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CENTRAL LONDON OFFICE MARKET UPDATEQ1 2018
Real Estatefor a changing
world
R E S E A R C H
www.realestate.bnpparibas.com3
CENTRAL LONDON OFFICE MARKET UPDATE
Daniel Bayley Head of City Agency [email protected]
+44 (0)20 7338 4444
SImon Knights Head of West End Agency [email protected]
+44 (0)20 7318 5041
Aidan Meynell Head of City Investment [email protected]
+44 (0)20 7318 5018
Simon Glenn Head of West End Investment [email protected]
+44 (0)20 7318 5045
Kuldeep Gadhary Research [email protected]
+44 (0)20 7338 4844
Fiona Don Research [email protected]
+44 (0)20 7338 4156
STATS AT A GLANCEBrexit & the economyWith further clarity emerging on a
Brexit transition deal, agreement on
citizens rights and the UK’s financial
settlement, the result has been a
boost to business confidence. The
latest Deloitte CFO Survey reported
an increase in optimism and positive
sentiment about the long-term effects
of Brexit. This has translated into an
increase in demand for Central London
offices. Indeed, levels are nearly 50%
ahead of the same period last year.
The Bank of England’s survey shows
hiring intentions are at above average
levels, suggesting buoyant levels of
demand are set to continue despite
slow economic growth. First estimates
for Q1 2018 suggest GDP grew by 0.1%.
BNP Paribas forecast a steady upward
trajectory over this year.
Leasing
Take-up figures in Q1 2018 reached
3.71m sq ft, up 20% on the long term
quarterly average and 46% up on the
same period last year. Unlike 2017,
which saw >100,000sq ft deals boost
demand, the first quarter of 2018 has
seen just three deals within this size
band complete. Deals of <5,000 sq ft
are up 25% on the previous quarter
suggesting small to medium sized
enterprises are reactivating property
requirements after a year of adopting
a ‘wait and see’ approach. We expect
momentum to continue into Q2 with
around 3m sq ft currently under offer.
The Media Tech sector drove demand
with large lettings to Google and
Mimecast. The Serviced Office sector
(which acquired record levels of
Central London office space in 2017)
got off to a muted start with just
150,000 sq ft of take-up recorded in
Q1 2018.
Despite high levels of development
completions both last year and this
year, large volumes of pre-letting
activity has kept the vacancy rate
below the long term average at 5.60%,
down from 6.15% in Q4 2017. We do
not foresee any substantial rises in
vacancy this year despite occupiers
continuing to rationalise their office
needs. Second hand tenant space
continues to increase in relevance,
accounting for 30% of total supply, up
from 20%, 12 months ago.
Prime rents are being maintained by
low levels of new development and
refurbished available space which
have fallen by 16% over the quarter.
The City and West End prime rent
remains at £67.50/ sq ft and £115.00/
sq ft, respectively.
InvestmentQ1 2018 Central London investment
volumes reached £2.35bn, down on
the long term average quarterly figure
of £2.95bn. However, we do estimate a
pick-up in activity in Q2 with £4.30bn
currently under offer.
A lack of large trophy asset sales,
which bolstered 2017 volumes, can
be attributed to lower levels seen
in Q1. This type of stock which is
high on overseas buyers shopping
lists, is in tight supply. Despite this,
investor demand remains strong with
significant capital circling Central
London. Indeed, the latest INREV
Investor Intentions Survey puts the
UK as preferred European destination,
with a large proportion of that
targeting London.
The MSCI Central London initial yield
continues to move in from 3.56%
in Q4 2017 to 3.49% in March 2018,
underpinning our view that prime
yields remain at 4.00% in the City and
3.50% in the West End.
