savills.com

The economy and property markets in 2014OAS breakfast, November 28th 2013

Global economy is improving (mostly)

USA Banks are lending Consumers have stopped precautionary saving Austerity programme less damaging than UK Medium term energy self-sufficiency? Labour cheap

BRICS Was slowing growth inevitable? China – not that much wrong Russia – virtually everything wrong (transparency, governance, oil price, law, corruption) Brazil – tight fiscal policy, how much has recent growth been due to US QE, needs

more reform India – most worrying, needs lots of reforms, tough to do business in

Global economy is improving (mostly)

Japan New economic policy holds out some hope for growth But new consumption tax could cancel out the benefits of QE

Eurozone Little hope of growth as a region Continued widening between core and fringe

Big theme Interest rates, tapering, QE and what

happens if the economies haven’t reached escape velocity when central banks act

EUROZONE GDP(indices; 2007 Q1 = 100)

2007 2009 2011 2013

90

95

100

105Eurozone North*

Eurozone South**

* Germany, Benelux, Austria, Finland. ** Italy, Spain, Greece, Portugal.

UNITED STATES GDP(indices; 2007 Q1 = 100)

2007 2009 2011 2013

90

95

100

105

USA North East *

USA South East**

* ME, NH, VT, MA, CT, RI, NY, NJ, PA, DE. ** SC, AR, AL, TN, GA, MS, LA, FL.

Until June I could have recycled this slide for the third year....

... But something happened to Britain this summer

Source: GfK,

Jan-

00

Sep-0

0

May

-01

Jan-

02

Sep-0

2

May

-03

Jan-

04

Sep-0

4

May

-05

Jan-

06

Sep-0

6

May

-07

Jan-

08

Sep-0

8

May

-09

Jan-

10

Sep-1

0

May

-11

Jan-

12

Sep-1

2

May

-13

-50

-40

-30

-20

-10

0

10

UK

Co

nsu

mer

Co

nfi

den

ce I

nd

ex

House price growth undoubtedly had something to do with this

Q4 80 Q2 83 Q4 85 Q2 88 Q4 90 Q2 93 Q4 95 Q2 98 Q4 00 Q2 03 Q4 05 Q2 08 Q4 10 Q2 13-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

Annual House Price Growth Affordability

An

nu

al H

ou

se

Pri

ce

Gro

wth

Su

rplu

s N

et

Inc

om

e a

fte

r H

ou

se

Pu

rch

as

e

Source: Savills, Nationwide

Are the chattering classes impacting on sentiment?

Source: Savills

Total real growth over period

UK PCL Difference

82 - 93 20.4% 29.5% 9.1%

93 - 05 122.7% 145.2% 22.5%

Since 05 -19.3% 65.9% 85.2%

Is this worrying or exciting?

Oct

-05

Feb-06

Jun-0

6

Oct

-06

Feb-07

Jun-0

7

Oct

-07

Feb-08

Jun-0

8

Oct

-08

Feb-09

Jun-0

9

Oct

-09

Feb-10

Jun-1

0

Oct

-10

Feb-11

Jun-1

1

Oct

-11

Feb-12

Jun-1

2

Oct

-12

Feb-13

Jun-1

3

Oct

-13

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

New Instructions New Buyer Enquiries

Source: RICS

The housing recovery becomes more national from 2014

Assuming no further changes in the taxation of high value property

2014 2015 2016 2017 20185 years to end2018

Prime London

4.5% -0.5% 7.0% 5.5% 4.5%

22.7%

Prime Regional

4.5% 1.0% 5.0% 5.5% 5.0%

22.7%

Source: Savills Research

But the UK recovery isn’t just about housing

Source: Markit/CIPS

Jan

05

Jun

05

Nov 0

5

Apr 0

6

Sep 0

6

Feb 0

7

Jul 0

7

Dec 0

7

May

08

Oct

08

Mar

09

Aug 0

9

Jan

10

Jun

10

Nov 1

0

Apr 1

1

Sep 1

1

Feb 1

2

Jul 1

2

Dec 1

2

May

13

Oct

1330

35

40

45

50

55

60

65

70

Services Manufacturing

% B

alan

ce

People are less worried about losing their jobs

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Gfk/NOP consumer confidence - unemployment expectations% balance

Source : Haver Analytics

And consequently are saving less

Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3 Q4 Q1 2012

Q2 Q3 Q4 Q1 2013

Q24.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Sav

ing

rat

io %

Source: ONS

But earnings growth is still weak

Jan

01

Nov 0

1

Sep 0

2

Jul 0

3

May

04

Mar

05

Jan

06

Nov 0

6

Sep 0

7

Jul 0

8

May

09

Mar

10

Jan

11

Nov 1

1

Sep 1

2

Jul 1

3-4

-2

0

2

4

6

8

10

Private sectorPublic sector

Ave

rag

e ea

rnin

gs

(in

cl b

on

us)

%p

a

Companies are also planning on spending

-40

-30

-20

-10

0

10

20

30

40

1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: BCC

% balance

UK: Investment intentions

Service sector

Manufacturing sector

So, the outlook is for faster and more balanced growth

-2

-1

0

1

2

3

4

1997-2007

2012 2013 2014 2015 2016 2017

Consumer spending Investment

Govt. consumption Inventories

Net trade

UK: Contributions to GDP growth%pts

Source : Oxford Economics

What could go wrong?

