The london south bank office & retail market report q2 16

THE

LONDON SOUTH BANK OFFICE & RETAIL MARKETS Q2 2016

No. 1 South Bank Agent Q2 2016 by volume transacted and number of deals

DISCOVER SOUTH BANK WATERLOO BANKSIDE BOROUGH WEST LONDON BRIDGE BERMONDSEY ELEPHANT & CASTLE CAMBERWELL KENNINGTON VAUXHALL NINE ELMS BATTERSEA WANDSWORTH UNION STREET PARTNERS IS A JOINT VENTURE BETWEEN FAREBROTHER AND TUCKERMAN. IT PROVIDES A SPECIFIC AND BESPOKE REAL ESTATE SERVICE FOR THE SOUTH BANK, A MARKET WHICH HAS UNDERGONE AN UNPRECEDENTED TRANSFORMATION AND WHICH IS NOW FIRMLY ESTABLISHED AS ONE OF CENTRAL LONDON'S MOST IMPORTANT BUSINESS DISTRICTS. THE PRACTICE'S SERVICES INCLUDE OFFICE AND RETAIL LEASING, SALES AND DEVELOPMENT, LEASE ADVISORY, BUSINESS RATES, VALUATION AND INVESTMENT ADVICE. UNION STREET PARTNERS’ EXTENSIVE RESEARCH IS AIMED AT PROVIDING A SHORT, SHARP INSIGHT INTO THE LONDON SOUTH BANK MARKET. THIS QUARTERLY REPORT REVIEWS THE OVERALL PERFORMANCE OF THE LEASING, DEVELOPMENT AND INVESTMENT MARKETS AND IS PUBLISHED ALONGSIDE UNION STREET PARTNERS’ CENTRE OF LONDON REPORTS, PRODUCED IN PARTNERSHIP WITH FAREBROTHER. THESE PROVIDE A COMPREHENSIVE AND UNIQUE ANALYSIS OF THE EVOLUTION OF LONDON’S CENTRAL CORE ON THE NORTH-SOUTH AXIS FROM THE NORTHERN BORDER OF MIDTOWN AT KING’S CROSS THROUGH THE SOUTH BANK. CONTACT LIZZIE CAVE FOR MORE DETAILS LC@UNIONSTREETPARTNERS.CO.UK

DEFINITIONS South Bank - SE1, SE11, SE17, SW8 Stock - office accommodation, excluding offices under construction Floorspace - net internal area, unless otherwise stated Available - office space available for immediate occupation Azar Laghaei, PhD Head of Research +44 20 7855 3547 alaghaei@farebrother.com

Front Cover The largest Take-up transaction of the quarter was the 42,821 sq ft letting of the 4th and part Ground floor at County Hall, Belvedere Road, SE1 to etc.venues.

Availability Rate - available offices as a proportion of total stock

Secondhand Grade B - previously occupied lower quality space with features such as central heating or perimeter trunking Construction start - development where the main contract has commenced, normally excluding demolition or stripping out Construction completion - development where the main contract has reached practical completion

Take-up - completed transactions where offices are let or sold to an occupier

Hidden Supply - space which is not currently on the open market, but likely to come available in the near future

New - brand new buildings or buildings developed behind a retained façade

Long-term - average calculated since the 1st Quarter 2005

Refurbished - buildings which have undergone a major refurbishment

DAMIT - Design; Advertising, Marketing & PR; Media; Internet; and Technology & Telecoms

Secondhand Grade A - previously occupied higher quality space with features such as air-conditioning or raised floors

The London South Bank Office & Retail Markets Q2 2016

01

COMMENTARY MARKET FUNDAMENTALS SHOULD SUSTAIN CONFIDENCE BUT UNCERTAINTY LINGERS POST REFERENDUM 2ND QUARTER HEADLINES: n

South

n

The Availability Rate has moved from 2.7% to 3.0%

n

The

n

Bank Take-up in the 2nd Quarter was down from the 1st Quarter 2016 but first half of the year was in line with 2015

completion of the refurbishments at Cottons Centre, SE1, lifted New & Refurbished Availability by 7% Only just over 300,000 sq ft of newly refurbished space is expected

to come through in the second half of the year

n

The

long-term pipeline is looking healthier, particularly in the west with Battersea, Nine Elms and Vauxhall all showing good levels of ongoing construction

n

Investment transactions totalled £150m, which is 60% up on the

1st Quarter 2016

n

South

Bank’s retail destinations are evolving with Waterloo, London Bridge, Elephant and Castle and Bankside all seeing a considerable level of development underway

IN THIS EDITION Commentary 01 House View

03

Take-up 04 Availability 06 Future Supply

08

Investment 10 Retail & Leisure

12

The uncertainties surrounding the result of the EU Referendum and its subsequent consequences were and still are understandably a point of consideration for occupiers and investors, particularly in the larger size tiers. However, within the context of the wider Central London office market, South Bank experienced less of an impact in the lead up to the EU Referendum.

