DANIEL SZABO2015

THE LONDON OFFICE & RETAIL MARKETS

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THE LONDONOFFICE &RETAIL MARKETSA comprehensive market report identifying investment and occupation opportunities in the prime London real estate markets

WORD COUNT: 1970

(Apple Maps, 2015)

CONTENTS

Executive summary 01 Introduction 02 Economics in context 02 The London Real Estate market 03 Prime Office market 04 Prime Retail market 07 Future Outlook & Recommendations 10 List of Tables & Figures 11 References 12

1.0 | EXECUTIVE SUMMARY

• The London real estate market is strengthening, with no sign of slowing down in the upcoming years, presenting great investment and occupation possibilities.

• Excessive demand and limited supply, pushed the current prices to record highs, and availability in prime markets dropped to new lows.

• Even though competition is also fierce in sub-prime markets, these areas demonstrate the best offers regarding affordability, value and yield.

• In late 2016, a new supply of retail and office spaces are expected, proving a unique opportunity not seen in decades, but deals must be signed now

(JLL, 2015)

(Wikimedia, n.d.) 1

2.0 | INTRODUCTION • This market report aims to identify investment and

occupational opportunities in the quickly growing and highly competitive London market.

• Both the office and retail markets will be under great scrutiny, and by focusing on the prime markets, trends will be identified through analysing past transactions.

• After assessing the current condition of the market, the final part of the report will be centred around future developments and momentum.

• This information will be used to provide prompt and comprehensive recommendations for possible investors and occupiers coming into the market.

3.0 | ECONOMICS IN CONTEXT

• The drop in oil- and retail prices lowered inflation expectations, translating into increased real wages. The retail sector is capitalising on growing consumer spending. (JLL, 2014)

• The economic climate bolstered employment, decreasing unemployment figures to 5.7%. A large proportion of growth comes from office-based sectors boosting demand for offices. (CBRE, 2015)

• Low policy interest rates foster investment, and until deflation and slowing global growth jeopardise the economy, increase in the interest rate is unlikely.

• THREAT ON GROWTH:

‣ UK elections will probably chill investment in the first half of 2015.

‣ Deflation risks in the EU coupled with the prospects of a Greek exit from the Eurozone moderate markets. UK inflation was 0% in February, and is expected to fall below 0 this year.

• The growth potential is expected to prevail against uncertainty, and further expansion of the real estate market is anticipated. (CBRE, 2015)

3.0% 5.7% 1.6% 0%GDP growth unemployment 10-year gov bond yield inflation

• Volatile equity markets and EU uncertainty make the UK government bonds a safe choice for investors, pushing the yield below 2%. As many look for higher returns, even the lowest yielding London offices attract investors. (BNP Paribas, 2015)

2.4% 7.1% 3.0% 2.0%

UK GDP growth

Fig.1. (World Bank, 2015)

Fig.2. (BOE, 2015)

• The UK economy is rapidly expanding, with GDP growth reaching 3% in Q4 2014. This momentum is expected to continue throughout 2015 at a slightly slower 2.6% growth rate. (HM Treasury, 2015)

10-year gov bond yield

(World Bank, 2015) (Bloomberg, 2015)Table 1. Key Economic Indicators1

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4.0 | THE LONDON REAL ESTATE MARKET

• The real estate market entered 2015 after a really successful year. The underlying economic fundamentalBs helped demand grow in all real estate sectors.

• Limited supply in prime locations created an imbalance in the market, pushing prices and rents to new highs, and vacancy rates to record lows.

• The investment market outperformed expectations in recent periods. Large influx of foreign capital is lowering prime yields in many of the major markets (CBRE, 2015).

• The scarcity of investment opportunities in prime areas benefited secondary markets, as investors focus on developing areas, with higher yields and growth potential.

“There is likely to be a pause in the market around election time, then foot to the floor again for the remainder of the year”

Damian Corbett - head of Central London capital LBTrmarkets, JLL (Estates Gazette, 2015)

JLL Annual City Momentum Index

The CMI is a comprehensive index measuring socio-economic and commercial real estate momentum in major cities around the globe.

London ranked number 1 on CMI 2015

Based on: • strong economic fundamentals • largest foreign investment globally • positive sentiment in capital values • emerging as a global technology hub

(JLL, 2015)

(Fondoimagen.com, n.d.)

