Leeds City Centre OfficesQ3 : 2010 www.kingsturge.com

Market Overview Q3 : 2010

• Grade A availability stands at 590,000 ft2, though no

new space will be delivered before 2012. The market

will benefit from this supply, as confidence recovers.

• Speculative development remains on hold so, with

many major occupiers facing lease events, a return in

pre-letting is in prospect from next year.

• Take-up remains down on the long-term average.

Demand continues to be limited from larger occupiers,

though there are signs that confidence is returning.

• Prime headline rents remain at £27/ft2, but with a

relatively constrained supply in the prime core, we

expect an increase over the medium term.

• There have been relatively few prime investments

over recent months although yields would be

expected at 6.25% at the current time.

10 South Parade

Leeds City Centre Offices Q3 : 2010

Supply

The supply of new Grade A office accommodation immediately available in Leeds City Centre has decreased to just under 600,000 ft2 including new build and quality refurbishments.

This follows the development of four major new schemes in 2007-08: Highcross’ Broadgate, The Headrow (167,500 ft2) and Toronto Square (90,000 ft2); IVG’s No.1 Leeds (123,500 ft2); and Deltalord’s The Mint (117,500 ft2). All of this space remains available with the exception of approximately 14,000 ft2 let at Toronto Square. However, looking at the current supply in detail, just 150,000 ft2 is situated in the prime office core, with the majority in more peripheral areas of the City.

Given that average annual take-up of Grade A accommodation in Leeds is around 250,000 ft2, current availability represents the equivalent of 2-3 years supply in a stable market. As a result, Leeds is well placed for when the market does recover. Good underlying demand and a lack of speculative development will allow the market to absorb this space.

Only one speculative scheme remains under construction in Leeds City Centre which is Wilton Developments’ 10 South Parade. The building is part new build, part refurbishment extending to circa 36,000 ft2 and is already 35% pre-let.

Development Pipeline

In terms of overall pipeline supply, it is possible to identify over 4 million ft2 in various schemes City-wide. However, the majority of developers are incapable of starting on-site within 6 months, as most do not have detailed planning consent or the ability / willingness to build either speculatively, or with partial pre-lets in place.

Given the current uncertainty in financial markets, there are no proposals to build speculatively. It is highly unlikely that any new development will commence until well into 2011, given market conditions and the lead-in time for construction to commence. Therefore, the earliest a new

building could be delivered would be late-2012 or early-2013.

Assuming Grade A take-up is in line with the long-term average before this date, the lag in the development cycle will result in a shortage of Grade A space from 2012.

No speculative new build office scheme is expected to start on site during 2011. However, there are several major occupiers having lease events between 2011 and 2015. This is expected to result in a return of pre-let driven development activity in the City.

It is impossible to predict which buildings will start on site within the next 2 years, as developers are constantly re-visiting their masterplans and development programmes. But the next cycle is expected to be led by one of the City’s major schemes, such as Wellington Place, Whitehall Riverside, City Square House or 6 Queen Street, which has just received detailed planning for68,000 ft² in the heart of the traditional prime core.

Toronto Square

Leeds City Centre Offices Q3 : 2010

Demand

Demand for office accommodation in Leeds city centre has slowed over the last two years in line with the wider economic downturn (see chart 1). Take-up in 2009 totalled 390,000 ft2, well below the long-term average of 525,000 ft2. Grade A take-up accounted for just under 50% of this total, which is close to the long-term trend.

Take-up in Q2 2010 was disappointing, decreasing 44% on the previous quarter to one of the lowest figures on record at 48,000 ft2. But Q3 saw an improvement to 69,140 ft2 to bring take-up to 200,000 ft2 in the year to date. Nonetheless, without an even more dramatic improvement in Q4, activity is unlikely to reach last year’s levels and prevent 2010 being the worst year in over a decade.

The size of lettings continues to fall with the average this year being around 2,800 ft2 and only three deals over 10,000 ft2. Lettings of less than 5,000 ft2 ft account for over 80% of the total deals so far in 2010. Given the size profile of space under offer, we expect this trend to continue.

Professional services and financial sectors have historically been the driver of demand in Leeds, but have been subdued since the credit crunch (see chart 2). The public sector has held up better, but after the Spending Review, this demand may also be less buoyant. Meanwhile, all sectors continue to adopt a cautious approach, delaying relocating as long as possible, and landlords are offering competitive deals to avoid costly voids, which is further limiting churn.

