EMEA Office OccupierView

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1 EMEA Office OccupierView Q CBRE Global Research and Consulting EU-27 GDP 0.3% EU-27 BUSINESS CONFIDENCE EMEA PRIME RENT 0.1% EU-27 VACANCY RATE 16.1 BPS OCCUPIER CONFIDENCE RETURNING IN SOME KEY MARKETS Quick Stats Change from Q1 13 Q2 12 Chart 1: EMEA Prime Office Rent Cycle, Q Rent Occupier choice Hot Topics Occupier confidence returning in some key markets, elsewhere a wait-and-see attitude continues to dominate real estate decisions. Overall occupier choice increases sharply for first time since 2010 due to speculative completions in some core markets. 1 Prime rents generally stable but upward pressure on prime buildings is likely to follow a more widespread recovery in demand. Occupier confidence returning in some key markets Take-up levels rebounded in the second quarter, as positive economic news in some key cities instilled sufficient confidence into occupiers to reignite the leasing market. London, Moscow and all five German markets experienced a significant improvement in demand during the quarter. Elsewhere, although the eurozone saw positive GDP growth in Q2, the economy in many markets remains in a fragile state, and until a sustained recovery emerges occupiers are likely to continue to exercise caution in their real estate decisions. Within this environment, renegotiations and renewals of existing leases continue to be a prominent feature of the market as occupiers are reluctant to commit to new leases and the costs of relocating. Large speculative completions increase vacancy rate The overall vacancy rate increased at the sharpest rate since 2010 as major speculative office schemes completed in a few key cities. With further schemes due to complete in the next 18 months, options for occupiers looking for high quality space in some of the core markets will increase. Elsewhere, vacancy fluctuations were predominantly driven by occupier activity - in the southern European markets vacancy continued to increase as occupiers consolidated operations and released secondary space onto the market. Conversely, in some non-core western European markets steady levels of demand and very low levels of speculative completions have eroded some of the vacant space. The shortage of prime space and thin development pipeline has already restricted options for occupiers requiring high quality, centrally located office space in most markets. Prime rental growth restricted to best performing markets In some of the weaker markets there have been further downward adjustments to the prime rent to bring values closer in-line with the revised expectations and spending capacity of occupiers. In most markets, prime rents continued to be stable, however in some locations where demand has been improving, the shortage of high quality space has placed upward pressure on prime rents. As this supply situation is mirrored in many European markets, it is possible that occupiers will find rental levels for prime space will start to increase when a more widespread recovery in demand emerges. Completions will continue to be focused in a few key markets Further speculative schemes are due to complete in some core markets in the second half of 2013 and into However, following the rise in completions early forecasts suggest there will be a sharp dip in 2015, as very few schemes were started during the height of the eurozone crisis. This indicates that the shortage of prime space will continue to be an issue for many markets for the foreseeable future. In the markets where speculative schemes are coming through to the market, there has generally been strong occupier interest in the new buildings. This is likely to strengthen landlords negotiating position on prime buildings, and may restrict the options available to prospective occupiers going forward. Source: CBRE