(JLL, March 2015)

(greaterlondonnationalpark.org.uk, 2014)

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5.0 | PRIME OFFICE MARKET

DEMAND

• Improved economic conditions boosted market demand, with active demand reaching a high of 9.2m sq ft in Q4 2014 (JLL, 2015), and currently standing at 8m sq ft (CBRE, 2015).

• Large part of demand comes for office-based financial and service sectors, increasing demand in prime London offices

SUPPLY

• Central London office availability is at record lows at 11m sq ft, its lowest level in over a decade, as construction lagged behind demand (CBRE, 2015)

• There are a modest number of projects in the pipeline for 2015 (BNP Paribas, 2015)

• New grade A space is scarce in prime markets, second-hand spaces providing most of the current supply. (CBRE, 2015)

4.49m 5.1% £8bn 3.5–4%take up (sq ft) vacantcy rate investment yield

44% 1.4% 90% 0.5%

Fig.3. Location of prime office markets in Central London. (CBRE, 2015). Indicating prime rents per sq ft. (BNP Paribas, 2015)

The largest available unit in Central London is currently The Shard - 314,500 sq ft (CBRE, 2015)

(BNP Paribas, 2015)

(Oh So London, 2013)

Table 2. Key Indicators for Office market1

£62–£74£63–£75

£75–£118 £55 £28–£40

MARKET CONDITIONS

TAKE-UPS • Economic growth prompted record 16m sq ft take-up in 2014,

the highest since 2000 (BNP Paribas, 2015). As seen in Fig.4, the most popular areas were the City and West End.

VACANCY • Record take-ups resulted in the lowest vacancy rates on

record at 5.1%. (BNP Paribas, 2015) No increase can be expected in 2015, as pre-lets and under offers deplete newly constructed space before completion.

PRE-LETS • Because of acute supply shortages occupiers come to the

market early to maximise their chances of finding great potential.

• 26% of take-ups in 2014 were pre-leases (JLL, 2015). 58% of space expected for completion for 2015 is already let or under offer. (CBRE, 2015)

RENTS • Rents will keep increasing as competition for quality continues.

• Average London prime rents rose by 9.3% in 2014. (Colliers, 2015)

Fig. 4. (CBRE, Feb 2015)

Take-up by Market, February 2015

Availability in Central London

Fig. 5. (CBRE, Feb 2015)

Central London Development Pipeline

Fig. 6. (CBRE, Feb 2015)

ADDRESS TENANT SIZE (sq ft)

RENT

1 Bank Street, E14 Societe Generale 280,000 £47.5

70 Mark Lane, EC3 Zurich Insurance 68,253 £67.0

Cannon Palace, EC4 Threadneedle 65,000 £61.5

• The largest deal in 2014 was by far the lease to Society Generale in Docklands. Overall, most substantial deals were signed in the City, as supply of larger space in the West End is highly constrained.

(New London Development, 2015)(booking.com, 2014)

Table 3. Key Central London Leases, 2014 (CBRE, 2015)

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INVESTMENT

• As in shown in Fig.15, in 2014 investment only started catching up in Q4, but this momentum is expected to carry on throughout early 2015.

• 73% of the central London office investment comes from overseas (BNP Paribas, 2015).

• The large influx of foreign investment pushed down prime yields to new lows, but these are still considered safe and attractive compared to other asset classes. (Knight Frank, 2015).

Investment Transactions by Purchaser, 2014

Fig. 7. (CBRE, 2015)

Investment Volume by Market

Fig. 8. (BNP Paribas, 2015)PROPERTY PRICE YIELD SIZE

(sq ft)OWNER

HSBC, 8 Canada Sq, E14 £1100m 4.98% 1,092,000 -

The Gherkin, EC3 £726m 3.75% 514,710 Safra Group

BOAML, EC1 £583m 5.25% 585,000 Norges

Table 4. Key Central London Investments Q4, 2014 (CBRE, 2015)

• Investment with buyout in 2014, with many of the trophy assets changing hand among trophy participants of the market.

(Wired.co.uk, n.d.)

6.0 | PRIME RETAIL MARKET

INCREASING SHOPPING

• Average earnings are expected to grow by 1.7% in 2015, that will exceed the estimated 0% inflation by a healthy margin, leading to increased real wages.