Leasing activity in South Bank has historically recorded a fluctuating pattern, and the 2nd Quarter of 2016 was no exception. Due to a dearth of larger supply across much of South Bank, leasing activity was very much driven by smaller occupiers. Despite the Referendum uncertainties, these occupiers were less constrained in their real estate decisions. Take-up declined over the quarter, but total volumes leased during the first half of 2016 was on a par with the corresponding period in 2015.

Take-up was bolstered by a high number of smaller transactions, amounting to half of the total volumes leased this quarter. Activity also benefited from the inflow of a wide spectrum of occupiers from other areas of Central London. Migration into South Bank has been on an upward trend in recent years. The market can provide cost-effective space with total occupancy costs generally lower in South Bank than many parts of Central London. The South Bank’s, and Midtown’s proximity to the City and improving transport links provide great access to a broad base of companies. These together consolidate South Bank’s position as an area of credible choice for occupiers in Central London and sustain business sentiment.

In order to respond to the growing occupier interest, the market needs to have greater supply. While there was an 8% increase in total Availability of South Bank over the quarter, supply remained some way below the long-term average, with only one building which can satisfy large requirements in excess of 100,000 sq ft. Availability remains highly concentrated in and around London Bridge and Bankside submarkets.

Looking ahead, an uplift in supply is expected in the coming quarters with 1.75 million sq ft of speculative space currently under construction. This is the highest level since the 2nd Quarter of 2012 and, approximately 30% of it is scheduled for delivery in the next 12 months. 2017 in particular will be an exciting year for the South Bank office market, as a number of key completions are anticipated in the SW8 and SE11 areas, which will introduce a new set of dynamics to the market.

Investment activity was solid in the 2nd Quarter 2016. Overseas Investors played a major role, accounting for 70% of total turnover. Whilst there is an element of volatility in the market in the short-term, the market fundamentals are healthy and therefore the long-term prospects remain good. UK Institutional Investors are naturally cautious at present owing to the Referendum; however, the capital base remains strong with Overseas Investors looking at the weakness of sterling, within the background of lower return requirements.

The London South Bank Office & Retail Markets Q2 2016

TOTAL AVAILABILITY

618,120

02

TAKE-UP sq ft

198,133

% change on Q1 16

% change on Q1 16

+8%

-16%

AVAILABILITY NEW & REFURBISHED (SE1)

INVESTMENT

213,033

£150 m

sq ft

% change on Q1 16

% change on Q1 16

AVAILABILITY SECONDHAND (SE1)

SPECULATIVE

343,563

1.75 m

+7%

% change on Q1 16

+11%

AVAILABILITY RATE

3.0 % % change on Q1 16

+0.3% pts

sq ft

+60%

sq ft

CONSTRUCTION

% change on Q1 16

+5%

sq ft

The London South Bank Office & Retail Markets Q2 2016

03

HOUSE VIEW A MORE BALANCED MARKET AHEAD South Bank’s presence as one of the cornerstones of the Central London occupier market is now fully established. Large numbers of occupiers than ever before are actively seeking a presence in the South Bank. This is not just in the growing DAMIT sectors that are showing a concentration which competes with Old Street, Shoreditch, Clerkenwell, and other parts of Midtown, but this is also across all other sectors. The frustration for occupiers is the lack of alternative sites for them to acquire, with Availability at a lower level than the West End, Midtown, or the City.

The More London and London Bridge Quarter development activity has naturally coincided with higher levels of Take-up.

The good news now is that prospects for supply are bright, with the volume of space under construction reaching a four-year peak this quarter. There are a number of key developments underway and due for completion in the next 12 months. As demand remains robust, we anticipate rents to continue to grow, albeit steadily.

A NEW DIMENSION TO THE MARKET IN 2017 WITH SW8 AND SE11 SETTING THE NEW PHASE Whilst office supply and occupier activity have been historically concentrated in the SE1 area, 2017 marks the inception of a new stage in the overall South Bank office market. Of the total 1.75 million sq ft which is currently under construction, approximately 50% is located in SW8 and SE11, with the first phases of deliveries scheduled in 2017.

The SW8 area in particular will see an unprecedented spike in supply next year and will be one of the very few Central London submarkets with the highest proportion of stock being New & Refurbished space. An equivalent was recently seen in East London where the development of ‘Here East’, E15 brought a significant portion of cost-effective space to the market, attracted major tenants, and subsequently led to strong rental growth in Stratford.

The delivery of the new mixed-use developments in SW8 will be a key driver in shifting part of the occupier focus and introducing a new set of dynamics further south west. The cost differentials of these areas with the more established pockets of the market will add to their appeal amid smaller occupiers and start-ups.

At Union Street Partners, we are closely tracking the trends in these upcoming submarkets and with Battersea Power Station, SW8 underway for 2019 delivery, we expect the area to get the traction of some renowned companies in the near-future.

