accounted for a large share of take-up with a third of all transactions either pre-let or during construction. Occupiers are increasingly aware that the market is becoming more supply constrained and are acting early to secure office space, particularly to satisfy larger requirements; M&G and Amazon are recent examples.

The TMT sector accounted for the largest share of occupier activity in Q3 with large transactions to Amazon, Havas and Truphone boosting their market share to 30%. Banking & finance and service industries both accounted for 20% of quarterly occupier activity.

Occupiers widening search areas

Occupier demand for office space in Central London is currently 15.0 million sq ft; broadly unchanged compared to the Q2 total and 9% ahead of the 10 year average. Central London requirements are increasingly footloose and driven by cost, quality of product

Central London take-up 2005 - 2014 Q3

West End City Docklands 0 2000 4000 6000 8000 10000 12000 14000 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft Source: JLL

Central London active demand 2005-2014 Q3

millions sq ft Active demand 0 2 4 6 8 10 12 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Under offer Source: JLL

and surrounding amenity rather than a particular location. The lack of supply in certain areas of Central London, particularly the West End core is also a major contributory factor. This trend is currently benefiting the City and Docklands which have recorded quarterly increases of 4% and 11% respectively, at the expense of the West End where overall demand fell 6% to 4.8 million sq ft. Franklin Templeton’s move from the West End (The Adelphi, WC2) to the City (Cannon Place, EC4) is a recent example.

(5)

Supply falls to lowest level since 2008

Central London supply continues to trend down and fell a further 11% in Q3 to 10.5 million sq ft, compared to 11.8 million sq ft at the end of Q2; the current vacancy rate of 4.7% is the lowest since 2008. The City accounted for the majority of this fall, recording a 14% decrease and has now reached a tipping point, with take-up exceeding speculative completions.

Despite the strong leasing volumes in the City leasing market in 2013/2014, the vacancy rate had not fallen significantly due to unusually high levels of development completions during the same period. The level of development completions will return to an average level in 2015, however 57% of this space has already been pre-leased and strong demand means that the vacancy rate could fall rapidly in 2015.

Supply in the West End remains critically low, currently around 2.4 million sq ft, which equates to a vacancy rate of 2.6%. This has supported rental growth in many of the West End sub-markets with a tightening spread of rents across the wider West End market.

Rental growth resumes in City and Docklands

The continued strength of occupier demand has put upward pressure on rents with prime rents in the City and Docklands both increasing in Q3. Prime headline rents in the City core increased to £61.50 per sq ft in Q3, up from £60.00 per sq ft at the end of Q2. Prime rents in the Docklands market increased to £40.00 per sq ft from £38.50 per sq ft, partly due to tightening supply and the rising rents in other Central London markets, which are making the Docklands increasingly competitive. Prime rents in the benchmark Mayfair and St James’s market remained unchanged at £105 per sq ft but upward pressure remains and we expect further rental growth in the short term. While City prime rents have risen, the upward pressure is more apparent in the market for tower space (where rents in excess of £80 psf have been achieved), and for large lot sizes where a shortage of

Central London vacancy rates 2005 - 2014 Q3

0% 2% 4% 6% 8% 10% 12% 14% Sep-14 Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 Sep-06 Sep-05 Sep-04

Availability (%) of overall stock

West End City Docklands

Source: JLL

Central London prime headline rents 2005 - 2014 Q3

0 20 40 60 80 100 120 Jun-14 Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08 Jun-07 Jun-06 Jun-05 £ per sq ft

West End City Docklands

Source: JLL

available options is encouraging occupiers to pre-let. The market for mid-sized requirements in the 10-30,000 sq ft range is not as tight, with occupiers still able to choose from a number of different options. However, with strong demand and a lack of speculative completions in 2015, we expect availability to fall resulting in rental growth across a broader base.

(6)

The Central London market

Large lot sizes boost Q3 investment turnover

Q3 investment volumes (£4.3 billion) were stronger than the first two quarters in 2014, which takes the year to date total to £9.9 billion. This is behind the equivalent periods in 2013 and 2012, which were particularly strong years, but marginally ahead of the 10 year average. The uptick in investment turnover was driven by large lot sizes with eight transactions in excess of £100 million. Overseas buyers continue to dominate deals of this size, with only two of the eight largest deals involving a domestic buyer, and, in both cases, in a joint venture with an overseas party.

