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Hemicycle # 2

G7

The Capitals Real Estate

by


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G7

The Capitals Real Estate

E.R. : PP Verelst / May 2014

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Hemicycle Attended this meeting Lucy

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Fletcher, International Capital Group Canada (1),

Stephan von Barczy, Head of Capital Market France (2)

Helge Scheunemann, Head of Research Germany (3),

Davide Dalmiglio, Head of Capital Markets Italy (4), Akihiko Mizuno, Head of Capital Markets Japan (5), Damian Corbett, Head of Central London Capital Markets UK (6), Peter Riguardi, President of JLL’s New York Tri-State Operations USA (7).

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Edito The Head of States of the G7 countries will meet in a summit that will take place in Brussels on the 4th and 5th of June. Hot topics on the agenda will most likely be the geopolitical troubles in several places in the world, cooperation in a recovering economic climate, environmental issues, etc. As a real estate advisor, we questioned ourself on what could be the common points between the property markets in the USA, the UK, Japan, France, Canada, Italy and Germany? The Research team of JLL Brussels contacted JLL’s local representatives in each of the countries participating to the summit to compile the latest trends of the property markets in all of the G7 members state. The result is remarkable: should you be an occupier or a landlord in Tokyo, Toronto, Paris, New York, Milan, Frankfurt, or London, you speak the same language: mobility, energy-efficient buildings, flexible workspace, declining vacancy rate after crisis years, rising rents. On the property investment side, the convergence is even more obvious: there is massive cash available from local institutions or global money, particularly from emerging markets like China and the Middle East. Banks are more supportive than they used to be in recent past and loanto-value ratios tend to be more aggressive. As long term investment rates are under pressure, money is cheaper. Would you invest in one of the 7 capitals of G7 countries the observation is generally the same: yields are down, and price are up.

Vincent H. Querton M.R.I.C.S

CAnada

p.4

FRANCE

p.7

GERMANY

p.10

ITALY p.13

JAPAN

p.16

UK

p.19

USA

p.22

Belgium

p.25

International Director CEO Benelux

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TORONTO

CANADA Office Investment volume 2013

Prime rent C$ / m² / year

C$ 5.35B

Stock m² Net absorption m²

Office Investment volume Q1 2014

C$ 1.25B

48.90 171,437,073 -378,999

Vacancy rate

9.40%

Prime yield

5.00%

LEASING MARKET Trends currently seen in Toronto’s CBD office market reflect slower leasing activity and fewer large tenants in the market, particularly in the financial core. Smaller tenants have been more active, particularly in the sublease market where a number of blocks have become available in recent quarters. On the development side, almost 7.0 million square feet of office space is currently under construction in the Greater Toronto Area (GTA), of which over 5.0 million square feet is in the CBD. This represents the largest building boom in office construction since the 1990s. With these office developments scheduled for completion over the next four years, the CBD market is estimated to grow by over 7.0%, bringing the total inventory to 75.0 million square feet. As Downtown Toronto’s prime office real estate increases its supply, tenants looking for a CBD location will experience increasingly favourable conditions to relocate over the next few years. Though new supply will provide an increase in vacancy and potentially drive down net effective rates, demand for the available space is expected to rise as well. In the suburban markets, leasing activity is tapering off and vacancy rates have gradually increased reaching 12.5% at the end of the first quarter in 2014. However, the suburban market is not uniform in its characteristics and leasing activity in certain west submarkets such as the Airport Corporate Centre remains more positive. The amount of sublease space jumped to approximately 2.1 million square feet in the first quarter, which is up 8.2% from the previous quarter and is largely a result of right-sizing.

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INVESTMENT MARKET Direct commercial real estate investment in Canada was at record volumes in 2013, coming in at C$26.3 billion compared to C$24.8 billion in 2012, an increase of 6.0%. Retail transactions accounted to 33.0% of total transactions in 2013, driven by institutional trading of trophy assets in major urban markets. Office transactions, on the other hand, saw a sharp decrease in volumes reaching C$5.3 billion, down from C$10.2 billion in 2012. Toronto remains the dominant investment market in Canada accounting for over 35.0% of total volumes, driven in large by industrial, multi residential and retail transactions. Cap rates continue to compress as the availability of quality assets in the market place remain scarce. At the end of the year, Class A cap rates are holding at near historical lows, however select secondary markets are starting to see some softening.