FUNDAMENTALS REMAIN STRONG WITH OVERSEAS CAPITAL LIKELY TO BE THE MOST ACTIVE The uncertainty over the Referendum and its subsequent ramifications had started to filter through to some investment decisions, particularly amongst Institutional Investors who have become more cautious in the new political climate. This is not exclusive to London or South Bank, as the rest of Europe is also experiencing the after-effects. London still holds its position well, and continues to be attractive to a diverse range of Overseas investors, for whom falling Sterling matters more than the exit strategy from Europe. Furthermore, real estate remains an important asset class within which to offset pricing and volatility in other asset classes.

In summary, we expect Investor interest to continue, albeit there will be some market realignment in terms of pricing. The likely quantum is difficult to define with certain sub-sectors and locations more susceptible.

Certainly, we anticipate core South Bank to remain robust with little change in pricing, due to the limited nature of market opportunities.

FIG.1 TAKE-UP VS. SUPPLY 2006-2016

24%

More London PwC

26%

22%

The Place News UK

Bankside 2 & 3 Omnicom

2.5

South Bank Supply South Bank Take-up

10-year annual average

million sq ft

2.0

Supply: 1.0M SQ FT Take-up: 1.2M SQ FT

1.5

1.0

0.5

0 2006

2007

2008

2009 2010 2011 Market impacted by global financial crisis & low Supply

2012

2013

2014

2015

H1 2016

The London South Bank Office & Retail Markets Q2 2016

04

TAKE-UP TOTAL TAKE-UP

198,133 % change on Q1 16

-16 %

sq ft

Five-year Quarterly Average

309,513 sq ft

ACTIVITY SUPPORTED BY A WIDE SPECTRUM OF SMALLER OCCUPIERS COMING FROM ACROSS LONDON

TAKE-UP NEW & REFURBISHED (SE1)

TAKE-UP SECONDHAND (SE1)

49,088

140,839

% change on Q1 16

-62%

sq ft

Five-year Quarterly Average

115,896 sq ft

% change on Q1 16

-19%

sq ft

Five-year Quarterly Average

169,119 sq ft

TABLE.1 SELECTED Q2 16 OFFICE LETTINGS IN SOUTH BANK Occupier

Address

Sq ft

Grade

etc.venues

County Hall, Belvedere Road, SE1

42,821

Secondhand Grade B

Conf.

Zopa

Cottons Centre, Hays Lane, SE1

25,252

Secondhand Grade A

55.00

Dods Parliamentary Communications Ltd

The Shard, 32 London Bridge Street, SE1

16,875

New

Conf.

Kobalt

3 Valentine Place, SE1

12,841

New

62.50 on best

Expedition Engineering Ltd

Clove Building, Maguire Street, SE1

7,565

Secondhand Grade A

52.50

Rendel Ltd

200 Great Dover Street, SE1

6,735

Refurbished

55.00

ATG Media

65 Southwark Street, SE1

6,666

Secondhand Grade A

63.00

TUI Travel Group

Minerva House, 5 Montague Close, SE1

6,580

Secondhand Grade A

52.00

Urban Fresh Foods

Emerson Studios, 4-8 Emerson Street, SE1

5,355

Secondhand Grade B

56.50 on best

ProAct IT UK

95 Southwark Street, SE1

5,088

Refurbished

62.25

MongoDB (UK) Ltd

Franciscan Court, 16 Hatfields, SE1

4,428

Secondhand Grade A

55.50

Channel 3 Consulting Ltd

21 Queen Elizabeth Street, SE1

3,908

Secondhand Grade B

50.00

SeaCo Global Ltd

3 Valentine Place, SE1

3,552

New

62.00

Source: Union Street Partners

Reported Rent £psf

The London South Bank Office & Retail Markets Q2 2016

05

Against a background of uncertainty ahead of the EU Referendum, leasing activity during the 2nd Quarter reached 198,133 sq ft in the wider South Bank area (SE1, SE11, SE17 and SW8), which was 16% down on the 1st Quarter. This was significantly below the five-year quarterly average of 309,513 sq ft in South Bank. However, the trends seen particularly across SE1, which accounts for the major part of the South Bank office market, indicated that activity during the first half of the year was in line with the corresponding period in 2015. Secondhand Take-up accounted for 74% of total volumes leased during the quarter.

FIG.2 SE1 QUARTERLY TAKE-UP BY GRADE 1.00

million sq ft

0.75

0.50

0.25

0.00

2007

2008

Pre-lets

2009 New

2010 Refurbished

2011

2012

2013

Secondhand Grade A

2014

2015

2016

Secondhand Grade B

Source: Union Street Partners

(projection)

Take-up was fuelled by small and medium size transactions, who were less constrained with their real estate decisions ahead of the EU Referendum.

Sub-10,000 sq ft occupiers represented half of the total leasing volumes this quarter, with the average transaction size falling from 9,148 sq ft in the last three years to only 5,355 sq ft in the 2nd Quarter. This is also partly associated with the prevalent nature of supply and particularly the paucity of larger Availability across much of South Bank.

