CAPITAL WATCH ISSUE 1 2018

Despite a predicted scenario of slower leasing activity and an uptick in sublease space in the aftermath of the vote to leave the EU, central London remains firmly in a low- supply environment. Current supply levels across central London stand at 13.7 million sq ft, equating to an overall vacancy rate of 5.2%. New Grade A space now accounts for less than 50% of total supply and has seen three consecutive quarterly decreases as occupiers focus on upgrading space. Based on rolling three-year Grade A take-up, current new Grade A supply across central London remains limited, with just under 12 months’ worth of take-up on the market. While not quite back to levels recorded just prior to the EU referendum, the market is not showing signs of significant pressure and is certainly nowhere near the levels seen in the years after the global financial crisis. This is how things stand presently, but there are concerns around the volume of cranes across the London skyline and how that will impact on the future vacancy. The underlying uncertainty over Brexit and the structural changes in how we work – an analysis of IPD data for the same buildings over 5 years showed a downward trend in workplace density from 12.5 sq m to 9.6 sq m – could potentially impact on the demand for space at a time when it feels like more space is breaking ground. It's worth putting today's development market into perspective. The first thing to note is that the number of new office buildings delivered in central London is 23% below the numbers delivered during the financial crisis in 2008. Only 103 office buildings (over 20,000 sq ft) were completed during 2016/2017 totalling just over 12.0 million sq ft, down from 133 (14.5 million sq ft) in 2008/2009. Declining developer optimism, increased risk aversion and falling financial lending to property developers has led to a reduction of speculative development starts. The amount lent by banks to property developers has fallen 56% over the last five years, from £34 billion outstanding in December 2013 to just £14.8 billion in December 2017, according to the Bank of England. There is no disguising the fact that total development completions are expected to be above average over the next couple of years, on the plus side pre-committed space accounts for 46% of all space under construction, which is a high point when looking over the last five years. This figure is anticipated to rise with several rumoured pre-let deals at 22 Bishopsgate, among others, which will also mitigate the impact of this dominant scheme on future supply. Speculative space under construction across central London totalled 6.2 million sq ft at the end of March 2018. This has been falling steadily since a peak of more than 10 million sq ft back in mid-2016 as new starts fail to match development completions. This is also happening against a background of an expansion central London geography. Looking forward, Cushman & Wakefield estimate there is 6.1 million sq ft of planned office developments that could potentially complete over the next five years. Given that annual average Grade A take-up levels across London stand at 6.8 million sq ft, the development pipeline looks tight and, despite a more challenging economic and political outlook, Cushman & Wakefield forecasts do not anticipate any significant upturn in vacancy over the next five years. 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Completed-spec sq ft (millions) 2008 2010 2009 2013 2016 2017 2015 2014 2012 2011 2018 2019 2020 2021 2022 Under construction & available Pipeline probable 10-year spec average 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Number of years 2008 Q2 2009 Q3 2009 Q1 2011 Q1 2012 Q3 2013 Q1 2012 Q1 2011 Q3 2010 Q3 2010 Q1 2013 Q3 2014 Q1 2014 Q3 2015 Q1 2015 Q3 2016 Q1 2016 Q3 2017 Q1 2017 Q3 2018 Q1 Central London City West End *based on rolling 3-year Grade A take-up Are we at risk of oversupply? The market is not showing signs of significant pressure and is certainly nowhere near the levels seen in the years after the global financial crisis New Grade A supply in terms of years of take-up Central London development pipeline By Hayley Armstrong, Senior Insight Analyst, UK Research hayley.armstrong @cushwake.com CUSHMAN & WAKEFIELD 24 LONDON IN FIGURES