“Direct commercial real estate investment volumes in Canada reached record volumes in 2013, and year-to-date we are seeing no signs of slowing. The big story has been the shift in purchasing profile; the pullback by the REIT sector in the second half of 2013 has created more opportunities for domestic pension funds and private investors. Foreign investors, on the other hand, are showing a keen interest in Canada, but are challenged by a market that has limited offerings and is dominated by domestic investors.� Lucy Fletcher Vice President, International Capital Group and Capital Markets.

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OUTLOOK The outlook for 2014 is becoming increasingly positive from an occupier’s perspective as the growing inventory and relatively weaker market conditions are placing downward pressure on rents, creating tenant-favourable conditions. The majority of the new, predominantly downtown developments, have signed anchor tenants and often one or two additional large users; however, it remains to be seen if demand from medium and small companies are strong enough to fill the remainder of available space before completion dates. Traditionally, demand from smaller office users increases as developments are nearing their completion stage and we are therefore anticipating leasing activity to pick up near or after developments are completed.

Scotia Plaza (40 King Street West) located in the Financial Core, Toronto. It was purchased by Dundee REIT (67%) and H & R REIT (33%) for C$1.27b back in 2012.

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PARIS

FRANCE Office Investment volume 2013 (mio)

Prime rent € / m² / year

€ 10,930

Stock m² Take-up m²

Office Investment volume Q1 2014 (mio)

Vacancy rate

€ 2,888

Prime yield

735 52,018,350 507,000 7.50% 4%

LEASING MARKET After a 4th quarter which confirmed a slight increase in activity, the start of 2014 consolidated the gains at the end of last year. At 507,000 sq m, take-up during the 1st quarter of 2014 was much higher than in the 1st quarter of 2013 (+19%) while remaining at a level comparable with the end of 2013 (-4%). The most notable change at the start of the year is that total take-up on a 12 month rolling basis is back on an even keel for the first time since 2012, approaching 2 million sq m. In a gradually improving macro-economic context, it would be safe to say that the low point was reached in the second half of 2013 and that the market is now picking up. Nevertheless, significant differences are evident from one sector to the next. Paris CBD saw a notable increase in activity at the start of the year following five transactions for more than 5,000 sq m, including COVEA leasing more than 20,000 sq m in the 9th district (the first signed in the CBD since 2012). La Défense, on the other hand, it at its lowest point in the last 10 years. Nevertheless, the situation may radically change in La Défense in the coming months given more than 200,000 sq m of active seekers in the area. The large transactions segment – the main driving force behind stronger market performance – recorded a dynamic start to the year. With 16 transactions for more than 5,000 sq m, this market is up by 23% in number and 63% in surface area compared with last year. We should note that half of these transactions have been signed for existing buildings, representing an absorption of more than 120,000 sq m in immediately available supply (compared with barely 50,000 sq m at the same time last year). We should also note that the proportion of Grade A in the large surface areas market fell in the 1st quarter to 42% of take-up, particularly as a result of the significant share of existing buildings and of Paris (where Grade A accounts for less than 10% of properties) in this market segment this quarter.

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Immediate supply remains almost unchanged at the end of March, with 3.911 million sq m immediately available in the Greater Paris Region, representing a stable vacancy rate of 7.50%. It is worth noting that while available supply in the CBD fell slightly at the start of the year, available supply in La Défense rose by 9% (all second-hand products), leaving the vacancy rate at 13.3%. Headline rents changed erratically again at the start of the year. The Central Business District saw its headline prime rent record a 3.5% increase compared with the 4th quarter of 2013 to reach €735/sq m. While the highest rent remains €750/sq m, a level already reached for a few transactions at the end of 2013, this value has been confirmed by further leases signed at the start of the year. Rent in La Défense, meanwhile, is down by 2.8% over a quarter to €515/sq m in headline rent.

“At this stage of the year, we are expecting investment volumes to exceed €12 billion in the Greater Paris Region. Once again, although investors’ appetite remains strong, the Parisian investment market’s performance in terms of volumes will remain dependent on the level of supply.” Stephan von Barczy, Head of Capital Markets.

