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EMEA Corporate Occupier Conditions March 2012

Caution prevails but will it persist? The cautious tone of late summer was sustained through to the end of 2011 with reduced occupier activity in many markets. Corporate occupiers have reverted to a wait and see approach despite the fact that many have strong cash balances.

A slight upturn in demand would bring a fundamental and painful shift in market dynamics, potentially forcing corporate occupiers into expensive and compromised real estate decisions given the lack of quality supply in the markets. Are we in a hiatus amid unprecedented economic times? Or have we begun on the path to a new normal for corporate real estate which will lead to fundamental shifts in market behaviour? Evidence is increasingly pointing to the latter.


2 On Point • EMEA Corporate Occupier Conditions – March 2012

Introduction Welcome to the first edition of EMEA Occupier Corporate Conditions in 2012.

hanging fruit had already been harvested. Where are we now?

I recently reviewed the four reports that we issued during 2011. In my view, they accurately illustrate the changing dynamics of what proved to be a turbulent year. A year ago our report was issued with the headline ‘Future constraints in the spotlight as confidence returns’. The report reflected a realistic optimism across the market. It illustrated the growing levels of competition within the markets following a prolonged period of pure survival and recognised the shortcomings of the market from a supply perspective. We pointed to likely constraints being placed on those slow to recognise and / or satisfy their requirements. A quarter further on, our next report pointed to further improvement in confidence and the prospect of a tipping point in the markets. It appeared that increased activity, particularly in the flourishing German and Nordic markets, was turning market conditions rapidly away from the occupier. As such our property clocks were showing the bulk of markets at or beyond 6 o’clock – the point at which markets tip firmly in favour of landlords. Rental growth rates were increasing, albeit from low starting points, as the word expansion began to resurface. Once again we warned of tougher times for those occupiers who were not ready or authorised to act. As the summer months (remember them?) took hold, so to did greater caution. This was capture by the title ‘Taking Stock’. The extent and significance of the sovereign debt crisis and the protracted and highly political attempts to find a solution, eroded confidence and raised the spectre of renewed uncertainty. Unsurprisingly, occupiers applied the brakes, assessed their present position and rethought their future strategies. Real estate decisions became prolonged if not put on hold altogether, with activity only really driven by lease breaks and expiries and typically leading to the downsizing of portfolios. In November, as the year drew to a close, we reflected on reversion in the markets with the stark heading ‘Falling sentiment increases pressure on CRE teams’. Not only were activity levels much reduced but in addition CRE leaders were being placed under further pressure and scrutiny to bring a new wave of cost savings to bear. We recognised that this would require a more transformative real estate agenda to be pursued by CRE teams given that the low

6 weeks into the New Year and it is clear that uncertainty remains; confidence, whilst improving, is fragile; indicators paint a mixed picture in terms of outlook; supply dynamics are not changing but neither, in many markets, is the demand side. Many across the real estate industry are watching and waiting for a return to normal market conditions. But given my review of last year, I was struck by a fundamental thought: what if there is no return to normal? What if, alternatively, the conditions that we are currently witness actually represent a ‘new normal’? A normal where supply remains constrained; markets are polarised with limited quality and a glut of near obsolete stock; occupier activity is driven by a need to do more with less; and where the economic and operating environment permit only limited and very selective investment in real estate. As the year progresses this sense of a new normal appears to gain further credence. 5 challenges of the new normal Beyond pure market conditions, I believe that a ‘new normal’ will present five new challenges to CRE leaders and service providers and demand change to CRE skills-sets and behaviours. These are: 1.

Raising the productivity of people and places

2.

Leveraging technology and analytics to enhance decision making

3.

Securing scarce investment capital

4.

Being clear and authoritative on the value add of CRE

5.

Managing mobility

Look out for our forthcoming opinion piece on these challenges. It will be essential reading as we move through 2012 and beyond. Vincent Lottefier Chief Executive Officer EMEA Corporate Solutions


On Point • EMEA Corporate Occupier Conditions – March 2012 3

EMEA Corporate Occupier Market Conditions: Summary Exhibit 1: A low growth environment prevails with ongoing downside risk •

GDP growth forecasts have been regularly revised downwards and suggest sub 2% growth as the regional norm

Given ongoing concerns about sovereign and private debt Southern Europe is expected to be in recession during 2012 Tellingly for the region, the large economic of Germany, France and the UK are all forecast to display anaemic growth over 2012 with France actually contracting by 0.7% over the year

< 0% 0.0 – 0.9% 1.0 – 1.9%

0.4%

2.0 – 2.9%

1.1%

> 3.0%

0.9% -0.3%

0.3% -0.3%

Growth rates are strongest in Central and Eastern Europe although the Russian growth rate of 3.7% is not markedly different from rates recorded over 2010 and 2011.

3.7%

1.5% -0.2%

2.0% 0.2% 2.8%

0.4% -0.7%

-0.8% -1.5%

-3.5%

-1.2%

2.1%

2.3% 1.3% -6.5%

Exhibit 2: Confidence turned up slightly in January but still below long-term trend 110

50

105

40

100

30

95

20

90

10

85

0

80

-10

75

-20

70

-30

65

-40

60 2008

2009

2010

2011

Economic Sentiment (LHS)

Retail Trade Confidence

Service Sector Confidence

Industrial Confidence

Corporate confidence turned upwards marginally according to the January release of the European Commissions Confidence Index.

However, confidence levels still remain below the long term average and are no stronger than those witnessed at the start of 2010.

Further significant uplifts in corporate confidence will be required before corporate cash piles, which are generally strong, start to be released and invested in the real estate portfolios.

Confidence is strongest in Germany, the Baltics and Sweden, whilst being weakest in Italy, Hungary, Cyprus, Portugal and Greece.

-50 2012

Financial Services (non seasonably adjusted!)

Exhibit 3: Relatively moderate occupier take-up going forward as portfolios are re-set •

Around 2.9 million sq m of office take-up was witnessed across Europe during Q4. This was a reduction of 2% q-on-q and 9% down on Q4 2010.

2011 take-up volumes were in-line with the five year average and up 5% on 2010. Forecasts are for a mild reduction in activity over 2012.

15 of our core 24 European Index markets saw 2011 volumes exceed the previous year – most notable being Munich and Luxembourg.

’000 m² 14,000

Take-Up Western Europe Take-Up Central & Eastern Europe 10-year average (last 10 y)

Forecast

12,000 10,000 8,000

All CEE markets saw strong occupier demand across 2011, driving gross take-up 21% higher than 2010. Moscow, Prague and Budapest were more active markets q-on-q.

6,000

An active government sector accounts for much demand in MEA markets, particularly in Saudi Arabia, Abu Dhabi and Doha.

2,000

4,000

0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14


4 On Point • EMEA Corporate Occupier Conditions – March 2012

Exhibit 4: Net absorption to be around long-term trend •

Looking to the future, net absorption levels are to be broadly in-line with 10 year averages.

10 of the 24 core European Index markets shown opposite outperform the long-term average net absorption rates on an annual basis over the next four years.

This dynamic reflects ongoing efforts by occupiers in the region to restructure portfolios and focus down on doing more with less space going forward. New space will of course be required but greater volumes of older stock are also to be disposed of.

Avg Annual Net Absorption 2012-2015 as % of Stock

7% 6%

Warsaw

5%

Moscow

4% Prague

Lyon

Budapest

3% 2%

London City Stockholm

Frankfurt

1%

Paris CBD

Barcelona Amsterdam

London WE

The Hague

0% -1%

0%

Berlin Milan

Rome

Brussels

Paris LDF Hamburg Munich

Luxembourg Dublin

Madrid

1%

2%

3%

4%

-1%

5%

6%

7%

10Y Average Annual Net absorption as % of Stock

Exhibit 5: Vacancy rates fall slightly but still reflect large volumes of poor quality supply across the markets •

The European aggregate vacancy rate slipped below 10% for the first time since Q3 2009, falling 20bps to 9.9%.

This slight decline in aggregate choice was driven by London, the German markets, Amsterdam and Stockholm, which all saw supply tighten.

Vacancy Rates Q4 2011

9.6%

15 – 25%

7.5%

13.5%

10 – 15% 9.7%

5 – 10%

• •

We expect vacancy rates to decline further going forward but only slowly as demand levels stay muted and as occupiers re-set their portfolios.

16.3%

7.1%

0 – 5%

8.0% 19.6% 5.8%

8.4%

16.1%

8.5%

8.5%

13.9%

Current rates continue to be underpinned by a large volume of second hand space that has been released back to the market by occupiers.

6.9%

6.4%

9.6%

Falls in vacancy in the CEE region were mainly driven by Moscow and Budapest although available supply across CEE is also dominated by secondary stock.

10.8%

10.8%

12.0%

15.0%

8.0%

10.2%

11.2%

4.7% 10.1%

Johannesburg

6.7%

11.1%

19.2% 14.8%

11-13% 21%

3-4%

13.3%

25% 45%

35%

6.5%

12%

16.4%

9.1% 15%

Exhibit 6: The development pipeline is limited by historic standards European Office Completions (millions sq m)

Vacancy rate (%)

Completions of new office space rallied q-on-q by 41%, passing 1 million sq m, but in a year which witnessed the lowest quarterly completion volumes for a decade.

Given this, completions as a whole were 43% below the 10 year average.

The pipeline post-2012 shows some y-on-y improvement in potential completions but remains below the levels seen in 2008-09.

However the economic situation, confidence and financing rates effectively mean that the majority of what will be completed between now and the end of 2013 is already under construction.

12

8 7

10

6 8

5

6

4 3

4

2 2 2014

2012

2013

2010

2011

2009

2008

2006

2007

2005

2004

2003

2002

2000

2001

1999

1998

1997

0

1996

1

0


On Point • EMEA Corporate Occupier Conditions – March 2012 5

Exhibit 7: Some limited speculative development returning

Speculative development does appear to be returning in select markets but at a lower volume than historically has been the case.

250

Southern European markets show further releases of speculative supply in 2012 before the tap is turned off in 2012, with the exception of Barcelona.

150

300

1,000 800

200 600

Non-Speculative

London

Dublin

Barcelona

Berlin

Amsterdam

Munich

0

Madrid

0

Brussels

200

Milan

50

Paris

400

100

Paris and London see greater volumes of speculative development coming to market in 2013 although, of course, this space may be secured by occupiers prior to completion.

1,200

Düsseldorf

350

In ‘000 sq m 1,400

Frankfurt

Pre-let deals will present the primary route to securing quality real estate solutions in the markets.

Hamburg

In ‘000 sq m 400 2012 2013

In most markets non-speculative development represents the majority of space in the development pipeline over the next 24 months.

Speculative

Exhibit 8: Rental growth rates moderate over the medium term but markets turning towards landlords post 2012 Office Rental Growth

European Office Rental Growth 15

Forecast

10 5 0 -5 -10 -15 -20 2001

2003

2005

2007

2009

Reflecting the more subdued economic outlook, rental growth forecasts are relatively subdued over the next five years.

Dublin is forecast to see rental growth of almost 6% per annum over the period.

Moscow, which has traditionally volatile rental growth patterns, is forecast to growth at sub 3% per annum over the next five years although growth is stronger in the next 2 years.

Many western European markets show annualised rental growth of below 2% which will favour occupiers when one takes into account inflation over the same 5 year period.

(% pa 2012-2015)

(% pa, weighted average)

2011

2013

2015

Dublin London-City Lyon London-WE Stockholm Oslo Edinburgh Warsaw Madrid Moscow Barcelona Munich Frankfurt Budapest Paris-CBD Helsinki Prague Hamburg Berlin Luxembourg Milan Brussels Amsterdam Dusseldorf Paris-LDF

1.1 1.1 0.9 0.8 0.7 0.5 0.4

0

2.0 1.9 1.8 1.8 1.8 1.7 1.6

2

2.5 2.4

3.8 3.7 3.5 3.3 3.2

4

4.8 4.7

5.3

5.8

6


6 On Point • EMEA Corporate Occupier Conditions – March 2012

Exhibit 9: A growing ‘spread’ of clock positions illustrates variance in market dynamics Landlord’s Market

Tenant’s Market

Rental Growth Slowing

Rents Falling

London City, London West, Paris, Zurich, Oslo Tel Aviv, Moscow Helsinki

Rental Growth Slowing

Rents Falling

Rental Growth Accelerating

Rents Bottoming Out

Warsaw Düsseldorf, Geneva, Stockholm, Casablanca Algiers, Berlin, Hamburg, Munich Lyon, Stuttgart Gothenburg Cologne Malmo, Copenhagen, Krakow, Milan St. Petersburg, Manchester, Western Corridor

Southampton, Liverpool Zagreb, Nottingham, Kuwait City, Muscat Abu Dhabi Dubai, Jeddah, Riyadh, Cairo, Doha Athens Lisbon, Manama Belgrade, Brussels, Barcelona, Newcastle Budapest, Amsterdam, Dublin, Madrid, Utrecht, Rotterdam, The Hague, Eindhoven Rome, Edinburgh, Leeds, Tri-City, Tunis Birmingham, Bristol, Glasgow, Cardiff, Antwerp, Frankfurt, Luxembourg, Bratislava, Bucharest, Kiev, Prague, Istanbul, Johannesburg

Rents Rising

Decline Slowing

Western Europe Central and Eastern Europe Middle East & Africa

Prime rents were broadly unchanged q-on-q with the European Office Index increasing by a mere 0.4%.