But there are more encouraging signs for the future. Local job growth is expected to be driven by the private sector in areas such as industry, technology and media, as well as a reinvigorated financial and business services sector. This year, the major deals in Leeds have primarily involved these dynamic sectors and this pattern is set to continue (seetable 1).

Table 1 Top occupier deals of 2010

Occupier Address Size (ft) GE Capital Livingstone House 15,060 BSkyB 2 Wellington Place 14,450 Skills for Care Westgate 11,620 Xafinity 10 South Parade 9,400 Surfachem 2 The Embankment, Sovereign Street 8,300Source: King Sturge

There are also important long-standing named requirements which remain unsatisfied in Leeds (table 2), while agent-led requirements will further bolster take-up in 2011. In addition, there will be significant structural office demand. King Sturge estimates that there are 2.4 million ft² of lease breaks or expiries due over the next five years for the market as a whole. Not all will result in new take-up, but these events should provide the opportunities to support a recovery in demand from 2011.

Table 2 Leeds office requirements

Occupier Size (ft2) Walker Morris 100,000 Deloitte 70,000 KPMG 55,000 PWC 55,000 Arup 35,000 Lupton Fawcett 30,000 Clarion Solicitors 20,000 Watson Wyatt 20,000 Hiscox Insurance 20,000Source: King Sturge

Leeds City Centre Officeswww.kingsturge.com

All data contained in this report has been compiled by King Sturge LLP and is published for general information purposes only. While every effort has been made to ensure the accuracy of the data and other material contained in this report, King Sturge LLP does not accept any liability (whether in contract, tort or otherwise) to any person for any loss or damage suffered as a result of any errors or omissions. The information, opinions and forecasts set out in the report should not be relied upon to replace professional advice on specific matters, and no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication can be accepted by King Sturge LLP. © King Sturge LLP November 2010. This publication is printed on recycled, post-consumer fibre, totally chlorine free paper produced from sustainable stock. FSC certification.

Q3 : 2010

Rents

In Leeds City Centre, the headline rent remains £27.00/ft2, a similar level to last year. However, there have been few notable Grade A transactions to challenge this level recently. More peripheral Grade A developments are currently likely to achieve closer to £22.00/ft2.

Incentives are also becoming increasingly generous with two-years rent-free being the starting point for negotiations on an unbroken 10-year term, assuming good covenant strength.

Over the next 2-3 years, we expect increases in prime headline rents. Other than in smaller lettings, we expect the uplift will be driven by pre-let activity at the prime schemes in the city. But we expect a two tier market to emerge. Well-located, Grade A space will begin to see growth in net effective rents, while stagnant rents and generous incentives will remain the norm for more secondary stock.

A new top rent of £30.00/ft2 is likely to be established over the medium term, given diminishing supply in the core, rising build and finance costs and the inherent risk in development. This rise will be in line with other major regional cities such as Manchester, Birmingham and Edinburgh.

Investment

Early 2010 saw a busier period of activity in the investment sector in Leeds with several offices transacting. These differed greatly in terms of the specific fundamentals including; quality of location, tenant strength and unexpired term. Recently, nearly all of the transactions have comprised single let buildings as opposed to multi-let, such as the BT building on Sovereign Street and Kings Court on King Street.

Investment demand is sensitive to fundamentals and pricing. There has also been an increase in overseas interest particularly in respect of strong covenants. Initial yields have recently ranged from 6.75% to 10% depending on the unexpired term. This demonstrates that there has been good investor demand for the City, but clearly the quality and length of income remains the driving factor in pricing. Key Investment Deal

King Sturge has sold Kings Court located on King Street in Leeds City Centre to a Swiss private trust for £10 million (a Net Initial Yield of 8.4%). Kings Court is in the heart of Leeds’ business district and has 47,698ft2 office space over seven floors. Built in 1989, the building is let to law firm, Walker Morris, at an annual rent of £891,000 on a 25-year lease which expires in 2014.

Kings Court, King Street

Agency contacts:Richard Thornton: richard.thornton@kingsturge.comJonathan Gale: jonathan.gale@kingsturge.comT: 0113 2355 269 / 0113 2355 228

Investment contacts:Andrew Summersgill: andrew.summersgill@kingsturge.comBen Hall: ben.hall@kingsturge.comT: 0113 2355 209 / 0113 2355 248