FIG.3 SE1 TAKE-UP BY SECTOR IN Q2 16 Q2 16

% Sector DAMIT D A

M

I T

32% 68%

Q2 16

Design Advertising, Marketing & PR Media Internet Technology & Telecoms

13

Banking, Finance & Insurance

1 0 0 03 20 19 60 279

Corporate DAMIT Education Design Government Advertising, Marketing & PR Legal Media Professional Services Internet Retail & Leisure Technology & Telecoms Other

13

Banking, Finance & Insurance

Charities & Associations %2 Sector

D A

M

I T

187,388 sq ft

0 3 20 0 9

32% Named Take-up Q2 16 68%

Undisclosed (2,539 sq ft)

3 Years to Q2 16

Total Take-up: 189,927 sq ft

Charities & Associations %2 Sector

1 Corporate 0 DAMIT Education Government 10 Design Legal Marketing & PR 190 Advertising, 19 Media Professional Services 15 Retail & Leisure 46 Internet FIG. 4 SE153%TAKE-UP

BY SECTOR 3 YEARS ROLLING 47% 279 Technology Other & Telecoms Source: Union Street Partners

M I T D A

3

3 Years to Q2 16

47%

As with previous quarters, the South Bank leasing market continued to benefit from the inflow of occupiers migrating from other areas of Central London; but of significance this quarter was the growing appeal of the area to a range of businesses from the West End and Midtown.

These included examples from a cross-section of sectors such Banking & Financial, Professional Services, and Media. Zopa Ltd and The Publishers Association migrated from Midtown while Wilson Mason LLP, Expedition Engineering Ltd, Dod’s Parliamentary Communications Ltd, and Stepstone relocated to South Bank from various parts of Mayfair and St James’s.

Banking, Finance & Insurance

Charities & Associations %4 Sector

M I T D A

53%

The largest transaction this quarter was etc.venue’s leasing of 42,821 sq ft at County Hall, Westminster Bridge Road, SE1, which is the company’s third centre in South Bank to provide conferencing and event facilities from January 2017. There were three other transactions in excess of 10,000 sq ft including Zopa Ltd at Cottons Centre, Hays Lane, SE1 (25,252 sq ft), Dod’s Parliamentary Communications Ltd at The Shard, 32 London Bridge Street, SE1 (16,875 sq ft), and Kobalt Music Group at 3 Valentine Place, SE1 (12,841 sq ft). With 33% share of Take-up, DAMIT sectors remained a key component of the South Bank occupier mix, while a combination of Other companies and Professional Services occupiers also represented 46% of total activity in the 2nd Quarter.

3,868,439 sq ft

Named Take-up 3 Year rolling Undisclosed (358,228 sq ft)

8 1 21 194 159 174 9

Corporate DAMIT Education Design Government Advertising, Marketing & PR Legal Media Professional Services Internet Retail & Leisure Technology & Telecoms Other

3 4 8 1 2 4 9 17

Banking, Finance & Insurance Charities & Associations Corporate Education Government Legal Professional Services Retail & Leisure Other

TABLE.2 PROPORTION OF SOUTH BANK TAKE-UP BY NO. OF TRANSACTIONS SIZE BAND (SQ FT)

Q2 16

3 YEARS TO Q2 16

100k+

0%

1%

50-100k

0%

1%

40-50k

3%

1%

30-40k

0%

3%

20-30k

3%

3%

10-20k

5%

9%

5-10k

24%

16%

Total 3 Year rolling: 4,226,667 sq ft

1-5k

Source: Union Street Partners

AVERAGE TRANSACTION SIZE

65%

66%

5,355 SQ FT

9,148 SQ FT

The London South Bank Office & Retail Markets Q2 2016

06

AVAILABILITY TOTAL AVAILABILITY

618,120 % change on Q1 16

+8%

AVAILABILITY NEW & REFURBISHED (SE1) sq ft

Five-year Quarterly Average

1.06m sq ft

213,033 % change on Q1 16

+7%

sq ft

Five-year Quarterly Average

416,219 sq ft

AVAILABILITY RATE

AVAILABILITY SECONDHAND (SE1)

3.0%

343,563

% change on Q1 16

+0.3% pts

Five-year Quarterly Average

4.9%

% change on Q1 16

+11%

sq ft

Five-year Quarterly Average

480,166 sq ft

SECOND CONSECUTIVE QUARTER OF INCREASED SUPPLY CONCENTRATED AROUND LONDON BRIDGE AND BANKSIDE

81% of New & Refurbished South Bank Availability is in The Shard, 32 London Bridge Street, SE1 and The Cottons Centre, Hays Lane, SE1.