Of our 24 Index Markets four saw rental increases (Rotterdam, Berlin, Düsseldorf, Paris) whereas rents dropped slightly further in the two major Spanish markets of Barcelona and Madrid.

There is the broadest spread of markets on the EMEA Office Property Clock since we began our reporting in 2007. Market variance is greatest in Western Europe. There is a clear prospect of market cycles overlapping on the clock.

As shown by the EMEA Office Occupier Clock above, 41 of the 73 markets now covered within this report occupy a clock position at or beyond 6 o’clock and as such reflect conditions of current of forthcoming escalations in prime rental costs.

12 markets are now positioned at or beyond 9 o’clock indicating that the rate of rental growth in these markets is slowing although rises in prime rents continue. 7 markets have moved into this segment of the clock since Q3.


On Point • EMEA Corporate Occupier Conditions – March 2012 7

WESTERN EUROPE: Corporate Occupier Conditions The Eurozone debt crisis continues to weigh down economic growth prospects across the region. Recent downgrades to the credit rations of major European economies and the European Financial Stability Facility (EFSF) are likely to hinder a quick solution. Despite the serious backdrop key office market indicators showed improvement over Q4 2011 although the picture remains mixed with market performance in Germany and the Nordics stronger than elsewhere. Around 2.9 million sq m of office space was taken-up in Q4, reflecting a decline of 2% on Q3 and 9% down on 2010. Despite this slight weakness, occupiers were more active in 2011than had been anticipated with year end take-up volumes up 5% on 2010 and in-line with the five year average. 15 of our 24 Office Index markets saw 2011 take-up volumes exceed 2010 volumes, notably Munich (+52%) and Luxembourg (+44%). The picture for Europe’s largest market Paris and London was mixed. While both markets saw demand slowing over Q4, Paris finished 15% ahead of 2010 whereas London take-up was down 45% y-on-y. A slight increase in absorption reduced vacancy rates. The European aggregate vacancy rate slipped below 10% for the first time since Q3 2009 with a drop of 20bps to 9.9%. Western European vacancy also fell by 20bps to stand at 9.4%. This decline in choice was driven by London, the German markets,

Amsterdam and Stockholm. Going forward vacancy is expected to decline further, though only slowly with demand staying muted. Second hand space previously released continues to trade sluggishly and ongoing economic uncertainty will be reflected in limited expansion. Occupiers will also start to re-absorb currently surplus space before looking elsewhere. Completions of new office space rallied q-on-q by 41%, passing 1 million sq m, after a year which witnessed the lowest quarterly volumes for a decade. However, completions as a whole were 43% below the 10 year average. The pipeline for 2012 and beyond shows a dramatic increase in potential completions but the economic situation, confidence and financing rates effectively means that the majority of what will complete between now and the end of 2013 is already under construction. Prime rents were broadly unchanged q-on-q with the European Office Index increasing by a mere 0.4%. Of our 24 Index markets, four saw rental increases (Rotterdam +2.6%, Berlin +2.4%, Düsseldorf +2.1%, Paris +1.3%) whereas rents dropped slightly further in the two major Spanish markets (Barcelona 1.3%, Madrid -1.0%). All other index markets were unchanged over Q3. The Western European office property clock saw the spread between markets widen even further. 9 markets are now at or past 9 o’clock, with 28 remaining at or before 6 o’clock. Levels of incentives remain high and are keeping headline rents stable in many markets.

Exhibit 10: Western Europe Office Occupier Clock London City, London West, Paris, Zurich Oslo

Helsinki

Rental Growth Slowing

Rents Falling

Rental Growth Accelerating

Rents Bottoming Out

Düsseldorf, Geneva, Stockholm

Berlin, Hamburg, Munich Lyon, Stuttgart

Southampton, Liverpool Nottingham

Gothenburg Cologne Malmo, Copenhagen Milan Manchester, Western Corridor

Athens Lisbon Brussels, Barcelona, Newcastle Amsterdam, Dublin, Madrid, Utrecht, Rotterdam, The Hague, Eindhoven Rome, Edinburgh, Leeds Birmingham, Bristol, Glasgow, Cardiff, Antwerp, Frankfurt, Luxembourg


8 On Point • EMEA Corporate Occupier Conditions – March 2012

Amsterdam Cost: € 335 / sq m

Athens Competition: 79,200 sq m

Choice: 16.3%

Q4 take-up totalled 79,200 sq m which brought year end leasing volumes to 214,000 sq m. Notable Q4 deals included TMF Group taking 10,000 sq m and ING Bank leasing more than 20,000 sq m. The latter deal represents current market dynamics with the bank consolidating from five buildings into one modern building in the sub location Amsterdam South East. The 32,000 sq m of existing space they are vacating will be released back to the market over the medium term. Q4 2011 saw supply decrease slightly with 50,000 sq m being removed from vacant stock but the market remains oversupplied. The vacancy rate in the market is now 16.3% compared to a longer term average of 12-13%. There is one large speculative development under construction in the city centre totalling 26,000 sq m. Future space release from the pipeline will be dependent on pre-letting. Prime rents were stable q-on-q but secondary rents are under downward pressure amid plentiful choice and limited demand. Antwerp Cost: € 145 / sq m

Competition: 29,094 sq m

Choice: 11.8%

Occupier activity in Q4 reached 29,094 sq m, pushing the annual volume to around 97,000 sq m which is around the 10-year average. On the supply side, choice increased marginally to 11.8%. Choice is expected to reduce over 2012, with just one significant development currently under construction - the 12,000 sq m Onyx building, located in the Ring district. Whilst the short term pipeline is limited, there are a number of planned developments with a combined capacity of c.200,000 sq m which could be started as soon as the required pre-let rate has been met. As at the end of Q4, none of these projects have started, limiting the possibilities for potential larger requirements. Indeed, choice is very limited in the top segment of the market, in particular for floor plates in excess of 2,000 sq m. Costs remained stable for prime CBD space with rents at €145 per sq m. Costs for prime space in the Ring Road district increased slightly with prime rents edging up 3% to €140 per sq m. Some marginal rental growth is expected 2012, driven primarily by supply shortages for the best space in both the CBD and the Ring Road district. Incentives remain an important part of lease negotiations with an 8-10% percent discount on the headline rent representing market practice.

Cost: € 255 / sq m

Competition: n/a

Choice: 16.4%

The Greek economy remains in the middle of a deep recession, with 2012 expected to be the fourth consecutive year of negative growth. The sharp contraction in activity has resulted in a record increase in unemployment and, according to latest figures from IHS Global Insight around one in three people aged between 15 and 29 years are unemployed. The impact on the office market has been considerable. Competition for office space remains very low, with Q4 recording few noteworthy lease transactions. An increasingly common feature of the market is occupiers embarking on an active relocation search, only to agree on discounted terms with their existing landlords a few months later. No prime space was taken in the CBD in Q4. Corporate occupier relocations are almost exclusively driven by cost cutting objectives, with office space along or off the National motorway becoming increasingly sought after. Consequently, occupier activity increased somewhat in the North of Athens where top rents are recorded at around €204 per sq m per annum, still reflecting a 8.1% year-on-year drop. Costs for prime space in the CBD fell throughout 2011, with prime rents down 17% for the year to December at €255 per sq m per annum. While development has come to a standstill and speculative space is not added to the market, choice continues to increase, with the Q4 overall vacancy rate up 270 basis points over the year to 16.4%. Barcelona Cost: € 222 / sq m

Competition: 66,620 sq m

Choice:13.3%

Occupier demand in Q4 reached 66,620 sq m pushing the total for 2011 to 267,003 sq m. Competition in Barcelona therefore remained strong despite the subdued macroeconomic environment. Reflecting strong demand in 2011, choice continued to decline, reaching 13.3%. However, in the prime office area in Barcelona there has actually been an increase in available space, as various large occupiers review their options and seek lower cost, more efficient, buildings outside of the prime core. Overall costs fell slightly in the final quarter of 2011, following a very stable summer period, with prime rents down by 3.9% over the year. Looking ahead to 2012, occupiers will mainly be moving or restructuring in order to reduce their costs base, with the latter also being the main objective of lease negotiations. Consequently, rental levels are expected to continue to fall in the short term as occupiers command stronger negotiating positions.


On Point • EMEA Corporate Occupier Conditions – March 2012 9

Berlin Cost: € 258 / sq m

Bristol Competition:140,100 sq m

Choice: 8.5%

Competition for space remained high in Berlin during Q4 with annual take-up reaching 542,500 sq m. This represents the second-highest volume of the past ten years, exceeding the five-year average by 10%. Activity was greatest in the 1,000-sq m to 1,500-sq m segment with fewer lettings above 5,000 sq m compared to the previous year. In 2012 we expect take-up to be slightly lower but still well above the five-year average. In terms of choice, occupiers are increasingly encountering a lack of large units of space in Grade A locations. Above-average net absorption of more than 200,000 sq m and a low completions volume illustrate the increasing shortage of supply in Berlin. The vacancy rate fell significantly over the past 12 months, to end the year at 8.5%. Strong demand and eroding supply are putting upward pressure on costs in Berlin. The prime rent rose by almost 5% year-on-year, highlighting strong demand for higher quality space. The strongest demand was in the price category between €10.00 and €15.00 per sq m per month. Prime rents are expected to rise in 2012, with incentives remaining stable. Birmingham Cost: € 368 / sq m

Competition: 17,640 sq m

Choice:18.6%

Competition was boosted over Q4 with the acquisition of 5,600 sq m by The Law Society at The Cube. Other notable deals include the expansionary move by accountants Grant Thornton who took 2,500 sq m at Colmore Plaza. In general however, the market has been lacking large deals. Corporate occupiers remain hesitant due to a lack of confidence to deal in the current economic uncertainty. Overall supply fell for the first time during 2011, with vacancy rates falling to end the year at 18.6% - a level still above that seen at the end of 2010. Grade A supply continued to gradually fall reflecting a vacancy rate of just 3.0%, compared to an average of 4.4% over the last three years. Occupiers seeking larger floor plates face more limited choice. There was no change to the development pipeline in Q4. Looking ahead there is just 11,000 sq m sq m due to complete speculatively in 2013. Prime rents stabilised at €368 per sq ft with incentives remaining generous at around 36 months based on a 10 year term. We expect rents to remain stable over 2012 with incentives being hit first.

Cost: €354 / sq m

Competition: 10,600 sq m

Choice: 12.6%

Occupier demand picked up in Q4 with leasing volumes up 62% on the previous quarter. However, demand for 2011 as a whole was down 20% on the five-year average of 50,477 sq m. The volume of supply rose over the course of 2011, largely attributed to the steady stream of second hand space which remains unattractive to occupiers. At end Q4, Grade A space accounted for 22% of overall choice in the city centre market and includes the recently completed Bridgwater House (10,268 sq m). Prime rents remained stable qon-q at €354 per sq m. Incentives continue to be generous in the city centre at up to 18 months on a five year term or up to 36 months on 10 years. However, the comparative shortage of Grade A supply could lead to incentives moving in during 2012. Brussels Cost: € 300 / sq m

Competition:124,140 sq m

Choice: 11.1%

Whilst levels of competition for 2011 as a whole were well below the 10-year average, occupier sentiment improved somewhat over the second half of the year. This drove Q4 leasing volumes of some 124,000 sq m. Whilst overall choice in Brussels increased slightly over the quarter to 11.1%, the availability of space in the CBD continued to decline. Speculative development remains virtually absent in the CBD and a further tightening of choice is likely in 2012. However, the expected reorganisations in the financial sector could result in the release of some prime quality space in the CBD as well. Costs for prime CBD office space remained stable with the prime rent recorded at €300/ sq m. However, incentives in the decentralised zone and the periphery continue to increase as choice is abundant and competition among landlords fierce.