2 Q EMEA Office OccupierView 2 WESTERN EUROPE Amsterdam Demand for office space continues to be focused on high-quality centrally located buildings where occupiers can achieve cost reductions through improved efficiencies and space consolidation. Amsterdam is one of the most fertile markets for the implementation of new workplace strategies, which are being increasingly adopted by corporate occupiers. Brussels Office demand is mainly supported by the public sector and associated organisations, and as a result the European district has attracted the highest take-up in recent quarters. CBD market fundamentals have improved drastically over the last 18 months, and the upcoming shortage of new space may support a potential increase in the prime rent in the next 12 months. Dublin Demand for office space continues to be strong, with a large volume of active requirements currently on the market. There is a shortage of available prime space in the city, however speculative development will not be feasible until further improvements in rental values. Frankfurt As expected, take-up improved substantially on the very low level recorded in Q1. However, the shortage of high quality space in the city is continuing to have a detrimental impact on demand levels, with many companies extending their existing leases due to the lack of suitable options for upgrading. London Take-up was strong in Q2 and the improved economic outlook for the UK appears to have instilled sufficient confidence into occupiers to trigger progression of a number of key requirements, some of which were previously stalled. This is expected to place upward pressure on prime rents in the coming quarters. Lisbon Although take-up improved in Q2 on the record low recorded in the previous quarter, it remained at a very low level for the market. Given the economic conditions and low levels of confidence, office activity is not expected to increase significantly, and occupiers will continue to focus on driving down costs, reducing occupancy levels and renegotiating their leases. Luxembourg City Take-up in Q2 was slightly down on the levels recorded in the same quarter in the past two years. Occupiers require modern and efficient space however the supply of this is limited due to the low development pipeline. This is strengthening landlords negotiating position, and rent free periods and fitting out allowances are tightening. Madrid The recovery in demand recorded in the first quarter of 2013 has not been sustained, and take-up fell back sharply in Q2 to the lowest quarterly total since Unlike Q1, when take-up levels were boosted by a few exceptional large transactions, there were just two deals larger than 3,000 sq m recorded in Q2. Occupiers are generally not prepared to undertake a relocation until a broader consensus on when Spain s economy will return to growth is reached. Milan Demand is heavily skewed towards high quality space in central or semicentral locations as occupiers take advantage of a strong negotiating position and lower occupational costs to move to better located buildings. Competition between landlords has increased and as a result they are offering generous incentive packages and the prime rent has fallen for the second consecutive quarter. Munich Take-up continued to be robust in Q2, with leasing activity driven by expansion and relocation strategies supported by the strong local economic environment. The city has benefitted from a high economic diversity during the downturn in the first half of 2013 the highest volume of transactions to one sector was just 14%. Paris Although cost reduction policies and space optimisation stimulated some activity, this was not enough to maintain the number of relocations, which were held back by the economic climate and a tendency to renegotiate. In an attempt to stimulate demand for new office space, prime rents have been reduced to bring them closer inline with tenants expectations given the difficult economic conditions. Vienna Compared to the previous year, there has been a reduction in the number of large new lease transactions in the first half of The largest have been observed in the public and media and publishing sectors. We expect the latter to be a key driver of demand for the remainder of the year.

3 CENTRAL AND EASTERN EUROPE Belgrade Leasing activity was strong in Q2, however a high proportion of this was accounted for by lease renewals. Much of this was attributable to occupiers of new buildings which completed in the peak of the development cycle in Availability of high quality space continued to decrease, and it is expected that landlords will start to push up headline rents and trim incentives in the near future. Budapest Demand remained on a par with the first quarter, however at this level was someway below the same quarter the previous year. The vacancy rate remains high, at nearly 20%, however demand is expected to improve in the second half of the year which will absorb some of the available space. Moscow Take-up exceeded 300,000 sq m in Q2 for the first time since 2011, which was predominantly driven by domestic companies taking Class B offices in peripheral locations. International companies, who tend to occupy centrally located buildings, generally opted to extend their existing leases rather than relocate. Demand continued to be driven by the key sectors for the market banking & finance companies and the energy sector. Prague The market saw an increasing share of renegotiations in Q2, rising above 50% of total leasing activity to the highest proportion recorded. To compete with incumbent landlords, substantial incentives on vacant space are on offer to attract new tenants. The IT and professional services sectors continued to be the key drivers of the market. Warsaw Demand for office space continued to be strong as tenants are expanding their occupancy during the renegotiation or relocation process. Despite this, cost reduction continues to be the main driver and occupiers are aware of the increased competition amongst developers. As a result, they can achieve significantly better financial conditions and improve the standard of their office space by relocating to new buildings in business parks located outside the core city centre. Q EMEA Office OccupierView NORDICS Copenhagen Demand for office space was weak in Q2, largely due to a lower level of activity in the CBD. The focus on cost efficiency is shifting demand towards non-central locations where modern, efficient and relatively less expensive office space is available. Effective rents remain under pressure due to the high vacancy rate and focus on costs by occupiers. Stockholm Despite the comparative strength of the Swedish economy, the main trend continues to be consolidation, and occupiers are considering more spaceefficient sites outside of the city to reduce costs. A growing number of companies are implementing mobile workplace strategies to reduce their office occupancy levels. Helsinki 3 Demand is still focused on high quality buildings in the CBD and prime rents have continued to slightly increase. Development continues to be dependent upon pre-let activity; however construction companies are willing to give more incentives to tenants to get projects started. 3

