; The city office market Review of 2000 Preview of 2001 ... - King Sturge
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The city office market Review of 2000 Preview of 2001 ... - King Sturge


  • pg 1
									The city office market

Review of 2000
2000 was an exceptional year for the City office market. Huge amounts of the available space
were snapped up, while recent developer caution meant there was very little coming through to
replenish supply. As a result, rents shot up, and investors piled in.

   • Availability plummeted from 547,000m² to 180,000m²

   • Take-up soared to 657,000m²

   • Headline rents increased to £646m²

   • £4bn investment transactions completed

Preview of 2001
2001 will see the supply shortage at its most acute, only to be relieved by pre-lets or quick
refurbishments. Provided demand holds up – and there is every indication that it will – rents will
be pushed up even further in 2001. King Sturge predict that the City will be one of the best-
performing markets in 2001.

   • Supply will squeeze even tighter – vacancy rates will be virtually nil

   • Demand will remain strong – London’ economy will continue to outperform

   • The supply/demand balance will push rents even higher

   • Clear investment strategies

  725,000m² under           At the end of 2000 there was 725,000m² of office space under
  construction              construction in the City. By far the majority of this space, 87%, was
                            either started on a pre-let basis or has been let during construction.

  ..but only 55,800m²       There is now only 95,400m² of speculative space undergoing
  speculative               construction or refurbishment, and of this, only 55,800m² is due to
  completions in 2001                                                             s
                            complete this year. This represents about one month’ supply. Four
                            schemes of over 5,000m² are due to complete in 2001, plus two slightly
                            smaller ones, and a handful of smaller developments and
                                             Speculative completions due in 2001:
                               100 Leadenhall Street, EC3 (refurbishment)                  11,624m²
                          70 Gracechurch Street, EC3                                   9,184m²

                          1 St John’ Lane, EC1                                         8,554m²
                          1 Plough Place, EC4                                          5,036m²
                          Crystal Court, St John’ Square, EC1                          4,709m²
                          Blackfriars Court, EC4 (remaining space)                     4,528m²

Limited starts in      There are few definite construction starts planned for this year - at the
2001                   moment 29 Gresham Street, EC2 (12,500m²) is due to start, and there
                       are five or six other possibilities.

Some direct owner      There has been little commitment recently to speculative development
development            funding for major schemes. However, this year several owners,
                       particularly institutions, have started work on their own sites: Standard
                       Life (10 Gresham Street, Juxon House); Henderson (1 Plough Place,
                       Moor House – with Greycoat); Asticus (29 Gresham Street)

..but generally,       Overall, in 2001 as in 2000, development will be held back by the
caution                caution of owners and funders. There is no shortage of sites - there is
                       still a total of 1,119,600m² of sites with planning permission. Many of
                       these are very large, and four (Broadgate Plaza, Plantation Place,
                       Paternoster Square and Times Square) are cleared or being cleared in
                       preparation for a quick roll-out.

180,000m² available    Availability fell to 180,000m² during the last quarter of 2000. The
                       reduction in supply during 2000 has been dramatic – there is now only
                       a third as much space available as at the end of 1999.
2.5% vacancy rate      180,000m² represents only 2.5% of City stock – the lowest rate for

Limited new, large     42,200m² of space came to the market this quarter, but only 10,500m²
space                  of this was new or top quality second-hand space. Most of the space
                       released, and all of the good quality space, was under 2,000m² in size.

3 months supply left   There is now a severe imbalance of supply and demand – 180,000m² of
                       space available equates to only just over 3 months’worth of take-up.

Little on the          Very little space of any size is expected to reach the market in 2001.
horizon                New space is severely constrained by the development pipeline. Some
                       second-hand space will be released as a result of mergers and moves to
                       new headquarters, but only the smaller properties are likely to come
                       straight on to the market. Space released by banks like HSBC and RBS
                       will take some time to come to the market, partly because of the
                       logistics of moving, and because the larger properties will be re-worked
                       in some way before marketing.

Off-market             Perhaps oddly, given the restrictions on large units, it will be small
                       occupiers who may find it more difficult to move quickly in 2001 (large
solutions?           occupiers still have the option of taking a pre-let). We expect to see a
                     rise in the number of deals done off-market.

                                          The supply/demand balance

657,300m² let this   174,800m² was let in the last quarter of 2000, bringing take-up for the
year                 year to 657,300m², twice as high as each of the last two years. Interest
                     in large properties resurfaced this year – over 20% of this year’      s
                     lettings were of properties over 10,000m².

                                             Key lettings this quarter:
                              Property                 Size                    Tenant
                     Holborn Place, EC1              30,600        Sainsbury
                     280 Bishopsgate, EC2            24,184        Royal Bank of Scotland
                     Premier Place, EC2              20,940        Royal Bank of Scotland
                     88 Wood Street, EC2             8,200m²       Compaq
                     1 Great St Helen’ EC3           5,200m²       Global Marine Systems
                     25 Cannon Street, EC4           5,200m²       Shook Hardy & Bacon

Role of fringe       While much of the space let this quarter was accounted for by
                     traditional finance-related occupiers, the Sainsbury letting at Holborn
                     Place, EC1 this quarter and Globix’ acquisition of 1 Oliver’ Yard,s
                     EC1 earlier in the year indicate a developing role for the City fringes –
                     housing major occupiers interested in central London at a lower cost.
Widening tenant                                                                     s
                      The range of occupiers in the City is widening – this year’ major
base                  lettings included tenants from the legal and TMT sectors as well as the
                      traditional banking, insurance and finance.