10 On Point • EMEA Corporate Occupier Conditions – March 2012

Cardiff Cost: € 270 / sq m

Copenhagen Competition: 4,135 sq m

Choice: 10.3%

Leasing volumes were more subdued in the Cardiff market in Q4, totalling just 4,135 sq m. Despite the low level of activity in the final quarter, demand levels for the year as a whole reached 45,060 sq m and exceeded expectations. However, it should be noted that the pre-let to Admiral in Q2 accounted for 41% (18,580 sq m) of activity over the year. The level of choice for occupiers continues to be eroded in Cardiff and has fallen by 11.5% over the course of 2011 to stand at 102,190 sq m. There continues to be a shortage of high quality or new Grade A space available. However, two speculative schemes will improve choice during 2012/13 - namely JR Smart’s 7,060 sq m at Capital Quarter in the city centre and Office Visions 3,300 sq m Vision Court in St Mellons. No further speculative schemes are due to start on site during 2012. Prime city centre rents have remained unchanged over the past year at €270 per sq m per annum. Out-of-town rents were also unchanged at €193 per sq m. Typical incentives remain at 12 months for a five-year term and 24 months for 10 years. Cologne Cost: € 258 / sq m

Competition: 79,300 sq m

Choice:8.1%

Occupier activity in Cologne reached a new record of 332,000 sq m in 2011, which exceeded the five-year average by 31%. Two unusually large deals from RheinEnergie AG (45,000 sq m) and LANXESS Deutschland GmbH (38,000 sq m) were mainly responsible for this result. Together these two deals accounted for around a quarter of the total annual take-up. Demand in the wider market remained stable, and is expected to remain so over 2012. Choice for the occupier continues to be eroded. The completions volume of 42,000 sq m represented the lowest level witnessed over the last 5 years. Combined with the positive net absorption (around 60,000 sq m), this has led to a further reduction in the vacancy rate. Even less space will be completed in 2012 (27,000 sq m), thus placing further downward pressure on choice. High-quality and modern office space is virtually non-existent in the market and is forcing companies to consider pre-letting routes. This situation is not expected to change before 2013, when a higher completions volume should bring some relief. In terms of cost, prime rents remained stable at €21.50 per sq m per calendar month, although most deals were in the €10.00-14.99 per sq m per calendar month price segment.

Cost: € 242 / sq m

Competition: n/a

Choice:8.0%

Occupiers have become hesitant towards expanding and upgrading their office space with most now apply a ‘wait and see’ approach which was confirmed by activity levels in the second half of 2011. However, there are still a number of occupiers looking to expand, with domestic players being the most active in chasing the limited prime CBD space on offer. In secondary locations, public sector occupiers have been the most active in the last twelve months. However, these public sector moves, driven by cost saving measures, are likely to be absent from the market in 2012 and will cause a significant drop in competition in peripheral districts such as Valby and Glostrup. On the supply side, choice decreased somewhat with the overall vacancy rate at 8.0%. Choice in the prime segment remains extremely tight, with the majority of vacant premises being Grade B and C. Costs remained stable across the board with prime CBD rents at DKK 1,700 - 1,800 per sq m per annum, while rents for secondary CBD space ranges between DKK 1,000 -1,125. Incentives remained unchanged and are still widely used in order to attract new tenants and have been a strong driver of activity. Rental levels in peripheral locations vary considerable. In areas such as Glostrup and Valby prime rents stand at DKK 1,000 1,100 while secondary rent range between DKK 600-700. Dublin Cost: € 344 / sq m

Competition: 32,000 sq m

Choice:19.4%

Overall supply continued to fall in Q4 and over the course of the year the level of choice in the city centre fell from 23.0% to 16.3%. At year end there were just 5 buildings in the city centre which could accommodate an enquiry over 9,290 sq m. With no new office development underway, choice will become even more limited for occupiers. Several large buildings could potentially come back on to the market in 2012 due to break options, lease expiries or relocations potentially offering some opportunity for occupiers. While competition decreased somewhat in Q4, leasing volumes for the year as a whole reached 157,930 sq m - 28% up on 2010 and much in line with the five-year average of 155,350 sq m. Small requirements accounted for the majority of activity, with the average deal size at 653 sq m. Occupiers in the Technology were most active, with competition from new IT entrants expected to be strong throughout 2012. Costs remained stable with prime rents stabilising at €344 per sq m during Q4. Incentives have tightened over the course of 2011 for leases of five to ten years and now stand at 9-12 months on five-years certain. Further incentives are achievable for longer lease terms and larger deals.


On Point • EMEA Corporate Occupier Conditions – March 2012 11

Dusseldorf Cost: € 288 / sq m

Eindhoven Competition: 93,000 sq m

Choice:11.2%

Occupier activity in Düsseldorf reached a volume of around 394,000 sq m in 2011, 16% above the 10-year average. The number of deals increased to 660, 53% above the ten-year average, and the City sub-market remained the most popular location for occupiers. In view of some expected large deals and the on-going demand, we expect take-up in the market as a whole to reach a similar level of up to 400,000 sq m in 2012. Choice for the occupier declined modestly in 2011. High positive net absorption (154,000 sq m) contributed towards the slight decline in the vacancy rate over the year, although the overall vacancy rate remained above 10%. The completions volume of 66,000 sq m represented the lowest level of the past five years, although at least a quarter of the space is still available. In 2012, completions are expected to return to a significantly higher level of around 200,000 sq m, in part due to the completion of the new Vodafone building. Occupier costs have been increasing. The prime rent increased over the quarter to €24.00 per sq m per month and a further increase is conceivable. For most spaces, rents of between €10.00 and €15.00 per sq m per month are paid.

Competition: 11,340 sq m

Choice: 7.1%

Occupier activity tailed off towards the end of 2011 with competition totalling around 53,000 sq m, down 18% compared to 2010. This can be attributed to the lack of larger deals, with around 67% of take-up involving units of less than 1,000 sq m. Despite this, we have seen more viewings. There are a number of active requirements from occupiers including Brewin Dolphin and Blackrock, who are seeking around 4,000 sq m and 8,300 sq m respectively. There are also a number of lease expiries, particularly within the legal and banking sector, which should generate more competition. Occupier choice increased slightly over Q4, with vacancy rates moving to 7.1%. Q4 witnessed no change to the development pipeline. Site HI, now known as Atria, remains the only scheme under construction speculatively, and will deliver 17,600 sq m to the market in early 2013. However, we have seen renewed activity from developers trying to position themselves well to promote pre-lets. Costs stabilised with prime rents at €348 per sq m. Overall, incentives remain generous at around 36-42 months achievable on a 10 year term. For the very best space incentives are in the region of 30-36 months on a 10 year term.

Competition: 6,000 sq m

Choice:13.1%

The smallest of the five Dutch markets analysed within this report, Eindhoven saw strong levels of competition during 2011 with 50,000 sq m leased during the year. Take-up levels reflected declining confidence however with the majority of letting activity occurring during H1. Indeed Q4 2011 saw only 6,000 sq m of take-up. The largest transaction of 2011 was 15,000 sq m taken by Bosch in a former C grade Philips building. There is almost no newly built Grade A supply in the market which is forcing occupiers with requirements into build-to-suit arrangements. The vacancy rate ended 2011 at 13.1%. There is one small speculative office development in the market being constructed by a local housing association but essentially the development pipeline has been turned off. A 10,000 sq m unit is under-construction and is 65% prelet to KPMG. The remainder of the space is currently being offered to the open market. Prime rents were stable q-on-q at €185 per sq m per annum but the market below prime is soft and is witnessing rental decline. Frankfurt Cost: € 396 / sq m

Edinburgh Cost: € 348 / sq m

Cost: € 185 / sq m

Competition: 86,300 sq m

Choice:13.9%

Competition for space in Frankfurt was around 12% below both the five-year and ten-year average in 2011, with annual take-up reaching 424,400 sq m. However the number of deals did increase year on year - up by a third compared to 2010. Although the Banking District did not feature among the five largest deals, this sub-market is still the number one location in terms of the take-up volume. Peripheral locations outside the city centre were ranked second and the airport area in particular saw significant occupier activity. Choice declined over the year but the vacancy rate remained high at 13.9%. The total completions volume of 189,100 sq m almost equalled the overall reduction in property stock: with 179,400 sq m temporarily or permanently leaving the market during 2011. Around a quarter of this was due to change of use into residential or student accommodation or hotels. Prime rents remained unchanged throughout the year and average Grade A rents in Frankfurt were €21 per sq m per calendar month in Q4. Incentives are around 8 months’ rent free on a 5 year term.


12 On Point • EMEA Corporate Occupier Conditions – March 2012

Geneva Cost: € 865 / sq m

Gothenburg Competition: n/a

Choice: 1.0%

Competition for prime office space is less pronounced than over previous months and is mainly driven by hedge funds and or trading companies. Financial institutions, wealth managers and associated service providers are reconsidering their space requirements and consequently some supply might become available in the CBD area. Overall choice remains low, with office vacancy rates in the city centre at levels of less than 1%. Limited plots for construction continue to limit future supply in the CBD. One exception is the “42, Rue du Rhone” development which is expected to be completed in late 2012 and is set to become a prime location commanding asking rents of up to CHF 1,250 / sq m per annum. Outside the CBD, new supply can be predominantly found around the airport and in the UN area. The area around the Eaux Vives train station is also expected to see development activity as well as all train stations along the CEVA metro line project, which is expected to be completed in 2017. Overall competition for space remains high and finding suitable space solutions, especially for larger requirements, can be challenging for occupiers. Prime rents in the left bank CBD areas currently stand at CHF 1050 / sq m per annum, while office space overlooking Lake Geneva usually trades at a premium to this. Space in the CBD’s right bank areas (i.e. between the station and the lake) trades at a 25% discount to the left bank area. Office space outside the CBD is more widely available and trades at a further discount, with CHF 400-600 / sq m per annum recorded in the airport area.

Cost: € 265 / sq m

Competition: 29,100 sq m

Choice: 7.3%

Competition for prime space in Gothenburg intensified over Q4, with leasing volumes reaching 29,100 sq m. Occupiers from the construction and energy services sectors were very active, accounting for roughly 44% of total activity. Construction consultancy firm WSP recorded the largest transaction, signing a 6,500 sq m lease in the Rest of Inner City district. On the supply side, approximately 17,500 sq m was added to the market, all within the CBD. However, at completion, 75% of this space has been prelet and therefore has a less positive impact on choice. Choice continued to decline in Q4, with the overall vacancy rate falling by 90 basis points q-on-q to its lowest rate since mid-2008. Costs increased for a third consecutive quarter, with prime CBD rents up by 4.3% to stand at SEK 2,400 per sq m. Costs remained unchanged outside the CBD, with rents for Grade A office space in the wider city centre recorded at SEK 2,000 – 2,200 per sq m. Rental levels for office space in more peripheral areas range between SEK 1,200-1,500 per sq m. There is a possibility that the speculative schemes currently under construction for the next two years will ease competition for prime space somewhat. There are however, no signs of a slowdown in demand, which should keep costs at their current level for the foreseeable future. Incentives remain common, ranging from a rental rebate to a couple of rent free months or a combination of both. Hamburg

Glasgow Cost: € 354 / sq m

Cost: € 282 / sq m Competition: 5,140 sq m

Choice: 10.5%

There was 28,000 sq m of office take-up over 2011, down 35% when compared to the ten year average. Despite a reasonable level of viewings there has been a lack of large deals, with just one deal over 2,000 sq m in 2011. The Services and Banking & Finance sectors, accounted for 64% of occupier activity in 2011. Occupiers continued to focus on the Grade B market (73% of take-up) driven by smaller local occupiers rather than international corporates. Looking ahead we expect pent up corporate demand to drive activity over the next 2-3 years. In particular there are a number of lease events due to expire in 2014/15, with occupiers expected to begin ramping up their searches. Overall choice remained relatively stable in Q4 although Grade A supply remains more constrained with a vacancy rate of just 3.1%. Occupiers seeking larger units of Grade A space may have to consider pre-letting options. Prime rents stabilised at €354 per sq m per annum although rent free periods remain generous at between 24-30 months based on a 10 year term.