Notable transactions include: Woolgate Exchange, EC2 purchased by Cathay Life for £320 million which is the first purchase by a Taiwanese insurance company in the City; and the Pollen Estate, W1 purchased in a joint venture between Norges Bank Investment Management and The Crown Estate for £381 million.

The investment market is likely to see a surge in activity in Q4, with several large buildings currently on the market and expected to trade before the end of the year. This could boost turnover to over £15.0 billion, well short of the record £18.0 billion traded in 2013, but still more than double the historic average.

City yields tighten

Prime City yields moved in 25 basis points to 4.25% and are now at their lowest since 2007, while West End yields remained stable at 3.75%, although an inward bias remains. There is unprecedented demand in emerging areas and in particular vacant buildings are selling today at levels which anticipate strong rental growth over the medium term. Over time we expect these areas to become firmly institutionalised, attracting both UK and overseas capital, as investors realise these markets are quickly becoming established parts of the Central London market.

Central London investment volumes 2005 - 2014 Q3

United Kingdom Overseas 0 2 4 6 8 10 12 14 16 18 20 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 £ billions Source: JLL

Central London prime yields and the cost of money 2007 - 2014

0% 1% 2% 3% 4% 5% 6% 7% 8% Sep-14 Sep-13 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07

West End City 5-year swap Bank rate

Source: JLL / Datastream

“The investment market is likely to

see a surge of activity in Q4”

(7)

Issue to watch:

Serviced offices in Central London

Serviced office operators occupy approximately 3.5 million sq ft across Central London in 290 separate locations. These operators are not a new phenomenon and have been in existence since the late 1980s according to a new report commissioned by the City of London. However over the past 24 months the rate of which they are leasing new premises has accelerated rapidly. Letting activity from service office operators increased 144% in 2013, they let 405,000 sq ft in 25 transactions reflecting an average size of circa 16,000 sq ft in Central London. Exceptional take-up levels have continued into 2014. Year-to-date 352,000 sq ft in 16 deals has been let and the average deal size has risen to circa 22,000 sq ft, representing 4% of total take-up. There is a further 100,000 sq ft under offer and 2014 activity levels are set to surpass 2013. We do not anticipate any abatement in activity from serviced office providers in the short term with seven requirements currently in the market totalling 213,000 sq ft.

Why has activity in serviced offices increased?

Economic environment: There is a school of thought that serviced

office operators respond quicker than the traditional office occupier when economic conditions start to improve following a downturn. An improving economy underpins growth in business and new ventures while serviced office operators provide occupiers with the flexibility required in an improving market and when staff recruitment is difficult to forecast.

Flexibility: Whether corporate occupiers are looking for overflow or project

space, to emerge into new locations and markets, SMEs are unsure of their future growth, or a new start-up company requires their first office, they all have one need in common, flexibility. Since the economic downturn there has been a shift in attitude to remain flexible and adaptable to market conditions to minimise risk and potential loss.

Cost: Prime rents have risen 12% in the City and 11% in the West End in

24 months and overall occupancy costs are approximately £91.00 per sq ft and £163.00 per sq ft. Traditional office leases are unaffordable for many SMEs and start-up companies, particularly when you factor in fit-out and legal costs and deposits. At present the average cost of a workstation in the City core is £750 to £800 per month and £1,000 per month in core West End, this includes all associated costs and can end up being less or the equivalent cost of a traditional lease, whilst importantly still providing flexibility for businesses.

Historic take-up by serviced office operators (2006 to Q3 2014)

West End City Docklands 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 Q3 2014 2013 2012 2011 2010 2009 2008 2007 2006 sq ft Source: JLL

Lease length and covenant: Start-up companies and SMEs generally

require shorter leases and have a weaker covenant than traditional occupiers. Landlords typically require a minimum term of five to 10 years and this has been reinforced in the current supply constrained market. To offset a weaker covenant, landlords would require a substantial deposit which many SMEs and start-up companies cannot afford.

Product: There is a serviced office operator to suit all budgets. Traditional

offices are of course still available, however in today’s market, serviced office operators have spaces in some of the best buildings in London. They provide a high quality fit-out, meeting rooms with the latest technology, break-out space, network and other business services to facilitate their client’s day to day work without the pressure of operating their own office.

