Docklands

Take-up in the Docklands area has exceeded the 10-year average for the previous three consecutive years, with total take-up reaching 1.3m sq ft in 2016, the highest amount since 2010. The most notable lettings over this period include Societe Generale’s pre-let of 280,000 sq ft at One Bank Street, EY’s acquisition of 207,000 sq ft at 25 Churchill Place, Deutsche Bank’s sub-letting of 388,889 at 10 Upper Bank Street, Thomson Reuters acquisition of 315,000 sq ft at 5 Canada Square and the GPU’s acquisition of 536,175 sq ft at 10 South Colonnade.

Following this period of high take-up, it seemed inevitable that take-up this year would be muted, especially due to the uncertainty surrounding Brexit, and how the implications of this will affect the Docklands largest occupier type.

The first half of 2017 has been exceptionally quiet in comparison to previous years, with total take-up for the first six months at 60,225 sq ft across nine transactions. This is the lowest half year take-up since H1 2009, when 39,080 sq ft was leased across just 3 transactions, and is in stark contrast to the 10-year average of 478,300 sq ft. The largest transaction in the year to date was Deliveroo’s acquisition of 15,000 sq ft at 1 Clove Crescent, which is on the periphery of the core estate.

^{Source: Savills Research}

Historically, the Docklands market has been home to the world’s banking and financial services sector. Although, we have seen a recent desire from the core Canary Wharf estate to amend this image through the introduction of Level 39, a technology centred co-working space. Level 39, which has grown from a simple idea into a three-floor, 80,000 sq ft community space in One Canada Square, seeks to bring together some of the world’s fastest growing tech companies.

Total supply in the Docklands has come under downward pressure since the start of 2013, where there was 1.7m sq ft of available supply. This is largely due to above average levels of take-up for the previous three years. Currently, there is just 1.01m sq ft of available supply in the Docklands market, equating to a vacancy rate of 4.7%. This is extremely constrained given the 10-year average is 6.4%. The largest quantum of space available within the core Canary Wharf estate can be found at 5 Churchill Place (181,332 sq ft).

^{Source: Savills Research}

Rents

The fact that rental levels in the Docklands are lower than other central London markets can help in attracting potential occupiers who can’t afford the high rents in the core West End or City markets. We are of the opinion that the current benchmark rent has stabilised over the last 12 months, in line with the wider central London market, and remains at £47.50/sq ft.

For part floor lettings we have also maintained our benchmark rent of £50.00/sq ft. Rent-free periods might begin to move out over the next six to 12 months (depending on the path of the vacancy rate), but currently we have maintained a 27 month incentive for a 10 year lease term for a whole floor. For longer lease lengths, we have also continued to adopt 36 months for a 15-year term and 37 to 42 months for a 20+ year term certain.

Outlook

Looking forward, the Docklands and primarily the core Canary Wharf estate is probably the most affected submarket in central London by the UK’s decision to exit the EU. It is still too early to predict with any certainty as to what will occur in rental terms, as there are a number of variables to consider (e.g. movement of employees to mainland Europe, the potential for investment banks and hedge funds to have access to the European financial market, the outcome of general negotiations with the EU, the amount of “grey” space that will come to the market and expansion space required by the legal sector).

However, we expect the opening of the Elizabeth line, scheduled for December 2018, to begin to have a positive impact on the location where we expect rents to rise in the medium term. Nevertheless, in line with the City office market, it appears reasonable to anticipate that rents could be fairly flat over the next three years, but it will require continued review during the UK’s exit negotiation period to March 2019.