INVESTMENT MARKET The investment volume in the 1st quarter of 2014 reached a level not seen in the Greater Paris Region since 2007. At €3 billion, the market has risen by 73% compared with the 1st quarter 2013. The acquisition of the ownership structure of “Cœur Défense”, with an estimated asset value of €1.3 billion, accounts for the entire market increase in the 1st quarter. This transaction also shows some investors’ appetite for “distressed” sales, which remain rare in the Parisian market. Apart from the sale of “Cœur Défense”, the Parisian market remains very similar to the same period the previous year, with the same investment volumes (€1.7 billion) and almost the same number of transactions. Nevertheless, there are more large transactions in 2014, with an increase from four to six sales (excluding “Cœur Défense”) for more than €100 million. Once again, French investors remained active in all market segments at the start of the year. In the market of transactions for more than €100 million, French buyers accounted for four of the quarter’s seven transactions, although the three largest were carried out by foreign buyers, including a newcomer from Malaysia. The situation is very different in terms of volume, of course, with LONE STAR, the buyer of “Cœur Défense”, being an American fund. 8 / 28

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Under pressure from sustained demand for the best assets, we are again seeing a marginal contraction in prime yields although with potentially wider range of yields in some suburban Paris markets. Investors are taking an extremely precise and differentiated approach and the levels of yields available in some cases may vary by 100 basis points within a single market. In terms of Paris’s Central Business District, prime yields are now between 4.00% and 4.50%, close to their lowest ever and on a level with London.

OUTLOOK The progress of economic indicators at the start of the year, as well as 1st quarter market figures, leads us to leave our forecasts unchanged in relation to the rental market: • Take-up: 2 million sq m for 2014 with activity picking up in the second half of the year. •S  upply: stable with a likely erosion in the quality of available supply. • Rent: headline rents are likely to remain stable overall between now and the summer after the falls recorded in 2013. Incentives will remain at a high level. Depending on the rebound in demand in the second half of the year, the difference between effective rent and headline rent could begin to reduce. Investment volumes: investment demand remains strong in the Greater Paris Region and some large transactions are currently underway. The 2nd quarter will again be very active and on the scale of the year we anticipate an increase in investment volumes to around €12 billion. Yields: prime yields fell slightly again (-25 basis points) in the 1st quarter and remain under pressure from strong demand. Since the risk premium on OATs remains sufficient (200 basis points), these rates could remain at their current low level in the coming months.

Coeur Defense 9 / 28

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Frankfurt

Berlin

1,367

264

20,571,340

17,004,400

217,420

130,900

Vacancy rate

5.30%

7.90%

Prime yield

3.75%

4.60%

GERMANY Office Investment volume 2013 (mio)

Prime rent € / m² / year

€ 14,060

Stock m² Take-up m²

Office Investment volume Q1 2014 (mio)

€ 4,330

Letting MARKET The office lettings markets in the Big 7 presented a largely positive picture in the first three months of the year. The take-up volume between January and the end of March amounted to 697,000 sqm in total and was therefore almost 15% higher than a year previously. The take-up results would not be a cause for major celebrations among the market players, especially since the picture is very mixed at a regional level. The relative changes in take-up compared to the previous year ranged from -18% in Cologne – where take-up reached around 62,000 sqm – and +133% in Stuttgart. However, the capital of Baden-Württemberg still recorded lower take-up than Cologne, at just below 61,000 sqm, and its high growth was from a very low base in the first quarter of the previous year. As well as Cologne, Düsseldorf (-9%) and Hamburg (-3%) also registered lower take-up. On the other hand, Munich increased its take-up volume to 169,000 sqm (+11%), while in Berlin take-up grew by as much as 43%. The strong demand coupled with the further reduction in vacancies caused the prime rent in Stuttgart to increase by 50 cents to 19 Euro/sqm/month in the first quarter of the year. This represented a 3% increase both on an annual and a quarterly basis. In all other cities, the prime rents were stable on a sequential basis. However, year-onyear the nominal rental prices grew by 6% in Düsseldorf, almost 3% in Frankfurt and around 2% in Munich.

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INVESTMENT MARKET The German investment market appears to be maintaining its excellent momentum. The impressive end-of-year rally in 2013 continued seamlessly into 2014 to produce an equally good start to the year. The framework data remains good and the improved economic outlook coupled with the continuing low interest rate are fuelling transactions on the German market for commercial property. While domestic players dominated the market in 2013, we expect to see a much stronger involvement by foreign investors in 2014. Furthermore, the flow of international capital will continue so long as exogenous economic and political risks remain manageable, and the property asset class will benefit from this. The high price level that has now been attained in some areas can also not yet be identified as a limiting factor. On the contrary, an improved situation on the capital market once again allows higher loan-to-value ratios for borrowings and the banks are reducing their margins in view of growing competitive pressures, so that the market offers attractive conditions for borrowers. With around EUR 10 billion in commercially used properties across Germany as a whole, the transaction volume is around 40% higher compared to the first quarter of 2013 and is also equivalent to the volume recorded for the final quarter of 2012. The last quarter of a year is generally the strongest in terms of transaction activity. Indications are that the transaction volume in 2014 as a whole will be between EUR 35 billion and EUR 40 billion. This would therefore exceed the 2013 volume by up to 30%. The continuous growth since 2009 may arouse fears that the investment market is again moving to a rather unhealthy level, as was the case in 2006/2007. We cannot confirm this at the present time, however. We observe neither overstatements by the lending banks, nor do the prices achieved appear to be fundamentally unjustified. A well-developed awareness of risk still persists, and transactions are still being intensively analysed. Kranzier Eck-Berlin