A combination of factors has underpinned a rise in demand from serviced office operators however there are various factors that may hinder their ability to lease space moving forward, including; a supply constrained market and rising prime rents across Central London. Whilst demand for serviced office space will also be a key factor, as the economy improves, start-up and SME companies will mature and may choose to lease traditional office space and it will be interesting to see how the serviced office operator market evolves in the coming years.

Please note the above statistics are for Serviced Office Providers and do not include statistics on new co-working and incubator operations, such as WeWork.

(8)

The West End office market

Occupier take-up

• 990,200 sq ft was let in 41 transactions, an increase of 15% quarter-on-quarter and 19% higher than the 10 year quarter-on-quarterly average of 829,700 sq ft. This brings the year to date total to 2.6 million sq ft, 5% behind the equivalent period last year but ahead of the 2012 year-end total of 2.5 million sq ft.

• The TMT sector represented 31% of take-up in Q3. Whilst this sector still dominates take-up, its proportioned share has declined from the levels recorded in 2013 as other sectors have become more active such as the manufacturing sector which accounted for 20% of take-up in Q3. • Larger lot sizes (50,000 sq ft plus) underpinned take-up and

represented 47% of letting activity in Q3. This is quite uncharacteristic for the West End, where on average 30% of take-up is 50,000 sq ft or higher. The higher share for large deals signals that occupier confidence in the market is improving.

• Significant transactions in Q3 include: 3 Pancras Square, N1C where a pre-let of 164,000 sq ft completed to Havas at an average rent of circa £60 psf, DONG Energy completed at 5 Howick Place on 81,375 sq ft at a rent of circa £67.50 psf and 23 King Street, W1 secured by LEO (Executive Office Group) at £102.50 psf (23,150 sq ft).

• There is an additional 604,800 sq ft under offer, a decrease of 32% quarter-on-quarter but 7% higher than the 10 year quarterly average of 566,400 sq ft.

Occupier demand

• Demand weakened in Q3, partly due to the strength of take-up, but also because of footloose occupiers migrating outside the West End boundary. Occupiers accounting for 355,000 sq ft of in 12 requirements either refined the search area or completed on space outside the West End market; this is 45% higher than the levels recorded in Q1 and Q2.

• As a result, overall demand stands at 4.8 million sq ft, 6% lower than Q2 and 8% below the 10 year quarterly average of 5.3 million sq ft and active demand is 2.7 million sq ft; a fall of 21% quarter-on-quarter and below the 10 year quarter-on-quarterly average of 3.3 million sq ft. • Similar to the sectorial profile of take-up, the dominance of the TMT

sector has lessened and represents 30% of overall demand and 20% of active demand, with a more diverse occupier mix now apparent.

West End take-up 2005 - 2014 Q3

New Secondhand Under construction Off plan 0 1 2 3 4 5 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft Source: JLL

West End demand 2005 - 2014 Q3

0 1 2 3 4 5 6 7 8 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 millions sq ft

Active Potential Rolling 12 month take-up 0 1 2 3 5 6 7 Source: JLL

• New active requirements include; Expedia: 200,000 sq ft, Noble Europe: 50,000 – 60,000 sq ft, Egon Zehnder: 20,000 – 30 sq ft and Framestore: 20,000 – 25,000 sq ft.

Existing supply and the development pipeline

• Total supply is at its lowest level in 14 years and fell 8% quarter-on-quarter to 2.4 million sq ft. New supply accounts for less than a third of total supply.

• Vacancy rates are at their lowest levels since 2000/2001, with overall vacancy standing at 2.6% and Grade A vacancy at 1.9%, well below the 10 year quarterly averages of 4.8% and 2.9% respectively.

(9)

• Speculative development under construction is relatively unchanged quarter-on-quarter at 2.3 million sq ft.

• A single scheme completed construction in Q3; Walmar House, 288-300 Regent Street, W1 which is under offer to Richemont (40,000 sq ft).

• Five schemes started construction in Q3, however two are owner occupied or pre-let (Midland Goods Yard, N1 and 7-10 Hanover Square, W1). Speculative starts included 20 Eastbourne Terrace, W2 (93,500 sq ft), 29-30 St James’s Street, SW1 (14,000 sq ft) and The Department, 25 Wilton Road, SW1 (102,850 sq ft).

Rents

• Prime rents remained stable at £105.00 per sq ft (assuming a 10,000 sq ft floor plate and a 10 year term); an increase of 5% year-on-year. Rent free periods remain at 16 months.