CONTACTS
£2.35BN
3.71M
30%
Q1 2018 office investment volumes
Tenant space accounts for 30% of total supply, up from 20% in Q1 2017
£4.30BNCurrently under offer in Central London
5.56%Central London Q1 2018 vacancy rate, -59bps down on Q4 2017
Media Tech accounted for the largest share of take-up in the first quarter of 2018
Q1 2018 take-up is 20% ahead of the long term average quarterly figure and nearly 50% ahead of Q1 2017
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q ft
Quarterly take-up Vacancy Rate
Central London take-up vs vacancy rate
3.50%Prime yields in the West End remain stable in Q1 2018
4.00%City prime yields saw no movement in Q1 2018
www.realestate.bnpparibas.com5
CENTRAL LONDON OFFICE MARKET UPDATE
South Bank
LondonBridge
West End
Midtown
City
City Fringe
NorthernFringe
Bank
Holborn
Bond Street
BatterseaPower Station
Buckingham Palace
The Shard
The Silicon Roundabout
Paddington
Islington
Mayfair
Westminster
Knightsbridge
Chelsea
Victoria
Nine Elms
Soho
The O2
Covent Garden
King’s Cross St Pancras
Docklands
CanaryWharf
Stratfordtratfordtrattf
Stratford
Hammersmith
Shepherd’sBushWest London
Chiswick
Chiswick Park
CENTRAL LONDON OFFICE RENTS & VACANCY RATES BY SUBMARKET
key stats can go here
Despite continued supply pressures the vacancy rate fell to 5.56%, representing quarterly contraction of 59 bps.
The majority of submarkets experienced falls in vacancy, with the City market seeing the largest fall of 103bps to 6.16%.
Tenant supply has risen to 30% of total supply, which equates to 3.75m sq ft. 12 months ago tenant supply represented 20%.
Location Q1 2018 rent
Annual % growth
Mayfair & St James’s
£115.00 -9.8%
Victoria £80.00 -3.6%Soho £85.00 -3.4%Noho East £82.50 3.1%Noho West £85.00 -8.1%Paddington £67.50 5.5%
WEST ENDVacancy rate: 4.52%10 yr avg vacancy rate: 5.89% Location Q1 2018
rentAnnual % growth
Covent Garden £77.50 -3.1%Holborn £65.00 -3.7%
MIDTOWNVacancy rate: 4.69%10 yr avg vacancy rate: 6.21%
Location Q1 2018 rent
Annual % growth
City £67.50 -2.2%City Fringe £65.00 4.0%City Tower £77.50 -3.1%
CITYVacancy rate: 6.16% 10 yr avg vacancy rate: 8.18%
Location Q1 2018 rent
Annual % growth
Stratford £45.00 5.9%
STRATFORDVacancy rate: 9.51%
Location Q1 2018 rent
Annual % growth
Southbank £65.00 3.2%
SOUTHBANKVacancy rate: 2.67% 10 yr avg vacancy rate: 5.34%
Location Q1 2018 rent
Annual % growth
Canary Wharf
£42.50 -5.6%
Rest of Docklands
£30.00 -6.3%
DOCKLANDSVacancy rate: 9.88% 10 yr avg vacancy rate: 7.51%
Location Q1 2018 rent
Annual % growth
King’s Cross £75.00 -1.3%
NORTHERN FRINGEVacancy rate: 1.64% 10 yr avg vacancy rate: 7.78%
Robust levels of demand for new development and refurbished stock has kept vacancy rates below average. Over the next three years (2018-20) we estimate space under construction totals 17m sq ft, of which 54% is already committed.
Stratford was the only submarket to record a rise in rents in Q1 2018, reaching £45.00/ sq ft. Rents remained static in all other submarkets.
The majority of new development stock delivered in Central London this year will be in the City. 5.60m sq ft is due to complete, 60% is pre-let.
www.realestate.bnpparibas.com7
CENTRAL LONDON OFFICE MARKET UPDATE
THE WEST END (W1, SW1, W2, SW3, SW7, W8, NW1)
West End take-up levels rose to
0.98m sq ft in Q1 2018, a 50% rise on
Q1 2017 and a 22% rise on the 10-
year average. No deals over 100,000
sq ft were recorded this quarter and
buoyant levels of demand were the
result of smaller deals. Deals in the
<5,000 sq ft size bracket made up the
majority of take-up with 62% of deals
recorded in the band.
