PreOccupied Blog

By Richard Holberton, EMEA Head of Occupier Research at CBRE

2016 CORPORATE OCCUPIER OUTLOOK – FOCUS ON PERFORMANCE, BOTH PEOPLE AND SPACE

42% of the world’s leading companies see labour and skills shortages enmeshed with employee preferences as a key challenge to future operations, according to our latest European Occupier Survey.

A significant overhead, and in many cases the largest, for a company is the cost of its people. Increasingly companies want to maximise the return on human capital by providing workspaces that promote choice, collaboration and high levels of employee satisfaction, to attract the best staff and to support their brand.  It’s therefore no surprise that 74% report having a wellness programme in place.

The survey, now in its sixth year, polls real estate decision makers at 120 global corporations, to understand their objectives and associated challenges across a broad range of issues. The respondents represent companies headquartered primarily in Western Europe or North America, spanning multiple sectors, of which the largest are: manufacturing, banking and finance, professional services and, healthcare and life sciences.

Also of interest, 75% of companies seek more accurate data. There is mass recognition that the world is awash with information but better performance data is required to identify future real estate opportunities.

The backdrop: in recent years, companies have lived through recession and, at varying speeds, recovery. They have been through a phase where cost management dominated, followed by another where workforce issues and growth came to the fore. Both agendas are still important but the next challenge is more complex: using data and insight to optimise the performance of both space and people.

The most successful corporates have already addressed, or are addressing, cost management and employee-led issues. The next step for world class companies is more multi-dimensional and cross-discipline, and requires identifying the right mix of ways to optimise the performance of both employees and real estate portfolios. As a result the need for accurate and smart performance data analytics is set to grow.

EOS 2016 key points
Source: CBRE

To see the full set of European Occupier Survey results, download the full report here, view our Global Occupier Survey microsite here, or watch the full video here

Upcoming in the Global Occupier Survey 2015/16 Series

  • Americas Occupier Survey 2015/16 – Coming late January 2016
  • Asia Pacific Occupier Survey 2015/16 – Coming February 2016
  • Global Occupier Survey 2015/16 – Coming March 2016
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offices 2

UK and Germany Lead the Charge for Corporate Asset Sales Across Europe

By Richard Holberton, EMEA Head of Occupier Research at CBRE

Turnover from corporate property disposals, across Europe, is on an upward trajectory and set to reach €20bn in 2015.

Motivated by a desire to fund strategic change alongside an increasing acceptance of more innovative financial structures in the marketplace, corporate property asset sales continue to rise. This comes at a time when commercial property investment across Europe is set to jump for the sixth consecutive year after exceeding €220bn in 2014.

The two dominant European countries for disposals are the UK (29%) and Germany (22%). Together they constitute 51% of the total market with a number of major retail transactions, combined with significant Central London and office mixed use disposals, underpinning the UK total.

Improving economic conditions, falling unemployment and higher consumption growth across Europe is providing a favorable backdrop for the acquisition of retail and industrial assets. In the first half of 2015, collective retail corporate disposals hit €2.2bn almost the same figure for the whole of 2014 at €2.4bn. The industrial sector also picked up, with its 2014-15 market share reaching 14% compared with a long-run average of 9%.

The office sector remains the largest single component of corporate disposals with 38% of all activity in the first half of 2015. In addition, mixed-use buildings now represent 5% of the total market with a turnover of €442 in H1 2015 compared to €100m across the full calendar year in 2014.

Interestingly, while corporate property sales across Europe are rising, their share of the overall market has been shrinking. In 2008, during the early throes of the financial crisis corporate disposals accounted for 1 in 5 sales, or 18%, of the total market.  This figure was halved last year to just 9%.