The London South Bank Office & Retail Markets Q2 2016

07

Supply increased by 8% to stand at 618,120 sq ft by the end of the 2nd Quarter. This equated to an Availability Rate of 3.0%, up from 2.7% in the 1st Quarter. Total Availability, however, remained 41% below the five-year quarterly average of 1.06m sq ft. South Bank’s Availability Rate is currently the lowest across Central London meaning any further large letting will result in a substantial contraction to supply.

FIG.5 QUARTERLY SE1 OFFICE AVAILABILITY BY GRADE

1.5

million sq ft

1.0

0.5

0.0

2007 New

2008

2009

Refurbished

2010

2011

Secondhand Grade A

2012

2013

2014

2015

2016

Availability was dominated by Secondhand space, representing 61% of total supply. New & Refurbished Availability rose 7% over the quarter and reached 240,130 sq ft, approximately half of the average volume seen in the last five years. Quality supply, however, remained disproportionately sparse across much of South Bank, with 84% of all New & Refurbished space concentrated in London Bridge and Bankside submarkets. These two areas, combined, amount to 66% of the current total South Bank Availability.

Secondhand Grade B

The delivery of New or Refurbished space in South Bank has been very low for some time and, whilst there were no additions to New & Refurbished stock in the 1st Quarter, the completion of work at Cottons Centre, Hays Lane, SE1, brought 88,109 sq ft of Refurbished space to the market in the 2nd Quarter. The only other delivery this quarter was the small 8,500 sq ft completion of Harling House, 47-51 Great Suffolk Street, SE1.

Source: Union Street Partners

Supply was mainly characterised by smaller units across much of South Bank. The Shard remained the only building which could accommodate requirements in excess of 100,000 sq ft. There were three other buildings, with a total of size of greater than 50,000 sq ft, including Becket House, 1 Lambeth Palace Road, SE1 (60,910 sq ft), 1-2 Paris Gardens, SE1 (62,425 sq ft), and Cottons Centre, SE1 (88,109 sq ft); approximately half of the latter is, however, understood to be under offer. Choice therefore continues to be constricted for larger tenants in search of office space in the South Bank unless they will consider looking into the future and signing a Pre-let.

TABLE.3 CENTRAL LONDON SUPPLY COMPARED Grade (sq ft)

South Bank

Midtown

West End

City

New & Refurbished

240,130

850,949

636,933

798,769

Secondhand Grade A

192,528

339,187

832,640

2,375,385

Secondhand Grade B

185,462

227,901

1,030,591

1,392,125

Total (All)

618,120

1,418,037

2,500,163

4,566,279

20,472,480

41,303,163

72,317,018

74,208,960

3.0%

3.4%

3.5%

6.2%

Stock Availability Rate (%) Source: Union Street Partners

The London South Bank Office & Retail Markets Q2 2016

08

FUTURE SUPPLY TOTAL SPECULATIVE SPACE

SPECULATIVE CONSTRUCTION

1.75m

307,384

UNDER CONSTRUCTION

DUE IN THE REMAINDER OF 2016

sq ft

sq ft

% change on Q1 16

+5%

SPECULATIVE CONSTRUCTION

SPECULATIVE CONSTRUCTION

CONSTRUCTION DUE IN Q2 16 DUE IN 2018

DUE IN 2017

451,783

504,030 96,609

sq ft

sq ft sq ft

POSITIVE PROSPECTS FOR COMING QUARTERS WITH 2017 MARKING A RISE IN SW8 SUPPLY SELECTED CONSTRUCTION STARTS IN THE 2ND QUARTER 2016

1

Capital Tower, 91 Waterloo Road, SE1 15,585 sq ft | Bourne Capital | Q3 16

2

Union House, 182-194 Union Street, SE1 15,758 sq ft | CBRE Global Investors | Q1 17

3

209 Blackfriars Road, SE1 31,218 sq ft | Overcourt | Q2 17

4

3 1

2

Edinburgh House, 154-182 Kennington Lane, SE1 62,684 sq ft | Workspace Group | Q2 17

Pimlico

4 Vauxhall

BURGESS PARK

VAUXHALL PARK

Oval

KENNINGTON PARK

The London South Bank Office & Retail Markets Q2 2016

09

50% OF ALL SPECULATIVE SPACE

CURRENTLY UNDER

CONSTRUCTION IS OUTSIDE OF SE1

IN SW8 (NINE ELMS) AND SE11 (VAUXHALL / KENNINGTON)

55%

OF SPECULATIVE SPACE

CONSTRUCTION IS EXPECTED TO BE DELIVERED IN 2017 AND 2018

Looking further ahead, the largest proportion of speculative deliveries is currently anticipated in 2018, with almost 500,000 sq ft currently under construction. The majority of this space is at the Almacantar owned New development at Two Southbank Place, York Road, SE1 (297,678 sq ft), along with the New scheme at One Nine Elms (118,252 sq ft) by Dalian Wanda. Beyond this point, development activity remains limited to Battersea Power Station, SW8 (475,000 sq ft), which is currently under construction and anticipated to complete in late 2019.

