THE RACE FOR SPACE

6 CUSHMAN & WAKEFIELD 7 RACE FOR SPACE Overview A total of 24.4 million sq ft across 267 pre-let transactions completed during this period. On average, there were 27 pre-lets each year over this period, with the peak being 2013 and 2014 when 42 pre-lets were completed. Pre-letting was more prevalent in the City and East London than in the West End, with 148 pre-lets and 119 pre-lets, respectively. A combination of limited supply, and a lack of available debt for speculative development is resulting in Central London occupiers launching searches further in advance of their planned HISTORIC TRENDS relocations than ever before. This has resulted in a surge in pre-letting activity across London over the past five years. With supply expected to remain constrained and take-up volumes set to remain above average, the trend towards pre-letting is expected to continue into 2019 and beyond, as occupiers face an increasingly limited choice of space. Location Since 2009, the City has accounted for 57% of all pre-let deals across Central London by sq ft floorspace, compared with 34% in the West End and Emerging West. In East London, pre-lets were a key source of Docklands activity in the early 2000’s, Pre-letting has historically been an important part of the Central London office market, accounting for 23% of total transactions over 5,000 sq ft between 2009 and 2018. Average rental discount for pre-lets over 100,000 sq ft 2009-2018 Figure 1 Central London pre-lets as a proportion of total leasing volumes (2009-2018) Source: Cushman & Wakefield 0 2 4 6 8 10 12 14 ‘18 ‘17 ‘16 ‘15 ‘14 ‘13 ‘12 ‘11 ‘10 ‘09 ‘08 0% 5% 10% 15% 20% 25% 30% 35% Pre-let Traditional lease % Pre-let of total volumes 23 % 14 % 15 % 13 % 16 % 30 % 28 % 25 % 28 % 26 % 29 % Millions Figure 2 Number of pre-lets – central London (2009-2018) Source: Cushman & Wakefield Off plan Under construction 267 deals 219 48 BARGAIN HUNTERS? It has long been held as true that an occupier signing a pre-let will secure a rental discount over built stock, with the landlord willing to concede net effective rent for de-risking a scheme. Our analysis of 100,000 sq ft+ pre- lets over the last ten years shows that an average discount of 8% against prime built space was granted to occupiers. However, it is crucial to note that any potential discount is closely linked to the movement of the Central London market cycle, as well as the individual elements of the deal including location, competition for space or covenant of the incoming tenant. After the Global Financial Crisis in 2009, when the market cycle was perceived to be at its low point, occupiers actually paid a premium for pre-lets. Our research suggests developers will seek a premium at the bottom of the cycle due to the increased level of risk involved in kick- starting a scheme in a weak market. As the market cycle progresses, the level of risk falls as developers become more optimistic about the potential for letting space on the open market if necessary. Consequently, developers are able to offer pre-let space at a discount to occupiers often to provide early-stage financing. As we approach the very end of the cycle, developers are likely to once again price risk into their rental aspirations for pre-lets, which will ultimately reduce the discount available to occupiers. as investment banks moved to Canary Wharf mainly to accommodate large trading floorplates. However, there have been minimal pre-letting transactions in Docklands over the past three years as activity has focused around regeneration schemes in Stratford, with a total of five pre-let transactions signing since 2015. Over the period of analysis, East London has accounted for 9% of floorspace pre-let. Timing of pre-lets The average duration between exchange and practcal completion was 13 months with an average size of approximately 91,676 sq ft. The average duration between exchange and completion for those schemes which were pre-let off- plan was 30 months, with an average size of 225,140 sq ft. Considering pre-lets for buildings which were under construction, the average duration between exchange and completion was 9 months, with an average size of 62,423 sq ft. Off-plan pre-lets It is clear that pre-lets off-plan tend to involve large-scale occupiers. This trend was traditionally driven by the financial services sector taking large pre-lets in the City Core and Canary Wharf. Over the last ten years, there were 33 pre-lets off-plan for over 100,000 sq ft . The most active sector for pre-lets off-plan above 100,000 sq ft was the media & technology sector (12 deals) , followed by banking & financial companies (9 deals) and public & government sector (7 transactions). From a geographical perspective, 21 out of the 33 off-plan pre-lets were in the City and East London submarkets. 8 %