On a submarket basis, the majority
saw take-up rise. Q1 2018 levels in
Mayfair and St James’s totalled 0.26m
sq ft, an increase on Q1 2017 of 40%
and 20% on the 10-year average. In
Victoria, take-up reached 0.40m sq
ft, up 113% on Q1 2017 and 151%
on the 10-year average. High levels
of take-up can largely be attributed
to final deals at Nova North, Nova
South and Verde of which only 10,700
sq ft now remains. As take-up has
risen considerably, supply is now
constrained in Victoria with vacancy
dropping to 3.83% from 5.08% in Q4
2017.
The Banking & Finance and Media
Tech sector’s made up the majority
of demand during the quarter,
accounting for 15% and 17%,
respectively. Interestingly, the
Serviced Office sector that accounted
for 4% of take-up in 2017, took a 14%
share in Q1 2018. This demonstrates
the increased importance of Serviced
Offices as a key occupier in the market.
The continuing importance of Media
Tech and Banking & Finance sectors
shows the resilience of the West
End market in the face of economic
headwinds.
West End overall supply fell from
3.25m sq ft in Q1 2017 to 3.08m sq
ft in Q1 2018, a significant fall on the
4m sq ft 10-year average. The fall in
supply can be attributed to healthy
demand for existing stock; as well
as a reduction in schemes beginning
construction. Indeed, from Q1 2017
to Q1 2018 under construction
supply in the West End fell 94%,
buoyed by a number of pre-lets,
further constraining supply. The West
End vacancy rate (including under
construction space due to complete
within six months) was 4.52% in Q1
2018, significantly below the long
term average of 5.89%.
West End prime rents remained at
£115.00 per sq ft, a -9.8% annual fall.
We expect rental growth to return
by 2020. Rental growth has become
increasingly polarised between
submarkets, streets and buildings, so
rental growth in certain submarkets
may return earlier than in others.
Investment volumes in the West End
market totalled £0.39bn in Q1 2018,
falling 431% on Q1 2017 and 160% on
the 10-year average and West End
yields are currently stable at 3.50%.
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q ft
Quarterly take-up Vacancy Rate
15 & 17%Banking & Finance and Media Tech sector take-up shares.
The Banking and Finance and Media Tech sectors made up the majority of take-up.
THE CITY (E1, EC1, EC2, EC3, EC4)
The City saw strong levels of take-up in Q1 2018 reaching 1.76m sq ft, the
highest level of quarterly take-up since Q4 2014. Boosting levels were five
lettings under construction including SMBC acquiring 161,151 sq ft at 100
Liverpool Street, EC2 and Sidley Austin taking 135,545 sq ft at the Can of
Ham, 70 St Mary Axe, EC3.
The Banking & Finance sector demonstrated their commitment to the City
in Q1 and dominated demand levels accounting for 27% of take-up. The
Media Tech sector, which was joint top with Banking & Finance in 2017,
made up 17% of take-up.
Noticeably absent were Serviced offices, who accounted for 15% of last
year’s take-up, in Q1 that diminished to just a 1% share. With the likes
of WeWork still very much in expansion mode, we expect to see more
activity from this sector over the coming 12 months.
2018 is expected to see 5.60m sq ft of development completions in the
City, the highest on record. This may signal the signs of an oversupply
in the pipeline however on closer inspection 60% is already committed
leaving only 2.20m sq ft available. As a result, the vacancy rate has fallen
to 6.16%, its first substantial fall in nine quarters.