• Mending consumer conditions explain the increasing retail sales, that grew on a three monthly basis for nearly two years. (CBRE, 2015)

BRANDS

• Central London remains attractive between international and domestic brands, that continuously expand their exposure in the UK capital. (CBRE, 2015). Considering investments, and sales, the West End remains the core prime retail market in London.

• Notable new openings in 2014 included: Lululemon, Victoria Beckham, Tiger, Adidas Originals, Loft by Design, Omega, John Varvatos amongst many others. (JLL, March 2015)

• Online sales grew by 19% last year and accounting for about a third of all sales. The critical role of physical stores remains unquestioned though, as half of online orders were still collected in stores. (CBRE, 2015)

• Growth of shopping centres remains the strongest in retail. In 2014, shopping centre investment amounted to 47% of all retail investment. (Cushman, 2015)

(JLL, 2015)

(JLL, 2015)

MAJOR SHOPPING STREETS

• The construction of the new Crossrail Station is the most exciting development in the West End retail market.

• Previously overlooked areas are undergoing refurbishment and prime rents are rapidly increasing.

• As a result of the construction, on the East side of Oxford St. rents rose by 15% last year, and there are 15 new developments in the pipeline.

• The Northern part of Bond Street will also benefit from better transport links, IWC and Mont Blanc already positioned themselves into this new area.

District management companies in the prime West End market.Fig. 9. (JLL, March 2015)

Fig. 13. (Knight Frank, 2014)

Vacancy rates Zone A rents

(JLL, 2015)

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RETAIL INVESTMENT

• Even though the limited supply of prime assets constrain investment volumes,investment totalled £1.9bn in 2014, up from £1.7bn registered in 2013. (JLL, March 2015) There were few big deal in prime locations, see Table 9.

• A large proportion of investors come from Asia, who still consider Central London as ‘fair value’ compared to their local markets, largely due to the favourable exchange rates, higher rental yields and lower taxation rates. (JLL, March 2015)

• Investors look to diversify in A3 (restaurant) property, boosting the number of smaller transactions. Also interest increased in subprime areas, that are often leased long-term to variable occupiers. (CBRE, 2015)

• As The Brunswick Centre changed ownership in 2014, investors fiercely competed, and bidding raised the selling price £135.5m, 23% above its asking price. (CBRE, 2015)

ADDRESS LANDLORD TENANT RENT

388 Oxford Street Private TM Lewin £1.2m

15 Mount Street The Grosvenor Estate La Perla Confidential

Leicester Square Criterion Capital Nickelodeon Confidential

Table 6. Key Retail Leasing deals Q4, 2014 (CBRE, 2015)

Table 5. Key Retail Investments 2014 (CBRE, 2015)

ADDRESS PURCHASER CAPITAL VALUE YIELD

Brunswick Centre 45 Retail units £135.5m 3.70%

181/183 Oxford Street Vision Express £35.0m 2.64%

109/111/112 Mount Street Maynat Paris £26.0m 2.00%

(Ben Rowe Photography, 2011)(Rightmove, n.d.)

(JLL, 2015)

• The largest least deals showcase ever-growing eagerness of occupants to be present in key locations, even if rents are rapidly increasing.

7.0 | FURURE OUTLOOK & RECOMMENDATIONS

OFFICE OPPORTUNITIES

• OCCUPATION & INVESTMENT• Scarce supply and high rents in the West End and the

City make the Midland particularly attractive. Affordable and newly developed offices present great potential in these areas.

• Small and mid size offices around Shoredich for example are readily available and present great value for money, and are becoming increasingly popular

• The City still offers the most large offices, mainly consisting of second-hand spaces. If occupants look for over 50,000 sq ft offices, City remains the best location in town, as such spaces are sparse elsewhere

• An abundance of developments are expected to be completed in 2016, bringing the much needed supply

to the market, which is likely to tame rents, and sale prices temporarily. (CBRE Q4)

• If space is not a question of urgency, 2016 could be the year, when rents are mitigated for the first time, presenting great leasing opportunity in prime markets. But pre-leases must be signed now.

• For investment purposes, compared to prime-markets where foreign investment eliminated all yields, new developments in secondary markets carry larger yield potential (King’s Cross Development, Docklands, City)

• 2016 will also bring about investing possibilities for long-term investors. Deals are expected to be signed now.