Investment volumes and yields

• £1.8 billion was traded in 34 transactions, 40% higher than the 10 year quarterly average. This brings the year-to-date total to £3.7 billion, below the equivalent period last year (£4.4 billion). • West End assets remain attractive to overseas investors, who

accounted for 54% of total investment volumes, whilst UK investors represented 76% of the number of deals completed. This indicates that overseas money is targeting larger lot sizes. • There were four deals in Q3 that exceeded £100 million

representing 52% of total investment.

• Key deals include: The Pollen Estate, W1, acquired for £381 million in a joint venture between Norges Bank Investment and The Crown Estate, 130 - 137 New Bond Street, W1 purchased for £300 million in a joint venture between Oxford Property and Richemont, and The Point, Paddington Basin, W2 which was acquired by a joint venture partnership lead by Tishman Speyer for £210 million. • The weight of money (both UK and overseas) looking to invest

in the West End market, coupled with forecast rental growth is continuing to place pressure on pricing and yields.

• Yields remain unchanged at 3.75% for sub £10 million, 4.0% for £10 to £80 million lot sizes and 4.50% for lot sizes over £80 million, but are trending stronger.

West End vacancy rates 2005 - 2014 Q3

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Availability (%) of overall stock

Overall Grade A

Source: JLL

West End prime headline rents 2005 - 2014 Q3

£0 £20 £40 £60 £80 £100 £120 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 £ per sq ft

Prime Net effective

Source: JLL

West End investment purchases 2005 - 2014 Q3

Property companies Institutions Others 0 1 2 3 4 5 6 7 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 £ billion Source: JLL

(10)

The City office market

Occupier take-up

• 2.3 million sq ft was let in 60 transactions, the highest quarterly total since Q4 2006 and 75% ahead of the 10 year quarterly average. • Year to date take-up is now 5.1 million sq ft which is in line with the

equivalent period in 2013.

• Take-up was boosted by two large pre-let transactions which accounted for around a third of quarterly take-up: M&G Investments have pre-let 317,090 sq ft at 10 Fenchurch Avenue, EC3 and Amazon have pre-let 445,427 sq ft at Principal Place, E1. • Other notable transactions completing in Q3 include: Africa

House, WC2 where Mishcon de Reya have acquired the entire building (87,853 sq ft); 33,814 sq ft acquired by Franklin Templeton Investments at Cannon Place, EC4 and 45,212 sq ft pre-let to Ropes & Gray at 1 New Ludgate, EC4.

• The volume of floorspace under offer fell 26% as a result of strong take-up but remains 40% ahead of the equivalent period in 2013 and as such we expect strong leasing volumes to continue in the final quarter of 2014.

• Service industries accounted for nearly half (46%) of quarterly leasing activity with banking and finance and professional services occupiers accounting for 24% and 26% respectively.

Occupier demand

• Overall demand increased 4% in Q3 despite the strong take-up and is now 11.6 million sq ft; the highest total since Q4 2007.

• The quarterly increase was driven by an 8% increase in active requirements which ended the quarter at 7.5 million sq ft, compared to 6.9 million sq ft in Q2.

• The service (43%), banking and finance (22%) and professional (21%) sectors account for the largest shares of active demand. • Notable active requirements include The Royal Bank of Canada

(120,000 – 300,000 sq ft), Expedia (200,000 sq ft) and Ashurst (200,000 sq ft).

Existing supply and the development pipeline

• Overall supply decreased 14% to 6.9 million sq ft, compared to 8.1 million sq ft at end Q2 and has now fallen below the 10 year average of 7.8 million sq ft.

• The quarterly fall was driven by a 22% fall in secondhand supply, while the volume of new stock remained unchanged due to 1.4 million sq ft of development completions.

• Development completions in Q3 include: Bush House and Strand House, Aldwych Quarter, WC2 (202,000 sq ft); The Leadenhall Building, EC3 where 54% of the 593,000 sq ft has been pre-leased; and 71 Queen Victoria Street, EC4 (187,000 sq ft).