FIG.6 FUTURE SUPPLY IN SOUTH BANK 2015-2018 million sq ft

1.0 0.8 0.6 0.4 0.2

Q3 Q4 Q1 Q2 Q3 Q4

2015 Let

2016 Completed

Source: Union Street Partners

Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4

2017

2018

Under Construction

The prospects for the remainder of the year are positive with 307,384 sq ft due to complete. The refurbishment scheme at South Bank Central, SE1

by Hermes Real Estate and Canada Pension Plan Investment Board is the largest delivery scheduled for this year and will bring 228,421 sq ft to the market upon completion in the 3rd Quarter. This next largest scheme, also scheduled for the 3rd Quarter of the year, is Columbia Threadneedle Investments’ refurbishment of Courage Yard, 1 Copper Row, SE11 (43,193 sq ft). This building is already fully let to Zoopla.

The total speculative space due to be delivered in 2017 currently stands at 451,783 sq ft. The year in fact marks an unprecedented level of deliveries in the SW8 area. Vinci & St Modwen’s New scheme at New Covent Garden Site, SW8, is the largest speculative delivery anticipated in the 4th Quarter of the year. The New Build scheme of Sky Gardens, Wandsworth Road, SW8 (35,500 sq ft) by Fraser Property should also come online in the 1st Quarter of 2017. The refurbishment of Edinburgh House, 154-182 Kennington Lane, SE11, is expected to complete in the 2nd Quarter of 2017, helping bring a significant jump in New & Refurbished supply in SE11.

CURRENTLY UNDER

0

Key starts during the 2nd Quarter included Workspace Group’s refurbishment of Edinburgh House, 154-182 Kennington Lane, SE11 (62,684 sq ft) and Overcourt’s refurbishment of 209 Blackfriars Road, SE1 (31,218 sq ft). Speculative space under construction therefore reached 1.75 million sq ft at the end of the quarter, the highest level since the 2nd Quarter 2012 and 88% ahead of the five-year quarterly average.

Approximately 30% of this space is scheduled for delivery in the next 12 months, with the remaining due for completion by the end of 2019. This should relieve part of the pressure on Supply in the near-term, broadening the occupier choice in South Bank.

Hidden Supply

The London South Bank Office & Retail Markets Q2 2016

10

INVESTMENT Q2 16 INVESTMENT TURNOVER

LIQUIDITY CONTINUES TO HOLD BACK POTENTIAL SOUTH BANK INVESTORS

£150m % change on Q1 16

+60%

Five-year Quarterly Average

£288m

TABLE.4 SELECTED Q2 16 INVESTMENT TRANSACTIONS IN MIDTOWN Address

Sq ft

Vendor

Purchaser

Reported Price £m

The Harlequin Building, 65 Southwark Street, SE1

51,000

Aberdeen Asset Management

Meadow Partners

48.20

61 Southwark Street, SE1

66,699

Aberdeen Asset Management

HB Reavis

44.00

8 Mill Street, Little London, SE1

31,052

BlackRock Investments / Workspace Group

Westbrook Partners

16.50

Baden Place, Crosby Row, SE1

25,461

BlackRock Investments / Workspace Group

Westbrook Partners

14.85

220A-220B Queenstown Road, SW8

14,471

Boultbee Brooks Real Estate

TH Real Estate

7.70

The Gainsford Estate, Gainsford Street, Horselydown Lane & Brewery Square, SE1

11,312

Private Investor

Private Investor

6.30

3 Marshalsea Road, SE1

6,553

Dorrington

Private Middle Eastern Investor

5.70

67 Southwark Street, SE1

6,230

Allies & Morrison

Total Living Solutions

5.05

45 Great Guildford Street, SE1

3,275

Curb Records

Electrical Fire Safety First

2.88

Source: Union Street Partners

OBSERVATIONS ON THE CURRENT INVESTMENT CLIMATE

South Bank property fundamentals remain strong Capital base is still robust Real Estate is an important asset class Key infrastructure projects will be delivered Occupier base becoming more diverse Fundamentally an underdeveloped market

IMPORTANT TO MAINTAIN A BALANCED VIEW stability Political instability Pricing divergence London’s status

The London South Bank Office & Retail Markets Q2 2016

11

FIG.7 ANNUAL SE1 INVESTMENT TURNOVER BY SUBMARKET Annual Turnover £m

£m 2500

425

350

78

401

562

344

1,307 2,509 1,165

236

This is in contrast to the usual trend in the South Bank where UK Investors tend to opt for smaller lot sizes, whilst Overseas Investors generally favour the larger, prime assets, of which a number have traded in the South Bank this cycle. This is a reflection of a market that is continuing to evolve, attracting a greater and more varied Investor base.

2000

1500

1000

Eight Year Annual Average - £820m Eight Year Annual Average (Excluding More London) - £608m

500

0

Overseas activity was also present at the smaller end of the market with a private Middle Eastern Investor purchasing 3 Marshalsea Road, SE1, from Dorrington for £5.7 million, and a private French Investor purchasing The Gainsford Estate, Gainsford Street, SE1, for £6.3 million.