RETAIL MARKET

• The retail market is expected to enjoy a similarly successful year as in 2014, with new retailers coming into the market.

• For retail and mixed use property, the West End remains the core market in Central London, being the shopping hub of the city and the first-call for people looking to spend their money.

OCCUPATION & INVESTMENT • An estimated 3 million sq ft of new retail and leisure

space is to be opened in 2015 and 2016 in the West End, which will provide a singularly supply boost not seen in the past half a century. (JLL, March 2015)

• Early deals on these projects are lucrative for both investors and occupiers.

• Areas around the Crosslink train stations will see a great boost. Yet overlook areas showcase greater yields, and lower rents, and will see future growth.

• East-Oxford Street and North-Bond Street are undergoing revived popularity, until affordable spaces are more available, these location will be attractive for occupants.

MIXED USE PROPERTY

• For mixed use property, the West End only offers an abundance of small, medium offices currently, but are considered overpriced. Properties with slightly larger offices around Covent Garden could be well-suited for occupants looking for mixed-use spaces.

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8.0 | LIST OF TABLES & FIGURES

TABLES

FIGURES

ID NAME SOURCE

Table 1. Key Economic Indicators World Bank, 2015 and Bloomberg, 2015

Table 2. Key Indicators for Office Market BNP Paribas, 2015

Table 3. Key Central London Leases, 2014 CBRE, 2015

Table 4. Key Central London Office Investments Q4, 2014 CBRE, 2015

Table 5. Key Retail Investments 2014 CBRE, 2015

Table 6. Key Retail Leasing Deals Q4, 2014 CBRE, 2015

ID NAME SOURCE

Fig. 1. UK GDP Growth World Bank, 2015

Fig. 2. 10-year Government Bond Yield Bank of England, 2015

Fig. 3. Location of prime Office markets in London BNP Paribas, 2015

Fig. 4. Take-up by Market, February 2015 CBRE, Feb 2015

Fig. 5. Availability in Central London CBRE, Feb 2015

Fig. 6. Central London Development Pipeline CBRE, Feb 2015

Fig. 7 Investment Transactions by Purchuser CBRE, Feb 2015

Fig. 8 Investment Volume by Market BNP Paribas, 2015

Fig. 9 District management companies in the prime West End market. JLL, March 2015

