London Offices Snapshot July 2017
BARNET HARINGEY WALTHAM FORREST 8.0 7.0 City West End Source: Colliers International YEAR ON YEAR INDICATORS LONDON Grade A Absorption DEALS MAP 6.0 5.0 Availability Take-up Rents BRENT CAMDEN ISLINGTON sq ft (million) 4.0 3.0 2.0 CITY Grade A Absorption Availability Take up Rents 1.0 WEST END WESTMINSTER HACKNEY NEWHAM 0 Q2 2001 Q2 2002 Q2 2003 Q2 2004 Q2 2005 Q2 2006 Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Grade A Absorption Availability Take up CITY TOWER HAMLETS Figure 1: City and West End Offices Availability New & Refurbished space Rents KENSINGTON WANDSWORTH LAMBETH SOUTHWARK LEWISHAM GREENWICH MARKET HIGHLIGHTS > > heralded the fourth consecutive rise in London quarterly offices take-up, reaching 2.9 million sq ft. This was the highest quarterly total since Q1 2016 and was perfectly in line with the ten-year average. Pre-letting activity reached an 18 month high, boosted, almost single-handedly, by WeWork, who took a combined 426,000 sq ft at 2 Southbank Place, SE1 and 125 Shaftesbury Avenue, WC2. > > It remains somewhat contradictory, that despite steady uplift in overall transaction levels, vacancy across all the majority of key submarkets continued to rise in. London offices vacancy has ticked up above 5% for the first time in three years, now at 5.2%. This compares to just 3.1% for the same period in 2016. > > A two tier market is firmly in place now, with built new/refurbished accommodation in the City market reaching an exceptionally low level (see Figure 1). Second-hand availability, London-wide, now stands at its highest level for over six years. While new supply continues to be below trend, the release of surplus secondary space, in conjunction with marketed tenant space, is driving up vacancy. > > As a result of this imbalance, headline rents have remained broadly flat quarter-on-quarter, with Paddington actually seeing modest upward pressure following the completion of British Land s 4 Kingdom Street development, where demand for space has been extremely healthy. While prime rents remain relatively unchanged, Colliers predicts average rents declining across London by 2.2% during 2017. The West End should see slightly less downward pressure at -1.5% with the City at -3.5%. > > London investment volumes in Q2 totalled approximately 3.2bn, a fall of approximately 15% on the same period last year. The recent political uncertainty may have contributed to the subdued activity. Half year volumes have come in at close to 7.5bn compared to 8bn in H1 2016. SIZE (SQ FT) 0-2,499 UK Research 2,500 & Forecast - 4,999 Report 5,000-9,999 10,000-24,999 25,000-49,999 50,000-99,999 100,000 plus LONDON 3
Fig 2: City Take-up by Grade Q2 2014-2.60 2.08 Pre-let Grade A Grade B Grade C Source: Colliers International 1.56 sq ft (millions) 1.04 0.52 0.00 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Figure 3: City Vacancy Rates Q2 2016 Source: Colliers International 8.0% 7.0% 6.0% CITY OFFICE Agency > > While the City office market saw transaction levels fall quarter-on-quarter and fail to match the ten-year average, the total of 1.2 million sq ft still represented the second highest quarterly figure for over 12 months (see Figure 2). Take-up of new/refurbished space reached an 18-month high which, in turn, contributed to a sharp fall in availability of built new Grade A units. Below trend pre-letting activity appeared to be a major contributor to the fall in quarterly transaction levels. > > As in London as a whole, the City is seeing a sharp divide between availability of and the demand for, new and second-hand accommodation. Absorption of Grade A product was positive in H1 2017 but for Grade B and C stock, occupation fell by over 600,000 sq ft. This is in spite of continued strong absorption in Shoreditch and Aldgate. Equally, as Grade A take-up remained robust, a considerable amount of secondary space continues to be released onto the