Traditionally, corporate real estate disposals are used to raise capital. At present low borrowing costs mean the corporate bond market is attractive and retained earnings can fund onward investment. This equates to new disposal trends emerging. These are:

  • Companies managing down surplus property assets post acquisition
  • Disposal of older buildings
  • Advancement of corporate sustainability aims

In essence, the fact that many transactions are motivated by the desire to fund long-term strategic plans also reflects growing confidence in external market conditions.

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INTRANET_PHOTO_LIBRARYCAELOW9K

EMEA PRIME OFFICE RENTS ACCELERATE

Increasing demand for prime office space across a number of cities in EMEA is causing rents to accelerate, according to global real estate advisor CBRE.

Dublin’s prime office rents are now only just below their pre-crisis levels of 2009 at €538 per sq m per annum. This is set to increase further until supply responds to occupier demand. Similarly, the Berlin office market has reached a 12-year high of €23 per sq m pa as a strong local economy strengthens demand. The London City office market has seen a 3.1% uplift in the last quarter and is nearly 15% higher year-on-year at £67 per sq ft pa.

EMEA Prime Office Index Q22015

Illustrative of the strength of demand across the region, the EMEA Prime Office Rent Index (a CBRE benchmark which tracks 41 cities) grew 2.1% year on year as evidenced below.

As well as strengthening economic indicators, demand for prime office space is being driven by several factors including corporate desire to:

  • Be located in amenity rich locations to remain competitive on the local and international stage
  • Attract and retain the best employees
  • Retain proximity to market peers
  • Work from the best quality properties

In addition, the supply of new office space across EMEA has been subdued for some time due to low levels of development borne from the global financial crisis. Supply levels tightened further in the second quarter and this too continues to inflate rents and keep them on the upward trajectory.

Looking ahead, the office development response is set to pick-up, albeit slowly and only in certain locations. In CEE, markets such as Bucharest, Warsaw and Moscow have the strongest forecast development completions levels in EMEA. Development activity is also starting to pick up in parts of Western Europe with London Paris, Munich and Dublin forecasting some of the highest two year projections across the region.

Richard Holberton, EMEA Head of Occupier Research, at CBRE explains:

“Office prime rents continue on an upward trajectory due to the current competitive landscape. Companies are vying for the best space which is in short supply in many cities. This is consistent with a broadly positive economic environment and reflected in sharply increased take-up levels. Office development activity is showing some signs of picking up which will help bridge the supply to demand gap, but not immediately. So prime rents will remain on an upward path.”

View Richard Holberton’s biography here

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European Data Centre Industy Sees Influx Of Investment

Investment in the European data centre industry hit $8.7 billion in the second quarter.

Market consolidation continues to drive M&A activity and the geographical spread of investment activity is becoming more diverse as demonstrated by Singapore’s ST Telemedia purchase of a 49% stake in London’s Virtus and Japan’s NTT acquisition of the pan-European operator e-shelter.

Driving such investment is the buoyancy of the four core data centre markets – the FLAP cities of Frankfurt, London, Amsterdam and Paris. Robust demand within these European markets is providing a solid foundation for inward investment. This demand is exemplified with take-up at mid-year reaching 31.8MW and in line to surpass the five-year annual average of 60MW.

Out of the FLAP markets, London was the star performer in the second quarter. Driven by a resurgence in demand from traditional commercial sectors and a high volume of large scale transactions by both wholesalers and retailers, London has recovered well from a sluggish first quarter.
“The data centre sector continues to rapidly expand with M&A activity the talk of the industry. The sector is at an all-time high for investment activity and this has driven prices to historically high levels.

“High barriers to entry and the capital intensive nature of the business are keeping investors interested which is why we expect to see more M&A activity and consolidation amongst European data centre operators throughout 2015.”
These findings were reported in Data Centre MarketView Q2 2015. Download it here. And view a video summarising the findigs here.  Andrew Jay’s biography can be viewed here.

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Example_5

Only one in 10 companies relocate upon lease expiry

The vast majority of companies choose to remain in situ upon commercial lease expiry, with the management of property a significant factor in office location decisions, according to new ‘Stay or Not to Stay’ market analysis from CBRE. And of those who move, 50% are expanding.

