CENTRAL LONDON
PROPERTY MARKET REVIEW
CBRE RESEARCH |
QUARTER 3 2013
NO ONE KNOWS LONDON
QUITE LIKE
1
The summer marked a turning point for the UK economy, with the rate of recovery exceeding expectations. In Q2, we saw GDP rise by 0.7%, while the International Monetary Fund (IMF) once again upgraded its 2013 growth forecast, predicting growth of 1.4%, up from 0.9% only three months ago. We’ve seen UK services increase at their fastest rate since 1997, supported by growth in the financial and business sectors. Meanwhile, the key drivers of property demand – office-based employment and retail sales – continued to strengthen. The latter is particularly impressive when one factors in the positive impact of the Olympics on retail sales in 2012.
The summer also marked a turning point in the Central London real estate market, with office leasing above trend for a second consecutive quarter. We have also seen growing competition for space, with nine deals of over 100,000 sq ft each in 2013 to date, compared with five in the whole of 2012.
Central London retail continued to attract strong demand from a range of international retailers, with a flurry of activity in preparation for Christmas. The shortage of available stock on the main streets has led to an increase in demand for other locations.
Elsewhere, the Central London residential market has seemingly moved up another gear, with sales volumes continuing to rise as the economic recovery and increasing access to debt boost demand. Prime Central London continues to lead the way, thanks to its appeal to overseas buyers, but government initiatives such as Help to Buy and Funding for Lending are expected to stimulate the low to mid-end of the market in future.
In the investment market, Central London experienced a surge in turnover in Q3, as domestic investors sought opportunities presented by the recovery in the leasing market. Overseas demand remained as strong as ever, resulting in a number of prominent transactions in both the office and retail markets.
Our expectation for the final quarter of 2013 and the first half of 2014 is for more of the same, with the strengthening economic recovery stimulating further demand in the occupier market. This will help support office take-up levels and lead to renewed rental growth. Meanwhile, the high demand for Central London retail from international retailers will help support prime retail rents, as formerly secondary areas become more established due to the spillover in demand. London is well positioned to capture future capital flows, offering overseas investors a gateway into Europe in addition to the opportunity to invest in one of the most liquid and transparent markets in the world.
FOREWORD
Adam J Hetherington
Managing Director, Central London
➜
OFFICE
LEASING
page 3
CONTENTS
➜
OFFICE
DEVELOPMENT
page 12
➜
RETAIL
LEASING
page 17
➜
RETAIL
INVESTMENT
page 21
➜
RESIDENTIAL
page 23
GDP FORECAST
0.8%
Economic growth accelerating
As far as the UK economy is concerned, the news was almost universally positive over the summer. Quarterly GDP growth picked-up to 0.7% in Q2, and if survey evidence – such as the Purchasing Managers’ Indices (PMIs) which are at their highest levels in years – is to be believed, then further acceleration is projected for the remainder of the year.
The labour market continues to be a source of good news. Total employment in the three months to July stood at 29.8 million, an increase of 275,000 from a year earlier. The unemployment rate fell to 7.7% from 7.8% in the previous three months and in August the claimant count declined for the 10th consecutive month. However, the trade-off for that job creation is that wage growth remains subdued. In July, average earnings growth was just 1.1%, less than half the rate of inflation. Fortunately for consumers, the rate of inflation is likely to ease during the coming months.
At present it seems that increasing employment, combined with receding inflation and a recovery in the housing market, is offsetting subdued earnings growth and driving consumer spending growth. Retail sales are on an upward path, and in September, despite falling from the previous month, UK sales volumes were 0.7% above their level a year earlier.
A sustainable recovery?
This growth is welcome, but it is not yet clear how broadly based the recovery has been. Recent growth has been concentrated in household expenditure rather than investment, while exports fell by 4.6% in July, unwinding some of the recent strength in net trade.
ECONOMIC
OVERVIEW
CL HOUSE PRICES
9.7% y-o-y July
UK RETAIL SALES
0.7% y-o-y September
UK CONSUMER
CONFIDENCE
Q3 2013*
“GROWTH HAS EXCEEDED EXPECTATIONS SO FAR THIS YEAR, AND IF SURVEY EVIDENCE IS TO BE
BELIEVED, FURTHER ACCELERATION IS ANTICIPATED IN THE REMAINDER OF THE YEAR.”
Whole Economy Economic Sentiment (LHS) Service Confidence Indicator (RHS)
Index, Series Average = 10
0 Balance of Responses, SA 120 115 110 105 100 95 90 85 80 20 15 10 5 0 -5 -10 -15 -20 -25 -30
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13
FORECAST Annual % Change UK 5 4 3 2 1 0 -1 -2 -3 Inner London 2009 2010 2011 2012 2013 2014 2015 2016 2017 FORECAST
Chart 1: UK Economic Sentiment & Services Sector Confidence Chart 2: Office-Based Employment Growth
Sources: CBRE, Oxford Economics Source: DG ECFIN
The housing market recovery is undoubtedly contributing to growth at present, but if price growth doesn’t prompt a supply response from house builders, then it could be a source of problems in the future. These cautionary points don’t change the fact that so far this year, growth has exceeded expectations. As a consequence, forecasts of GDP growth are being revised upward, with consensus forecast GDP growth of 1.3% in 2013, accelerating to 2.1% in 2014.
London leading the recovery
In the three months to July, total employment in London stood at 3.95 million, which was a new record high. This was an increase of 2.4% from a year earlier, comfortably outpacing the respectable 0.9% growth recorded across the UK.
Recent survey evidence suggests that London’s outperformance will continue. The PMIs for London have been even more upbeat than those for the UK as a whole. August’s readings showed London outperforming in terms of output, orders, business outstanding and employment. Oxford Economics are forecasting GDP growth of 1.8% for London in 2013 compared with 1.4% for the UK.
Looking forward, the level of office-based employment in Inner London is expected to increase by an average of 1.9% per annum over the coming five years. This rate is a moderation from the rapid increase of recent years but is ahead of the 1.4% growth per annum forecast across the UK as a whole.
UK BUSINESS
CONFIDENCE
3
The Central London office market has turned,
with the pick-up in the first half of the year
continuing into Q3. With ever-increasing
signs of economic recovery improving occupier
confidence and therefore advancing relocation
decisions, competition for space is
likely to intensify in the final quarter.
CENTRAL LONDON
OFFICE LEASING
View from 20 Fenchurch Street
Phillip Howells
Executive Director West End Agency
Take-up continues to rise
Central London take-up increased by 4% over the quarter to reach 3.6m sq ft, remaining above the 10-year average of 3.0m sq ft for a second consecutive quarter. The uplift in take-up is also reflected in the rolling annual total, with take-up for the past 12 months standing at 12.5m sq ft, marking its highest point since Q1 2011 (12.6m sq ft).
As in the previous quarter, the majority of take-up was concentrated in the West End (1.2m sq ft) and the City (1.1m sq ft), with the former back above trend and recording its highest level since Q2 2011 (1.2m sq ft). Take-up was also above the 10-year average in Southbank (0.8m sq ft) and Docklands (0.3m sq ft). Midtown saw take-up fall to 0.2m sq ft from 0.6m sq ft.
Under offers fall but remain high
The volume of space under offer fell by 13% over the quarter to 2.5m sq ft, marginally below the 10-year average of 2.7m sq ft. This fall was due to a number of key lettings’ transacting. Even so, there remains a sufficient volume of space under offer to suggest that the recovery in leasing levels will continue in the final quarter of the year.
Availability falls to 16.9m sq ft
Central London availability fell by 5% to stand at 16.9m sq ft, falling in line with the 10-year average. This caused the availability rate to fall to 7.7% from 8.1% a quarter ago.
CENTRAL LONDON
OFFICE LEASING
Q3 2013
“LEASING LEVELS REMAINED ABOVE TREND FOR A SECOND CONSECUTIVE QUARTER, DEMONSTRATING
THAT THE RECOVERY IN THE OCCUPIER MARKET IS UNDERWAY. WITH AVAILABILITY NEARING ITS PEAK,
RENTAL GROWTH IS FORECAST IN ALL CENTRAL LONDON MARKETS IN 2014.”