market due to mergers, acquisitions and relocations. City vacancy now stands at 5.2% compared to 3% in July 2016, with Southbank apart, availability increasing in all submarkets (see Figure 3). > > Media and tech continues to drive demand, with Framestore the latest West End occupier to make the march eastwards, taking 98,000 sq ft in Holborn. Financial services take-up should improve in the second half of 2017, with Deutsche Bank set to commit to a new 500,000 sq ft HQ. Investment > > City investment volumes stood below trend at 1.5bn in Q1 2017. This was some 30% down quarter-on-quarter and 10% down on the ten-year average. However, Q3 looks set to see renewed appetite for product with the anticipated sale of 20 Fenchurch Street and strong interest in a number of other lots being brought to market. > > Overseas money continues to dominate a tight market, accounting for 85% of purchases within the City. AsiaPac and Germany were the key contributors with major purchases at Cannon Place (DEKA - 485m-4.40%), 20 Gresham Street (China Resources Land - 300m - 4.00%) and 33 Old Broad Street (SEA Holdings - 258m - 3.80%). > > It is worth noting that three of the top five deals this year have been from German funds, increasing evidence that the flood of AsiaPac money may be slowing, as expectation of enhanced price advantage, caused by further weakening of sterling, has not materialised as had previously been anticipated. Figure 4: City Take-up by Business Sector 2017 to date > > Headline rents remain stable for the present, aided by exceptional supply shortages for 15% Education prime product. City occupiers seeking in Insurance excess of 50,000 sq ft in new builds are being forced to widen searches in order to satisfy requirements. LONDON 5 Vacancy Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 9% Southbank 10% 5% City Core Aldgate 2% 1% Shoreditch Canary 16% 3 Holborn Clerkenwell Farringdon Docklands Source: Colliers International Media & Tech Legal Financial Retail & Leisure Business Services Serviced Offices Healthcare Other
Figure 5: West End Take-up by Grade Q2 2014-1.8 1.6 1.4 Pre-let Grade A Grade B Grade C Source: Colliers International 1.2 1.0 sq ft (million) 0.8 0.6 0.4 0.2 0.0 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Figure 6: West End Vacancy Rates 12% 10% Q2 2016 Source: Colliers International WEST END OFFICE Agency > > While West End take-up came close to matching the improved figures recorded in Q1, it is worth noting that the serviced offices sector accounted for 20% of demand by market share (see Figure 7). Serviced offices providers have taken over 1.7 million sq ft across London over the past 18 months, with expectation of a number of further major acquisitions in second half of 2017. West End take-up exceeded the ten-year average for the second successive quarter. > > The West End shows greater supply/demand stability than the City market with overall absorption only falling by 43,000 sq ft, in sharp contrast to H1 2016, when occupation fell by over 560,000 sq ft. Nevertheless, vacancy, driven by second-hand product, has experienced a steady rise over the past 12 months. While Paddington appears to be oversupplied, we are aware of close to 150,000 sq ft at 4 Kingdom Street and The Point, which is currently under offer and expected to sign in Q3. > > Another trend becoming apparent is the decline in demand for sub 5,000 sq ft units. West End availability of units below 5,000 sq ft rose by 17% quarter-on-quarter to reach 680,000 sq ft or 15% of total availability. The prevalence of serviced office space means that latent availability is increasing. The space is remarketed to occupiers who might otherwise be looking at conventional office space, impacting wider vacancy accordingly, particularly in the sub 5,000 sq ft size band. > > While 1.4 million sq ft has completed in the West End in 2017 to date, 80% of that was either pre-let, has since secured