Competition: 146,100 sq m

Choice: 8.5%

The Hamburg office market appeared immune from the euro and debt crisis in 2011. Competition for space was high, with companies expanding strongly, as illustrated by the net absorption of 220,000 sq m. Annual take-up of 540,000 sq m was higher y-on-y and above the long-term average. Occupier activity was driven primarily by the high number of deals above the 5,000-sq m mark. Strong demand pushed vacancy down considerably over the year, thus reducing choice for occupiers. The level of completions and the speculative proportion of these were both lower than in the two previous years. A number of Green Building projects were realised either with a certificate or pre-certificate throughout the year and Green buildings are becoming an increasingly important feature of the Hamburg market. Completions are set to increase during 2012, with projects such as the Tanzende Türme (St. Pauli) and Opern Plaza (Innenstadt) scheduled for completion. Strong demand drove up both the prime and average rents in 2011. Prime rents are expected to increase again slightly in 2012 with incentives stable at 2-5 months’ rent free on a 5 year term.


On Point • EMEA Corporate Occupier Conditions – March 2012 13

Helsinki Cost: €300 / sq m

Lisbon Competition: n/a

Choice: 9.6%

Competition for prime space in the best locations remained robust in Q4, overall occupier activity weakened somewhat with a couple of, mainly international, occupiers shelving their requirements on the back of the sombre economic forecast. Domestic occupiers continue to be the main driver behind activity, although a number of large office relocations were also announced in Q4 e.g Ernst & Young, taking 10,000 sq m in the Töölönlahti district and Outotec moving into a new development of more than 20,000 sq m in Matinkylä, Espoo, west from Helsinki. Nokia continues to downsize and is expected to release over 20,000 sq m of office space in the Ruoholahti district, located 1.5 kilometres west of the CBD. On the supply side, around 250,000 sq m is due to be completed in 201213. However, overall choice will not increase significantly with most schemes expected to be around 90% pre-let on completion. Costs for prime CBD space increased to €25 per sq m per month, on the back of strong competition for the limited space available. Outside the CBD, costs remained stable, although rents in the Ruoholahti district are expected to fall somewhat as choice increases. The district will align with the other more peripheral office districts, where rents range between €16 - €17 per sq m per month. Costs for secondary space continued to decline. Whilst headline rents seem to have bottomed out, landlords are trying to secure tenants by offering increasingly large incentive packages. Leeds Cost: € 335 / sq m

Competition: 7,900 sq m

Choice:11.6%

Occupier activity moved in line with average levels, with take-up for 2011 just 2% off five year averages. Despite some notable deals in Q4, occupiers remain generally cautious, with few large scale transactions but a clear preference for good quality space. Grade A take-up accounted for 57% of deals in 2011. Activity was driven by a broad range of sectors including recruitment, financial and media. Looking ahead we expect occupier activity to be driven by lease events and further consolidation within the legal sector. The development pipeline was unchanged with just 6,000 sq m due to complete speculatively in 2012. With few new starts, a number of landlords are taking the opportunity to upgrade secondary assets and take advantage of the continuing ‘flight to quality’ of some occupiers. 2012 could see the return of some pre-letting activity, which may in-turn kick-start speculative space in the city core. Prime rents stabilised over Q4 and landlords continue to offer around 30 months rent free on a 10 year term.

Cost: € 222 / sq m

Competition: 37,520 sq m

Choice:11.3%

Occupier activity picked up in the final quarter of the year with over 37,520 sq m let. Despite this, occupier activity was relatively subdued during 2011 with take-up down 12% y-on-y. Notable deals in the final quarter of 2011 included the acquisition by a US multinational of 6,200 sq m at the Virtual Pavillion, which is located within the Parque das Nações (Zone 5). This area saw the greatest amount of activity during Q4. The TMT sector and Utilities occupiers accounted for the majority of take-up. Occupiers face a lack of choice in terms of good quality space, with existing supply generally failing to meet the requirements of occupiers. 2011 saw the completion of around 54,000 sq m of new office space, however there were no new completions during Q4. We expect to see some further development activity going forward although this will be relatively limited with around 52,000 sq m scheduled to complete in 2013. Prime rents fell by 2.6% q-on-q to €222 per sq m. Incentives are in the range of 1 to 3 months based on a three to five year lease. London City Cost: € 708 / sq m

Competition: 92,960 sq m

Choice: 7.1%

Occupier activity improved on q-on-q although the annual take-up volume was 44% down on 2010 levels and well below the long term average. Volumes in 2011 were driven by smaller transactions, with 93% of the total below 2,500 sq m compared with 84% in 2010. Active requirement volumes decreased slightly in the final quarter, driven by three large requirements satisfying their search. Annually, total occupier demand increased 43%, and ended the year 14% above the long term average. Choice decreased 7% and as a result vacancy rates fell to 7.1% while Grade A remained stable at 4.4%. Prime rents continued to remain stable, with rent free periods at 22 months assuming a 10 year term. Prime rents are likely to remain stable over much of 2012 although some erosion may be witnessed in selective sub-markets. Occupiers have limited choice in Grade A space especially for contiguous floors. Landlords holding Grade B and C space are more nervous and are therefore prepared to offer more generous lease terms.


14 On Point • EMEA Corporate Occupier Conditions – March 2012

London West End Cost: € 1234 sq m

Lyon Competition: 99,270 sq m

Choice: 4.0%

Occupier activity increased at the year-end with a flurry of deals before Christmas. There was 99,300 sq m let across 52 deals in the final quarter. This volume was up 64% q-on-q and exceeded expectations given the economic backdrop. Activity levels were boosted by four deals in excess of 5,000 sq m to the London Borough of Camden, Savills, Nokia and Pimco Europe. 2011 also saw a rise in pre-letting activity as occupiers reacted to the increasingly limited supply of new space available from the development pipeline. Choice fell further at the year-end to 338,600 sq m, an annual decrease of 29%. This equates to an overall vacancy rate of 4.0% and a Grade A vacancy rate of 2.2% - the lowest level since 2008. Prime rents remained stable at the yearend at €1,234 per sq m per annum as did rent-free periods (16 months). Average Grade A rents kicked up slightly at the year-end (1%) to €961 per sq m per annum. Prime rents are forecast to remain flat during 2012 as concerns over the wider economy feed into the occupier market. However, growth is expected to return in 2013/2014, particularly as a result of the Grade A shortage. Luxembourg Cost: € 456 / sq m

Cost: € 270 / sq m

Choice: 6.2%

Fierce competition for prime office space continued into Q4, with around 41,750 sq m taken by occupiers. International occupiers mainly target the best quality office space in central office areas such as the CBD, Station- and Kirchberg district. However, choice has decreased significantly with Q4 city centre vacancy dipping below 3%. The on-going supply squeeze has pushed many occupiers to more peripheral office districts, with the Cloche d’Or, Howald and Bertrange Strassen districts among the most popular. Availability of high quality space is somewhat better in these districts at over 5%. Increased competition pushed up overall costs in Q4. Whilst prime headline rents remained stable at €456 per sq m per annum in the CBD, incentives tightened further with around 5 months rent-free now achievable on a 5 year lease as well as a further 1-2 month’s rent free in additional cutbacks. Outside the central office districts, costs are significantly lower - €26- €28 per sq m per month in The Cloche d’Or district; €20-€24 per sq m per month in the Howald districtl and €22.50 - €26 per sq m per month in Bertrange Strassen district, Incentives are also much more generous with around 10-15 months’ rent free achievable on a 5 year lease as well as a further 2-3 month’s rent free in additional cutbacks. For 2012, costs are expected to increase in the city centre with incentives under further pressure, while more peripheral office space should remain stable.

Choice: 6.3%

2011 was the second strongest year since 2007 in terms of take-up despite a lack of quality options in the most sought-after parts of the market. The Part Dieu area was notable with 22% of total take-up. The North-West suburbs also attracted major companies and saw 55, 000 sq m let over the year. There was a clear preference for new and refurbished property. Choice fell in the final quarter to 6.3%. Second hand supply rose by 7%, whilst new supply fell nearly 17%. Part-Dieu, Presqu’Ile Confluence and the 6th district are undersupplied whereas Villeurbanne and the outskirts offer more choice. Pre-lets are being encouraged by the lack of market options. In Presqu’Ile, for example, over 70% of space under construction has been pre-let. Costs for the best space remained at €270 per sq m per annum. Costs in Presqu’Ile were €263 per sq m per annum with €250 per sq m per annum in the 6th district. Second-hand rents have stagnated and range between €150 and €170 per sq m per annum. Madrid Cost: € 309 / sq m

Competition: 41,750 sq m

Competition: 105,880 sq m

Competition: 70,520 sq m

Choice:10.8%

Available office and high-tech office space surpassed 2 million sq m at year end. The level of choice rose again in the CBD as occupiers continue to vacate space which is not being offset by new take-up. Most new development is concentrated in the periphery and satellite areas, including a high proportion of high-tech buildings. Future choice for 2012 and 2013 comprises projects which are currently either in or entering the construction/refurbishment phase. Competition has remained steady over recent months due to an increase in smaller requirements under 1,000 m² – which increased by 50% compared to Q3. Most of the larger transactions took place in areas further from the city centre, such as the 6,320 sq m leased by Securitas in the La Gavia business complex in Ensanche de Vallecas and the 4,590 sq m leased by Beam Global in the Edificio Pórtico. Costs continued to decline with prime rents down 1.0% in Q4 to €309 per sq m per annum, due to the disequilibrium between supply and demand. The periphery is attracting interest from occupiers looking for large floor plates at lower costs which, combined with the abundant new, high quality supply, is generating downward pressure on rental levels in this market area.


On Point • EMEA Corporate Occupier Conditions – March 2012 15

Malmö Cost: € 238 / sq m

Milan Competition: 22,500 sq m

Choice: 6.3%

Following a slight dip in occupier activity in Q3, competition was again strong over Q4 with leasing volumes totalling at around 22,500 sq m. Total take-up for 2011 was 96,300 sq m - up 53% on 2010 and the highest level in five years. Occupiers from the public administration and education sector were the most active in Q4, followed by the by the IT and Consultancy sector. On the supply side, 7,400 sq m was added to the market with the completion of a new office building in the Lund district. Nevertheless, choice decreased to 6.3%, down from 7.1% in Q3. Choice is expected to increase somewhat in 2012, with around 60,000 sq m due to be completed. Costs remained virtually unchanged across the board with stable prime rents in both the CBD and periphery. Prime CBD rents range between SEK 1,800 – 2,100 per sq m while rental levels for good quality space in the peripheral office districts are recorded at around SEK 1,200 – 1,500 per sq. m. The Lund Inner-city submarket was the only area becoming more expensive in Q4, with prime rents up by 3% over the quarter to stand at approximately SEK 1,700 per sq m. Manchester Cost: € 387 / sq m

Competition: 38,700 sq m

Choice: 10.3%

Occupier choice continued to fall over Q4, with 214,000 sq m currently available representing a vacancy rate of 10.3% at year end. Occupiers remain more limited in terms of Grade A choice, with a vacancy rate of just 2.8%. Construction is well underway at the Co-operative Group’s new 30,000 sq m office, due to complete in 2012. In addition, the recent pre-let to KPMG (5,800 sq m) at One St Peters Square, has kick started construction of the speculative element of this scheme (c.18,500 sq m) delivering much needed space in the city centre. While the pre-let to KPMG points towards improved confidence, take-up for 2011 was down 24% compared to five year average levels. 2012 is likely to witness occupier activity that is driven by lease events, although there are a number of significant active occupier requirements in the market – including Bupa who are seeking 12,000 sq m and Panone, 7,400 sq m. This may point towards some improved optimism.