FORECAST Million sq ft 5 0 10 15 20 25 30 M ill io n sq ft 0 2 4 6 8 10 12 14 16 18 Take-up Availability (RHS) 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014
OUTLOOK
Take-up in 2013 is forecast to be above trend, boosted by improving economic growth, higher business confidence and a number of significant lease events. With stronger economic growth forecast in 2014, we expect leasing levels to accelerate, resulting in higher levels of take-up.
Availability is forecast to peak in 2013, preceding 2014’s high point in the current development cycle. The high levels of demand forecast for 2014 are expected to absorb the new supply coming through, causing availability to fall.
Chart 3: Central London Take-up and Availability
Source: CBRE
TAKE-UP
4% (3.6m sq ft)
UNDER OFFERS
-13% (2.5m sq ft)
AVAILABILITY
-5% (16.9m sq ft)
CENTRAL LONDON PRIME RENT INDEX
2.3%
The largest fall in supply was in Southbank, where availability fell to 1.4m sq ft following the 430,200 sq ft letting to News UK at The Place in London Bridge Quarter. Availability also fell in the West End and Docklands to 4.9m sq ft and 1.7m sq ft respectively.
Meanwhile, availability increased slightly in the City and Midtown to 7.1m sq ft and 1.8m sq ft respectively, when major schemes completing in 12 months were brought into the availability figures.
Prime headline rents continue to rise in the West End
Prime headline rents increased in five West End markets, including Mayfair and St James’s, which increased by 3% to £100.00 per sq ft, a level last seen in 2007.
Prime rents remained unchanged in all other main Central London markets, with both the City and Midtown at £55.00 per sq ft and Southbank and Docklands at £45.00 per sq ft and £38.50 per sq ft respectively.
5
CITY
OFFICE LEASING
TAKE-UP
-32% (1.1m sq ft)
UNDER OFFERS
-27% (0.9m sq ft)
AVAILABILITY
+2% (7.1m sq ft)
PRIME RENTS
£55.00
Q3 2013
Chart 4: City Take-up Chart 5: Sector Structure of City Take-up
Secondhand New Completed Pre-let Rolling Annual Take-up (RHS)
3 4 5 6 7 1 0 1.5 2.0 2.5 0 1 2 0.0 0.5 1.0 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 20 12 Q1 20 13 Million sq ft Million sq ft Q3 20 13
Banking and Finance Business Services
Manufacturing, Industrial and Energy Insurance
Public Sector Professional
Consumer Services and Leisure TMT 16% 26% 7% 20% 15% 4% 5% 7%
City take-up fell by 32% in Q3 to 1.1m sq ft, following a high total in Q2, when a number of large deals completed. This caused take-up to fall below the 10-year average of 1.2m sq ft; however, the rolling annual trend is positive, with take-up for the past 12 months totalling 5.1m sq ft, marking its highest point since Q1 2011 (5.1m sq ft).
The downturn in take-up was reflected across all types of space, with the most significant fall noted in pre-let space, which fell by 71% to 0.1m sq ft. The volume of secondhand and new take-up also declined, falling by 17% and 24% to 0.7m sq ft and 0.3m sq ft respectively.
In the previous quarter, nine deals over 50,000 sq ft helped support take-up. In Q3, the number of deals over that threshold fell to three. The largest of the quarter saw law firms CMS Cameron McKenna and Field Fisher Waterhouse take 140,300 sq ft at Cannon Place, 78 Cannon Street, and 100,700 sq ft at Riverbank House, 2 Swan Lane respectively.
Those deals follow significant Central London lettings to Bird & Bird and Debevoise & Plimpton in the previous quarter and Nabarro in Q4 2012, all of which were driven by pending lease events – but adding further weight to the argument that occupier confidence is improving.
Strong demand from the legal sector pushed the proportion of professional take-up to 26% in Q3. Banking and finance again showed signs of greater activity accounting for 20% of take-up. The sector was supported by a 49,100 sq ft letting to Vanguard at The Walbrook Building; business services, and technology, media and
Address Sq Ft Occupier Business Sector
Cannon Place,
78 Cannon Street 140,300 CMS Cameron McKenna Professional Riverbank House,
2 Swan Lane 100,700 Field Fisher Waterhouse Professional The Billiter Building,
22 Billiter Street 59,300
London School of Business and Finance
Consumer Services and Leisure
The Walbrook Building 49,100 Vanguard Banking and Finance
1/2 Broadgate 46,100 Royal Mail Public Sector
Table 1: Key City Transactions, Q3 2013
Source: CBRE Source: CBRE
Source: CBRE telecommunications (TMT), accounted for 16% and 15% of Q3 take-up respectively.
The volume of under offers fell by 27% over the quarter to 0.9m sq ft, following the high turnover of deals. As a result, volumes fell below the 10-year average of 1.1m sq ft, but there remains sufficient space under offer to support current levels of take-up in the final quarter.
10 9 8 7 6 5 4 3 2 1 0 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Million sq ft New Completed 10-Year Average Secondhand
New Under Construction
2.0 2.5 3.0 3.5 0.0 0.5 1.0 1.5 2004 Million sq ft 2006 2008 2010 2012 2014 2016
Under Construction Let/Under Offer Proposed Let/Under Offer Completed
Proposed Available
Under Construction Available 10-year Average
City availability rose by 2% over the quarter to reach 7.1m sq ft, also reflected in the availability rate, which increased from 9.3% to 9.5%. This compares with a 10-year average of 7.5m sq ft and marked its highest point since Q1 2012 (7.1m sq ft).
The increase was driven by a 19% uplift in early marketed stock, which reached 2.1m sq ft, as new developments such as the Leadenhall Building (with 216,600 sq ft still available) moved to within 12 months of completion. Q3 early marketed supply reached the highest level since Q1 2009 (2.1m sq ft). The quantum of new completed space also increased over the quarter, rising by 3% to 1.4m sq ft. Secondhand supply fell by 5% to 3.6m sq ft.
There were 14 buildings of 100,000 sq ft or more available in the City in Q3. Currently under construction, 20 Fenchurch Street represented the largest quantum of available space in a single building, at 292,500 sq ft; 125 London Wall was the largest secondhand unit, at 224,100 sq ft.
Chart 6: City Availability Chart 7: City Development Pipeline
30 20 10 0 -10 -20 -30 Annual % Change 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 FORECAST
OUTLOOK
Typical headline City rents were unchanged, at £55.00 per sq ft over the quarter, having remained at that level since Q4 2010. Even though there have been some isolated examples of improving rents, across the wider market typically rent-free incentives have hardened, thereby starting to increase net effective rents.
Stronger demand in the Core – and not just in the buoyant markets of Clerkenwell and Shoreditch – will in time result in headline rents increasing in all City markets. This will be pronounced in 2014 if current activity is maintained.
Chart 8: Prime City Rent
Source: CBRE Source: CBRE
Source: CBRE Development completions totalled 0.4m sq ft in Q3, with a total of 1.3m sq ft expected in 2013, which is substantially below the 10-year average of 1.9m sq ft. Completion levels are projected to peak at 3.1m sq ft in 2014, with only 1.6m sq ft in 2015 and 2.7m sq ft expected in 2016.
In total, the development pipeline equates to a potential 8.7m sq ft of new space being delivered from 2013 to 2016. Of that around 6.3m sq ft is speculative, with the largest volumes anticipated in 2014 (2.2m sq ft) and 2016 (2.3m sq ft).
The long-term development outlook is likely to change though, because 2.6m sq ft, scheduled for delivery from 2014 to 2016, is not yet under construction and is unlikely to start without first securing a pre-let.