tenants or is now under offer. The second six months of 2017 will see just 400,000 sq ft of speculative space delivered to the market. > > Grade A supply shortages are likely to become more acute as 2017 progresses which will benefit headline rents. Paddington has seen rents climb to a record high of 72.50 due to the successful letting strategy employed at 4 Kingdom Street. Secondary rents are becoming more fluid though, as the proportion of secondhand supply accelerates. Investment > > Investment activity in the West End in Q2 has been dictated by modest levels of new supply, with volumes falling back once more in the face of limited product. While larger lot sizes brought to market have generated strong interest and performed well, the quantum has not been sufficient to drive up volumes toward the longer term trend. Despite a very strong start to 2017, the half year total of 3.2bn was 12% down on the 2016 equivalent. > > The two largest deals were both to AsiaPac investors. Chinese Estates Group, paid 175m for 11-12 St James s Square and Joint Treasure International purchased 3 St James s Square for 135m. > > Not being forced sellers, UK institutions were almost completely absent from the market and regardless of current keen pricing, are acutely aware of the limited opportunities for redeployment of capital. With yields remaining firm, and occupational sentiment neutral, we do not expect to see their re-entry into the market in the short term. Figure 7: West End Take-up by Business Sector 2017 to date Vacancy Rate 8% 6% 2% 0% Knightsbridge Euston / KX Marylebone 1% 1% 3% 2%2% 9% 11% 20% Soho Mayfair Fitzrovia 26% 21% Victoria Bloomsbury Covent Garden Paddington St James's Source: Colliers International Media and Tech Business Services Serviced Offices Financial Retail & Leisure Energy & Utilities Other Legal Healthcare Public Sector Manufacturing LONDON 7
Figure 8: London Market Summary TAKE-UP (000S) SQ FT AVAILABILITY (000S) SQ FT ALL GRADES **NSA (000S) SQ FT VACANCY RATE PRIME RENTS PSF PRIME YIELDS % Q1 2017 Q1 2017 H1 2017 OUTLOOK > > Transaction levels are set to remain consistent, albeit below average. > > Secondary vacancy will continue to climb putting additional pressure on average rental levels. > > Grade A supply is exceptionally constrained, with landlord space set to reach record lows in core West End and City locations by the end of 2017. > > Market disruptors, such as serviced offices providers, will continue to raise challenges for conventional landlords across all geographies. > > Negative average rental growth is set to become the norm over the next 12 months, although headline rents for best in class product will remain stable, even experiencing very modest uplift in specific supply-starved locations. > > Availability of investment stock appears to be slowly improving in the City but West End locations will remain critically undersupplied, with potential sellers unwilling to liquidate capital in such a tight market. WEST END (WHOLE) New / Refurb 492 476 1,100 961 Secondhand 616 622 3,001 3,553 TOTAL* 1,108 1,098 4,101 4,514-43 5. Bloomsbury 26 31 157 163 20 7.0% 68.50 4.50 Covent Garden / Strand 275 337 644 660-179 7.1% 84.00 4.25 Euston / King's Cross 97 74 278 257 122 2.9% 77.50 4.50 Fitzrovia 242 94 397 430 91 5.2% 86.00 4.50 Knightsbridge 5 25 50 97-40 2.5% 95.00 4.00 Marylebone 28 34 242 269 3 4.2% 95.00 4.00 Mayfair 127 127 547 692-156 5.8% 118.00 3.50 Paddington 13 68 231 450 9 11.9% 72.50 4.50 Soho 53 59 226 255-8 4.6% 92.50 4.25 St James's 68 83 426 431 92 8.6% 118.00 3.50 Victoria 165 82 797 671 81 4.9% 75.00 4.25 CITY (WHOLE) New / Refurb 423 499 1,004 815 Secondhand 987 730 3,603 4,400 TOTAL* 1,410 1,229 4,607 5,215-439 5.2% City Core 682 506 2,696 2,956 39 4.5% 70.00 4.00 Holborn 81 262 501 593-85 7.6% 70.00 4.00 Farringdon 145 76 338 357-132 7.6% 69.00 4.75 Clerkenwell 164 15 196 222-8 7.5% 67.50 4.75 Shoreditch 167 201 306 284 256 4.2% 65.00 4.75 Aldgate 25 73 162 215 146 5.6% 60.00 4.75 DOCKLANDS New / Refurb - - - - Secondhand 9 31 306 308 TOTAL 9 31 306 308-112 7.9% 30.00 5.50 CANARY WHARF New / Refurb - - 159 146 Secondhand 12 14 655 765 TOTAL 12 14 814 911-209 5.9% 45.00 4.75 SOUTHBANK Source: Colliers International *Includes additonal locations **Net Stock Absorption New / Refurb 18 285 177 190 Secondhand 134 215 450 419 TOTAL 152 500 627 609 35 3.1% 67.50 4.75 LONDON 9