                              Non-financial tenants taking more than 5,000m² in 2000:
                                Law                     TMT                      Other
                      Brobeck Hale & Dorr        Bloombergs              Commission for
                      Freshfields                Compaq                  Health Improvement
                      Gouldens                   Global Crossing         Customs & Excise
                      Shook      Hardy    &      Globix                  Global          Marine
                      Bacon                                              Systems
                      Sullivan & Cromwell                                Sainsbury

Demand still strong   There is considerably more demand to come. In particular, there are a
                      number of law firms, both British and American, with immediate and
                      longer-term requirements. Some of the key firms are Allen & Overy,
                      Addleshaw Booth, Paisner & Co, DJ Freeman (who abandoned plans to
                      take 1 St John’ Lane), Macfarlanes, Vinson Elkins and White & Case.

                      Headline rents have risen to £646m² (£60ft²). This level has now been
                      achieved both on new space – at 88 Wood Street, EC2 – and on second-
£646m² achieved at    hand space. RR Donnelley paid £646m² at 55 Bishopsgate, EC2 in
55 Bishopsgate        December.

...and why            The latter deal is an important market indicator for several reasons – the
                      acceptability of second-hand space, albeit of top quality and excellent
                      location, the sheer shortage of space (the occupier had very few
                      options) and the increased importance of location and quality to what
                      have traditionally been seen as City "support" services – RR Donnelley
                      is primarily a printer of IPO and other financial documentation.

Minimal rent-free     Rent-free periods are now between 3-6 months on leases of 10 years
periods               and longer, and have fallen to as little as 1-3 months on five-year

More growth in        Continuing short supply, coupled with buoyant demand, will produce
2000                  good rental growth in 2001. At the time of writing, one City property
                      was under offer at £673m² (£62.50ft²), although the deal under
                      negotiation is for a short lease.
..especially for     Rental pressure is undeniably there, but, given the shortage of supply, it
second-hand space?   may be difficult to find the deals to prove substantially higher rents this
                     year. The shortage of new supply will also have a knock-on effect on
                     rents for good-quality second-hand space, and much of the visible
                     rental growth may be in this area.

                     INVESTMENT ACTIVITY
Record investment    £1.90bn was invested in the City market between October and
                     December 2000, taking total investment for the year to £4.03bn. The
                     total value of City office investment has increased more than fourfold
                     in five years.

Portfolio            Total investment in 2000 was boosted by three key portfolio sales:
                             Vendor                   Purchaser                   Price
                     Wates                       Prudential                               £246m
                     British Land                WestLB                                   £311m

                     MEPC                        Portfolio Holdings                       £150m

Irish and German     70% of the purchasers in 2000 were domestic. Both UK funds and
purchasers           property companies were very active in the market, though on balance
                     over the year the funds were net investors and the companies
                     disinvestors. However, £544m was also spent by overseas investors,
                     notably Irish private investors, and some of the German bank-managed
                     investment funds.

Japanese vendors     UK owners also made up most of the vendors in 2000, although there
                     were a number of notable sales, totalling £356m, by Japanese
                     developers and institutions:
                                      Property                               Vendor
                        60 Victoria Embankment, EC4               Sumitomo
                        55 Bishopsgate, EC2                       Kumagai Gumi
                        24 Chiswell Street, EC1                   Shimizu

                        Vintners Place (part-interest),           Sumitomo
                        Old Change House, EC4                     Nisho Iwai
                                24 King William Street, EC4              Nippon Life

  Yields at 6.25%            Prime investment yields in the City now stand at 6.25-6.5%.

  Continuing interest        2001 should see continued investor interest in this market. A currency
                             realignment could bring a resurgence of overseas interest, though from
                             Europe rather than Asia.

  Two strategies             There will be investor opportunities at both ends of the market in 2001.
                             There are asset management opportunities, which require effort and
                             carry void risk, but the supply-side case is still very strong. There are
                             also higher yielding longer-term passive investments, which look good
                             value at current yield levels, and might provide the opportunity to sell
                             on if overseas investors return to the market.

Q4 2000 – summary data
000m²                           Dec 99         Mar 00         Jun 00          Sep 00         Dec 00
Construction – speculative          200.80         243.55         260.54          215.61          95.37

Construction – pre-let              504.42         606.07         636.28          636.31         629.70
Planning permission               1,144.30       1,407.21       1,109.04          952.08       1,119.59

000m²                              Dec 99          Mar 00          Jun 00         Sep 00         Dec 00
Total space available               547.12         486.11         372.81          207.83         179.95

000m²                              Dec 99          Mar 00          Jun 00         Sep 00         Dec 00
Total space taken up                113.54         100.53         173.05          208.99         174.77

                                   Dec 99          Mar 00          Jun 00         Sep 00         Dec 00
£m²                                      511            511            619             619            646
£ft²                                 47.50          47.50           57.50          57.50          60.00

Investment activity
£m                               1996           1997           1998            1999           2000
Total invested                       1,373          2,065           3,077          2,158          4,029
Further contacts
For further information on issues relating to this report, please contact the following:
 Partner in Charge     Peter Joslin            peterjoslin@kingsturge.co.uk
 City Research         Helen Morris            helenmorris@kingsturge.co.uk
 City Investment       James Beckham           jamesbeckham@kingsturge.co.uk
 City Agency           Mark Bourne             markbourne@kingsturge.co.uk

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