Cost: € 530 / sq m

Competition: 83,520 sq m

Choice:10.1%

Occupier activity picked up in 2011 with 320,000 sq m let - the highest level since 2001 and above five year average levels. Despite this occupiers remain cautious about the wider economic environment and this is expected to lead to reduced activity in 2012. Occupiers continue to focus on good quality, Grade A space which accounted for around 70% of take-up in 2011. Notable deals include the acquisition by Alcatel of the first “LEED Platinum” certified building in Italy, situated on the Energy Park in Vimercate. Occupier choice stabilised in Q4, however the market has been characterised by falling Grade A supply on the one hand, and increased availability of Grade B space on the other. From 2013 we anticipate a lack of speculative development in the market, with current economic uncertainties making new speculative starts challenging. Prime rents stabilised at €530 per sq m per annum, with limited rental growth projected for 2012. Munich Cost: € 360 / sq m

Competition: 268,000 sq m

Choice:9.6%

Munich continued to see strong levels of occupier activity in Q4. The annual take-up volume of 887,000 sq m was up 50% y-on-y, driven by company expansion measures and a series of large deals (14 transactions larger than or equal to 10,000 sq m). As usual, the Innenstadt (city centre) sub-market was dominant in terms of both take-up volume and number of deals. The automotive industry remains particularly expansive, and the industry sector generates the highest take-up in Munich as a whole. Choice declined significantly compared to the previous year. Completions volumes fell and will continue to decline in the next two years. The availability of high quality space will reduce further as a result. Prime rents increased over the year and will also increase slightly in 2012. Average rents also rose to €14.29 per sq m per month, which was partly due to the high number of deals in the high-price segment. Incentives remain at 2-5 months’ rent free on a 5 year term.


16 On Point • EMEA Corporate Occupier Conditions – March 2012

Oslo Cost: € 490/ sq m

Paris La Defense Competition: 186,000

Choice: 7.5%

Occupier activity intensified with take-up up 8% q-on-q and reaching 186,000 sq m in Q4. Strong occupier preference for CBD locations is still present, although Skøyen and other western office districts have also received increasingly strong interest in recent months. There is strong competition for high quality, space and energy efficient buildings, but so far occupiers have been somewhat reluctant to pay a premium for this. On the supply side, almost 300,000 sq m of new office space is expected to be completed during 2012, with the major development areas being the CBD east and Fornebu. Speculative development remains very limited, although some developers’ recent successes with offering new space on short notice might tempt some of the larger players to consider building speculative again. Whilst overall choice remained stable at 7.5%, the availability of Grade B properties continues to rise. The same trend is expected for 2012, although the amount of vacant Grade B space could be reduced by demolition and conversion. Costs for prime CBD space continue to rise, with CBD rents up 18.8% y-on-y to NOK 3,800 per sq m. Costs for good quality space outside the city centre have seen slower growth over the year and range between NOK 2,200 – 2,800 per sq m. Whilst incentives for prime CBD space are almost non-existent, Outside the CBD rent free periods of 6-12 months are achievable. Paris CBD Cost: € 759 / sq m

Competition: 84,111 sq m

Choice: 4.5%

Occupier activity within the CBD area witnessed a slowdown over 2011 – by around 5%. This was due to the relative scarcity of available Grade-A supply, a slight downturn in large transactions and doubts about the economy affecting confidence. Overall choice, at 4.5%, remains limited and more or less unchanged on Q3. Despite the slowdown in activity the cost of space increased to €759 per sq m, a 3.7% annual increase. As one of the more expensive areas within Paris we expect more corporate occupiers to look elsewhere for value in 2012 as the cost of construction index, which has increased 7% annually, could prompt some companies to renegotiate, relocate or question the value of their current locations.

Cost: € 581 / sq m

Competition: 30,950

Choice: 5.4%

The amount of occupier activity fell in the La Défense market over 2011 with annual volumes of around 121,800 sq m. This was an 18% reduction on 2010 and around 28% below the 10 year average. Competition in this area is much less strong than the rest of Paris, with the Paris region as a whole seeing activity increase 14% this year. Activity was dominated by lease extensions with a limited number of new entrants. Choice, at 5.4%, remains reasonable compared with some other areas within the Greater Paris Region (average 6.9%). Costs for the best space have been maintained at around €590-600 per sq m, with such rents paid in the “First Tower.” We expect occupational activity to improve from its current levels but with more choice expected to emerge the impact on costs will be negligible with occupiers continuing to enjoy options of quality space albeit at rents higher than the inner rim. Rome Cost: € 420 / sq m

Competition: 16,250 sq m

Choice:6.5%

Take-up, which tailed off in the second half of 2011, totalled 175,000 sq m for the year – above the five year average. Occupiers continued to focus on the more central areas of Rome. Notable deals in Q4 took place within two of the city’s most modern developments: Cofely GDF Suez acquired 5,900 sq m in the Europarco Business Park (Eur zone), while Colgate Palmolive is moving to the Da Vinci Center, in the new Fiera di Roma area, occupying 3,000 sq m. The financial services sector dominated take-up in Q4, with weak demand from the public sector expected to continue into 2012. Expectations for 2012 indicate a decline in takeup, with activity, returning to average levels of circa 150,000 to 160,000 sq m. Overall supply remained relatively stable in Q4 reflecting a vacancy rate of 6.5%. Q4 saw the completion of some Grade A refurbishments in the EUR and Laurentina zones, which offset any take-up activity. We could see further increases in supply in 2012 as a result of occupiers vacating areas in the eastern part of the city. Prime rents and incentives remain broadly stable, with prime rents at €420 per sq m per annum. A slight reduction in rents is anticipated in 2012.


On Point • EMEA Corporate Occupier Conditions – March 2012 17

Rotterdam Cost: € 200 / sq m

Stuttgart Competition: 48,600 sq m

Choice:15.4%

Competition in the market increased significantly at year end with Q4 accounting for almost 50,000 sq m of activity out of an annual total of 135,000 sq m. Key to this increase was one big city centre transaction by the Dutch asset management firm Robeco (16,000 sq m) who will be moving into a new, yet to be constructed building. In so doing, they will vacate more than 20,000 sq m of stock in the market over a 2-3 year period. Although the vacancy rate for the market is 16.4% the local municipality is keen on stimulating the development market to supply product that is more suited to the demands being made by occupiers who are increasingly seeking to adopt new styles of working. As a consequence vacancy rates in the market will be stubbornly high over the medium term. Prime rents increased slightly over Q4 2011, after being stable for the last two years. Rents now stand at €200 per sq m per annum. The paucity of high quality supply in the market might lead to some slight upwards pressure in prime rents but the reality is that average market rents continue to be under downward pressure.

Cost: € 216 / sq m

Competition: 79,600 sq m

Choice:6.1%

Strong occupier demand drove Stuttgart take up levels to an all-time high in 2011. Demand for space remained robust over Q4 and office space take-up increased again q-on-q. The 2011 take-up volume was around 47% higher year-on-year at 280,400 sq m. As has been the case in previous years, small transactions (<500 sq m) dominated the leasing market in 2011, with the City Centre remaining the submarket of choice for occupiers. Such high levels of competition for space led to a considerable reduction in choice for occupiers. In an annual comparison, vacancies were reduced by around 82,000 sq m and the vacancy rate fell by 1.0 percentage point. This trend will continue in 2012. Occupier costs have also been rising. Prime rent increased by 2.9% to €18.00 per sq m per month by the middle of the year, and a similar increase is expected for 2012 due to the strong demand and tight supply situation. Total completions were around 79,000 sq m, of which more than half took place in the final quarter. The Hague

Stockholm Cost: € 472 / sq m

Cost: € 210 / sq m Competition: 73,777 sq m

Choice:9.7%

Occupier activity was stable q-on-q reaching approximately 76,000 sq m. While 2011 as a whole shows a significant increase in competition compared to 2010, much of this happened in the first half of 2011. The second half of 2011 registered competition levels well below the 5-year average. This reflects the sudden change in sentiment in the market. Nevertheless, sentiment in the wide occupier base in Stockholm remains fairly upbeat compared too many other markets across Europe and whilst a further marginal easing of competition is expected in the first half of 2012, it won’t be as dramatic as seen in the last six months. On the supply side, choice continues to decline with the overall vacancy rate now below the 10% mark for the first time since late 2008. Whilst the CBD and Inner City submarkets continue to experience high levels of competition and a decline in available space, choice has been increasing in a number of peripheral markets in previous quarters. However, there are still occupiers looking for high quality space in the periphery, with some marginal rental growth in selected peripheral markets. Both the Kista and Solna / Sundbyberg districts recorded an increase in rents of SEK 100 per sq m to stand at SEK 2,100 and SEK 2,200 per sq m per annum respectively. Costs in the CBD remained stable with rents at SEK 4,200 per sq m per annum and incentives remaining at roughly 1-3 months’ rent free on a standard lease.

Competition:22,000 sq

Choice: 10.8%

m

Q4 take-up was some 22,000 sq m, which was almost half of the total volume for 2011. Driving this performance was one stand out deal where construction-services business BAM took a unit of some 10,000 sq m but which has yet to commence construction. This was the exception rather than the rule, as generally the market has seen a fundamental lack of large lettings. Supply is increasing as the public administration sector continues to dispose of space. This trend will intensify over the next five years as government consolidation strategies start to be implemented. It should be noted that approximately half of the office stock in the market is held by the Dutch Government. Most of the space that will be disposed is city centre located. As this dynamic works through vacancy rates will be increase from their current level of 10.8%. The reality is that vacant stock in the market is higher than this quoted rent, due to the amount of vacant space held off market by public institutions. Given this looming supply dynamic, rents decreased q-on-q to €210 per sq m per annum eradicating the small uplift in rents witnessed during Q3.


18 On Point • EMEA Corporate Occupier Conditions – March 2012

Utrecht Cost: € 220 / sq m

Zurich Competition: 18,000 sq m

Choice:13.0%

Total take-up over 2011 was 79,000 sq m which is the lowest annual volume since 2002. Q4 take-up stood at 18,000 sq m – down 4,000 sq m on Q3 although Q3 performance was highly inflated by the 18,000 sq m letting to Danone for their Innovation Centre. A general trend being witnessed in the market is occupiers focusing on a more intense utilisation of space and hence smaller requirements in the market. Grade B and C supply is plentiful especially outside of the city centre. There is almost no vacant stock in the city centre market which clearly illustrates the polarised nature of supply in Utrecht. The overall market vacancy rate actually declined q-on-q to 13% of stock – or 320,000 sq m of available space. Prime rents were stable q-on-q although the prime component of the market has traditionally been defined as being outside of the city centre. The City Centre, which has suffered over the last few years from a lack of development, will become the new prime market. There is great potential for new office development around the train station over the next five years, and indeed this development has already commenced alongside a new train station development. Western Corridor Cost: € 348 / sq m

Competition: 58,300 sq m

Choice:13.9%

Leasing volumes remained strong in Q4 but occupier demand for the year as whole, which totalled 167,225 sq m, was down 14% yon-y and was 18% below the five-year average. The Manufacturing sector, which includes the pharmaceutical and engineering sectors, accounted for 49% of space taken in Q4 with Service Industries comprising 34%. The level of choice increased slightly during Q4, largely reflecting second hand Grade B space coming on to the market. A shortage of Grade A space remains prevalent in many towns, in particular in West London which saw the Grade A vacancy rate fall to a historic low of 2.7%. At end-Q4 there was 59,420 sq m, of speculative space under construction. Confidence in the West London market has been further reinforced by Hammersmith Grove South (9,940 sq m) starting on site in January 2012. Prime rents increased marginally, driven by further upward pressure in Chiswick, Hammersmith and Staines. Incentives remain at 30 months rent free on a 10 year lease in the Thames Valley and 24 months in West London. We expect further slight rental growth in 2012, predominantly in the West London markets and an overall reduction in incentive packages.

Cost: € 906 / sq m

Competition: n / a

Choice: 4.7%

Strong demand for office space has tightened available supply considerably in recent quarters leading to rising costs for occupiers. This has supported rising construction activity, although it is concentrated in Zurich West and Nord. Almost 100,000 sq m of new office space came to the market in 2011 and an additional 250,000 sq m is expected to be delivered by 2015. Many domestic Swiss occupiers are actively relocating to these new, modern office developments, leaving their old office space in CBD locations empty. With new choice for modern Grade A supply in the market the competition is easing and, driving up vacancy in CBD locations. Though prime rents in the range of CHF 1,100 per sq m per annum are currently still archived, the pressure on landlords is expected to increase. Thus, incentives are expected to become more generous, provided in the form of fit-out contributions or rent-free periods while landlords are keen to stick to headline rent. Rents in the CBD usually range between CHF 550-800 per sq m per annum. Elsewhere in the city centre rents range from CHF 450-650 per sq m per annum. Both, Zurich North and Zurich West offer further discounts to this with rents ranging between CHF 180-350 per sq m per annum.


