City Agents Office Commentary
Quarter 2 – 2011
This digest summary tracks data from surveying agents on a regular (longitudinal) basis, although
data and comment from other commentators may be quoted. The agents who are regularly
tracked have different definitions of what they regard as the City.
Data contained within this commentary has been sourced from: BNP Paribas Real Estate
(BNPPRE), CBRE, Cushman Wakefield (CW), DTZ, Drivers Jonas Deloitte (DJD), Estates
Gazette (EG), GM Real Estate (GMRE), GVA, Ingleby Trice Kennard (ITK), Jones Lang LaSalle
(JLL) and Knight Frank (KF).
Contents
Take-up
p2
Demand
p3
Supply and Availability
p4
Development
p4
Rent
p5
Investment
p5
Yields
p6
Outlook
p7
Summary of Statistics
p8
TAKE-UP
Q2 2011 - City Office Take-Up: New and Second Hand Space
Take-up was reported at circa 0.74m
sq ft a decrease of 24% on quarter 1,
the lowest level since Q2 2009. The
largest transaction was at 107
Cheapside,
EC2,
where
Hays
Specialist Recruitment took 47,200 sq
ft.
Q2 also witnessed 2 significant prelets, firstly by Aon which signed for
191,000 sq ft at British Land’s
Leadenhall Building (Cheesegrater),
and secondly by CMS Cameron
McKenna
which
confirmed
its
intention to take 200,000 sq ft at
Hammerson’s
Principal
Place
scheme.
Q2 2011 - Office Take-Up: Central London Districts
In terms of market sector composition,
Banking and Finance remained the
highest source of City take-up,
however this decreased to 36% by the
end of the quarter (compared to 41%
in Q1). This sector was also the
largest contributor of take-up in 2010.
Business Services was the next
highest source of take-up finishing the
quarter at 22% of all take-up.
Q2 2011 – City Take-Up by Business Sector
2
DEMAND
Agents reported total occupational demand (active & potential) at 10.44m sq ft. This compared to 8.42m sq ft
in Q1, and an increase of 23% on the same period in 2010. Overall occupier demand was 9.5% above the 10
year annual average and is still at its highest level since Q3 2009.
Of the total occupational demand, active demand ended the quarter at 5.34m sq ft, up circa 22% on Q1 2011
and 6.5% up on the same period in 2010. Potential demand (not included as part of active demand) finished
the first quarter at circa 5.10m sq ft, an increase of 16% on Q1, up 40% on the same period in 2010, and 15%
above the five-year quarterly average.
Q2 2011 - City Office Demand
According to Colliers there are 13 active and potential requirements of 100,000 sq ft focussed on the City
market. A number of tenants are also reoccupying space that had formerly been marketed for subletting.
Accenture will take back 82,000 sq ft at 20 Old Bailey and SNR Denton is reoccupying 18,900 sq ft at 1 Fleet
Place.
SUPPLY & AVAILABILITY
City agents reported City availability at circa 7.50m sq ft, a decrease of 6% on the previous quarter and 33%
(3m sq ft) below the peak set in Q2 2009.
Of the total City availability, Grade B space was recorded at 2.80m sq ft.
The largest single unit of available space is The Walbrook, at 409,500 sq ft.
City agents reported that overall vacancy rates finished the quarter at circa 6.90%, a slight decrease of 0.5%
on the previous quarter. Of the overall vacancy rate, Grade A vacancy rate was reported at circa 3.9%.
3
Q2 2011 - City Office Availability
DEVELOPMENT
There is 3.15m sq ft of space currently under construction. This is down 2% down on the previous quarter
and 31% up on the same period last year.
Completion levels are expected to be circa 1.1m sq ft in 2011, and are expected to dip further to 0.9m in 2012
before rising to 2.5m sq ft in 2013. Completion rates are then expected to rise significantly above 3m sq ft in
2014 when a number of very large schemes are expected to complete.
Construction in the City accounts for 53% of the total Central London floor space currently in the pipeline.
Q2 2011 - City Office Space Under Construction
RENT
Grade A headline rent was reported at £55.00 per sq ft, no change on the previous quarter. Agents expect
prime rents to rise to £60 per sq ft by the end of the year, and continue the current growth rate until 2014. The
rent-free period on a 10-year lease is currently 21-24 months, this compares to 36 months a year ago.
4
Q2 2011 - Central London Prime Rents
INVESTMENT TURNOVER
City agents reported an increase in second quarter investment transactions to circa £1.86bn, up 34% on Q1
2011 and up 81% on the same period in 2010.
Q2 was reported as the strongest quarterly volume of investment transactions recorded since 2007, and is
well above the long-term average of £1.4 bn.
Agents reported that investment volumes were mainly driven by overseas purchasers investing £1.2 billion
(63% of the total), although UK Institutions were also very active over the quarter, investing £528 million.