7
WEST END
OFFICE LEASING
TAKE-UP
17% (1.2m sq ft)
UNDER OFFERS
20% (1.0m sq ft)
AVAILABILITY
-10% (4.9m sq ft)
PRIME RENTS
3% (£100.00)
Q3 2013
Chart 9: West End Take-up Chart 10: Sector Structure of West End Take-up
3 4 5 6 0.6 0.8 1.0 1.2 1.4 Million sq ft
Secondhand New Completed Pre-let Rolling Annual Take-up (RHS)
0 1 2 0 0.2 0.4 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Million sq ft
Banking and Finance
Business Services
Manufacturing, Industrial and Energy
Insurance
Public Sector
Professional
Consumer Services and Leisure
TMT 14% 24% 18% 16% 6% 20% 2%
West End take-up increased again in Q3, rising by 17%, to reach 1.2m sq ft. This not only brought take-up back above the 10-year average of 1.0m sq ft but also marked the highest point since Q2 2011 (1.2m sq ft). The uplift in leasing activity caused the rolling annual total to reach 3.8m sq ft compared with 3.7m sq ft 12 months ago.
The increase was driven by a significant upswing in new completed take-up, which reached 0.4m sq ft in Q3 from 0.1m sq ft in Q2, as deals to Facebook and Schlumberger Oil completed at 10 Brock Street, Regents Place (87,700 sq ft) and 62 Buckingham Gate (64,600 sq ft) respectively. The latter scheme also saw Rolls Royce take 37,400 sq ft. Conversely, the quantum of secondhand and pre-let space fell by 3% and 78% to 0.8m sq ft and 18,200 sq ft respectively.
In contrast with previous trends, there were three deals over 50,000 sq ft, of which the largest saw retailer ASOS.com acquire 95,500 sq ft at Greater London House.
The TMT sector was the most active over the quarter, accounting for 24% of take-up, of which a large proportion was underpinned by the deal to Facebook. The letting by ASOS.com helped boost take-up by the consumer services and leisure occupiers, accounting for 20% of the total; a number of lettings by serviced-office operators, such as Instant Managed Offices at The Point (35,500 sq ft), caused the proportion of business services take-up to stand at 18%.
The high level of take-up was reflected across the majority of submarkets, with only North of Oxford Street West (117,100 sq ft) and Knightsbridge (3,000 sq ft) recording take-up below the respective 10-year averages of 141,600 sq ft and 24,500 sq ft. The best-performing markets relative to trend were Soho (97,200 sq ft) and North of Oxford Street East, including Bloomsbury and Euston (317,400 sq ft), against 10-year averages of 71,600 sq ft, and 238,600 sq ft respectively.
The amount of space under offer increased by 20% over the quarter to 1.0m sq ft, 22% above the 10-year average of 0.8m sq ft, suggesting that the improvement in take-up will be sustained in the coming quarters.
Address
Sq Ft
Occupier
Business Sector
Greater London House,
Hampstead Road 95,500 ASOS.com Consumer Services and Leisure 10 Brock Street,
Regents Place 87,700 Facebook TMT
62 Buckingham Gate 64,600 Schlumberger Oil Manufacturing, Industrial and Energy
62 Buckingham Gate 37,400 Rolls Royce Manufacturing, Industrial and Energy The Point 41/43,
North Wharf Road 35,500
Instant Managed
Offices Business Services
Table 2: Key West End Transactions, Q3 2013
Source: CBRE Source: CBRE
New Completed 10-Year Average Secondhand
New Under Construction
5 6 7 8 9 Million sq ft 1 0 4 2 3 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 0.0 2004 2006 2008 2010 2012 2014 2016 Million sq ft 1.8 1.6 1.4 1.2 2.0 1.0 0.8 0.6 0.4 0.2
Under Construction Let/Under Offer Proposed Let/Under Offer Completed
Proposed Available
Under Construction Available 10-Year Average
Availability fell by 10% over the quarter to 4.9m sq ft, also falling 9% below the 10-year average of 5.4m sq ft. This caused the availability rate to fall to 5.7%.
The largest decrease was noted in new completed supply, which fell by 13% to 874,700 sq ft, but which remained above the 10-year average of 773,900 sq ft. Q3 also saw the quantum of secondhand and early marketed space fall by 8% and 10% to 2.8m sq ft and 1.2m sq ft, respectively. However, early marketed supply remained well in excess of the 10-year average of 0.9m sq ft due to the high levels of new development.
The largest available unit in the West End was at 10 Bloomsbury Way, due to complete in Q2 2014 and totalling 152,200 sq ft; the largest ready-to-occupy unit was at Park House (140,900 sq ft).
The fall in availability was reflected across most submarkets, with only Soho, Covent Garden and Strand, and St James’s seeing an increase, with availability rising by 12%, 5%, and 3% to 0.3m sq ft, 0.5m sq ft, and 0.6m sq ft respectively. The largest decline was noted in North of Oxford Street East where availability fell by 28% to 0.9m sq ft following the high levels of take-up in Q3.
Chart 11: West End Availability Chart 12: West End Development Pipeline
30 20 10 0 -10 -20 -30 Annual % Change 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 FORECAST
OUTLOOK
Prime rents increased in the majority of West End markets, including Mayfair and St James’s, which increased for the third consecutive quarter to £100.00 per sq ft. The strongest growth was seen in Victoria and Knightsbridge, where prime rents rose by 8% each to £70.00 per sq ft and £65.00 per sq ft, respectively. Prime rents in Soho (£77.50 per sq ft) and North of Oxford Street East (£65.00 per sq ft) also increased.
West End prime rents, reflective of Mayfair and St James’s, are unlikely to increase further in 2013, having already risen by 8.1%. However, that might change should leasing activity remain strong. We forecast rental growth of around 4.0% in 2014, driven by the wider economic recovery filtering through to the occupier market.
Chart 13: Prime West End Rent
Source: CBRE Source: CBRE
Source: CBRE Supply levels in the majority of West End submarkets were below trend, with the exception of St James’s, and Covent Garden and Strand, where availability stood 50% and 5% above the 10-year average respectively. As in the previous quarter, Knightsbridge recorded the lowest amount of available stock relative to trend: 35% below its 10-year average. Development completions increased to 0.6m sq ft in Q3 from 0.5m sq ft in Q2, bringing total completions for the year to date to 1.2m sq ft. The largest scheme to complete over the quarter was British Land’s 10 Brock Street, totalling 320,400, of which 295,300 sq ft is let to occupiers, including Debenhams (174,500 sq ft) and Facebook (87,700 sq ft). Development completions are scheduled to total 1.4m sq ft in 2013, which is above the 10-year average of 1.0m sq ft. In 2014 and 2015, completion levels are projected to deliver 1.3m sq ft and 1.5m sq ft respectively before peaking at 1.7m sq ft in 2016.
Around 4.9m sq ft of the 5.9m sq ft scheduled for delivery from 2013 to 2016 is speculative. However, with the majority of that space yet to go under construction, the timing of later schemes will depend on the availability of financing and the continuation of the occupier market recovery over the next year or so.
9
TAKE-UP
386% (0.8m sq ft)
UNDER OFFERS
-55% (0.2m sq ft)
AVAILABILITY
-26% (1.4m sq ft)
PRIME RENTS
£45.00
Q3 2013
Take-up in Southbank increased to 0.8m sq ft in Q3 from 0.2m sq ft in Q2, marking the highest level since Q2 2007 (0.9m sq ft) and compared with a 10-year average of 0.2m sq ft. This brought the rolling annual total to 1.2m sq ft, 31% above the 0.9m sq ft in Q3 2012.
Take-up in Q3 was driven by two deals over 200,000 sq ft. The largest occurred at The Place, 25 London Bridge Street, where News UK moved its London headquarters from Wapping, taking 430,200 sq ft. Advertising firm Ogilvy & Mather leased 216,300 sq ft at Sea Containers House, North Building, in the second largest deal of the quarter. In a quarter of strong Central London take-up, both deals represented the largest across Central London in Q3.
As a result of the aforementioned lettings, the TMT sector accounted for the majority of take-up in Q3, taking 86% of the total.