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Investors continued to show strong interest in top office properties in prime locations in the first few weeks of the year. As a result, office prime yields again fell slightly to an average of 4.61% for the Big 7. This decline was caused by the slight decreases in yields in Berlin, Hamburg, Cologne and Munich by 10 basis points apiece. Yields also showed some movement outside the top locations but not to the same extent as the prime yields. The prime yields could fall further as the year progresses, but strong price increases are not to be expected.

“While domestic players dominated the market in 2013, we expect to see a much stronger involvement by foreign investors in 2014. Furthermore, “the flow of international capital will continue so long as exogenous economic and political risks remain manageable, and the property asset class will benefit from this.� Helge Scheunemann, Head of Research.

OUTLOOK The outlook for the rest of the year remains positive. We forecast a total take-up result of around 3 million sqm, which remains in line with the average for the last 10 years. The lettings market will not only be supported by large searches above 10,000 sqm but also by the solid economic data. Companies are also continuing to recruit new staff particularly in the services sector, which is so important for the office market. Tenants still have high expectations with regard to the efficiency and quality of office spaces. We observe that companies make no cutbacks here, and if they find they are unable to meet their high requirements through a physical move then remaining in the existing office space is a real alternative. Lease extensions are increasingly becoming a market-influencing factor that has to be addressed by owners and advisers. At the same time, tenants are taking longer to make decisions as they are undertaking more intensive reviews of their space options. This is particularly the case for large companies, which increasingly recognise the strategic importance of office workplaces not only for the overall calculation of costs but also for employee satisfaction. As the year progresses, we expect to see further slight rental price increases in Berlin, Frankfurt, Hamburg and Munich; the overall increase for 2014 is then likely to be around 1.5%.

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ITALY Office Investment volume 2013 (mio)

Prime rent € / m² / year

€ 1,476

Stock m² Take-up m²

Office Investment volume Q1 2014 (mio)

€ 152

Vacancy rate Prime yield

Milan

ROME

450

400

12,510,760

12,119,200

51,840

20,760

13.30%

5.20%

5.15%

5.30%

Letting MARKET The main Italian Office markets are those of Milan and Rome, with a stock of approximately 12 mn sqm each. The Milan market is a fragmented market with a core central area consisting of the Centre and Historical Centre submarkets on the one hand and the new CBD on the other, that has been consolidating further to the regeneration of the area aroung the Milano Porta Garibaldi High Speed Train station. Around the city centre, peripheral submarkets are consolidating thanks to recent infrastructure improvements, particularly new underground stations. The Rome market is concentrated in the City Centre/Semicentre markets, hosting a high concentration of business services, the CBD and the E.U.R. Beyond this core markets, a number of other locations account for the remaining office stock, including the Fiumicino and Fiumicino Corridor submarkets. With regards to the letting market, throughout 2013 Milan has showed a slightly reduced YoY level of activity, with a nonetheless strong Q4 absorption level; Rome, instead, has grown on a YoY basis, thanks to a number of large owner occupation deals as well as international corporate activity. In the Milan letting market the first quarter of 2014 continues to reflect the dynamics recorded over the last two years, as renegotiations undertaken over the past 24 months have prolonged the life of leases that were due to expire in 2014. Nonetheless, Q1 take-up has been quite active, with a take up of approximately 52,000 sqm, and broadly in line with the 5-years average (49.000 sqm). In the 12 months to Q1 2014 activity has been growing in central submarkets, which have benefitted from a significant repricing over 2013 as well as a moderate increase in availability. A recovered level of activity in prime locations suggests a stabilization in prime face rents, which were thus confirmed at 450 €/sq.m/pa as well as average incentive levels.