Political risk

USA Debt ceiling reached again (Mar/June 2014) End of QE

Europe Default hasn’t gone away What happens when Greece doesn’t need the EU’s money?

UK The real housing crisis?

Households take on more debt to fund house moves Higher housing activity drives up consumer spending and GDP Unemployment goes below 7% faster than expected Inflation rises and then rates rises More debt and earlier rate rises lead to financial stress?

Vote winners – mansion tax etc

What does this mean for office markets in the UK?

Rising leasing volumes everywhere

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0

5

10

15

20

25

30

35M25 Regional cities (top 7) Central London

Avg: 4.6m sq ft 4.0m sq ft 9.5m sq ft

Source: Savills

And a return to a normal split between London and the regions

2000

2002

2004

2006

2008

2010

2012

2014

2015

0

5,000

10,000

15,000

20,000

25,000

30,000

Rest of UKLondon£m

Source: Savills

Regional spread is still interesting (as is prime/secondary)

Source: Savills

01

/91

01

/92

01

/93

01

/94

01

/95

01

/96

01

/97

01

/98

01

/99

01

/00

01

/01

01

/02

01

/03

01

/04

01

/05

01

/06

01

/07

01

/08

01

/09

01

/10

01

/11

01

/12

01

/13

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

200

250

300

350

400

WE/Reg spread bps West End (Avg 5.07%) Regional (Avg 6.47%)

Yie

ld %

Spr

ead

bps

savills.com

Three key themes for UK offices over the next five years

Theme 1 – The return of the empowered employee

Employment is at a record high

Significant questions around immigration

Employers have got used to not raising salaries – can they compensate with workplaces?

Employees (especially graduates) might start having a choice of employer again

... Once again the workplace will be a tool to attract and retain talent

What is important to employees?

Comfort of work areaTemperature

LightingLength of commute to

work General noise

levelsSpaceKitchen

SmellSecurityQuality of wireless

technology Public transport connectionsCar parking Internal fit out

(bespoke)Availability of meeting rooms Proximity to shops Break out area

Environmental/ green policies of

the company (e.g. recycling)

Variety of local re-tail/ leisure offering Proximity to green

space/ parks View from the workplace Canteen/ café

ColourGreen space / roof terrace Office art/

greeneryEnvironmental per-formance (“Green” rating) of the build-

ing Showers/ changing

facilitiesAbility to work

from a variety of locations within the

building Proximity to

leisure facilities Bicycle storage Clustering of simi-lar businesses in local area/ net-

working opportuni-ties

Gym Social area/ bar External building

design (newly built)Crèche Smoking area Games room Prayer room

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: Savills, YouGov

What is important to employees in London?

Comfort of work areaLength of

commute to work

TemperaturePublic transport connectionsGeneral noise

levelsLightingSpace

Kitchen Security

SmellQuality of wireless technology Proximity to shops Internal design/ fit

out Availability of meeting rooms Variety of local re-

tail/ leisure offering Proximity to green space/ parks Break out area/

quiet room Environmental/

green policies of the company (e.g.

recycling) Proximity to

leisure facilities ColourOffice art/ greeneryView from the

workplace Showers/ changing

facilitiesCanteen/ café

Environmental per-formance (“Green” rating) of the build-

ing

Green space / garden/ roof ter-

race Bicycle storage Clustering of simi-lar businesses in local area/ net-

working opportuni-ties

Ability to work from a variety of

locations within the building

Car parking External building design Gym

Social area/ bar Crèche

Smoking area Games room Prayer room

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: Savills, YouGov

The return of the empowered employee:Implications for the market

SME demand, unwilling self-employed and part-timers

In-movers to CBD’s e.g. Telefonica, Amazon, Jacobs

The return of the softer factors – social, place, environment

Transport hubs: travel costs, housing costs, rising fuel prices

The workplace as home space?

Theme 2 – Austerity

Public sector cuts will continue to bite nationally

Retail is still dealing with structural change

Some occupiers will want to be seen as austere, others will have no choice

Implications: Stronger demand for the fringe than the core Some businesses will drift out-of-town for great buildings Rise of blingteria

Theme 3 – TMT, tMT, mobile, big data, bricks versus clicks, gamification, social media

Technological changeImplications for the market

Generally over-forecast, occasionally under forecast

Not a bubble, a fact of life

Workplaces and outside spaces shouldn’t be a barrier to adoption

Tenant demands are no more homogenous than Professions or Finance

Creatives create the buzz that others aspire to

Final thoughts

The recovery is underway and there are even some upside scenarios

The “new normal” isn’t as new as many would like you to believe

The next decade in offices will again be about people and places

Watch out for: Electioneering politicians Rising rates Sustainability shocks