Fig. 10 Vacancy rates and rents Knight Frank, 2014

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9.0 | REFERENCES

DATA, GRAPHS & FIGURES

Bloomberg, (2015). United Kingdom Government Bonds. [online] Available at: http://www.bloomberg.com/markets/rates-bonds/government-bonds/uk/ [Accessed 10 Apr. 2015]. BNP Paribas, (2015). At a Glance: Central London Office Market. Q4 2014. [online] Available at: http://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-01/lom_q4_2014.pdf?id=p_1621577 [Accessed 10 Apr. 2015]. BNP Paribas, (2015). At a Glance: UK Retail Focus. Q4 2014. [online] Available at: http://ttp://www.realestate.bnpparibas.co.uk/upload/docs/application/pdf/2015-02/retail_focus_q4_2014.pdf?id=p_1622159 [Accessed 10 Apr. 2015]. BOE, (2015). Bank of England Statistical Interactive Database | Interest & Exchange Rates. [online] Available at: http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&C=DUS&G0Xtop.x=51&G0Xtop.y=7&XNotes2=Y&Nodes=X41514X41515X41516X41517X55047X76909X4051X4052X4128X33880X4053X4058&SectionRequired=I&HideNums=-1&ExtraInfo=true#BM [Accessed 10 Apr. 2015]. BOE, (2015). Bank of England Statistical Interactive Database | Interest & Exchange Rates. [online] Available at: http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&C=C6S&G0Xtop.x=51&G0Xtop.y=11&XNotes2=Y&Nodes=X4051X4052X4053X4058&SectionRequired=I&HideNums=-1&ExtraInfo=true#BM [Accessed 10 Apr. 2015]. CBRE, (2015). Central London Property Market Review. Q4 2014. [online] Available at: http://www.cbre.co.uk/uk-en/research [Accessed 10 Apr. 2015]. CBRE, (2015). Marketview: Central London Office. February 2015. [online] Available at: http://www.cbre.co.uk/uk-en/research [Accessed 10 Apr. 2015]. Colliers, (2015). Research & Forecast Report, UK | London. Q4 2014. [online] Available at: http://www.colliers.com/-/media/B7465FB4D2724B2A9AA683313755A180.ashx?la=en-GB [Accessed 10 Apr. 2015]. Cushman & Wakefield, (2015). Marketbeat, Retail Snapshot UK. Q4 2014. [online] Available at: http://www.cushmanwakefield.com/~/media/marketbeat/2015/02/uk_retail_4q14.pdf [Accessed 10 Apr. 2015]. Estates Gazette, (2015). A league of their own. p.84. HM Treasury, (2015). Forecasts for the UK economy. No. 333. [online] Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/396864/forecomp_201501.pdf [Accessed 10 Apr. 2015]. JLL, (2015). Central London Office Market Report. Q4 2014. [online] Available at: http://www.jll.co.uk/united-kingdom/en-gb/Research/JLL_Central%20London%20Q4_hi-res%20%5B2%5D.pdf?b4988bf7-f065-451a-a6f9-93cc14499a5d [Accessed 10 Apr. 2015]. JLL, (2015). London's West End Review & Outlook. March 2015. [online] Available at: http://viewer.zmags.com/publication/e987dc2b#/e987dc2b/1 [Accessed 10 Apr. 2015]. Knight Frank, (2014). Central London Retail, Occupier & Investment Markets. Winter 2014. [online] Available at: http://content.knightfrank.com/research/303/documents/en/winter-2014-2471.pdf [Accessed 10 Apr. 2015]. Knight Frank, (2015). Central London, Quarterly - Offices. Q4 2014. [online] Available at: http://content.knightfrank.com/research/104/documents/en/q4-2014-2655.pdf [Accessed 10 Apr. 2015]. World Bank, (2015). GDP growth (annual %) | Data | Table. [online] Available at: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG [Accessed 10 Apr. 2015].

IMAGES

Apple Maps. (2015). Apple. Ben Rowe Photography, (2011). Brunswick. [image] Available at: https://benrowephotography.files.wordpress.com/2011/08/brunswick_01.jpg [Accessed 10 Apr. 2015]. Booking.com, (2014). Leicester Square Exterior. [image] Available at: http://q-ec.bstatic.com/images/hotel/max300/149/14940454.jpg [Accessed 10 Apr. 2015]. Fondoimagen.com, (n.d.). [online] Available at: http://fondoimagen.com/file/4764/2880x1800/crop/big-ben-londres.jpg [Accessed 10 Apr. 2015]. Greaterlondonnationalpark.org.uk, (2014). City of London. [online] Available at: http://www.greaterlondonnationalpark.org.uk/wp-content/uploads/2014/02/London-view-by-scyrene.jpg [Accessed 10 Apr. 2015]. hotelroomsearch.net, (2014). The City. [image] Available at: http://www.hotelroomsearch.net/im/2014/10/london-3.jpg [Accessed 10 Apr. 2015]. JLL, (2015). London's West End Review & Outlook. March 2015. [online] Available at: http://viewer.zmags.com/publication/e987dc2b#/e987dc2b/1 [Accessed 10 Apr. 2015]. New London Development, (2015). 1 Bank Street plans. [image] Available at: http://newlondondevelopment.com/full/54f8381269702d1102f50000/1_Bank_Street_image.jpg?1425553421 [Accessed 10 Apr. 2015]. Oh So London, (2013). The Shard. [image] Available at: https://ohsolondon.files.wordpress.com/2013/04/viewing_gallery_the_shard1.jpg [Accessed 10 Apr. 2015]. Rightmove, (n.d.). Brunswick. [image] Available at: http://media.rightmove.co.uk/67k/66944/29479313/66944_3255_IMG_05_0000.JPG [Accessed 10 Apr. 2015]. Wikimedia, (n.d.). City of London. [image] Available at: http://upload.wikimedia.org/wikipedia/commons/d/da/The_City_London.jpg [Accessed 10 Apr. 2015]. Wired.co.uk, (n.d.). The Gherkin. [image] Available at: http://cdni.wired.co.uk/1920x1280/k_n/London_5.jpg, [Accessed 10 Apr. 2015].

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