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On the supply side, the city-wide vacancy rate increased to 13.3%, driven by a series of releases mostly in the Centre and Periphery submarkets. For the Rome office market 2014 is off to a slow start: Q1 totalled 21,000 sqm marking a decline on both Q1 2013 and the 5 yrs quarterly average. The slowdown is mostly the result of a decline in the average deal size (ca.1,000 sqm), which has resented from the lack of large owner occupation deals that characterised 2013. Grade A floorspace represented just under a third of the quarterly and the 12 month rolling take up, in line with evidence that quality is an important but not crucial driver of tenants’ locational choices in the Rome market. At a geography level, the E.U.R. submarket has been the most active in Q1 2014 as for the 12 month rolling. On the supply side, the overall vacancy rate is broadly stable at 5.2%, with some speculative schemes completed during the quarter. The prime rent in the CBD remains stable at € 400 / sq. m pa as do incentives and further stability is expected for 2014, in a nonetheless still generally occupier-friendly market.

“After a strong 2013 in terms of transacted volumes, We are expecting a similar or even better year with an increased numbers of international players, amongst the different sectors, targeting big lot sizes, portfolios and prime assets mainly in the Office and retail sector. The domination of opp funds is almost over and therefore we envisage the presence of core players, not Just domestic, sustaining the demand with a contextual Yield compression in all Asset classes supported by banks restarting again their financing activity.” Davide Dalmiglio, Head of Capital Markets.

INVESTMENT MARKET The first quarter has been overall more positive for the Italian Commercial Real Estate investment market with approximately €800mn invested across all sectors, up on the same quarter of 2013. The Office sector, however, has so far performed weakly, with approximately €152mn invested, compared with €430mn in Q1 2013. Milan, in particular, has registered two transactions, representing the totality of investment volume in the office sector during the considered period; this is in line with evidence from the 12 months leading to Q1 2014, which have seen Milan attract most of investors’ interest with 77% of the Office investment volume directed to Milan. After revising prime net yields slightly upward at the end of 2013, in Q1 values are

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stable at 5.15%. In Rome the quarter has seen no evidence of investment transaction. Considering the 12 months rolling, however, almost â‚Ź350 mln has been invested in the market, down by 20% on the 12 months rolling regarding Q1 2013. Also the investment pipeline for the rest of 2014 suggests a more dynamic year than what Q1 has shown, with a number of good quality assets in the E.U.R. and CBD submarket that are expected to confirm yield stability.

OUTLOOK The outlook for the rest of 2014 is stable, with subdued letting activity and stable cost levels. The tenant friendly market has increasingly rewarded new or refurbished assets featuring flexible quality spaces, a consolidated or strengthening location and affordable rents. In the investment market, these dynamics are paving the way for an uplift for those investors who are able to seize the current window of opportunity.

Bodio Centre Milan

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TOKYO

JAPAN Office Investment volume 2013 (mio)

Prime rent

¥ 1,618,929

Stock m² Take-up m²

Office Investment volume Q1 2014 (mio)

¥ 746,837

¥ 32,268 / tsubo / month 41,000,000 6,380,000

Vacancy rate

3.7%

Prime yield

3.6%

LEASING MARKET Rents in the Grade A office market in 1Q14 registered growth for the eighth consecutive quarter. Since bottoming in 2Q12, rents have continued to grow, albeit moderately, as vacancy has decreased due to limited new supply following the global financial crisis and demand driven by a “flight to quality” following a natural disaster in 2011. The improvement in economic sentiment and conditions as a result of “Abenomics” supported the growth trend, and rental growth in 2013 reached 2.4% y-o-y. Since the beginning of 2014, growth has accelerated, as evidenced by the latest figures for May, with rental growth of 1.2% m-o-m and the vacancy rate decreasing to less than 3%.

“In the leasing market, demand backed by solid economic growth and a tightening labour market, as reflected in the 3.6% unemployment rate in 1Q14, coupled with the high forward commitment rate of new supply of more than 90% for 2014, will place further downward pressure on vacancy and accelerate rental growth.” Akihiko Mizuno, Head of Capital Markets.

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INVESTMENT MARKET In the investment market, total transaction volumes doubled to JPY 4 trillion (USD 41 billion) in 2013 compared with the previous year, led by domestic investors, J-REITs in particular. The office sector saw the highest level of sales volumes across all sectors, increasing 101% y-o-y. This upward trend continued in 1Q14, as quarterly transaction volumes reached JPY 1.3 trillion (USD 12 billion), increasing more than 25% y-o-y. At the city level, Tokyo for the first time became the most actively traded city in the world, overtaking London and New York. Unusually, there was a large component of foreign investors, accounting for 25% of all buying activity.