The survey analysed 500 companies in the UK and Netherlands to understand the factors surrounding occupier behaviour when ‘stay or go’ property decisions are being evaluated. Of those companiestay or go front covers surveyed, just 12% moved the last time their lease expired and of those who had moved premises nearly two-thirds had changed their footprint, with 50% expanding.

A core part of the ‘stay or go’ decision-making process centres on the management of an asset in terms of the quality of the technical (related to the physical fabric of a building) and commercial services (relationship between occupier and service provider) provided.

Of the two, technical services were deemed marginally more important. The survey findings cite that occupier satisfaction ratings are 10% lower for movers versus renewers with respect to maintenance and cleaning of a building. In addition, for overall building facilities management the difference is 8.3% compared to 7.25% for commercial services.

The clearest difference in satisfaction levels between prospective movers and renewers relates to the following technical service features:

  • Clear and responsive service for reporting faults
  • Sufficient and reliable lifts
  • Clear communications and adequate notice for works
  • Sufficient, quiet and reliable climate control

Read the full findings in CBRE EMEA research report, To Stay or not to Stay: The role of Asset Services in influencing tenant renewal decisions.

Read Richard Holberton’s biography here

 

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Giant virtual map pin on city landscape

To CBD or not to CBD: The importance of being centrally located

Still the feel-good story of Europe’s economic recovery, Spain saw its biggest city, Madrid, record its strongest first quarter since 2013 with take up soaring to over 125,000 sq m in Q1 2015. However, not dissimilar to other Western European markets, occupiers in Madrid have found that supply is struggling to meet the demand for brand new buildings, especially in the central business district (CBD). But, unlike many other markets, it would appear that the strength of this appetite has caused some occupiers to begin to rethink their locational strategies. A gradual migration to the periphery of the core appears to be underway as a number of occupiers have moved from the core to less central locations.

Spec more important than location?

Evidence of this was KPMG, which after 25 years of occupancy relocated from its office in the CBD to a brand new building on the border of the CBD. BBVA has also carried out a similar relocation. The emerging trend in the Madrid office market is that large companies are leaving behind second hand space that needs refurbishment. It would appear that building quality is beginning to dominate occupier locational strategy in the market.

Business district

This migration trend can be interpreted mainly as a demand-side response to the current undersupply – itself a result of the development finance scarcity during the crisis and continuing caution amongst developers. Whilst modernity of space might have been trumped by cost cutting initiatives amongst occupiers’ priorities during the crisis and early stages of the recovery period this no longer holds true. As such, in the current recovery market where expansionary real estate programmes now lead the corporate real estate agenda, the appetite for modern space is strengthening.

Lack of available stock pushing occupiers to periphery of CBD

Nonetheless, the fact occupiers have not left the CBD entirely but only moved to its periphery suggests that being centrally located remains important. Additionally, we may yet see a reversal in trend in the future; once supply begins to respond adequately and refurbishments and development pick up in the CBD, occupiers may well return to the centre. The new norm of shorter lease terms and the increasing real estate market intelligence amongst occupiers make this highly likely.

Furthermore, this trend is not yet widespread and may well be a Spanish market phenomenon as occupier response to supply constraints has varied across markets. Moreover, the role played by location-choice and building selection in attracting and retaining staff is becoming a more important strategic goal.

Superior infrastructure, connectivity, building specification and workforce appeal are driving location decisions

Regardless, it appears that occupiers are becoming more flexible about their location in a city’s CBD. The pull side effects of improvements in connectivity as a result of public investment in infrastructure, combined with the push effects of costs and the appetite for modern buildings appear to be plausible explanatory factors. Certainly amenity, accessibility and workforce appeal are becoming more important decision criteria regardless of location.