4 Q EMEA Office OccupierView MIDDLE EAST AND AFRICA Dubai The office market has recently experienced rising demand with new leasing enquiries and active requirements emerging. The majority of movements are upgrades, expansions and consolidations to more central locations, with a number of enquiries generated by firms seeking new HQs in prime locations. These areas are expected to see further rental growth in the foreseeable future due to a shortage of high grade supply. Johannesburg New developments in the Sandton area continue to be the main focus of corporate demand. There is more than 200,000 sq m of office space currently under construction in this location, and as such there is strong competition between developers and prime rents are under pressure. Energy efficiency is becoming an increasing concern of occupiers, with utility costs increasing by 15%-20% per year. Tel Aviv The main driver of activity continues to be consolidation, with occupiers moving out of the CBD to more cost efficient space in peripheral locations. Most occupiers are still looking for flexible leases and rent free periods on new developments have become longer whilst landlords of secondary space are tending to reduce the headline rent. 4

5 TALKING POINT: A TALE OF TWO CITIES CONTRASTING RECOVERIES IN PARIS AND LONDON Many markets in Europe experienced a recovery in 2010 and the first half of 2011, which was subsequently stalled by the onset of the eurozone crisis. Since this brief recovery, most markets have been in a period of stagnation, with demand levels running below trend and rents stabilizing in a plateau between the trough in 2009 and pre-recession peak. Whilst the outlook for some markets is improving, in most a continuing stagnation, and in some cases worsening market conditions appears set to continue for at least the remainder of This divergence in the pattern of recovery which is emerging is illustrated by two key markets: London and Paris. Both markets showed a strong recovery in 2010 and early 2011 when prime rents increased by around 15% from the trough recorded at the end of When the eurozone crisis impacted WHAT IS ON OFFER FOR OCCUPIERS? occupier confidence in the second half of 2011, demand levels fell below trend and prime rental growth stalled in both markets. However in the first half of this year the two markets have started to move in opposite directions. Confidence appears to have returned to the London market, with a number of occupiers moving their requirements forward, some of which had been postponed until the economic outlook became clearer. The buoyant levels of demand have already resulted in two consecutive increases in the prime West End rent, and it is expected to lead to accelerating growth in the City, as well as Southbank and Midtown markets, over the next 18 months. By contrast, in Paris there continues to be a waitand-see attitude amongst occupiers, with renegotiations and renewals accounting for a significant proportion of leasing activity. TALKING POINT: EU INVESTMENT INCENTIVES Demand in the first half of 2013 fell to the lowest level since 2002, and the prime rent fell for the first time since the height of the economic crisis. Companies are reluctant to commit to new leases, and the capital costs of relocating, whist the French economy remains in fragile. The contrasting market performance is creating two very different scenarios for occupiers. In London, companies requiring high quality, well located space are already seeing their options narrow and rental costs increase, a trend which is likely to continue as the development pipeline for 2015 is set to fall back. In Paris however, there is still an opportunity for occupiers to take advantage of a strong negotiating position, given the difficult market conditions, to secure a new lease on favourable terms. Q EMEA Office OccupierView 5 The current EU incentives scheme will come to an end in June 2014, and from the 1 st of July 2014 there will be a fresh pot of money to be awarded from 2014 through to As a result, occupiers who are making decisions for projects likely to start from July 2014 need to be aware of the potential incentives available. The European Commission provides and regulates all EU State Aid, with rules applied so there is no distortion of competition and trade within the EU. There are 28 European members eligible to regional aid with guidelines set out by the EC to allow Member States to grant state aid to companies to support investments in new operations in the less advantaged regions of Europe or to extend or modernise existing operations. The EU allocates incentive bandings according to a region s GDP per capita over the last 3 years and the unemployment rate; this will then determine the region s aid ceiling. Grants can be equivalent to 50% of first two years salary costs or the initial capital investment, whichever is greater. Whilst this provides the greatest proportion of aid to the most disadvantaged areas, where fundamental structural issues such as a weak employment base or poor transport infrastructure may make the location unsuitable for certain office operations, some areas which already have established BPO centres such as Sofia, Krakow and Vilnius are eligible for the highest level of aid. Furthermore, although the highest value of incentives are primarily concentrated around CEE there are also high levels available in Western Europe, for example 30% of costs are obtained in certain parts of former East Germany. Certain conditions are applied to provide a fair and competitive environment. These include an investment project having to be seen as mobile i.e. at least two regions have to be in genuine contention for the project. Others include the regulation of companies having to remain in the country for five years otherwise they will have to repay their grant. Individual governments are able to promote the availability of incentives in line with their target sectors they want or require in the country. The main focus sector for countries was ICT, with 23 of the 33 countries analysed promoting this on their target sector list. Whilst it is not advised to base operations in a country or region solely on the availability of incentives, they should be considered in every project conducted to understand its eligibility to receive any type of incentive from each short listed country, and what impact that will have on their business relative to other factors. With a new pot of incentives coming in next year, occupiers need to be aware of what is available in the new fund, and whether they are eligible for it, to avoid missing out on any potential benefits. 5