City take-up 2005 - 2014 Q3

New Secondhand Under construction Off plan 0 1 2 3 4 5 6 7 8 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft Source: JLL City demand 2005 - 2014 Q3 0 3 6 9 12 15 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft

Active Potential Rolling 12 month take-up 0 3 6 12 15 Source: JLL

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City vacancy rates 2005 - 2014 Q3 0% 2% 4% 6% 8% 10% 12% 14% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Availability (%) of overall stock

Overall Grade A

Source: JLL

City prime headline rents 2005 - 2014 Q3

0 10 20 30 40 50 60 70 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 £ per sq ft

Prime Net effective

Source: JLL

City investment purchases 2005 - 2014 Q3

Property companies Institutions Others 0 2 4 6 8 10 12 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 £ billion Source: JLL Rents

• In line with the improving leasing market, prime headline rents increased to £61.50 per sq ft, up from £60.00 per sq ft at the end of Q2.

• Incentives remained stable at 24 months rents free, on an assumed 10 year term.

• Rental growth in 2014 has been limited by above average

development completions which have maintained a healthy balance of supply and the recent tendency of large occupiers to pre-let rather than take existing stock.

• Moving into 2015, the supply pipeline is more restricted and we expect to see the Grade A vacancy rate fall which will support rental growth.

• Prime rents are forecast to increase by 25% to £75.00 per sq ft between now and 2017.

Investment volumes and yields

• £2.2 billion was traded in 51 transactions in Q3 2014, a 36% quarter-on-quarter increase and 20% ahead of the 10 year quarterly average.

• The three largest transactions of the quarter involved foreign buyers who have a preference for larger lot sizes located in core locations: Blackstone have purchased 125 Old Broad Street, EC2 for £320 million; Woolgate Exchange, EC1 was acquired by Taiwanese insurance company Cathay Life for £312 million, whilst a 50% stake in MidCity Place, WC1 was purchased by Singaporean sovereign wealth fund Temasek for £186 million.

• UK buyers accounted for 25 of the 51 transactions in Q3 but their lower average deal size means UK purchasers account for only 25% of quarterly investment turnover.

• We expect the weight of capital seeking City opportunities to remain high with strong demand for both value-add opportunities and larger lot sizes with longer income.

• Prime yields moved in 25 basis points to 4.25% for sub £40 million lot sizes and 4.50% for lot sizes of £40 to £125 million and above £125 million.

(12)

Occupier take-up

• 153,000 sq ft was let in seven transactions, a 16% quarter-on-quarter fall on the 183,500 sq ft transacted in Q2 2014.

• Year to date take-up is now 812,000 sq ft, already 50% higher than the 550,000 sq ft leased in 2013 and the highest annual total since 2010 when take-up reached 2.2 million sq ft.

• The largest transaction of the quarter was the 59,896 sq ft acquired by Truphone at 25 Canada Square, E14.

• Other notable transactions include: 39,730 sq ft to GFK at 25 Canada Square and 22,043 sq ft to the Nursing & Midwifery Council at One Stratford Place, E20

• There is an additional 765,528 sq ft under offer, the majority of which is to the Financial Conduct Authority (425,000 sq ft) and Transport for London (250,000 sq ft) at the International Quarter, Stratford.

Occupier demand

• Overall demand for office space in Docklands and East London increased for the fifth consecutive quarter and currently stands at 3.7 million sq ft.

• The quarterly increase in overall demand was driven by an uptick in the level of active demand which rose by 29% to 2.6 million sq ft.

• Banking and finance (38%) and services sectors (32%) account for the largest proportion of active demand.

• New active requirements with search areas including Docklands include Trinity Mirror (70,000 – 100,000 sq ft), Booking.com (60,000 sq ft) and Funding Circle (23,000 – 27,000 sq ft).

Existing supply and the development pipeline

• Total supply fell 3% to 1.2 million sq ft, equating to a vacancy rate of 5.6% which is the lowest level since Q1 2009.

• Following the completion of 25 Churchill Place, E14 in Q2 2014 there are no developments under construction in Docklands and East London. • There is potential for significant development at major schemes in

Docklands and Stratford, notably Wood Wharf (circa 4 million sq ft) in Docklands and the International Quarter in Stratford (circa 4 million sq ft), both of which require pre-lets.

Rents

• Prime rents increased to £40.00 per sq ft from £38.50 per sq ft where they have remained since Q2 2011, driven by tightening supply.

• More favourable terms are available for larger units of second hand space, while smaller units are in short supply and attract a premium.

Investment volumes and yields

• There were two investment transactions in Docklands in Q3 2014 totalling £356 million: Exchange Tower, E14 purchased by The Korean Teachers Credit Union for £191 million and 25 North Colonnade purchased by Blackstone for £165 million.