View Richard Holberton’s biography here

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  • CityScape of Central London

London remains world’s most expensive office market

London’s West End continued to be the world’s highest-priced office market but Asia dominated the world’s most expensive office locations, accounting for four of the top five markets, according to CBRE Research’s semi-annual Global Prime Office Occupancy Costs survey.

The study also found that the real estate recovery in the Emerald Isle (Ireland) remained on track, with Dublin (26.1 percent) and Belfast (13.3 percent) showing the largest and fourth-largest year-over-year prime occupancy cost increases, respectively among the 127 cities surveyed.

London West End’s overall prime occupancy costs of US$267 per sq. ft. per year topped the “most expensive” list. Hong Kong (Central) followed with total prime occupancy costs of US$254 per sq. ft., Beijing (Finance Street) (US$196 per sq. ft.), Beijing (Central Business District (CBD)) (US$188 per sq. ft.) and New Delhi(Connaught Place –CBD) (US$157 per sq. ft.) rounded out the top five.

Occupancy Research

Prime office occupancy costs mirror global economy

The change in prime office occupancy costs mirrored the gradual recovery of the global economy. Global prime office occupancy costs rose 2.0 percent year-over-year, with the Americas up 2.9 percent, EMEA rising 1.5 percent and Asia Pacific up 1.4 percent.

CBRE tracks occupancy costs for prime office space in 127 markets around the globe. Of the top 50 “most expensive” markets, 19 were in EMEA, 20 were in Asia Pacific and 11 were in the Americas.

Leasing activity increases in EMEA regional markets

The continued market recovery in EMEA has led to a revival in leasing activity beyond London and Dublin to UK regional cities and smaller Central and Eastern European markets. The exceptions have been Russian office markets, where Western sanctions and the steep drop in oil prices have led to a deep recession, and Warsaw, where supply levels continue to exert downward pressure on rents. In EMEA, occupiers are starting to switch from cost optimization and space reduction to expansions. Prime office occupancy costs increased by 1.5 percent, as only 11 out of 57 EMEA markets saw a year-over-year decline in occupancy costs.

Why the market has experienced change

Occupier caution has declined and corporate confidence has been on the rise and this is starting to translate into a degree of expansionary momentum. At the same time, many office markets are increasingly short of the quality, modern, flexible and highly accessible or CBD-located office buildings which corporations are seeking to execute workplace strategies that will drive productivity and attract or retain talent.

To view more of the Global Prime Office Occupancy Costs survey results click here.

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berlin

TMT Sector experiences highest take-up in Berlin

Companies from the TMT sector are increasingly establishing themselves as an essential occupier group for office real estate – particularly in the German start-up capital Berlin. This is the result of the latest study on the German TMT sector undertaken by real estate services company CBRE. In total companies from this sector accounted for one fifth of the aggregate take-up of the last five years in Germany.

“This development underlines the significance of the digital economy in Germany”, says Jan Linsin, Head of Research at CBRE Germany. According to the Monitoring-Report of the Federal Ministry of Economic Affairs and Energy the ICT sector is one of the main drivers of innovation in the German economy. Since the financial crisis this industry was able to gradually increase its gross value added (GVA) to a total of roughly EUR 89 billion in 2013. With a contribution to commercial GVA of 4.7% in each of the three years from 2011 to 2013 the ICT sector shares the top rank with the automotive manufacture industry (4.7%) and lies ahead of mechanical engineering (4.5%).

Strong office leasing take-up from the TMT sector the Berlin

Berlin is progressively evolving into the capital of the creative economy and the German start-up ecosystem. In comparison with the other German markets Berlin registers a disproportionately high share of TMT take-up – almost one quarter of the total cumulated take-up between 2010 and 2014. In the first quarter of 2015 the sector even accounted for approximately 40% of all leasing activity. The positive development of Berlin’s GVA also underpins the strength of the internet economy. According to a study from the Investitionsbank Berlin’s (IBB) its share accounted for 4.2% of the entire economic output of Berlin in 2013 even ahead of Berlin’s fairly dynamic construction sector. The capital offers a very good overall infrastructure which provides excellent conditions for businesses and has played an essential role in the sustainable growth of the TMT sector by attracting tech talent from all over the world. Leasing activity in the TMT sector has nearly tripled measured by the number of registered leases since 2010 contributing significantly to the absorption of vacant office space.