2007

2008

Bankside

2009 London Bridge

2010

2011 Waterloo

2012

2013

2014

Borough West

2015

2016 YTD

Bermondsey

Source: Union Street Partners

FIG.8 INVESTOR TYPE BY VALUE IN Q2 2016 % Investor % Investor TypeType UK Fund 5 UK 5 Fund UK Private / Other / Other 0 UK 0 Private UK Property Company Company 26 UK 26 Property 31% 31% 69% 69%

Occupier Occupier 0 Owner 0 Owner 4 33 0 32

Overseas European European 4 Overseas Overseas Middle Middle Eastern Eastern 33 Overseas Overseas Far Eastern Far Eastern 0 Overseas Overseas Other Other 32 Overseas

Total Turnover in Q2 16

£150m £46m UK vs. £104m Overseas Source: Union Street Partners

% Investor % Investor TypeType 23 UK 23 Fund UK Fund

UK Private / Other /2016, Other closed at 10 UK 10 Private South Bank Investment turnover in the 2nd Quarter UK Property Company Company 14 UK 14 Property a level of £150 million, which is 60% up on the previous quarter. The 51%47% 47% transactions remained Owner Occupier Occupier 2 Owner 2 unchanged, number 51% of individual however, with nine transactions completing in both quarters. All of the 2nd Quarter European European 0 Overseas 0 Overseas 2% in SE1, with the exception of Boultbee Brooks’ sale of transactions 2% were Middle Middle Eastern Eastern 37 Overseas 37 Overseas Overseas Overseas Far Eastern Far 9Real 220A-220B Queenstown Road in SW8 to9TH Estate forEastern £7.7 million.

Other Other 5 Overseas 5 Overseas

In the 1st Quarter 2016, 100% of the transactions were undertaken

by UK Investors, whereas 69% of the activity in the 2nd Quarter was

by Overseas Investors. Meadow Partners’ £48.2 million purchase of The Harlequin Building, 65 Southwark Street, SE1, represented the largest transaction, for the quarter, followed by HB Reavis’ purchase of 61 Southwark Street, SE1, for £44 million. Both buildings were sold by funds managed by Aberdeen Asset Management.

The owner occupier sector is still an important component; however, activity during this quarter was limited. The only owner occupier activity for the quarter, was the smallest transaction, where Greggs the food retailer sold their own freehold at 82 Lower Marsh, SE1, for £1.5 million to UK Property Company, Oxygen Asset Management.

Looking at the year-to-date, Investment in the South Bank totals £244 million. This is a decrease of 30% on the same period last year where £350 million was transacted in a relatively even split of £169 million and £181 million for the 1st and 2nd Quarters respectively.

When considering the number of transactions completing (21 in the first half of 2015 versus 18 in the first half of 2016), it is evident that a few large lot sizes distorted the figures.

Two other notable transactions include the sale of Baden Place, Crosby Row, SE1, and 8 Mill Street, Little London, SE1, both of which form the element of Blackrock and Workspace’s £120 million eight building ‘London Collection’ portfolio. On an aggregate basis, both these assets sold for approximately 10% over the asking price.

In summary, despite caution in the run up to the Referendum, with the ensuing unexpected result, there have been a number of transactions exchanging on the South Bank. Investor interest remains strong; however, pricing will be subject to some volatility owing to natural concerns over a changing economic and political environment. Despite this added challenge, we remain optimistic in respect to the South Bank’s prospects.

The market is performing well, particularly if you cast back to where the South Bank used to sit, in terms of its pricing regimes. As concerns rise in respect to Supply across Central London, it is important to note that South Bank remains an underdeveloped market in what is one of London’s most important strategic locations. With key infrastructure improvements underway and a rapidly diversifying occupier base, the general South Bank environment and experience continues to advance.

The London South Bank Office & Retail Markets Q2 2016

12

RETAIL & LEISURE The South Bank, not traditionally known for its retail offering beyond the restaurant and leisure amenities along the River Thames, is beginning to see change.

A number of distinct areas across the area are becoming more established as existing developments progress and new opportunities gain consent.

Waterloo, home to London’s busiest station with almost 100 million passengers each year, has until now, been somewhat overlooked.

The most visible change in the area is the development of Southbank Place, SE1, a mixed-use scheme of new office and residential space along with 65,000 sq ft of new retail. The proposed redevelopment of the former Waterloo International Terminal (WIT), however, could be a real game changer for the area. A planning application has been submitted by London & Continental Railways (LCR) for up to 130,000 sq ft of mixed-use retail and leisure space which would be due to complete in 2018/19. LCR’s plan is to create a new shopping centre for the South Bank, which happens to be attached to the mainline and underground stations. Both Southbank Place and the WIT will improve connectivity between the station and the cultural attractions along the river. The proposed redevelopment of Elizabeth House on York Road, SE1, can and should further support this.