The high turnover of deals caused the volume of space under offer to
SOUTHBANK
OFFICE LEASING
New Completed Pre-let
Secondhand
Rolling Annual Take-up (RHS)
1.0 1.4 1.2 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Million sq ft 0.0 0.2 Million sq ft 0.4 0.6 0.8 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 New Completed 10-Year Average Secondhand
New Under Construction
1.0 1.5 2.0 2.5 Million sq ft 0.0 0.5 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
Chart 14: Southbank Take-up Chart 15: Southbank Availability
-15 -10 -5 0 5 10 15 20 2014 Annual % Change FORECAST 2013 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
OUTLOOK
Southbank prime rents, reflective of More London, remained unchanged over the quarter at £45.00 per sq ft, having increased from £42.50 per sq ft in Q3 2012.
Southbank prime rents are forecast to end the year at £47.50 per sq ft, driven by strong demand for new space. Rental growth is forecast to accelerate in 2014 as occupier confidence improves due to stronger economic growth and as the new development around London Bridge changes the rental dynamic in the Southbank market.
Chart 16: Prime Southbank Rent
fall by 55% to 0.2m sq ft in Q3, although it remained roughly in line with the 10-year average, suggesting that take-up will remain above trend in the final quarter.
Availability fell by 26% over the quarter to stand at 1.4m sq ft but remained significantly above the 10-year average of 0.9m sq ft. This quarterly change caused the availability rate to fall to 7.9%. The largest decline was in early marketed space, which fell by 79% over the quarter to 0.2m sq ft following the lettings at The Place and Sea Containers House. There was also a 2% fall in secondhand supply, which stood at 0.4m sq ft. New completed stock increased by 35% to reach 0.8m sq ft. Completion levels in 2013 to date reached 0.8m sq ft, boosted by the completion of major schemes such as The Place (430,600 sq ft) and 1 London Bridge (168,300 sq ft, with 138,200 still available) in Q3. There are no further developments planned in 2013. A further 1.4m sq ft is scheduled for delivery from 2014 to 2016, of which 0.8m sq ft is speculative.
Source: CBRE Source: CBRE
Take-up in Docklands increased significantly in Q3, rising to 0.3m sq ft from 0.1m sq ft in Q2, to lift take-up back above the 10-year average of 0.2m sq ft. Q3 marked the highest level since Q3 2011 (0.4m sq ft) and caused the rolling annual total to rise to 0.5m sq ft, which is roughly level with a year ago. In contrast with recent quarters when take-up focused entirely on secondhand space, 61% of take-up in Q3 was new completed, with the remainder secondhand.
Take-up in Q3 was boosted by the 205,300 sq ft letting to accounting firm KMPG at 30 North Colonnade, with the firm planning to relocate from its current London headquarters at Salisbury Square in the City, following the expiry of its lease in 2015. The second largest deal of the quarter saw HSBC take 54,200 sq ft at 1 Canada Square.
As a result of the letting to KPMG, professional occupiers accounted for 61% of take-up, and banking and finance reflected 21% of the total.
DOCKLANDS
OFFICE LEASING
TAKE-UP
220% (0.3m sq ft)
UNDER OFFERS
-37% (0.03m sq ft)
AVAILABILITY
-6% (1.7m sq ft)
PRIME RENTS
£38.50
Q3 2013
Million sq ft Million sq ft 2.5 2.0 1.5 1.0 0.5 0.0 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 SecondhandPre-let New CompletedRolling Annual Take-up (RHS)
Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
New Completed 10-Year Average Secondhand
New Under Construction
Million sq ft 2.5 2.0 1.5 1.0 0.5 0.0 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
Chart 17: Docklands Take-up Chart 18: Docklands Availability
25 15 5 -5 -15 -25 Annual % Change 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 FORECAST
OUTLOOK
Prime headline rents in Docklands remained stable at £38.50 per sq ft over the quarter, maintaining a level held since Q2 2011.
We expect prime Docklands rents to remain unchanged for the remainder of the year. The outlook for 2014 is more positive, however, with growth driven by improving economic conditions, which should filter through to the occupier market.
Chart 19: Prime Docklands Rent
Under offers fell by 37% over the quarter to stand at 31,800 sq ft, 83% below the 10-year average of 0.2m sq ft.
Availability fell by 6% to 1.7m sq ft in Q3, reflecting an availability rate of 8.9%, but remained above the 10-year average of 1.5m sq ft. That decrease was driven by a 50% decline in new completed space, which fell to 0.2m sq ft in Q3 following the letting to KPMG – in addition to an 8% fall in secondhand space (1.3m sq ft). Early marketed stock remained unchanged at 0.2m sq ft.
The largest available unit in Q3 was at 5 Churchill Place, comprising 286,600 sq ft. There were five additional buildings available at the end of Q3 that were capable of fulfilling a requirement over 100,000 sq ft.
Source: CBRE Source: CBRE
11
TAKE-UP
-71% (0.2m sq ft)
UNDER OFFERS
33% (0.3m sq ft)
AVAILABILITY
+3% (1.8m sq ft)
PRIME RENTS
£55.00
Q3 2013
MIDTOWN
OFFICES
25 15 5 -5 -15 -25 Annual % Change 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 FORECASTOUTLOOK
Midtown prime rents remained unchanged at £55.00 per sq ft over the quarter, retaining parity with the City.
Midtown prime rents are unlikely to increase further in 2013, having already risen by 4.8%. However, Midtown is forecast to show strong rental growth over the next few years, because of its attraction to West End occupiers looking east for lower rental levels, the market’s ability to provide suitable grade-A stock, and the impact of Crossrail.
Chart 22: Prime Midtown Rent
Take-up in Midtown has become more subdued following a very strong start to the year, with 0.2m sq ft let in Q3, marking a 71% decline from the previous quarter. This caused take-up to fall below the 10-year average of 0.3m sq ft. The rolling annual total also fell to 1.9m sq ft, but compared with 1.3m sq ft a year ago.
In the first half of the year, take-up was driven by a handful of large deals. In Q3, the largest deal was a 27,000 sq ft letting to investment manager Quilter Cheviot at 1 Kingsway. The second largest deal of the quarter was at 22 Tudor Street, where BAT Industries acquired 16,700 sq ft. As a result, take-up in Q3 was dominated by occupiers from banking and finance, and consumer services and leisure, accounting for 27% and 21% of the total respectively. In addition, manufacturing, industrial and energy accounted for 19% of take-up and TMT 15% of the total.
Under offers continued to rise in Q3, increasing by 33% over the quarter to reach 0.3m sq ft, which is level with the 10-year average. The increase caused under offers to rise to its highest point since Q3
Secondhand Pre-let Million sq ft Million sq ft 2.0 2.5 0.5 1.0 1.5 0.0 0.7 0.6 0.8 0.9 1.0 0.2 0.3 0.4 0.5 0.0 0.1 New Completed Rolling Annual Take-up (RHS)
Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 0.0 0.5 1.0 1.5 2.0 2.5 Million sq ft Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 20 12 Q3 20 12 Q1 20 13 Q3 2013
Secondhand New Completed New Under Construction 10-Year Average
Chart 20: Midtown Take-up Chart 21: Midtown Availability
2007 (0.4m sq ft) and suggests an improvement in take-up in the coming quarters.
Availability rose for the second consecutive quarter, rising by 3% in Q3 to reach 1.8m sq ft, which reflected an availability rate of 7.8%. As a result, availability rose further above the 10-year average of 1.5m sq ft and marked its highest level since Q3 2005 (1.8m sq ft). The uplift in availability was driven by an increase in secondhand and early marketed space, which increased by 7% and 3% to 0.7m sq ft and 0.9m sq ft respectively. The increase was partly offset by a 15% reduction in new completed stock, which fell to 0.1m sq ft.
Development completions are projected to total 0.4m sq ft in 2013, which is on trend, with 0.3m sq ft having completed in 2013 to date. The peak in the development cycle is expected to be reached in 2014 with the delivery of 1.3m sq ft. A further 1.1m sq ft is projected per year in 2015 and 2016, although that may change subject to the strength of the occupier market. Of the 4.0m sq ft scheduled for delivery from 2013 to 2016, 62% is speculative.
Source: CBRE Source: CBRE
CENTRAL LONDON
OFFICE DEVELOPMENT
DEVELOPMENT COMPLETIONS
130% (1.9m sq ft)
CONSTRUCTION STARTS
-85% (0.3m sq ft)
Q3 2013
Completions more than double in Q3
Completion levels more than doubled in Q3 to reach 1.9m sq ft, with 1.4m sq ft concentrated in Southbank (0.8m sq ft) and the West End (0.6m sq ft), bringing completion levels for the year to date to 3.1m sq ft.