• Year to date investment turnover is now £1.2 billion, the highest since 2007, albeit this includes the sale of 10 Upper Bank Street, E14 for £795 million.

Docklands take-up 2005 - 2014 Q3

New Secondhand Under construction Off plan 0 0.5 1 1.5 2 2.5 3 3.5 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft Source: JLL Docklands demand 2005 - 2014 Q3 0 1 2 3 4 5 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 millions sq ft

Active Potential Rolling 12 month take-up

Source: JLL

The Docklands and East

London office markets

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Headline

transactions

West End 3 Pancras Square, N1C Area: 164,000 sq ft Tenant: Havas

Rent: £60.00 per sq ft (average) Building Status: Pre-let

5 Howick Place, SW1

Area: 81,374 sq ft Tenant: DONG Energy Rent: circa £67.50 per sq ft Building Status: New

The Pollen Estate, W1

Area: 730,000 sq ft

Purchaser: Norges Bank Investment

Management & The Crown Estate

Reported Price: £381 million Est Initial Yield: 1.50%

130-137 New Bond Street, W1

Area: 50,240 sq ft

Purchaser: Oxford Properties/Richemont Reported Price: £300 million

Est Initial Yield: 2.52%

City

Principal Place, E1

Area: 445,427 sq ft Tenant: Amazon Rent: Confidential Building Status: Pre-let

10 Fenchurch Avenue, EC3

Area: 317,090 sq ft Tenant: M&G Investments Rent: Confidential Building Status: Pre-let

Woolgate Exchnage, EC1

Area: 350,290 sq ft Purchaser: Cathay Life Reported Price: £312 million Est Initial Yield: 5.10%

125 Old Broad Street, EC2

Area: 328,000 sq ft Purchaser: Blackstone Reported Price: £320 million Est Initial Yield: 4.98%

Docklands & East London

25 Canada Square, E14

Area: 59,896 sq ft Tenant: Truphone Rent: £31.00 per sq ft Building Status: Secondhand

Exchange Tower, E14

Area: 490,179

Purchaser: Korean Teachers Credit Union Reported Price: £191 million

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Rental conditions

across Central London

West End village Knightsbridge Covent GardenBelgravia & Marylebone& Euston Mayfair Oxford StreetNorth of Paddington Soho St James’s Victoria

Max £80.00 £65.00 £67.50 £105.00 £92.50 £56.50 £80.00 £105.00 £72.50 min £47.50 £44.50 £40.00 £72.50 £41.48 £35.00 £45.00 £62.50 £40.00 % annual change (average) 18.5% 0.0% 0.0% 5.0% 0.0% -1.7% 14.3% 5.0% 0.0%

City village Central Core City Midtown Eastern Aldgate Northern Shoreditch Clerkenwell Southbank Southern

max £61.50 £60.00 £57.50 £50.00 £57.50 £47.50 £55.00 £57.50 £57.50 min £52.50 £45.00 £40.00 £35.00 £45.00 £40.00 £42.50 £42.50 £50.00 % annual change (average) 5.1% 9.1% 4.5% 25.0% 4.5% 18.8% 15.8% 15.0% 9.5%

(15)

Planning policy and

development update

Definition of Terms

Floorspace Threshold – Data refers to office floorspace in units of 5,380 sq ft and above. Grading – A subjective assessment taking into account specification, floorplate efficiency and image. Take-Up – Floorspace acquired for occupation by leasing, pre-leasing or purchasing a freehold or long leasehold

interest.

Supply – Floorspace which is on the market and available for occupation. Floorspace which is under offer prior to a

contractual commitment is included. Speculative development prior to practical completion is excluded.

Speculative Development – Floorspace under construction or comprehensive modernisation which will be available

for speculative letting (or sale). The forecast of development completions relates only to developments currently under construction.

Net Absorption – a measure of the change in occupied stock between periods.

Demand – Some applicants search across two or three market areas. In such cases their demand appears in the total

for each area. However, when calculating total Central London demand, duplicates are eliminated.

Active Demand – Organisations with a declared requirement for office accommodation which are actively in the

market to acquire floorspace in the short term.

Potential Demand – Organisations with a potential requirement for office accommodation, but without a finalised brief

in terms of timing.