“In the investment market, transaction volumes are expected to rise, with persisting demand from domestic investors while offshore investors become increasingly active. Strong competition for assets will place downward pressure on investment yields and active investment is expected in all sectors across the nation. The various projects planned for the 2020 Summer Olympics should also have a positive impact on the real estate market.� Akihiko Mizuno, Head of Capital Markets.

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Tokyo

OUTLOOK Following the announcement of the three-pronged economic measures – the socalled “Abenomics” package – in December 2012, economic sentiment and conditions have improved significantly. The wealth effect from rising equity values has stimulated consumption, in particular for luxury goods, while the devaluation of the Japanese yen has supported exports and a rise in visitor arrivals amongst others. In 1Q14, real GDP registered 5.9% q-o-q growth in annualised terms, a higher than expected figure. Growth in the quarter was driven by private demand, including private consumption and corporate capital expenditure, ahead of the consumption tax increase in April. Although the tax increase is likely to impact domestic spending in 2Q14, there is optimism as machinery orders in 1Q14 (the 3-6 month leading indicator for capital expenditure) registered growth compared with the previous year.

Nakano Central East –Tokyo

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LONDON

UK Office Investment volume 2013 (mio)

Prime rent € / m² / year

€ 29,919

Stock m² Take-up m²

Office Investment volume Q1 2014 (mio)

€ 2,277

1,367 20,571,340 217,420

Vacancy rate

5.30%

Prime yield

3.75%

LEASING MARKET The volume of leasing activity slipped back following above average take-up across Central London 2013, however the underlying fundamentals remain sound as 217,400 sqm was let in Q1 2014. A further 305,800 sqm is under offer, the highest level since Q3 2007 which should boost letting activity in Q2. Pre-completion lettings were a strong feature of the market in 2013 (31% of total transactions), and they have remained strong in Q1 2014 (30% of total transactions), signalling the strength of the market Despite the strong take-up over recent quarters, demand remains very strong at 1.2 million sqm. There was a particularly large increase in the West End, where active demand increased 23% quarter-on-quarter to stand at 482,200 sqm. Replacement demand continues to come through, with new requirements boosting the level of active demand, reflecting the strength of occupier sentiment and employment growth. The Technology, Media & Telecommunications (TMT) sector continues to underpin demand and accounts 26% of requirements across Central London. Occupier mobility was a key trend that emerged in 2013. Occupiers became less focused on location and driven more by cost, quality and availability of supply in their search for new office space. Occupiers are increasingly viewing the Central London market as a whole, rather than having a traditional City or West End focus. This trend is partly driven by the increasing cost in the West End, for instance prime rents are at £1,130 psf, reflecting an annual increase of 7.7%, in comparison prime City rents are £646 psf (5.2% annual growth) and £414 psf in the Docklands where rents have remained stable since June 2011. As such there has been increased occupier migration in 2013 and into 2014 particularly from the established West End

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sub-markets; the key beneficiaries of this migration include Kings Cross, Farringdon and Shoreditch to the north of the core markets, London Bridge and Bankside in Southbank and Midtown generally. Eroding supply is also a key contributor to occupier mobility. Supply continued to fall in Q1 as the overall vacancy rate fell to 5.3% and Grade A to 3.9%. Speculative under construction also fell 16% in Q1 to 490,000 sqm. We expect occupier mobility to continue, at least until we see a return to higher levels of speculative delivery across Central London.

INVESTMENT MARKET £1.9 billion was traded across Central London in Q1, the lowest quarterly volume since Q1 2010 and can be attributed solely to a limited supply of tradable assets in the West End, as investor demand remains very strong. A key characteristic of the Central London market in recent years has been the increasing dominance from overseas investors, for instance 85% of total investment in 2013 was overseas in origin. Q1 2014 bucked recent trends as UK investors returned to the market accounting for 65% of total investment (35% foreign investment. Whist we expect UK investors to remain competitive we anticipate that overseas investors will be active during the remainder of 2014. We expect trading volumes to accelerate in Q2, as rising values motivate sellers to bring more stock to market which will see prime yields remain under pressure. Prime yields for smaller lot sizes remained stable at 3.75% in the West End and fell 25 basis points to 4.5% in the City at Q1 2014.

“While trading volumes have tapered off in Q1 after a rush of large deals in the second half of 2013, investor demand for Central London office stock remains very robust. The market is underpinned by a healthy occupier market, which offers prospects for rent driven capital value growth over the next few years.” DAMIAN CORBETT, HEAD OF CENTRAL LONDON CAPITAL MARKETS.