The largest scheme to complete over the quarter was The Place, 25 London Bridge Street, totalling 430,200 sq ft and fully let to News UK. The second largest scheme to complete was British Land’s 10 Brock Street, totalling 320,400 sq ft, of which 295,300 sq ft is multilet to occupiers including Debenhams, Twitter, and Facebook. The largest speculative scheme to complete was Africa House, 64/78 Kingsway, at 118,300 sq ft.
Central London development nearing its peak
Development completions are expected to reach 4.0m sq ft in 2013, exceeding the low totals recorded in 2011 (1.7m sq ft) and 2012 (2.4m sq ft), but still below the 10-year average of 4.3m sq ft. Completions will peak at 6.7m sq ft in 2014, of which 4.6m sq ft is speculative. The total in 2014 is boosted by the completion of a number of City towers such as 20 Fenchurch Street (668,900 sq ft, of which 292,500 sq ft remain available) and 122 Leadenhall Street (574,900 sq ft, with 216,600 sq ft remaining). There is currently a further 4.5m sq ft and 6.1m sq ft scheduled to complete in 2015 and 2016 respectively. These totals may change to reflect market conditions.t
“DEVELOPMENT COMPLETIONS WILL PEAK AT 6.7M SQ FT IN 2014 FOLLOWING THE
COMPLETION OF A NUMBER OF CITY TOWERS. MEANWHILE, STRONG DOMESTIC DEMAND
HELPED BOOST LAND SALES FOLLOWING A SLOW START TO THE YEAR.”
Construction starts fall
Construction starts fell by 85% to 0.3m sq ft in Q3, marking their lowest point in 2013. The largest scheme to go under construction was Alphabeta (formerly Triton Court), Finsbury Square, totalling 215,100 sq ft, all of which is speculative.
Domestic demand drives increase in land sales
Land sales continued to recover following a slow start to the year, rising by 15% in Q3 to reach £617m. This brought the total for the year to date to £1.4bn, 50% below the corresponding total in 2012. As in the previous quarter, domestic purchasers were the most prominent, accounting for 59% of the total.
The value differential between residential and commercial real estate has continued to drive demand for residential land sales, with 59% of land sales in 2013 to date for residential use. In Q3, the residential component accounted for 41% of the total compared with 78% in the previous quarter.
Chart 23: Central London Developments
Completed City West End Other Central London 10-Year Average
Million sq ft 10 12 14 16 0 2 4 6 8 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CBRE
VOLUME OF LAND SALES
13
Central London remains a key target for
overseas capital, and we expect this trend to
continue, with growing demand from Asian
institutional investors. However, we have also
witnessed significantly increased demand from
domestic buyers, with UK property
companies becoming more active in Q3.
CENTRAL LONDON
OFFICE INVESTMENT
44 Dover Street
Michael Edwards
Executive Director Office Capital Markets
SOURCES OF DEMAND
In contrast with previous quarters, domestic investors accounted for 54% of turnover in Q3, with UK property companies representing 37% of the Q3 total. This was supported by five deals over £100m and five over £50m. UK institutions accounted for 8% of Q3 turnover.
Overseas investors accounted for 45% of transaction volumes in Q3. Of these, Asian investors were the most prominent, accounting for 25% of the total, while Middle Eastern investors traded 10%. North American investors were more subdued in Q3, accounting for only 5% of the total.
Chart 24: Investment Transactions by Purchaser, Q3 2013
CENTRAL LONDON
OFFICE INVESTMENT
UK Institution UK Property Companies UK Other USA and Canada Middle East and North Africa Germany Europe Other Asia Other Overseas Unknown 1% 3% 9% 37% 8% 5% 2% 10% 25% Source: CBRE
Turnover at its highest level since Q3 2007
Central London investment transactions increased marginally over the quarter to reach £4.2bn, marking their highest level since Q3 2007 (£5.6bn). This brought the rolling annual total to £14.6bn compared with £12.3bn a year ago.
The West End saw the highest volume of transactions over the quarter, contributing £2.0bn compared with £1.8bn in the City, £0.2bn in Docklands, £0.2bn in Southbank and only £20m in Midtown.
15 deals over £100m drive turnover
Underpinning the increase in transaction levels were 15 deals over £100m compared with 10 in the previous quarter and 7 in Q1. The largest deal of the quarter saw British Land buy the Paddington Central Estate, for £476m. The second largest deal of the quarter was by Samsung SRA Asset Management, following the purchase of 30 Gresham Street, for £310m (a 5.15% yield).
Recovery in leasing market attracts domestic investors
Q3 saw a significant increase in activity from domestic investors, particularly from UK property companies. Drivers for this have been an increase in capital flows and also the desire to take advantage of the growing signs of recovery in both the economy and the leasing market. This has broadened investors’ investment criteria from core to core plus, resulting in increased competition for development and refurbishment opportunities, with multiple bidding on some assets.
“TRANSACTION LEVELS REMAINED HIGH IN Q3, DRIVEN BY INCREASED ACTIVITY FROM DOMESTIC
INVESTORS. THE WEIGHT OF OVERSEAS MONEY AND RENEWED CONFIDENCE IN THE OCCUPIER
MARKET WILL PUT FURTHER PRESSURE ON PRICING IN Q4, PARTICULARLY FOR PRIME ASSETS.”
Asian demand expected to increase
In addition to the increase in domestic investor activity, Central London remains a key market for overseas investors, accounting for 66% (£17.0bn) of transaction volumes since the start of 2012 (£25.8bn). About 20% of the total for the whole period originated from Asia, with the strongest demand from Malaysian (£1.7bn), Chinese (£1.0bn) and South Korean (£0.9bn) investors.
We expect Asian demand to broaden over the next 12 months, with certain legislative changes in such countries as Taiwan and China that will permit those countries’ pension funds to invest in non-domestic real estate for the first time. We also anticipate greater demand from those Asian pension and sovereign wealth funds with little or no exposure to international real estate, as illiquid home markets cause investors to consider alternatives. Central London’s reputation as a transparent and highly liquid market is likely to continue to make it a priority destination for future overseas demand.
Pressure on pricing
The high level of investment, coupled with the recovery in the leasing market, has maintained positive pressure on pricing across Central London, with City prime yields moving to 4.75% in Q1 2013. The weight of money that is chasing limited investment stock could translate into further yield compression in the final quarter in some markets.
INVESTMENT VOLUMES
1% (£4.2bn)
Q3 2013
FOREIGN BUYERS
45% of transaction volumes
CL PRIME YIELDS
15
INVESTMENT VOLUMES
43% (£1.8bn)
PRIME YIELDS
4.75%
FOREIGN BUYERS
58%
AVAILABLE STOCK
£1.0bn
Total 4-Quarter Average
1.5 2.0 2.5 £ billion 0.0 0.5 1.0 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
City 5-Year Swap Rate
% 5 4 6 7 8 0 1 2 3 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
Chart 25: City Office Investment Transactions Chart 26: City Prime Yield vs Swap Rate
Investment volumes in the City increased by 43% over the quarter to reach £1.8bn, marking their highest level in a year. This brought transaction levels for the year to date to £3.6bn, which compares with £5.4bn at the same point last year.
The total in Q3 was supported by six deals over £100m compared with four in the previous quarter. The largest deal of the quarter saw Samsung SRA Asset Management, a new entrant in Q2, purchase 30 Gresham Street from GIC for £310m on a 5.15% yield. The second largest deal of the quarter involved the sale of the Lloyds Building, 1 Lime Street, to Chinese investor Ping An, for £260m (a 6.1% yield).
As in the previous quarter, overseas investors accounted for the majority of turnover in Q3, at 58% compared with 65% in Q2. Asian investors once again accounted for the highest proportion, reflecting 36% of the Q3 total. This was supported by the big-ticket purchases by Samsung SRA Asset Management and Ping An, mentioned above. UK property companies were responsible for 24% of investment volumes in Q3, supported by Area Property Partners’ £115m purchase of 10 Fleet Place at a 6.17% yield.