On Point • EMEA Corporate Occupier Conditions – March 2012 19

Western European Corporate Occupier Markets at a glance Competition (Take-up as a % of stock) Market

Choice (% Vacancy Rate)

Costs (Rents EUR / sq m / pa)

Q4 2011

12-month outlook

Q4 2011

12-month outlook

Prime, Q4 2011

12-month outlook

Amsterdam Antwerp Athens

1.2 1.5 n/a

Ä

Ä Å

335 145 255

Ä

Ä

16.3 11.8 16.4

Barcelona

1.1

Ä

13.3

Æ

222

Æ

Berlin Birmingham Bristol

0.8 1.1 0.6

Ä

Ä

Ä

258 368 354

Å

Ä

8.5 18.6 12.6

Ä

Brussels

0.9

Ä

11.1

Æ

300

Æ

Cardiff Cologne Copenhagen Dublin Dusseldorf

0.4 n/a n/a 0.9 1.0

Ä

Ä

Ä

10.3 8.1 8.0 19.4 11.2

Å

270 258 242 344 288

Edinburgh

0.5

Ä

7.1

Æ

348

Å

Eindhoven

0.4

Ä

13.1

Ä

185

Ä

Frankfurt

0.7

Å

13.9

Æ

396

Å

Geneva Glasgow Gothenburg Hamburg Helsinki Leeds Lisbon London City London West End Luxembourg Lyon Madrid Malmö Manchester Milan

n/a 0.3 0.9 1.0 n/a 0.7 0.8 0.9

Ä

1.0 10.5 7.3 8.5 9.6 10.3 11.3

Ä

865 354 265 282 300 335 222

Ä

Æ

Å

Æ

Å

708 1234 456 270 309 238 387 530

Ä

1.2 1.2 2.0 0.5 1.1 1.2 0.7

7.1 4.0 6.2 6.3 10.8 6.3 10.3 10.1

Munich

1.3

Æ

9.6

Æ

360

Å

Oslo

n/a

Å

7.5

Æ

490

Å

Paris CBD

1.2

Æ

Ä

759

Å

Paris La Defense

0.8

Æ

4.5 5.4

Å

581

Ä

Rome

0.1

Ä

6.5

Å

420

Ä

Rotterdam

1.3

Ä

16.3

Ä

200

Ä

Stockholm

0.7

Ä

9.7

Æ

472

Å

WE Ä

Ä

Æ Ä Å

Ä Å Æ Ä Ä Ä Å Å Æ Æ Å Ä

Æ

Æ

Æ Ä Æ

Æ Æ Ä Å Æ Å Æ Æ Æ Ä Å Æ

Å Æ

Ä

Å Ä Ä Æ Å

Ä Å Å Ä Ä Æ Ä Ä Ä Æ Ä Ä Ä

Stuttgart

1.0

Æ

6.1

Æ

216

Å

The Hague

0.5

Ä

10.8

Å

210

Æ

220

Ä

Utrecht

0.7

Ä

13.0

Ä

Western Corridor

0.7

Å

13.9

Æ

348

Å

Zurich

n/a

Ä

4.7

Å

906

Ä


20 On Point â&#x20AC;˘ EMEA Corporate Occupier Conditions â&#x20AC;&#x201C; March 2012

CENTRAL AND EASTERN EUROPE: Corporate Occupier Conditions Despite the ongoing uncertainty stemming from the Eurozone crisis, Central and Eastern Europe continued to mark one of the regions bright spots, both in terms of economic activity and demand for real estate in 2011. Growth is likely to be more muted in 2012 with downside risks particularly for those Central and Eastern European countries more dependent on exporting to the Eurozone. Nevertheless 2012 growth in Central and Eastern Europe is still anticipated to be well above the trend of Western European counterparts. In its latest World Economic Outlook update, the IMF underlined this with forecast 2012 GDP growth of 1.1% for the CEE region, with growth expected to accelerate to 2.4% in 2013. All major CEE markets saw strong occupier demand during 2011, driving gross take-up 21% higher than 2010. Moscow, Prague and Budapest each witnessed marked growth in transaction activity in Q4. Despite the headline numbers

European corporate occupiers operating in CEE continued to be cautious and cost-sensitive, and are increasingly looking for flexible space that allows them to use their space more efficiently. The solid demand for space and an increase in net absorption has driven a decline in the overall European office vacancy rate to 9.9%. Falls in vacancy in the CEE region were mainly driven by Moscow and Budapest. The supply environment continues to be polarised between prime and Grade A stock, which continues to be in short supply, and secondary stock which remains oversupplied in many CEE markets. Completions remained at historic lows in 2011, and although there are signs of an increase in new completions for 2012 and 2013 at an aggregate level, a diverse and polarised supply environment in Central and Eastern Europe will continue to challenge occupiers in 2012. Costs for occupiers operating in Central and Eastern Europe remained broadly stable in Q4 after some notable rises earlier in the year in major markets such as Warsaw and Moscow. Any further prime rental growth anticipated in 2012 is likely to be more moderate in line with a more subdued economic outlook.

Exhibit 11: Central & Eastern Europe Office Occupier Clock

Moscow

Rental Growth Slowing

Rents Falling

Rental Growth Accelerating

Rents Bottoming Out

Warsaw

Zagreb

Belgrade Krakow St. Petersburg

Budapest Tri-City Bratislava, Bucharest, Kiev, Prague


On Point • EMEA Corporate Occupier Conditions – March 2012 21

Belgrade Cost: € 180 sq m

Bucharest Choice: 21%

In Q4 the market experienced a slight increase in leasing volumes compared to the previous quarter. A few major deals for floor plates of over 1,500 sq m pushed total take-up to 7,500 sq m. However, leasing activity remains driven by the condition of the general economy, both domestic and international. On the supply side, choice for A and B class office stock declined to 21%, down from 22% in Q3 due to a lack of new development. Whilst choice seems abundant, the few international occupiers looking for space in Belgrade encounter difficulties finding large, modern, floor plates. Therefore such requirements are usually dealt with by the occupiers themselves. For example, Raiffeisen Bank is developing its new 17,000 sq m headquarter in New Belgrade. Costs for prime CBD space remained stable, and range between €14-€16 per sq m per month. Rents for B class office space in New Belgrade and the city centre stand at €14 per sq m per month and €13 per sq m per month respectively. Rents for the same quality space in the wider city zone range between €10-€12 per sq m per month. Incentives are increasingly being used to attract tenants with typical conditions including 3-months’ rent free (on a 5-year lease), free parking spaces and fit-out contributions. Bratislava Cost: € 198 sq m

Choice: 11.2%

Competition for prime office space increased in Q4, with occupiers taking around 32,200 sq m over the quarter. The IT, professional services and manufacturing sectors were most active. However, compared to 2011 overall competition has weakened slightly with leasing volumes down 35.5% y-on-y. On the supply side, just over 6,900 sq m was added in Q4, with the completion of the Trinity Offices (3,370 sq m) in Bratislava II and the Microstep building (3,500 sq m) in Bratislava III. Choice increased therefore to 11.2%, although the polarisation between Grade A and B space continues to increase with choice of Grade A space actually becoming reduced. While Q1 2012 will not see any speculative completions, there are several projects currently under construction for delivery in H2. Costs for prime office space in Bratislava’s best locations remained stable in Q4, with rents ranging between €14-€17 per sq m per month. Rental levels in the Inner City zone range between €10.5 - €12.5 per sq m per month, while rents in the Outer City district have stabilised between €8 -€10 per sq m per month. Costs are expected to remain stable in the short term.

Cost: € 228 / sq m

Choice: 14.8%

Competition in the occupier market eased significantly in Q4 with leasing volumes down to 21,800 sq m, the lowest quarterly figure in 2011. Total occupier activity in 2011 reached 202,000 sq m. On the supply side, Q4 saw the completion of five new office buildings with a total GLA of 38,000 sq m. Demand for this high quality space remains strong with the largest projects fully let prior to completion (i.e. Novo Park and Crystal Tower). The pipeline in 2012 is currently estimated at 130,000 sq m (35% is either pre-let or owner occupied) while the 2013 pipeline is limited to 70,000 sq m. Choice for Class A & B space decreased to 14.8% with further decreases forecasted for the next 12-18 months on the back of the limited development pipeline. The cost of prime space ranges between €19-19.50 per sq m per month with limited fluctuations expected in 2012. The overall incentive package, consisting of rent free periods and / or fit-out contributions, are mainly applicable to large pre-lets which are crucial for any project to obtain finance and commence construction work. Budapest Cost: € 240 / sq m

Choice: 19.2%

Competition for modern office space increased significantly in Q4, with leasing volumes recording the highest levels since late 2008. Indeed, gross take-up reached a record high with 119,730 sq m, of which renewals represented 40%. Net absorption was also positive, decreasing choice in the market with vacancy rates standing at 19.2% at the year end. The lowest availability of space is registered in the Buda North submarket while the highest is recorded in the Periphery. New supply amounted to 71,225 sq m, out of which 84% was pre-let before completion. Costs remained stable with prime office rents at €20 per sq m per month. Average headline rents are in the range of €10-13.50 per sq m per month, depending on location. Incentives also remained stable, with 6.5 months rent free achievable on a 5 year lease.


22 On Point • EMEA Corporate Occupier Conditions – March 2012

Kiev Cost: € 323 / sq m

Moscow Choice: 15.0%

Occupier activity slowed significantly over Q4 2011, with leasing volumes reaching 7,363 sq m. In line with the previous quarters, international manufacturing and business services occupiers were the most active. Competition is the strongest for Grade B space as occupiers continue to manage their costs. The amount of new supply added to the market was significant in Q4, with six new office buildings with total area of 96,800 sq m being delivered to the market. However, just one Grade A office building was completed in 2011 (101 Tower with GLA of 46,400 sq m), with the remainder of completions representing Grade B supply. Costs remained flat in Q4, with rents for prime CBD space at USD 420 per sq m per annum. For 2012, costs are expected to remain stable on the back of increasing choice (270,000 sq m of available supply over the short term). Krakow Cost: € 180 / sq m

Choice: 8.0%

The occupier market has to date not been severely affected by the European economic slowdown. The city has remained an attractive location, in particular for occupiers from the Business Process Outsourcing / Shared Service Centre sector. Competition increased over the year, with Q4 seeing a significant number of new tenants entering the market such as Capita (3,700 sq m), Cisco (2,500 sq m) and Heineken (4,000 sq m). Furthermore, there are still a considerable number of enquiries from both established and new occupiers in the market, seeking office premises up to several thousands of square metres in size. Despite new office completions with a combined GLA of 20,800 sq m, the level of choice remained relatively stable. Taking into consideration the limited short term development pipeline and increasing competition, choice is expected to decrease to decrease in 2012. Costs remained stable at the prime end with rents at €14- €15 per sq m per month and incentives representing a discount of around €1.50– €2.5o per sq m per month, in particular for larger pre-let deals. Prime headline rents are expected to remain stable in the short term, although occupiers might experience less generous incentive packages in 2012.

Cost: € 924 / sq m

Choice: 16.3%

Competition intensified over Q4 with leasing volumes of just over 490,000 sq m. 2011 occupier activity was boosted by a number of very large deals in popular office buildings in the third zone of Moscow. Schemes such as the Olympia Park, Metropolis, SkyLight, Dvintsev, Krylatsky Hills have been particularly popular with domestic and international occupiers. On the supply side, choice decreased slightly to 16.3%. Around 165,000 sq m of new space came to market with the completion of three large Class A buildings in the city centre and Moscow City financial district accounting for around 60% of new space. Around 2.6 million sq m is expected to be completed in the next three years but just 40% of this considered as International Class A space and just 20% is located in the CBD. This will have a direct impact on international occupiers, who will find it increasingly difficult to source large floor plates in the already very tight CBD market. Rent stabilisation continued over Q4 with prime rents continuing at US$1,000 -1,200 per sq m (excluding operational expenses and VAT). Nevertheless, annual rental growth came to 33% in 2011, the highest in Europe. For 2012, a slower rate of growth of around 5-7% is expected. Class A base rents amounted to 600-850 US$ per sq m; and Class B+ base rents to 400-600 US$ per sq m. Incentives have become slightly less generous, with 3-6 months’ rent free achievable on a standard 5-7 year prime lease. Prague Cost: € 252 / sq m

Choice: 12.0 %

Competition for prime space in Prague continues to be fierce, with Q4 being the sixth consecutive quarter of overall positive net absorption. Choice increased somewhat over Q4 with five new properties delivered, adding 32,711 sq m to the market. A further 128,300 sq m is under construction with completions scheduled between 2012 and 2013. The cost of prime space has remained stable over ten consecutive quarters, although there are some signs that landlords of the very best space are considering raising asking prices. For the time being, prime rents stand at €21 per sq m per month. Rental levels on non prime buildings have also remained stable with Inner City projects commanding between €14.90-17.50 per sq m per month and Outer City locations ranging between €13.00-14.50 per sq m per month. Second hand product in all submarkets stands at approximately €1.50 below the aforementioned ranges. The pressure to provide incentives differs significantly from property to property, depending on both the situation within the submarket and the length of the vacancy in the property itself. Providing incentives is in many cases a preferred option rather than providing a discount on headline rents.