TMT companies drive rents

While rents paid by TMT companies still lie slightly below the market average, rental levels across the sector are rising quickly. “Companies from the TMT sector are increasingly considered to be some of the major tenants in top locations and hotspots and to be a substantial driver of rental growth”, says Matthias Hauff, Head of Agency Berlin at CBRE. “One of the main reasons is the fast growth of those companies, which need larger office spaces rather short-term and are willing to pay more for them.”

Typically TMT companies choose non-CBD office locations within the perimeter of the “S-Bahnring” (the urban railway loop). The strongest concentration lies in the office submarket City-East. Mitte, Mediaspree and Kreuzberg are the most sought after among the most important clusters (MICs) and are all located within that submarket. Apart from global players such as Microsoft or Amazon publicly traded Berlin based companies Rocket Internet or Zalando as well as numerous start-ups are located in those three clusters. The majority of incubators and accelerators, where start-ups emerge and are boosted, as for example the Betahaus in Kreuzberg, are also located here.

Emerging clusters such as the EUREF-Campus and Adlershof are also in the TMT focus

Due to the agglomeration of IT firms as well as companies from areas like mobility or renewable energy but also scientific and academic research facilities the development areas EUREF-Campus and Adlershof stand out as TMT clusters because of a stronger focus on Industry 4.0 or the Internet of Everything. Influenced by the two major Universities, the Technical University Berlin (TUB) and the University of the Arts (UdK) around the Ernst-Reuter-Platz in the City-West submarket this area is a further magnet for tech firms and incubators with a stronger focus on ICT. The eastern districts within the S-Bahn loop and Kreuzberg, which are also some of the most sought after residential neighborhoods among “new” Berliners register a particularly high density of TMT companies as a share of overall office leasing activity.

Disproportionate rental growth in non-CBD and peripheral submarkets

Non-CBD (City-East, City-West) and peripheral submarkets registered significant rises of average rents between 2005 and Q1 2015 with increases of 43% and 70% respectively. This drives demand among investors and recently led prime yields in non-CBD submarkets to compress to 4.90% and in peripheral submarkets to 6.25%. “Buildings in micro locations and clusters with a high TMT density offer particularly high value-add potential and are becoming increasingly interesting for investors familiar with the Berlin market who have recognized the importance of the TMT sector for Berlin’s economy” explains Fabian Huether Head of Investment at CBRE in Berlin.

TMT companies are not contenders for new development yet

The TMT sector’s impact on new office developments is rather moderate at best so far. To date tenants from this sector are generally considered to lease in existing buildings. “Because of the highly dynamic business model and the trial and error approach of early stage start-ups the planning horizon is too short as to be considered potential tenants office developers” according to Hauff. “However, with increasing maturity they become interesting for developments of office buildings or campuses like the Factory Berlin in Mitte completed in 2014 or the campuses of Rocket Internet or Axel Springer, both located in Kreuzberg and currently in the planning stage.”

View Jan’s biography here.

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EU Ref

Will the EU referendum impact the UK office occupier market?

The uncertainty preceding the UK general election result appears to have had minimal impact on the property market which is generally seeing strong levels of activity in both the office and industrial sectors, fuelled by escalating demand from investors and occupiers alike.