Stock levels remain tight, which could potentially limit the options available to overseas investors, who have tended to target core assets in prime locations with long income streams. However, some investors have overcome that obstacle by turning to off-market deals, whereas others, such as UK property companies, have sought to take advantage of the improvement in the leasing market by investing in development opportunities in the hope of capitalising on potential rental growth.
Source: CBRE Sources: CBRE, Macrobond
CITY
OFFICE INVESTMENT
Q3 2013
Source: CBRE
Address Purchaser Capital Value (£m) Yield (%)
30 Gresham Street Samsung SRA Asset Management 310.0 5.15 Lloyds Building,
1 Lime Street Ping An 260.0 6.10
70 Gracechurch Street Legal & General Group 202.0 5.26
10 Fleet Place Area Property Partners 115.0 6.17
1 Fleet Place Private investor 112.5 5.10
Table 3: Key City Transactions, Q3 2013
EFFECTIVE X-RATE
4%
Prime City yields were unchanged at 4.75% in Q3 having moved in from 5.00% in Q1, but remain under pressure. The weight of the international capital that is chasing a limited supply of prime buildings with long-term income means that pricing is expected to remain robust. Pricing on secondary or subprime assets with short-term income is likely to improve, as purchaser demand increasingly turns toward less prime assets as the recovery in the occupier market gathers momentum.
INVESTMENT VOLUMES
61% (£2.0bn)
AVAILABLE STOCK
£0.6bn
Total 4-Quarter Average
£ billion 2.5 2.0 1.5 1.0 0.5 0.0 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
West End 5-Year Swap Rate
% 0 1 2 3 4 5 6 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013
Chart 27: West End Office aInvestment Transactions Chart 28: West End Prime Yield vs Swap Rate
Investment volumes in the West End increased by 61% over the quarter to reach £2.0bn, achieving one of the highest levels on record. This brought turnover for the year to date to £4.7bn compared with £3.3bn a year ago.
Turnover in Q3 was driven by seven deals over £100m totalling £1.2bn, compared with four in the previous quarter. The largest deal of the quarter saw the sale of the Paddington Central Estate to British Land for £476m, also marking the largest investment deal in Central London in Q3. The second largest deal saw the Canada Pension Plan Investment Board purchase the CPPIB portfolio, consisting of eight properties, from the BT Pension Fund Trustees for £174m.
In contrast with previous quarters, domestic purchasers accounted for 64% of the West End total, of which the largest proportion was accounted for by UK property companies, reflecting 49% of the total. This was supported by, not only, the British Land acquisition, but also transactions by Almacantar and Alchemy Properties at 125
Shaftesbury Avenue (£122m on a £5.42% yield) and Great Minster House, North Horseferry Road (£100m on a yield of 5.75%). Asian investors accounted for 21%, boosted by a £133m purchase by Hong Kong hotel group, Peninsula Hotels at 1/3 Grosvenor Place.
West End stock continued to decline over the quarter, falling from £982m in Q2 to £615m in Q3, and placing further constraints on the options open to investors. In the previous quarter, we commented on the possibility of vendors being enticed to bring product to the market due to current pricing and high levels of demand. In Q3, there was some evidence that this has taken place, which should replenish supply levels and help support turnover in the final quarter.
There remains strong demand for properties with residential conversion opportunities due to the value differential between residential and commercial. We expect this trend to intensify in the short-term while planning authorities’ debate future planning restrictions on residential conversion.
Prime yields remained unchanged at 4.00%, a position held for over two and a half years. The weight of the money that is chasing a limited supply of available stock could lead to some yield
compression in Q4, but it would more likely be property specific and not across the board.
Source: CBRE Sources: CBRE, Macrobond
WEST END
OFFICE INVESTMENT
Q3 2013
FOREIGN BUYERS
35% of transaction volumes
Address Purchaser Capital Value (£m) Yield (%)
Paddington Central Estate British Land 476.0 Portfolio
CPPIB Canada Pension Plan Investment Board 173.9 Portfolio
1/3 Grosvenor Place Peninsula Hotels 132.5
-125 Shaftesbury Avenue Almacantar 112.0 5.42
Park Crescent West AMIRI Construction 105.0 Portfolio
Table 4: Key West End Transactions, Q3 2013
Source: CBRE
PRIME YIELDS
17
The number of London flagship stores
continues to grow, as strong international
demand spills over from prime Central London
streets. This in turn has raised the competition
for space in locations previously considered
secondary, resulting in significant
rental growth in these markets.
CENTRAL LONDON
RETAIL LEASING
Steven Stedman
Senior Director Retail
Economic recovery under way, but real wages lag behind
Since the start of the year, we have seen the UK take its first steps toward economic recovery. Over the summer, the recovery established a firmer foothold, with strengthening GDP growth (the IMF again upgraded its forecast for 2013 to 1.4%), rising employment, and ever-improving business confidence, and with the Purchasing
Managers’ Index for services at its highest level since December 2006. Despite that good news, it is important not to get too carried away. Disposable incomes continue to be squeezed due to weak wage growth, and inflation has caused the real value of workers’ incomes to fall. This has led some consumers to try to save money by trading down and bargain hunting.
Retail sales strengthen despite falling footfall
Central London retail sales continued to improve in Q3 from the previous year, with average annual growth of 5.6% per month. This growth resulted from good weather at the start of the quarter – helping boost July (6.0%) and August (7.4%) – in addition, sales were supported by rising consumer confidence and household expenditure. The good weather at the start of the quarter helped support annual footfall growth of 2.3% in July. In August and September, a combination of a reduction in tourists following the Olympics in the
CENTRAL LONDON
RETAIL LEASING
CL RETAIL SALES
3.5% y-o-y September
-4.6% y-o-y September
CL FOOTFALL
RENTAL OUTLOOK 2014
8.8%
Q3 2013*
“WITH THE ECONOMIC RECOVERY GATHERING PACE, CONSUMER CONFIDENCE HAS
BEGUN TO IMPROVE, ALTHOUGH SUCH ISSUES AS FALLING REAL INCOMES COULD
DERAIL THE RECOVERY. DESPITE THIS, DEMAND IN THE LEASING MARKET HAS
REMAINED STRONG, WITH FURTHER GROWTH FORECAST FOR 2014.”
previous year and poorer weather in September caused footfall to fall on an annual comparison.
Demand for limited prime pitches pushes up rents
The shortage of available space on the main streets is well documented. Demand for the best units remains high, with limited supply causing prime rents on Old and New Bond Street to each rise by 8% to £1,300 ZA.
Retailers have also been aggressively acquiring space outside the core West End. This was reflected in rental growth in such markets as Covent Garden (up 12% to £770 ZA) as well as Brompton Road, King’s Road, and Mount Street, which rose by 4% to £675 ZA, £415 ZA and £400 ZA respectively. Cheapside prime rents also increased in Q3, rising by 9% to £245 ZA.
Rental growth in Central London is forecast at 10% in 2013, with 2014 also forecast to see strong growth, supported by more robust economic growth and continued competition from retailers for limited units.
*30 Ft zones (New) Bond St* (Old) Bond St* Oxfor d St (West )* Sloane St Covent Ga rden Brompton Road Regent St* Oxford St ( East)* Piccadilly Cir cus Kings R oad Mount St Marylebone High St* Strand
Moorgate/Liverpool St Tottenham Cour t Road Victoria* Cheapside
Kensington High St*
High Holborn Fenchur ch St Paddington 1,400 1,200 1,000 800 600 400 200 0 £ per sq ft ZA
Chart 29: Central London Prime Rent, Q3 2013
Source: CBRE *CBRE, NWEC
19
In the Central London leasing market, Q3 witnessed an increase in activity as retailers rallied in preparation for the Christmas period. The quarter saw a number of key deals, flagship store openings and major fit-outs of newly acquired units.
Demand remains exceptionally strong on Oxford Street, which has witnessed a surge in activity from retailers looking to secure a presence on the street and interest from established retailers looking to relocate or expand.