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OUTLOOK As the year progresses, we expect trading volumes to accelerate once more, as rising values motivate sellers to bring more stock to market and interest from foreign investors, particularly in large lot sizes, continues to grow. Overall, demand will still out-strip supply, however we expect yields to remain firm, with potential for further compression for best assets.

Leadenhall Building London City

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New York

USA Office Investment volume 2013 (Mio)

Prime rent

$103,531.7

Stock / Inventory sqf Take-up sqf

Office Investment volume Q1 2014 (Mio)

$23,073.0

Vacancy rate Prime yield

$79.88 443,523,324 8,032,606 9.20% 4.2%

LEASING MARKET Strong demand from the creative industries—throughout Manhattan but especially in Midtown South—drove leasing activity higher and absorption into positive territory in the first quarter of 2014. Landlords, sometimes negotiating with multiple tenants for the same space, have raised rents and bumped tenants—a practice not widely seen since before the recession. Asking rents rose and concessions decreased, not only for red-hot Midtown South properties and the Trophy set, but for the broader Manhattan market. Midtown Class A rents have increased 15 quarters in a row to $76.30 per square foot. At quarter-end, sublease space represented only 20.5% of the available Class A Midtown supply, down from 35.1% in 2009. The most visible example of this has been on Avenue of the Americas—at one point a bastion of large blocks of financial services surplus space—where Class A vacancy rate decreased to 12.1% from 16.0% at year-end 2012. Meanwhile, the top of the Trophy market, typically defined as leases starting above $100 per square foot, is quickly approaching the historical peak years of 2007 and 2008, both in terms of velocity and pricing. Manhattan’s top buildings report starting rents of $200 per square foot for the best space. The Downtown market, however, still has room to recover. The overall vacancy rate increased slightly to 13.2%, largely the result of Thompson Reuters’ intent to relocate 450 employees to Hoboken and vacate 447,829 square feet at 195 Broadway. Highquality opportunities and comparatively low pricing, however, are driving tenants— particularly those in the legal services, media, advertising and technology sectors— Downtown from elsewhere in Manhattan. In the first quarter, both Revlon and Macmillan Science and Education Group signed leases to move Downtown. Approximately

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one-third of all new leases Downtown in the first quarter were relocations from outside the district—the highest of any market by far. Several major leases, including those in the less active financial and legal services industries, are scheduled to close by year-end. Competition and pricing for large blocks could increase as options diminish. Without a sudden economic or political shock, rents will likely trend higher through 2014 and accelerate into 2015. Longerterm, Manhattan remains fundamentally supply-constrained. According to employment forecasts, by 2018 Manhattan office-using employment will surpass the all-time peak of 2000, yet total office inventory has not significantly changed. Most new construction in Midtown is scheduled to be completed beyond 2018. Established Midtown tenants will continue to migrate Downtown and to the West Side for more affordable options while start-up tenants are beginning to scout emerging submarkets in Brooklyn and Queens.

“Pricing and velocity at the top of the market have reached their strongest levels since 2008. More than half of Manhattan’s top-tier trophy properties posted a vacancy rate of less than 5.0%. Demand from smaller financial services tenants, including hedge funds and private equity firms, has increased parallel to recent Wall Street gains.” PETER Riguardi, president of JLL’s New York tri-state operations.

INVESTMENT MARKET The New York City investment sales market witnessed an exceptionally strong start to 2014 with over 100 deals closed and an additional 45 transactions under contract. The first quarter of 2014 saw a total of $6.1 billion in closed transactions, a 9.0% increase from the first quarter of 2013. The total value of closed and under contract deals was $16.4 billion, a 125.0% increase from the first quarter of 2013. Manhattan office sales accounted for more than 42% of gross sales activity with $2.6 billion in transactions. Downtown office properties continued as the most sought-after assets in the city, with notable transactions at 55 Broadway, 61 Broadway, 90 Broad Street, 110 William Street, 156 William Street and 160 Water Street. The price per square foot metric continued to rise, due in large part to investor demand for the retail component of some Class A buildings. Midtown Class A office sales set a new price per square foot record at $1,383. Cap rates dropped slightly to 4.2%.

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OUTLOOK Several major leases, including those in the less active financial and legal services industries, are scheduled to close by year-end. Competition for large blocks should increase as tenants begin to see their options diminish. Already, landlords are negotiating with multiple tenants for the same space. While this has been true in Midtown South for several quarters, it is now more widespread. Tenants are getting bumped and landlords are raising rents—sometimes during negotiations—a practice not seen since 2008.