The majority of new stock being delivered this year is in the City Core;
100 Bishopsgate, The Scalpel and Can of Ham will dramatically change
the skyline of the City. The City fringe accounts for just a quarter of
completions contributing to a current undersupply in this submarket. As a
result, the value proposition in comparison to the City core has diminished
with rents in the two submarkets both standing in the high to mid £60’s.
Following the trend seen across Central London, City Investment volumes
were down on the long term average reaching £1.13bn, representing
a 26% fall. Encouragingly however, £3.30bn is under offer which will
contribute to stronger volumes in Q2. Overseas investor appetite for City
assets shows no signs of abating with non-domestic capital making up
three quarters of Q1’s total.
Despite continued Brexit worries, the City of London’s standing as a top
global financial centre remains. Indeed, the capital retained its number
one spot in the latest Z/Yen Global Financial Centres report. Furthermore,
in a survey of senior financial professionals by Duff & Phelps, London stole
New York’s crown as world’s top financial centre. Both are major votes
of confidence in the City of London’s long term future as a key global
financial hub.
Association2%
Banking & Finance27%
Insurance3%
Media Tech17%
Other/Undisclosed13%
Professional services22%
Property & Construction
1%
Public Sector2%
Retailer & Leisure4%
Serviced Office1%
Services Sector8%
West End take-up vs vacancy rate
4.52%Q1 2018 West End vacancy rate.
Q1 2018 saw vacancy drop on previous quarters and the 10-year average of 5.89%.
City take-up by business sector
City under construction development pipeline
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2007
2008
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2010
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2012
2013
2014
2015
2016
2017
2018
2019
2020
M s
q ft
Completed Future supply Pre-let Long-term avg
6.16%Q1 2018 vacancy rate
High levels of pre-letting activity has resulted in vacancy rate falls
Z/Yen Global Financial Centres Index, January 2018
London remains top global financial centre in 2018
www.realestate.bnpparibas.com9
CENTRAL LONDON OFFICE MARKET UPDATE
MIDTOWN (WC1, WC2)
Midtown take-up reached 0.26m sq
ft in Q1 2018, a 35% decline on Q1
2017 and a 12% decline on the 10-
year average. The largest deal of
the quarter was to Regus at 60 St
Martins Lane where the Serviced
Office operator took 31,820 sq ft. As
a result the sector took the largest
share of take-up, accounting for
23%, up from the 2017 level of 13%.
Professional services also took up a
large proportion of take-up during
the quarter at 17%, in line with the
market’s historic association.
Supply levels in the Midtown market
totalled 0.96m sq ft and were down on
Q1 2017 and the 10-year average by
83% and 42% respectively. Every grade
saw supply drop off with new existing
supply dropping most dramatically
reflecting strong interest for Grade A
Midtown offices, during Q1.
Under construction supply dropped
10% from Q4 to Q1 reflecting pre-lets
at the Post Building where McKinsey
took a further 26,540 sq ft on their
previous option; as well as a muted
development pipeline. Indeed, there
are currently three developments
(The Post Building, 29 Floral Street
and 44 Eagle Street) projected to
complete by the end of Q3 2018, of
which 39% is pre-let.
Rents have remained stable in Covent
Garden and Holborn submarkets
at £77.50 and £65.00 per sq ft
respectively. On an annual basis,
rents have fallen 3-4% in both
Midtown locations.
Midtown investment volumes totalled
£0.59bn in Q1 2018, an 88% rise on
the 10-year average.
4.69%Q1 2018 vacancy rate
The vacancy rate has fallen from 8.90% 12 months ago to 4.69%
23%Q1 2018 Serviced Office take-up share
Serviced Offices account for 23% of take-up, up from 13% in 2017
SOUTHBANK (SE1)SE1 take-up totalled 0.22m sq ft
in Q1 2018, a 106% rise on Q4 2017
and in line with the 10-year average.
A large proportion of take-up in the
market was attributed to the deal at
Cooper & Southwark to CBRE Facilities
Management who took 78,584 sq ft.