The increase in demand comes at a time when the existing public realm and shopping environment are being addressed by the New West End Company, which launched a rebrand of Oxford Street in August. This was achieved alongside a revolutionary partnership with the British Fashion Council to promote the street as London’s top fashion destination during London Fashion Week Autumn / Winter 2013.
This followed an earlier announcement in Q1 of a 10-year commitment to regenerate the public realm and overall shopping environment surrounding the key West End shopping districts, namely Bond Street, Oxford Street, and Regent Street.
New Bond Street has witnessed continued strong demand from brands looking to upsize, with Victoria’s Secret the latest retailer believed to be upsizing its existing unit by taking the former Bally store at 117 New Bond Street adjacent to its flagship store at 111. Such is the strength of demand that high premiums are still being offered to secure the best units. One such example saw the Kering Group acquire the former Marina Rinaldi store at 39 New Bond Street at an estimated premium of £6m.
However, the key story of the quarter was the establishment of a new prime rent of £1,300 ZA, achieved with the letting of 13/15 New
National Sales West End Sales
Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sept-13
16% 14% 12% 10% 8% 6% 4% 2% 0 -2% -4% Annual Change
National Footfall West End Footfall 8% 6% 4% 2% 0 -2% -4% -6% -8% -10% Annual Change
Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May
-13
Jun-13 Jul-13 Aug-13 Sep-13
Chart 30: Retail Sales Chart 31: Footfall
Sources: HSI, AS, NWEC Sources: BRC, NWEC
Bond Street to Chopard, which marked the highest rent achieved in Central London to date.
Regent Street remains a key market for international retailers looking to establish a UK presence prior to expanding into Europe. There were fewer notable transactions over the quarter but there were a number of store opening announcements. For example, J.Crew has confirmed its European flagship store at 165 Regent Street will open on 7
November, in preparation for the Christmas period. Adjacent to J. Crew, Watches of Switzerland plans to open the largest watch store in the UK in spring 2014. In addition, Longchamp has opened a new UK flagship store in the former Quiksilver unit at 229 Regent Street. The Shaftesbury Estate, which comprises Carnaby Street and Seven Dials, has continued to rebrand and reposition its existing retail holdings by securing a number of niche retailers and restaurant operators.
Over the past 18 months, Carnaby Street has attracted independent boutiques and concept stores, including Lavand, which acquired the former Gola Store at 40 Carnaby Street for its first UK store on a new 10-year lease.
Other new retailers include Lyle & Scott at 1-2 Carnaby Street, which recently opened, whilst Gant Rugger and Eleven Paris established their first UK stores on Beak Street and Carnaby Street respectively. There were also a number of new restaurant openings, such as Grillshack, Rosa’s Thai and Flat Iron.
At Seven Dials in Covent Garden, there has been a strategic move to increase the menswear offering, with new stores opened by Farrell and Industrie. Q3 also saw the opening of a number of concept
Table 5: Key Leasing Transactions, Q3 2013
Address Landlord Retailer Rent Lease Term Zone A (£)
16 Conduit Street F&C REIT Asset Management Dior £308,500 pax New, 10-year lease £360 ZA + £700,000 premium 39 Old Bond Street Private Landlord Kering Group £1.5m New, 10-year lease £1,250 ZA + £5m premium 6/7 Mount Street The Grosvenor Estate Christopher Kane Confidential New Lease £400 ZA
40 Carnaby Street Shaftesbury Lavand £250,000 pax New, 10-year lease Confidential
90 Cannon Street Bank of China Sainsbury’s £275,000 pax New, 15-year lease Overall £61.30 Unit 68, Jubilee Place, Canary Wharf Canary Wharf Management Banana Republic Confidential New, 10-year lease Confidential
472 Oxford Street AXA CIS Schuh £1.15m Assignment N/Q
280 High Holborn Hines Pret A Manger £175,000 pax New, 15-year lease Confidential
Unit 1, 508/520 Oxford Street Great Portland Estates Boots Confidential 9-year lease Confidential 24 Great Marlborough Street Ramsbury Family Aquascutum Confidential Confidential Confidential 19/20 Long Acre, Covent Garden Capital & Counties Lululemon Confidential New, 10-year lease Confidential Covent Garden continues to attract international brands, particularly
from the health and beauty sector. Following the successful Chanel concept store opening in the Market Building, Dior are also rumoured to be opening stand-alone make up, perfume, and cosmetics-only stores. As a result, Capital & Counties is now focused on securing other luxury cosmetic brands for the Market Building.
Mayfair has seen a significant amount of activity over the quarter, with a flurry of new entrants seeking to establish their first UK stores. Such is the demand for space from international retailers that many are willing to pay significant premiums in order to obtain the best units on the most sought after streets.
For example, Mount Street has witnessed growing demand from a number of leading luxury brands, such as Linda Farrow, with demand pushing up prime rents from £350 ZA to £400 ZA over the quarter. The new rental tone was also confirmed by Christopher Kane, which acquired a new lease at 6/7 Mount Street from the Grosvenor Estate, paying a rent of £400 ZA.
A shortage of available stock has led to a spillover of demand onto other streets, such as Conduit Street, where Dior have taken a new 10-year lease on the former Layers Store, reflecting a new record ZA of £350. The rental tone has been strengthened further by the addition of a number of high-end niche brands, including the recently opened
Source: CBRE Jimmy Choo and Maison Martin Margiela stores. The Diesel Black Gold assignment of the former Filofax unit is rumoured to have been secured by a premium of £200,000.
The City has continued to attract retailers looking for large, well-configured units in high footfall locations. Following on from Metro Bank’s assignment of the former River Island store on Cheapside in Q2, Sainsbury’s have secured a convenience store on Cannon Street, paying a rent equivalent to £66 per sq ft overall. The latter marked a continuation of the demand from the A1 convenience food store operators and restaurateurs. Another recent example saw Wahaca open a restaurant / take-away concept at Land Securities’ One New Change.
21
The weight of overseas money targeting Central
London retail has continued to put pressure on
pricing, with further yield compression in Q3.
While investors have continued to seek pragmatic
solutions to limited stock by seeking
off-market deals.
Phil Cann Executive DirectorHead of UK Retail
126/127 New Bond Street
CENTRAL LONDON
RETAIL INVESTMENT
INVESTMENT VOLUMES
98% (£800m)
AVAILABLE STOCK
£384m
EFFECTIVE X-RATE
4%
Q3 2013*
900 800 700 600 500 400 300 200 100 0 £ million PropCos Funds & Institutions Asian Middle Eastern SWF EU Flight Money Retail Dynasties Estates Unknown Private US Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 4.5% 4.0% 3.5% 3.0% 2.5% 6.5% 6.0% 5.5% 5.0% Q3 200 7 Q1 200 8 Q3 200 8 Q1 200 9 Q3 200 9 Q1 201 0 Q3 201 0 Q1 201 1 Q3 201 1 Q1 201 2 Q3 201 2 Q1 201 3 Q3 201 3New Bond Street Regent Street Oxford Street West Oxford Street East Old Bond Street
Chart 32: Central London Retail Investment Transactions by Purchaser Type Chart 33: Central London Prime Shop Yields
Investment volumes doubled to more than £800m in Q3 as a result of several large transactions in the West End that were driven by strong demand from European and Asian investors and that accounted for 29% and 20% of the total, respectively.
We have seen downward pressure on Central London yields in the prime London submarkets, with both New and Old Bond Street yields improving from 3.00% to 2.75%. The strength of demand for these prime assets was perhaps most noticeable in the sale of 9 Old Bond Street at a yield of 1.42% last quarter.