GRADE A TAKE-UP BY SECTOR (sq ft) GRADE A TAKE-UP AVG DEAL SIZE (sq ft) 52,142 50,011 21,233 11,384 25,000 76,408 Media & Tech Serviced Offices 20,000 181,117 611,711 Business Services 288,312 Financial Legal 15,000 Retail & Leisure sq ft 341,660 560,063 Healthcare Public Sector Energy & Utilisies 10,000 401,440 Insurance Manufacturing 5,000 0 Q2/2015 Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 LONDON OFFICES 2017 SUBMARKET DEMAND PERFORMANCE Projected Annual Take-up levels vs 10 year average based on current demand 150 100 > > An analysis of demand across the key London submarkets in 2017 to date, allows us to assess the current market health in relation to transactional activity. Projecting annual take-up based on H1 2017 figures, we can see which submarkets are ahead of the 10 year average and which locations are lagging the longer term trend. % above / below long term average take-up 50 0-50 > > The majority of submarkets saw their demand profile improve in with Holborn, Southbank, Eastern City and Paddington experiencing the sharpest positive corrections. > > Regardless, over half of the centres may struggle to hit the 10 year average for take-up, unless demand in the second half of 2017 improves. Canary Wharf, in particular, has seen the weakest demand with extremely modest levels of take-up in 2017 to date. In contrast, with the exception of Farringdon, Canary Wharf vacancy has risen at the fastest rate of any submarket in the year to date. -100 City Fringe Holborn Covent Garden Fitzrovia Southbank St James's Victoria Eastern City West End (Whole) City (Whole) Bloomsbury Mayfair Paddington Soho City Core Euston Knightsbridge Marylebone Canary Wharf > > City Fringe, comprising Farringdon, Clerkenwell, Shoreditch and Aldgate, continues to outperform trend. While demand has slowed marginally in Q2, Farringdon (+86%), Clerkenwell (+65%) and Shoreditch (+57%) all remain substantially above the 10 year average. > > While the West End (Whole) market remains closely aligned to trend, the City (Whole) has drifted out slightly with the City core itself underperforming in the year to date.
CONTACT US London Agency David Hanrahan +44 20 7487 1769 david.hanrahan@colliers.com Paul Smith +44 20 7487 1767 paul.smith@colliers.com London Investment John Olney +44 20 7487 1768 john.olney@colliers.com Rob Hayes +44 20 7487 1766 rob.hayes@colliers.com Tenant Representation Stuart Melrose +44 20 7344 6909 stuart.melrose@colliers.com Lease Advisory Charles Cowley +44 20 7344 6818 charles.cowley@colliers.com Research & Forecasting Guy Grantham +44 20 7344 6793 guy.grantham@colliers.com This report gives information based primarily on Colliers International data, which may be helpful in anticipating trends in the property sector. However, no warranty is given as to the accuracy of, and no liability for negligence is accepted in relation to, the forecasts, figures or conclusions contained in this report and they must not be relied on for investment or any other purposes. This report does not constitute and must not be treated as investment or valuation advice or an offer to buy or sell property. July 2017 Colliers International is the licensed trading name of Colliers International Property Advisers UK LLP (a limited liability partnership registered in England and Wales with registered number OC385143) and its subsidiary companies, the full list of which can be found on www.colliers.com/ukdisclaimer. Our registered office is at 50 George Street, London W1U 7GA. 17269