On Point • EMEA Corporate Occupier Conditions – March 2012 23

St Petersburg Cost: €424 sq m

Warsaw Choice: 13.5 %

Q4 2011 saw a drop in competition, with net absorption reaching just 20,430 sq m. The recent slowdown in occupier activity, which was particularly noticeable in the H2, demonstrates the uncertainty in the market regarding the future economic perspective. Indeed, many tenants have taken a ‘wait-and-see’ approach until there is some more clarity on the direction of the market. On the supply side, choice increased to 272,900 sq m - 46% of which is Grade A space. Just a small percentage of the new office space added to the market in Q4 was pre-let, pushing up overall choice to 13.5%. In total, four new office projects were completed over Q4 providing a combined surface of 31,680 sq m. The most significant completion was the first phase of Airportcity St. Petersburg, providing 13,600 sq m of prime space in two buildings. The three other completions provided 18,080 sq m of new Grade B space. Choice is set to increase in the short term, with around 320,000 sq m of office space expected to be delivered by the end of 2013, equating to an 11% increase in total office stock. Costs remained stable with just minor changes in US$ denominated rents explained by a fluctuating currency rate. Rents stand at US$320-390 per sq m per annum for Class A and US$240310 per sq m per annum for Class B office buildings. Occupiers remain price-sensitive, limiting rental growth in the short term. Tri-City Cost: € 144-168 / sq m

Choice: 8.4%

Whilst leasing volumes finished slightly up y-on-y, the majority of activity originates from occupiers relocating from older, out of date, buildings into newer stock The level of choice has decreased from 10.2% last quarter to 8.4% at the end of Q4 2011. Vacancy is anticipated to increase again during 2012 as five buildings providing over 50,000 sq m of modern space are planned for delivery in 2012. Costs continue to fall, although rents are expected to bottom out shortly. In Gdynia, prime rents stand at approximately €14.00 per sq m per month. Sopot and Gdansk are slightly cheaper at €12.00 €13.00 per sq m per month.

Cost: € 300 / sq m

Choice: 6.7%

Competition for space decreased somewhat in Q4, with leasing volumes reaching 82,000 sq m, down 13% q-on-q. The limited choice for modern space has meant an increase in the number of pre-lets, accounting for around 21% of total 2011 occupier activity. Overall, choice has remained relatively stable over the last 18 months, hovering between 6.5% – 7%. However, the availability of prime, city centre located, space is much more limited and the slowdown in development activity adds further pressure. In 2011, just 120,000 sq m of new office space was delivered, putting further strain on centrally located prime space. As at the end of Q4 2011, approximately 6.7% of the modern office stock in Warsaw was vacant (6.1% in the CBD, 7.1% in the City Centre Fringe and 6.7% in Non-Central locations). Overall choice should remain stable in a short-term, although a further tightening in central Warsaw is likely. Whilst costs remained stable over Q4, the supply driven increase in costs recorded in 2011 is likely to continue in 2012 bringing an increase in headline rents as well as a tightening of incentives. Zagreb Cost: € 180 / sq m

Choice: 9.5%

Despite modest GDP gains, Croatia’s economic recovery remains fragile and without fiscal retrenchment and structural reforms, GDP growth is likely to stagnate or to see a slight dip in 2012. Q4 occupier activity was mainly driven by occupiers trying to optimise their office requirements. Consequently, competition levels have been relatively low with just a handful of noteworthy leasing deals recorded at the year end. It is anticipated that sentiment in the occupier market will remain fragile over the short term, predominately driven by existing tenants. Choice is relatively abundant and expected to increase further in the short term with around 80,000–100,000 sq m due for delivery in 2012. Costs remained fairly stable across the board with prime rents at €15 per sq m per month, while Grade A space outside the CBD ranges around €12 per sq m per month depending on the location. Landlords are increasingly offering incentives in the form of rent free periods, tenant fit-out or relocation contributions. The boost in available space in 2012 is expected to drive down overall costs as landlords compete for the limited amount of demand in the market. However, this will mainly through more generous incentive packages with prime headline rents anticipated to be held firm for 2012.


24 On Point • EMEA Corporate Occupier Conditions – March 2012

Central & Eastern Europe Corporate Occupier Markets at a glance Choice (% Vacancy Rate) Market

Costs (Rents EUR/sq m/pa)

Q4 2011

12-month outlook

Prime, Q4 2011

12-month outlook

21 11.2 14.8

Æ

Ä

Æ

180 198 228

19.2

Æ

240

Ä

15.0

Å

323

Ä

CEE Belgrade Bratislava Bucharest Budapest Kiev Krakow Moscow Prague St Petersburg Tri-City Warsaw Zagreb

Å

Ä Å

8.0

Ä

180

Ä

16.3

Ä

924

Ä

12.0

Å

252

Ä

13.5

Æ

424

Å

8.4

Å

144-168

Å

6.7

Æ

300

Å

9.5

Å

180

Ä


On Point â&#x20AC;˘ EMEA Corporate Occupier Conditions â&#x20AC;&#x201C; March 2012 25

MIDDLE EAST AND AFRICA: Corporate Occupier Conditions 2011 marked a year of huge change in the Middle East as political and social upheaval impacted a number of countries across the region. From Tunisia to Egypt and beyond, popular movements swept away political incumbents, resulting in instability and challenging operating conditions for international companies based in affected markets. For those countries impacted, the longer term implications of this change remain difficult to discern, with upheaval continuing today. In the short term many investment decisions are on hold, with corporates remaining cautious. Despite this tumultuous backdrop, markets in the UAE including Dubai and Abu Dhabi, as well as Saudi Arabia saw more stability and in fact benefitted somewhat from regional safe haven status. Overall the IMF is expecting economic activity in the Middle East and North Africa to accelerate in 2012-13, driven mainly by the recovery in Libya and the continued strong performance of regional oil exporters. Prospects are more muted for oil-importing countries in the MENA region.

Jeddah, Abu Dhabi and Doha. Occupier activity from international occupiers has been relatively flat in the UAE over recent quarters and focused on consolidation and portfolio efficiency, although Saudi Arabia continues to see a broad range of economic sectors seeking space including the petrochemical, construction and engineering sectors. In South Africa, despite signs of slowing growth, Johannesburg saw an upturn in occupier demand in Q4 which is putting pressure on the availability of prime space. The supply environment varies more widely in the MEA sub-region than in any of the other geographies we cover, due to the broad spectrum of market maturity and development. At one end are markets such as Algiers and Tunis which have extremely limited availability of modern high quality office space. At the other are the UAE markets of Dubai, and increasingly Abu Dhabi, where high vacancy rates and oversupply are expected to characterise the markets for the foreseeable future. Costs have been trending downwards as a result of the high volumes of available space. In fact 2012 will see rents stable or falling in all of the MEA markets covered in this report, some good news for those occupiers looking to transact in the Middle East and Africa.

An active government sector continues to account for a large proportion of demand for office space in markets such as Riyadh, Exhibit 12: MEA Office Occupier Clock

Tel Aviv

Rental Growth Slowing

Rents Falling

Rental Growth Accelerating

Rents Bottoming Out

Casablanca Algiers

Kuwait City, Muscat Abu Dhabi Dubai, Jeddah, Riyadh, Cairo, Doha Manama

Tunis Istanbul, Johannesburg


26 On Point • EMEA Corporate Occupier Conditions – March 2012

Abu Dhabi Cost: € 355 / sq m

Cairo Choice: 23%

During Q4, choice across the Abu Dhabi Metropolitan area increased by around 79,000 sq m bringing total supply to approximately 2.46 million sq m. However, the completed space was just a fraction of the office GLA originally scheduled for delivery in the last quarter of 2011 with major deliveries that included Etihad Towers and Al Khubair Tower (Seba/Al Ain tower) delayed. The recent handover of Grade A office space and anticipated future supply in Abu Dhabi is providing tenants with an improving standard and range of options to consider. Costs for good quality space continue to decline. Incentives such as fit-out contributions have become much more generous on the back of increasing choice. Rents were recorded at AED 3,800 in Q4 2011, with average effective rents for Grade A space standing at AED 1,700 per sq m per annum, down 55% from their peak. These average rates have been exceeded in a small number of buildings, mainly occupied by the oil and gas sector as well as government institutions. The gap in costs between Grade A and B space is expected to widen further while the gap between commercial rents in Abu Dhabi and Dubai is shrinking. Net effective rents are expected to decline.

Cost: € 414 / sq m

Choice: 35%

The leasing market is expected to remain relatively subdued as most occupiers adopt a ‘wait and see’ approach ahead of the upcoming presidential elections. Choice continues to expand in the satellite areas of New Cairo, where demand is strongest. These office districts have grown in popularity with domestic and foreign occupiers as they offer modern office space, access to business services, amenities for staff, enhanced security and the opportunity to avoid the congested and polluted downtown areas of Cairo. Choice in central Cairo has increased to around 20% and is substantially higher in Greater Cairo at around 35%. As occupiers consolidate their portfolios and take advantage of new, better quality space, the Downtown area is likely to see increasing vacancy levels during 2012. Overall costs have declined significantly, with Q4 prime rents for fully fitted-out space down 20% on the year before at US$ 540 per sq m per annum. Occupiers will have the upper hand in 2012 and will focus on more flexible terms such as contraction options and right of first refusal. A Force Majeure clause is also becoming more common in lease contracts. Casablanca

Algiers Cost: € 456 / sq m

Cost: € 240 / sq m Choice: 4%

The market continues to remain scarce on International Grade A office space with the majority of office space consisting of converted residential space. Large occupiers have typically developed their own building and subleased spare space which also helped recovering development costs. New supply is provided by further transformation and refurbishment of art-deco properties in the city centre, although they will only offer small floor plates. Larger floor plates can increasingly be found in the Bab-Ezzouar area, which is transforming into a business hub. A key success factor will however be transport infrastructure which is not fully ready yet. International occupiers include European companies with a certain emphasis on French companies. However Chinese companies are active as well. It should be noted though that all kinds of companies need to be set up with Algerian majority ownership and that setting up a business in Algeria involves a couple of legislative hurdles. Costs for prime office space remain stable at DZD 3,700 per sq m per month. Rents for good Grade B space, which continues to compete with Grade A space given its low availability, remain at levels of DZD 2,500-3,000 per sq m per month.

Choice: 8%

The Casablanca office market continues to lack international Grade A office space . The first delivery of the Casablanca Marina, a 60,000 sq m development by a local developer, is expected for 2012, although the pricing may be prohibitive for many occupiers as it is likely to command rents of around MAD300 per sq m per month. Anfa Place is another large scale development adding modern space to the market. Outside the city centre, choice largely consists of singular developments in the Sidi-Maarouf area. The demand side continues to be very mixed including a wide range of outsourced operations such as call-centres and back office services for European corporates. Casablanca benefits from its perception as a stable economic environment as well as cost-advantages, a skilled labour pool and competition for office space is therefore expected to increase. It is also perceived as a gateway to Western Africa. Costs for modern Grade A office space increased slightly over the quarter, with rents rising to MAD220 per sq m per month. Rents for good quality space in non-central areas remain around MAD150 per sq m per month.