This was reinforced by the sale of Canali at 126-127 New Bond Street for £44.1m, reflecting 2.22% NIY. The off-market sale received eight bids, three of which came from private Hong Kong cash buyers, including the purchaser, who is a new entrant to the UK market. The trend for off-market sales continued in Q3, with one in two transactions carried out through one-on-one discussion or amongst a select group of buyers. Remarkably, four of the five largest deals in Q3
(each worth £75m or more) were carried out off-market. They included two sales on Oxford Street, where Land Securities sold Oxford House to Great Portland Estates for c. £87m, reflecting an NIY of 3.50% and Amsprop sold 291B Oxford Street to an established Hong Kong buyer for £76m, 2.75% NIY. Whiteley’s shopping centre was also sold off-market for c. £115m to Meyer Bergman, backed by Blackstone. Properties to watch in Q4 include the London assets in Telereal Trillium’s Hyperion Portfolio and the Royal Exchange in the City. The Hyperion Portfolio is a rare opportunity to acquire six long-let RPI linked flagship assets in core London locations.
At 4.90% NIY, Royal Exchange offers an alternative to Bond Street. The luxury destination is expected to attract significant interest from a diverse pool of international capital on the back of similar asset-management-intensive opportunities this year such as Old Spitalfields Market and Whiteleys.
Source: CBRE Source: CBRE
Address Key Tenants Capital Value (£m) Yield (%)
99 Kensington High Street Marks & Spencer, Gap, H&M, Virgin and The White Company 225.0 4.57
Whiteleys Gap, H&M, Marks & Spencer, Pizza Express and Odeon c. 115.0
-309 Oxford Street Aldo 105.0 2.50
Oxford House, 76 Oxford Street Curry's c. 87.0 3.50
291B Oxford Street McDonald’s, Everything Everywhere 76.0 2.75
126/127 New Bond Street Canali 44.1 2.22
28/29 Dover Street Philip Mould 32.0 3.75
Table 6: Key Investment Transactions, Q3 2013
*CBRE, Macrobond Source: CBRE
CL PRIME YIELD
3.00%
23
The impact of new government initiatives, coupled
with brighter economic prospects, has improved
underlying consumer confidence and given the
residential market a boost over the past quarter.
This is evident in both a pick-up in sales
activity and the continued rise in values.
Mark CollinsChairmanResidential
CENTRAL LONDON
RESIDENTIAL
Market receives a further boost in confidence
The government’s Help to Buy and Funding for Lending schemes are starting to have an impact on the wider housing market because they help to improve both confidence and buying capabilities. This, combined with the general economic recovery, has led to an 11% increase in housing market sales activity over the past quarter across England and Wales. In London, where activity has been more buoyant, the increase was less marked, at 7% in the prime markets and 4% across the wider market.
Average values continue to strengthen
Average house prices in the prime boroughs have reached nearly £1.5m. This follows a quarterly increase of 2% and an annual increase of 6%. In addition, average growth has picked-up across London as a whole, with a 5% increase over the past quarter.
New-build values and take-up still positive
The underlying capital growth, in addition to the unrelenting demand for high-quality new-build products, has continued to boost new-build values. The average price for a new two-bedroom flat in London is now £670 per sq ft, following a 3% increase over the quarter.
Greater London absorption rates are at a record high despite a
CENTRAL LONDON
RESIDENTIAL
Q3 2013*
“CONFIDENCE IN THE CENTRAL LONDON RESIDENTIAL MARKET CONTINUES TO STRENGTHEN, WITH BOTH
DEVELOPMENT AND SALES ACTIVITY INCREASING. THIS IS FEEDING THROUGH TO PRICES, WHICH ALSO
CONTINUE TO RISE.”
notable increase in supply this year, with 60% of units currently under construction sold off-plan. This is up from 56% over last quarter and 50% during 2012.
UK buyers account for over half of all sales
Domestic purchasers have been prominent in both the new and secondhand markets, accounting for over half of all sales. Demand from UK buyers has been strongest in the City and Southbank. Meanwhile, sales exhibitions are still proving successful in Asia, and there has also been a notable influx of capital from the Middle East.
Rents have returned to positive growth
Average rents increased by 1.6% over the past quarter, in both Prime Central London and the wider market. The most significant uplift has occurred in the City, where rents increased by 10% over the quarter, following a fairly subdued year in 2012.
Development activity continues to rise
The pick-up in development activity has continued this quarter, with 828 new units going under construction and creating a construction pipeline of around 6,580 units in Central London. The largest concentration is located in the City and the Docklands.
PRIME SALES VOLUMES
7%
PRIME RENTS
1.6%
STARTS
828 units
PRICES
1.7%
Chart 34: Central London House Prices
0ct-97 May-98 Dec-98 Jul-99 Feb-00 Sep-00 Apr-01 Nov-01 Jun-02 Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-08 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13
Annual Price Change (%)
Average Value
Annual Price Changes (RHS)
Average Values (LHS) 35 30 25 20 15 10 5 0 -5 -10 -15 -20 £1,200,000 £1,000,000 £800,000 £600,000 £400,000 £200,000 £0
25 180 170 160 150 140 130 120 110 100 90
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Apr-13 Jul-13
Average Value (Index = Jan 2007)
London England and Wales Prime Central London
£1,000 and more £800 - £999 £700 - £799 £600 - £699 £500 - £599 £400 - £499 £300 - £399 Under £300 £ per Sq Ft
2012 2013, Year to date, annualised 2011
1,000 2,000 3,000 4,000 5,000 6,000
Number of Sales
Prime Central London sales levels picked up considerably over the quarter, increasing by 7% compared with 4% in the wider market. That growth reflects improving purchaser confidence, supported by the recovery in the UK economy. In addition to government schemes such as Funding for Lending, which has effectively reduced mortgage rates, and the Help to Buy initiative, which negates the need for a large deposit when buying a new-build property.
Average house prices in Prime Central London have continued to strengthen, now standing at £1.5m in the boroughs of Kensington and Chelsea, and the City of Westminster. Average flat prices are £1.1m. This reflects an increase of 2% over the quarter, or 6% from a year ago. This quarter also saw the gap between Prime Central London and wider market close slightly, with average Greater London price growth outperforming the prime boroughs, recording a 4.5% rise, which translates to an annual increase of 7%.
Ongoing underlying capital appreciation has continued to push up new-build values. This has been compounded by a more notable emphasis on developing higher-end products in emerging prime areas, such as the City and Southbank. The average asking price for a two-bedroom flat in London is now £670 per sq ft compared with £650 per sq ft last quarter and £620 per sq ft at the end of 2012. Looking back over a longer period, the average new-build value for London has increased by 34% over the past three and a half years. Price increases differ from scheme-to-scheme, with 261 new-build units recording an increase in Q3, and only 61 units experienced a price reduction. Popular schemes, such as Fitzrovia Apartments and Fitzroy Place, reflected increases in value of 10% and 3%,
respectively. In addition, units at Canary Quarter and Providence Wharf also increased in value, rising by up to 11% and 5%, respectively.
The biggest story in the new-build market remains the strong demand for units over the £1,000 per sq ft price bracket, with the volume of transactions doubling over the quarter. The other major surge in activity has been in the £400 to £499 per sq ft bracket.
Sales rates of new-build schemes remain at a record high, with 60% of units currently under construction sold off-plan. This compares with an average of 56% over the quarter and 50% during 2012. Take-up rates are highest in areas where development is constrained. For example, absorption rates are at 67% in Kensington and Chelsea, and 68% in Hammersmith and Fulham. The City has also benefitted from considerable interest against the backdrop of little development. Absorption rates of off-plan units are now at 84%. For example, Roman House is 95% sold out after less than a year of sales.
Off-plan sales also remain high in areas undergoing significant development. For example, Tower Hamlets currently accounts for 12% of all construction starts across London, yet 73% of units have been sold to date.
Demand in Southbank also remains high despite the large-scale development within the market. South Bank Tower, which was released in Asia in Q2, has already sold over a third of its units. One Blackfriars has also sold well, following on from the successes of Riverlight and Embassy Gardens, located in Nine Elms.
London’s credentials as a safe haven for investment remain its greatest asset, and as a result, there is still substantial demand from overseas buyers. Large schemes are still experiencing great success at initial launches along the traditional Asian exhibition path, such as in Hong Kong, Kuala Lumpur, Singapore, and now Bangkok. Buyers from the Middle East were more active in Q3.
Chart 35: Prime Central London Price Index Chart 36: New-Build Price Distribution
Source: CBRE Source: HM Land Registry
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