Q2 2011 - Capital Transactions
The most significant investment transaction was at Aviva Tower, EC3, where it was reported that a private
Indonesian investor has paid £288.25m for the freehold interest. The transaction reflected a net initial yield of
5.40% and a capitalised cost of £965.00 per square foot. The property comprises 315,000 square feet and the
office accommodation is let to CGU International Insurance Plc until April 2024.
This was followed by the sale of the Leadenhall Triangle, (52 – 56 Leadenhall Street, 49 Leadenhall Street/22
Billiter Street, 109 – 114 Fenchurch Street & 100 Fenchurch Street) EC3 to Henderson/Alberta Pension Fund.
The deal is reported to have been in excess of £175.00m reflecting a net initial yield of 6.00% and a
capitalised cost of £400.00 per sq ft. The portfolio comprises 460,000 square feet and is multi-let to Markel,
Chubb Insurance, RJ Kiln, London Metal Exchange and Randall & Quilter.
5
Other Notable Investment Transactions in Q2 2011
1 Finsbury Circus,
EC2.
Clients of Invesco is reported to have paid £141m to BT Pension Fund and Royal
Mail Pension Plan for the virtual freehold interest. The transaction reflected a net
initial yield of 5.60% and a capitalised cost of £720.00 per sq ft. The property
comprises 210,000 sq ft and is multi - let to Stephenson Harwood, Alvarez &
Marsal Europe and National Westminster Bank.
6 – 8 Bishopsgate,
EC2.
Mitsubishi Estate Company is reported to have paid £95m for the freehold interest
in this receivership sale. The transaction reflected a net initial yield of 7.00% and a
capitalised cost of £705.00 per sq ft. The property comprises 143,000 sq ft and is
let to Deutsche Bank AG until 2015. In addition, Mitsubishi Estate Company
recently purchased the adjoining 150 Leadenhall Street, EC2 for a reported £32m
which reflected a capitalised cost of £605.00 per sq ft.
1 King William
Street, EC4.
Nippon Telegraph & Telephone Corporation is reported to have paid £67m for the
freehold interest in this receivership sale. The transaction reflected a net initial
yield of 5.60% and a capitalised cost of £725.00 per sq ft. The property comprises
90,000 sq ft and is let to Rothschilds.
110 Cannon Street,
EC4.
The Universities Superannuation Scheme (USS) is reported to have paid £48.50m
to Land Securities for the freehold interest in this 73,000 sq ft refurbishment sale,
the contractor and professional team will be retained by USS.
YIELDS
Prime yields for lot sizes under £40 million remained at 5.25%.
OUTLOOK
Investor demand is expected to remain strong in the near term not least as new entrants to the market who
have yet to acquire assets, come under increasing pressure to deploy their capital. Examples of sporadic
pricing (particularly of assets sold off market) and the trading of properties purchased during the past twelve to
twenty four months are anticipated as investors seek to realise short term gains.
Bank led sales will also continue to be a feature of market activity. From an occupational viewpoint, the current
rate of take up of completed stock is insufficient to maintain the downward trend of vacancy rates.
With circa 1.75 million square feet of returning stock expected to be added to supply figures by the year end, it
is likely that vacancy rates will increase. (GMRE)
Summary of Statistics (Q1 2011 & Q2 2011)
Q1 2011
Take-Up (million Sq ft)
Q2 2011
New
Second
hand
Total
New
Second
hand
Total
GM Real Estate (No change
0.30
0.50
0.80
0.38
0.40
0.78
Knight Frank (Decreases)
~
~
~
~
CBRE (Decreases)
0.33
0.65
1.17
0.98
0.16
0.58
1.09
0.74
JLL (Decreases)
0.39
0.42
0.80
0.40
0.29
0.69
Q1 2011
Total Demand (million Sq ft)
JLL (Increases)
Q2 2011
Active
Potential
Total
Active
Potential
Total
4.15
4.26
8.42
5.30
5.01
10.31
6
Q1 2011
Availability (million Sq ft)
Q2 2011
New
Second
hand
Total
New
Second
hand
Total
Knight Frank (Decreases)
~
~
9.79
~
~
9.40
CBRE (Decreases)
2.79
3.19
5.98
2.67
3.14
5.81
Vacancy Rate (%)
Q1 2011
Q2 2011
Knight Frank (Decreases)
8.40
8.00
JLL (Decreases)
7.40
6.90
CBRE (Decreases)
6.80
6.60
Prime Yields
Q1 2011
Q2 2011
JLL (No change)
5.25
5.25
Knight Frank (No change)
5.25
5.25
Space Under Construction
(million Sq ft)
Q1 2011
Q2 2011
Knight Frank (Increases)
3.28
3.45
CBRE (Decreases)
3.23
3.15
Headline Rent (£)
Q1 2011
Q2 2011
Knight Frank (No change)
55.00
55.00
JLL (No change)
55.00
55.00
CBRE (No change)
55.00
55.00
Investment Turnover (£ billion)
Q1 2011
Q2 2011
JLL (Increases)
1.350
2.021
Knight Frank (Increases)
1.394
1.867
GMRE (Increases)
0.860
1.800
CBRE (Increases)
0.550
1.430
7