601 Lexington Avenue

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Brussels

BELGIUM Office Investment volume 2013 (mio)

Office Investment volume Q1 2014 (mio)

Prime rent € / m² / year

€ 1,251

€ 841

Stock m²

285 13,322,566

Take-up m²

101,000

Vacancy rate

10.30%

Prime yield

6%

LEASING MARKET The year 2013 was difficult in the Brussels leasing market, with take-up at a 20 year low of 331,000 m² as a result of limited corporate activity and absence of the Belgian administrations for the second year in a row. 2014 started much better with large deals by local administrations such as Actiris that took 32,000 m² in the North district and the European Commission that took 15,000 m² in the Leopold district. Subject to the outcome of a legal action of trade unions, the Flemish Community signed for 46,000 m² in the North district. The take-up in the first half of the year may therefore reach c. 200,000 m². Development activity slowly recovers in CBD locations though it is way below historic levels. Vacancy is declining in the CBD and recently fell below 6%, however outside the CBD and more specifically in the periphery the vacancy remains high. This is mitigated by the reconversion of old vacant (partly or fully) offices into residential, although for now this is only applicable in the green part of the Decentralised areas, this is a trend not likely to come rapidly to an end. The vacancy rate stabilised at 10.3% in Q1 2014 and may tighten to or slightly below 10% by year end. Prime rents in Brussels were unchanged at € 285 / m² / year, achievable in the Leopold district, while in the Pentagon and the Louise district rents of € 230 are applicable. In the North and Decentralised, prime rents are unchanged at € 185 and in the Periphery the best buildings in the best areas trade at a face rent of € 165. Economic rents are substantially below these values, depending on the location, however in CBD districts with the increased scarcity of new and accessible buildings incentives may decline in the short term.

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INVESTMENT MARKET At the end of May 2014 office investment volume in Belgium amounted to € 841 Mio thanks to two huge deals. In Brussels, Cofinimmo sold the North Galaxy to the Danish pension fund ATP (in a JV with AXA) for € 475 Mio: the largest deal ever in the country. This 105,000 m² building is occupied by the Federal Administration of Finance with a long term lease. In Antwerp, Kanam Grund sold its 130,000 m² Kievitplein to AG Real Estate for € 195 Mio: again the largest office deal ever in Antwerp. The limited movement in rental values in Brussels and Antwerp largely explains the typology of the investors: most of the flagship transactions are realised by long term investors such as institutionals (insurance companies or pension funds) and REITs rather than opportunistic investors looking for fast capital gains. For about a year we have observed increased liquidity in the market with more money available to finance large size deals. Banks are more supportive and loan-to-values ratios tend to increase, even mezzanine financing is more common. This is primarily valid for core transactions with prime location, prime quality and creditworthy tenant(s). Yields in CBD locations converge to 6% or below for standard lease terms, with 5.8% being achieved in the Leopold (European) district. Outside the CBD, however, yields stabilise at 7.5% - 9% though the liquidity is restricted so far. For long term leases and Triple A tenants such as European institutions or Belgian administrations yields are also under pressure with levels of 5 – 5.25% being the norm.

“Prime rental values in Brussels have hardly changed over the last years. The volatility is more limited than in other European capitals implying that on the one hand the likelihood of substantial gains for prime properties is relatively low, and on the other hand the risk of substantial capital losses is limited as well. Future rental income is predictable, this characteristic being a strength for long term investors such as insurers and pension funds.” Pierre-Paul Verelst, Head of Research Belux.

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OUTLOOK The macroeconomic forecasts for 2014-2015 are not particularly positive, GDP growth in Belgium is estimated by Oxford Economics at a modest 1.1% in 2014 and 1.4% in 2015. The likelihood of a material turnaround of corporate occupiers activity is low, though as many of them have restored their balance sheet and P&L we believe that a progressive return to the market is possible in the near term. Administrations and Europe are poised for other large lettings, some of them being expected to be finalised before the end of the summer, which implies that 2014 will be substantially better than 2013 in terms of take-up. The pace of improvement of vacancy may however remain slow, as on the one hand there are some speculative developments in the pipeline and on the other hand occupiers reduce their footprint. On the investment side, a few other large size deals (above € 75 Mio) are under negotiation suggesting that volume by year-end may substantially exceed the 10 year average of € 2.6 bn in total and €  1.5 bn for offices only.

European District Brussels

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Jones Lang LaSalle Avenue Marnixlaan 23 B - 1000 Bruxelles - Brussel Tel: +32 (0)2 550 25 25 www.JLL.be

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