In addition, once open in early 2017, the development of Leake Street Arches behind Waterloo Station will provide a new restaurant and bar area, extending over 24,200 sq ft within eight railway arches. This will add to the success of Lower Marsh which is already popular with independent retailers looking to establish themselves in the area. In the 2nd Quarter 2016, Union Street Partners undertook a letting at 17 Lower Marsh, SE1, to local wholesaler and café operator, Borough Produce Ltd. With a growing number of independent café and bar operators establishing themselves on the street, together with the street’s vibrant food market, Lower Marsh is fast becoming one of Waterloo’s hotspots. Investors are increasingly recognising this and there are now plans for not just one but two new hotels on Lower Marsh. At 23-25 Lower Marsh, SE1, there are plans to create a boutique hotel with penthouse residential apartments, a restaurant and ground floor retail, and on land owned by Network Rail, at 138 Lower Marsh, SE1, approval has been granted for a shipping container hotel of circa 20 rooms.

Another area where the addition of retail space is increasing is Bankside. Connecting the River Thames with Elephant and Castle (which itself is undergoing significant transformation with Delancey’s redevelopment), Blackfriars Road has recently benefitted from Transport for London’s Cycle Superhighway extension in addition to the redevelopment of Blackfriars Station and extension to the Tate Modern. In the immediate vicinity, the provision of retail is being delivered as part of new mixed-use developments. In the 2nd Quarter, Abokado took 1,400 sq ft at Great Portland Estate’s 240 Blackfriars Road, SE1, on a 10-year lease, paying a rent of £60,000 pa. Just across the road, Hoxton Hotel will be opening an 192 room hotel with rooftop sky bar at 40 Blackfriars Road, SE1, when this mixed-use scheme delivers in 2018.

Two other notable developments include Hermes Real Estate and Canada Pension Plan Investment Board’s South Bank Central, SE1, and Berkeley Homes’ One Blackfriars, SE1. South Bank Central will be complete in September this year and will provide 38,000 sq ft of new retail, as well as 225,000 sq ft of offices below the 190 residential apartments in the upper floors of the former King’s Reach Tower. Both the office and retail components are being marketed by Union Street Partners. Little Waitrose have launched their first store on the South Bank in this scheme, and other new names to the area are set to follow.

Adjacent to South Bank Central, One Blackfriars, SE1, will comprise an iconic riverside tower of 50 storeys with luxury residential apartments and a boutique hotel. Marriott Autograph has signed for the hotel and is expected to deliver three restaurant/ bar spaces, including a double height bistro restaurant and rooftop terrace. The scheme will include approximately 10,000 sq ft of commercial space with phase one due for completion in the 2nd Quarter 2018.

Further east along the South Bank, London Bridge is already well renowned for its retail and leisure offering owing to the success of Borough Market which appeals to locals and tourists alike.

But the redevelopment of London Bridge Station, which has been ongoing since 2013 and is due for completion in 2018, will provide an additional 85,000 sq ft of retail, albeit mostly food and beverage orientated. Also planned for completion in 2018 is the redevelopment of the former Vinopolis site where Meyer Bergman has recently gained consent for the restoration of existing railway arches, to provide a new shopping arcade off Stoney Street. This scheme will provide 140,000 sq ft of retail, 10,000 sq ft of leisure and 75,000 sq ft of offices which will enhance Borough Market’s existing offering. Recent 2nd Quarter activity in the area includes a letting to Hawksmoor at 16 Winchester Walk, SE1, where the award-winning steakhouse and bar has signed up to 7,000 sq ft on a 15-year lease. South Bank’s retail destinations are evolving in response to this increasingly exciting market!

The London South Bank Office & Retail Markets Q2 2016

13

SOUTH BANK’S RETAIL DESTINATIONS ARE EVOLVING

40 BLACKFRIARS ROAD, SE1

ONE BLACKFRIARS, SE1

SOUTHBANK CENTRAL, SE1

138 LOWER MARSH, SE1

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SIMON SMITH

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T 020 3757 7777 TEAM@UNIONSTREETPARTNERS.CO.UK UNIONSTREETPARTNERS.CO.UK Union Street Partners is a joint venture company between Farebrother and Tuckerman. It provides a specific and bespoke Real Estate service for the South Bank, a market which has undergone an unprecedented transformation and which is now firmly established as one of Central London’s most important business districts. The Practice’s services include Office and Retail Leasing & Development, Lease Advisory, Business Rates, Valuation and Investment advice.

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This publication has been carefully prepared and it is intended for general guidance only. No responsibility is accepted by Union Street Partners for any errors or omissions. The information contained herein should not be relied upon to replace professional advice on specific matters and is not, in whole or in part, to be published, reproduced or referred to without prior approval.

Information may be subject to revisions in subsequent editions. ©2016 Union Street Partners. All rights reserved.

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