On Point • EMEA Corporate Occupier Conditions – March 2012 27

Doha Cost: € 487 / sq m

Istanbul Choice: 20 %

With energy prices remaining high, the economy faces few risks. Despite the strong economic growth being experienced, Doha’s office market remains characterised by oversupply. Tornado Tower and Al Fardan Commercial Tower, two of the most prominent buildings in West Bay are now fully occupied. However, apart from a few large requirements, many companies are seeking office space in lower unit sizes, with most requirements being for space less than 500 sq m. This continues to cause a mismatch between existing supply and the demand profile. Occupier preference is for fitted out space which remains limited despite the oversupply situation. As a consequence of the increased choice available to tenants, landlords are offering greater flexibility on lease terms and rental levels. With the Qatar Government indirectly helping to support rental levels by taking large amounts of newly developed prime space, costs remained stable with rental levels for prime rents unchanged in Q4 at QAR 190 per sq m per month. However, overall rental levels are expected to decline further in 2012. Dubai Cost: € 336 / sq m

Choice: 29%

The Dubai office market continues favour occupiers, who enjoy a wide range of choice at increasingly competitive costs. Competition remains strongest for single ownership properties in the CBD, although overall occupier activity remains relatively subdued as major corporates are reviewing their occupancy strategies and reducing their space requirements through portfolio optimisation. Whilst many developments have been put on hold, choice remains abundant with around 800,000 sq m added to the market in 2011 and a further 1.1 million sq m forecasted to be delivered in 2012. The largest concentrations of existing, and available, space are outside the CBD in locations such as TECOM, Jumeirah Lake Towers and Business Bay, with much of this space being strata titled. Nevertheless, while city-wide vacancies continue to increase at a greater pace, choice in the CBD did also increase slightly in Q4 to 29%. Costs for prime CBD have remained stable in 2011, with prime rents in the DIFC flat at AED 2,370 per sq m per annum, while prime rents elsewhere in the CBD remained stable at AED 1,615 per sq m per annum. Costs for secondary quality space as well as buildings in secondary locations, continued to decline on the back of the large amounts of vacant space and subdued demand levels. The gap between asking and achieved rentals also continues to widen as landlords compete aggressively for tenants offering generous incentives and terms.

Cost: € 360 / sq m

Choice: 9.1 %

Istanbul offers some 2.8 million sq m of Grade A office space and continues to grow. Completions in 2011 were 39% higher than in 2010. Choice is expected to increase further with an additional 682,000 sq m of space under construction for completion by the end of 2013. 44% of this new supply will be located in the CBD, which is expected to grow further in occupier attraction. Despite these high levels of completions, strong economic growth and a corresponding further increase in occupier demand during the year drove the total market vacancy rate up by just 210bps to stand at 9.1%. Choice remains most limited in the CBD with a vacancy rate of 4%, whereas vacancy remains highest outside the CBD on the European side. High levels of completions did however increase vacancy on the Asian side of the city, but at the same time, submarkets like Umraniye saw high take-up volume as they offer high quality space at significant discounts to CBD locations. Costs remained stable, with prime rents paid in the CBD unchanged at €30 per sq m per month. Rents for space in decentralized locations stand at €18 per sq m per month, but are expected to increase as well. In fact, rents in Umraniye have seen a rental increase of around 60% since early 2009. Jeddah Cost: € 217 / sq m

Choice: 15%

On the demand side, government agencies and affiliated organisations continue to account for the majority of activity. Choice continues to increase, with an additional 190,000 sq m of new space due to be completed in the CBD by the end of 2013. The largest completion for 2012 will be the 75,000 sq m Headquarters project on the Corniche. Costs for prime CBD space increased slightly in Q4, with prime rents recorded at SAR1,060 per sq m per annum while rents fell in secondary locations. However, choice in the CBD is expected to increase, potentially putting some downward pressure on costs in 2012. Furthermore, the supply demand imbalance is likely to result in the emergence of rent free periods and other incentives and therefore a widening gap between asking and effective rents. Free parking, enhanced security and improved space offerings are the main incentives used by landlords to attract and retain tenants. Occupiers remain price sensitive and aware of their stronger position usually only deciding to relocate on neutral costs terms. The redevelopment of areas such as Kasr Khozam and Rowais will encourage occupiers to move towards the NorthWest of Jeddah. Market conditions are expected to remain occupier favourable throughout 2012.


28 On Point • EMEA Corporate Occupier Conditions – March 2012

Johannesburg Cost: € 231 / sq m

Manama Choice: 10.3%

Competition for office space increased in Q4, with both take-up and absorption up in prime areas, mainly in Sandton, Hyde Park and Rosebank resulting in reduced choice. Occupier demand in these nodes is driven by companies looking for crucial access to transport infrastructure (particularly the Gautrain system) as well as consolidation activities to achieve operational efficiencies. Expansion remains the exception and space taken-up in the prime nodes leaves second-hand space behind in less attractive nodes, clearly indicated by the range of vacancy rates. Whilst overall choice in the Johannesburg market decreased marginally over the quarter (standing at 10.3% at year-end), choice for secondary areas continued to increase with the Johannesburg CBD and Braamfontein recording the highest vacancy rates, while prime nodes continue to see vacancy decreasing. Overall new supply in 2011 was roughly 25% lower than in 2010, with expected completions in 2012 due to reach 159,000 sq m. A number of these projects are already pre-let and under construction. Whilst costs for prime space in the best locations remained stable over the quarter, the demand for prime nodes led to a marginal increase in average achieved rents. However, given that overall choice remains high, occupiers are not willing to pay premiums over market level rents. Rents for Grade B offices on the other end softened slightly in landlord’s bid to secure tenants. Overall, market conditions remain tenant favourable. Kuwait City Cost: € 232 / sq m

Choice: 40%

Anecdotal information indicates that the Government of Kuwait, through its investment arm Kuwait Investment Authority (KIA), will invest KWD1 billion (US$3.6bn) in the local commercial property sector. It remains unclear as to what direct impact this will have on the office market in Kuwait City. Of the current stock of 1.2 million sq m in the market, around 30% can be considered of a Grade A quality. We anticipate a continued slowdown in demand, particularly within secondary locations as occupiers consolidate and upgrade. The market is currently in a state of oversupply. Vacancy rates remain high at around 40% and new additions of supply over the short term are expected to exert a downward pressure on rental rates during 2012. Current prime rents stand at KWD7 per sq m per month and have declined 22% over the last 12 months. The market continues to be tenant favourable with sustained demand limited to quality space in prime locations within the city.

Cost: € 208/ sq m

Choice: 25%

The three main CBD’s of Bahrain – Seef District, Central Manama and The Diplomatic Area – comprise approximately 650,000 sq m of office space. Current vacancy is estimated to be around 25% of stock. Although the country has now reached a period of relative stability, demand remains subdued due to continued uncertainty surrounding the political situation. Despite the delay of many projects and a slowdown in the development pipeline, the supplydemand imbalance is not expected to change over the short term and overall rental rates are likely to move further downwards throughout 2012. Prime office rents remained stable at BD8.50 per sq m per month in Q4 2011. However, shell and core space is currently being offered for rates as low as BD5 per sq m per month in newly completed buildings in the Diplomatic Area and Seef District. Due to aging office stock and limited expansion opportunities, tenants in buildings along Government Avenue, which has long been the historic central business district of Manama, are relocating to the Seef District and new space within Bahrain Bay. Muscat Cost: € 205 / sq m

Choice: 25%

Existing graded stock totals approximately 600,000 sq m – the majority of which comprises Grade B space. Buildings that meet with international occupier requirements remain in limited supply. Although the market is oversee in supplied, Grade A office space remains limited and is rented as a significant premium to secondary space. An additional 185,000 sq m of Grade A space is expected to be delivered to the market over 2012 which should increase choice for occupiers. Qurum and Shati At Qurum continue to see the greatest demand from corporates. Due to the overall lack of suitable accommodation available at present, many companies are looking at the option of constructing purpose built space. This trend, and the expected completion of new space in 2012, is likely to result in additional downward pressure on occupancy levels and rents, particularly in existing locations within Ruwi / CBD and Al Khuwair.


On Point • EMEA Corporate Occupier Conditions – March 2012 29

Riyadh Cost: € 410 / sq m

Choice: 12%

The office market continues to move in favour of occupiers as completions during 2011 and a significant development pipeline delivering 818,000 sq m of office space by the end of 2013 provides an abundance of choice. On the demand side, public sector entities remain the biggest source of competition, benefiting greatly from the country’s huge stimulus measures. In the private sector, local conglomerates and consulting/engineering firms have been among the most active occupiers, while competition for space from multinational companies remains subdued. Relocations and upgrades to higher quality stock are being driven by the offer of improved workspace, security and increased parking. The number of serviced offices is on the rise, with Servcorp and Regus acquiring new space in 2011. It is expected that some projects will witness delays, but overall choice is likely to increase and place downward pressure on costs in 2012. Costs for prime space remained stable over Q4 with rents unchanged at SAR 2,000 per sq m per annum, but are expected to decrease significantly in 2013/2014, when new choice coming to the market reaches a peak. With large amounts of new space being delivered, costs for secondary product will remain under pressure. Tel Aviv Cost: € 302 / sq m

Choice: 3-4%

In line with slower growth in the US and the EU, overall economic growth is likely to slow, although expansion will continue. On the Tel Aviv office market, choice remains tight although the situation is improving. The first step was the new 45-storey 60,000-square meter Electra Building (formerly Elco building) that attracted corporates such as Pay Pal as well as Google. While there are no significant additions to be expected in 2012, there is quite substantial supply expected beyond 2013 with around 400,000 500,000 sq m to be completed in central Tel Aviv and areas such as Herzliza-Pituah and Petah-Tikva. Development for these projects has started or is about to start as developer confidence increases. Many of these projects will however be developed on a speculative basis as occupiers do not usually commit to pre-leases. Current competition for office space remains dominated by the high-tech sector. It is however yet to be seen as to when international corporates will switch back to expansion mode as they remain cautious for the moment. Costs for prime space remained unchanged at ILS 125 per sq m per month. Rents in areas such as Herzliya in the North of the centre remain at around ILS 70-80 per

sq m per month. Incentives remain practically unknown apart from a three month grace period for standard fit-out. Accessibility remains vital and recent improvements to the freeway system are expected to help commuters to cope with rush hour traffic. Tunis Cost: € 110 / sq m

Choice: 12 -15%

Activity levels in the Tunis office market have taken a temporary time-out on both the supply and the demand side given the on-going uncertainty over the course of the political future of the country. The new Islamist government has given every indication that it is serious in tackling Tunisia's deep social and economic issues. It is however yet to be seen what approach it will take towards foreign investment. While many prominent figures in the cabinet are in favour of keeping Tunisia open, there are several figures that harbour more conservative Islamist views, suggesting that Tunisia will take a business like rather than a warm approach to relations with the West. Occupiers already established in the market which include large blue chips such as IBM and Fidelity will continue to operate, but expansion plans remain on hold. Overall, the market remains at the early stages of evolving towards an office market of international standards. New, modern office space is underway in the “Lac de Tunis” area which is also increasingly seen as the new prime area, offering a more secure operational environment. However, development activity is slow, as many materials need to be imported. Costs remained unchanged in Q4, with prime rents recorded at TND 18 per sq m per month and forecasted to remain stable over the short term.


30 On Point • EMEA Corporate Occupier Conditions – March 2012

Middle East and African Corporate Occupier Markets at a glance Choice (% Vacancy Rate) Market

Q4 2011

Costs (Rents EUR/sq m/pa)

12-month outlook

Prime, Q4 2011

12-month outlook

MEA Abu Dhabi

23

Å

355

Æ

Algiers

4

Ä

456

Ä

Cairo

35 (Grade A: 5)

Å

414

Æ

Casablanca

8

Ä

240

Å

Doha

20

Å

487

Æ

Dubai

29 (CBD)

Å

336

Æ

Istanbul

9.1

Ä

360

Å

Jeddah

15

Å

217

Æ

10.3

231

Ä

Kuwait City

40

Ä Å

232

Æ

Manama

25

Å

208

Æ

Muscat

25

Å

205

Æ

Riyadh

12

Å

410

Æ

Tel Aviv

3-4

Ä

302

Å

12-15

Ä

110

Ä

Johannesburg

Tunis


Business Contact: Corporate Solutions Vincent Lottefier Chief Executive Officer EMEA Corporate Solutions Paris +33 1 40 55 49 92 vincent.lottefier@eu.jll.com

Report Contacts: Research Dr Lee Elliott Director EMEA Research London +44 (0)20 3147 1206 lee.elliott@eu.jll.com Tom Carroll Associate Director EMEA Research London +44 (0)20 3147 1207 tom.carroll@eu.jll.com Acknowledgements: We gratefully acknowledge the help and assistance of the following Jones Lang LaSalle alliance partner firms in the preparation of some of this material: Akershus Eiendom AS, Athens Economics and Sadolin & Albæk.

EMEA Corporate Occupier Conditions – March 2012 OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends. www.joneslanglasalle.eu

COPYRIGHT © JONES LANG LASALLE IP, INC. 2012. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.


EMEA Corporate Occupier Conditions 2012