Prime Rent – An opinion of the highest rent (excluding incentives) achievable upon a letting agreed at the quarter-end

of a notional 10,000 sq ft unit of the best quality office space in a prime location. Net effective rents are calculated against our prime headline rent values and assume a 10-year term, a notional three month fit-out period and amortisation over 10 years. In practice net effective rents are subject to far more variability related to the specific characteristics of the individual premises.

Prime Yield – An opinion of the yield which would be appropriate for a freehold Grade A office investment in a prime

location let at a current market rent to a tenant with a strong financial covenant.

Investment Turnover – Capital transactions comprising freehold and long leasehold acquisitions

Office to residential permitted development rights

On 1st August the Government published a consultation document called ‘Technical consultation on planning’. One of the key proposals of this consultation is to make permanent the office-to-residential permitted development rights, with the exemption areas granted to Local Authorities no longer applying. Whilst this new legislation is prepared, the Government is also consulting on the extension of the above permitted development rights from 30 May 2016 to 30 May 2019.

The consultation ended on 26 September and the responses received are now being considered. The Mayor of London and London Councils, including Westminster, have formally written to the Government objecting to plans to remove exemptions that prevent the conversion of offices to homes without the need for planning permission in parts of London.

Local policy update

Westminster City Council is consulting on its Community Infrastructure Levy Charging Schedule until 31 October. Proposed charging rates have been set out depending on whether a development schemes is within the Prime, Core or Fringe zone.

Islington Council and the Government have agreed the extent of the area within the London borough which will be protected from the conversion of offices to homes under permitted development rights.

Applications

Westminster City Council has resolved to grant planning permission for developer Derwent London’s office-led mixed-use development at 25-33 Berners Street. The proposal includes the demolition of three offices and the erection of a single eight storey building with basement. A total of 123,300 sq ft of office space is proposed, together with 24,300 sq ft of retail space (restaurant and shops) on part of the ground and basement levels.

Camden Council has resolved to approve detailed proposals for Three Pancras Square, a new 11 storey office building in King’s Cross. The scheme was submitted by developer Argent and includes 205,000 sq ft of offices and 15,100 sq ft of flexible retail space at ground floor. The proposal forms part of the King’s Cross Central development that was granted outline permission in December 2006.

Lambeth Council has resolved to grant planning permission for the redevelopment of the New Bondway site in Vauxhall, to provide two linked buildings of 24 and 50 storeys. Developers Citygrove and McLaren Property submitted plans for this mixed-use development providing 55,700 sq ft of office space, 7,800 sq ft of ground floor retail space and 450 homes.

Tower Hamlets Council has resolved to grant permission for the mixed-use redevelopment of Wood Wharf, submitted by Canary Wharf Group. The outline permission with all matters reserved is for a scheme that includes a range of 1.8 million sq ft to 3.8 million sq ft of office floorspace, 1,700 to 3,610 homes and a range of other uses.

To discuss how these changes may affect your development, contact Guy Bransby on 0207 399 5409 or Jeff Field on 020 7852 4742.

(16)

Contacts

© COPYRIGHT JONES LANG LASALLE 2014. This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in

Central London Office Market Report – Q3 2014

Front cover image: Three Pancras Square, King’s Cross, N1C, developed by King’s Cross Central Ltd Partnership.

jll.co.uk LEASING Neil Prime

Director

Head of UK Office Agency +44(0)20 7399 5190 neil.prime@eu.jll.com

Adrian Crooks

Director

West End Agency & Development +44 (0)20 7399 5135 adrian.crooks@eu.jll.com Dan Burn Director City Agency +44 (0)20 7399 5966 dan.burn@eu.jll.com CAPITAL MARKETS Damian Corbett Director

Head of London Capital Markets +44(0)20 7399 5286

damian.corbett@eu.jll.com

Julian Sandbach

Director

West End Investment +44 (0)020 7399 5973 julian.sandbach@eu.jll.com Chris Northam Director City Investment +44(0)20 7399 5826 chris.northam@eu.jll.com RESEARCH Jon Neale Head of UK Research UK Research +44(0)20 7852 4685 jon.neale@eu.jll.com Ben Burston

Head of UK Office Research UK Research +44 (0)20 7399 5289 ben.burston@eu.jll.com Alex Hodge Associate Director UK Marketing +44(0)20 7399 5735 alex.hodge@eu.jll.com

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