The Property sector made up the
majority of demand making up 34%.
Following closely behind was the
Media Tech sector which made up
32%. The high proportion of Media
Tech companies within the Southbank
market demonstrates the market’s
resilience and its ability to attract
smaller start-ups to a modern and
vibrant setting.
Supply levels in Southbank were
up marginally on Q4 2017 levels
at 0.52m sq ft, however, supply has
followed a steady declining trend
with levels currently 99% below
the 10-year average. This decline is
primarily due to strong take-up for
Grade A stock, as well as a reduction
in under construction availability
as fewer schemes enter the market.
Indeed, One and Two Southbank
Place are currently the only two
under construction schemes in the
submarket over 100,000 sq ft and
both are fully pre-let. The vacancy
rate currently stands at 2.67%, down
on the 10-year average of 5.34% and
the Q1 2017 level of 3.15%.
Prime rents stand at £65.00 per sq
ft, in line with Q4 2017 levels but an
annual increase of 3.2%, reflecting
good demand within a supply
constrained submarket.
Q1 2018 saw vacancy drop on previous quarters and the 10-year average.
2.67%Q1 2018 Southbank Vacancy Rate.
Property & Construction took the largest share of take-up in the quarter.
34%Percentage share of Property & Construction in Southbank take-up.
Address (Floor) Sq Ft Approx rent (per sq ft)
Term (Break) Tenant Landlord
100 Liverpool Street, EC2 (3, 4, Part 5) 161,151 £63.00 20 Years SMBC British Land / GIC
Can of Ham, 70 St Mary Axe, EC3 (12-21) 135,545 Conf 15 Years Sidley Austin TH Real Estate
R7 Handyside Street, N1 (Bldg) 123,189 £70.00 12.5 Years Google New Look (Assignor)
1 Finsbury Avenue, EC2 (3-4) 78,628 £56.50 10 Years Mimecast British Land / GIC
3 Minster Court, EC3 (UG, G, 1) 70,591 £57.50 20 Years Charles Taylor Ivanhoe / Greycoat / FREO
Nova North, SW1 (3-5) 65,909 Conf 12 Years Atkins & Co Landsec
Cooper & Southwark, SE1 (Bldg) 78,584 £65.00 (approx) 15 Years CBRE Facilities Management HB Reavis
One Angel Court, EC2 (Part 3, 4, 23, 24) 59,298 £64.00 / £84.50 10 Years Prudential Stanhope/Mitsui Fudosan
10 Bishops Square, E1 (Part 4) 58,708 Conf. 8.5 Years Improbable Worlds Allen & Overy (Sublessor)
Aurum, 30 Lombard Street, EC3 (Bldg) 56,350 £65.00 overall 15 Years St James’s Place WM McKay Securities
Q1 2018 DEALS TABLESKey leasing deals
Key investment deals
Address Lot Size Capital Value (per sq ft)
Yield Purchaser Vendor
Riverbank House, Swan Lane, EC4 £355m £1,109 4.39% Oxygen Evans Randall
Cannon Bridge House, 25 Dowgate Hill, EC4 £248m £865 5.18% Mirae / NH Securities Blackstone
90 High Holborn, WC1 £200m £1,088 4.59% Lab Tech Investments Permodalan Nasional Berhad
First Avenue House, High Holborn, WC1 £154m £1,372 3.14% Japanese Investor Topland Group Plc
55 Mark Lane, EC3 £127.7m £790 5.19% Hao Tian Development Reignwood Group China
Centro Buildings, NW1 £109m £831 4.20% Workspace Group Plc Columbia Threadneedle
5 Chancery Lane, WC2 £76m £896 4.93% Lee Kim Tah Private Swiss
60 Gresham Street, EC2 £70.75m £1,161 4.07% Bank of China Aberdeen Standard
15-19 Bloomsbury Way, WC2 £70m c.£850 n/a Lab Tech Investments BUPA
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