6 Q EMEA Office OccupierView 6 KEY INDICATORS Country City Prime Office Rent (Local Measure) / SqM Last 3 months Last 12 months Typical Lease Length (Years) Typical Rent Free Period (Months) Austria Vienna 25 per sq m pm Belgium Brussels 285 per sq m pa /6/9 1 year secured Croatia Zagreb 15 per sq m pm Czech Republic Prague 21 per sq m pm to 10 Denmark Copenhagen DK1700 per sq m pa / Finland Helsinki per sq m pa None France Lyon 300 per sq m pa France Marseille 270 per sq m pa France Paris 800 per sq m pa /6/ Germany Berlin 22.5 per sq m pm Germany Frankfurt 38 per sq m pm Germany Hamburg 24 per sq m pm Germany Munich 31.5 per sq m pm Greece Athens 23 per sq m pm Hungary Budapest 20 per sq m pm Ireland Dublin 323 per sq m pa Israel Tel Aviv ILS110 per sq m pm None Italy Milan 480 per sq m pa Italy Rome 410 per sq m pa Netherlands Amsterdam 340 per sq m pa or 10 years 20%-30% Netherlands Rotterdam 220 per sq m pa or 10 years 20%-30% Norway Oslo NOK3900 per sq m pa Poland Warsaw 27 per sq m pm Portugal Lisbon 18.5 per sq m pm Romania Bucharest 18 per sq m pm Russia Moscow $1200 per sq m pa Russia St Petersburg $800 per sq m pa Serbia Belgrade 15 per sq m pm Slovak Republic Bratislava 16 per sq m pm Spain Barcelona 213 per sq m pa Spain Madrid 297 per sq m pa Sweden Stockholm SEK4400 per sq m pa or Switzerland Geneva CHF1000 per sq m pa Switzerland Zurich CHF850 per sq m pa Turkey Istanbul $45 per sq m pm UAE Dubai AED280 per sq ft pa UK Birmingham 28.5 per sq ft pa y with 5y break 36 UK Bristol 27.5 per sq ft pa y with 5y break 30 on10y, 15 on 5y UK Edinburgh 28 per sq ft pa UK Glasgow 27 per sq ft pa UK London City 55 per sq ft pa UK London West End 97.5 per sq ft pa UK Manchester 30 per sq ft pa

7 CONTACTS For more information about this Regional OccupierView, please contact: EMEA Research Richard Holberton Director EMEA Research Henrietta House Henrietta Place London W1G 0NB t: e: Zachary Gauge Researcher EMEA Research Henrietta House Henrietta Place London W1G 0NB t: e: Q EMEA Office OccupierView For more information about EU Investment Incentives, please contact: GCS Consulting Stephen Fleetwood Associate Director GCS - Consulting St Martin s Court 10 Paternoster Row London EC4M 7HP t: e: stephen.fleetwood@cbre.com Christopher Johnston Analyst GCS - Consulting St Martin s Court 10 Paternoster Row London EC4M 7HP t: e: christopher.johnston@cbre.com + FOLLOW US GOOGLE+ FACEBOOK TWITTER 7 Global Research and Consulting This report was prepared by the CBRE EMEA Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE. 7