That of course is good news for business! Less good news, however, is that following the Conservative win, more uncertainty beckons in the shape of the looming referendum to decide whether Britain should be in or out of the European Union. This new uncertainty could have greater bearing on occupier (and investor) activity – particularly if the referendum date is a long time coming. If last year’s Scottish referendum is anything to go by we could see a noticeable pause in occupier and investor activity. However, this dampening effect on the property market was only temporary with demand levels quickly returning to normal post-referendum. So, assuming there is no change and the UK votes to stay in the EU it is logical to assume that it will be also return to ‘business as usual’ shortly after the referendum. We could even see a short term surge in pent up demand levels.

This prognosis does not sound too bad. However – what would happen if the UK votes to leave the EU? We can only speculate at this stage but there could some significant negative impacts on office demand. Here’s why:

The UK could lose its pulling power as a favoured European headquarters location

To date it has an enviable track record in attracting European HQ’s. A remarkable 60% of the top 250 global companies are headquartered in London or the South East of England. An exit from the EU could endanger this position. To ensure easy access to the EU market global companies may choose alternatives such as France or Ireland over the UK.

An economic downturn could ensue, leading to falling employment and business confidence

This is certainly not a foregone conclusion. There are differing views regarding the economic ramifications of an EU exit. However, if the economy were to be adversely affected in terms of lower GDP and employment this would inevitably lower demand for office space (and other types of property). This in turn would mean rents would be lower than they would otherwise have been.

Possible labour market restrictions – limiting talent and pushing up wages

It is unclear what labour market restrictions might be applied following an EU exit but there is a potential threat of employment losses due to repatriation of EU workers from the UK. This could lead to key skills shortages and a diminishing talent supply – a key driver of office locational decisions (according to the CBRE Occupier Survey). It could also lead to a rising wage bill if there was not enough competition for jobs.

Risks to financial services

London’s dominant position in relation to the financial sector could be weakened. At the very least, if the UK is not in the EU there is a risk that future regulation will be designed in a less City-friendly way than it is now. London could lose competitive advantage and related sectors such as legal services, accounting and management consulting could also be affected.

Whatever happens, it is going to be fascinating over the next year or so to see if the recent momentum in UK occupier (and investment) property markets continues, or whether growing uncertainty about the result of the referendum will start to act as a brake on activity. I would hope positive momentum is sustained, but I have a hunch that we might at least see a slowdown. Watch this space for further updates.

The Prime Minister’s discussions with EU partners over revised terms of ‘staying in’ also represent a further complication. For a more in depth look at some of the issues involved please take a look at our recent UK EU Referendum Viewpoint: Heading for the Exit.

View Emma’s biography here.

 

 

 

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Frankfurt Leads European Data Centre Charge

Data Centre colocation take-up across Europe is being driven by market activity in Frankfurt, according to the latest data from global real estate advisor, CBRE.

In the first quarter of 2015, Frankfurt (8.3 MW) accounted for half of the total European take-up (16.3MW) which already represents almost half (48%) of the city’s total take-up in the whole of 2014. This year, Frankfurt has also been responsible for the majority of new data centre supply across Europe. Download the Data Centre MarketView Q1 2015 here and view our highlights video here.

Mitul Patel, Associate Director, Research – EMEA Data Centre Solutions, at CBRE explains: “Frankfurt has seen year-on-year growth in take-up for the last 5 years and this shows no signs of abating in 2015. The financial capital of Germany has become an increasingly attractive option in the European colocation market, through a combination of data protection regulation, excellent connectivity and its geographical position as an ideal strategic base between West and East Europe.”

In contrast, London has continued to struggle in the early part of 2015. Last year, and for the first time in a decade, the English capital was replaced at the top of the colocation data centre take-up table by Amsterdam. However, with three quarters of available space in wholesale facilities, one or two deals could significantly alter this trend.

Andrew Jay, EMEA Head of Data Centre Solutions, at CBRE commented: “The size and scale of the data centre industry keeps expanding at pace. This is reflected by recent heightened industry M&A activity with news of Equinix, the global data centre group agreeing to purchase UK based TelecityGroup for £2.35 billion. The expectation is that we will see more investment activity and consolidation amongst European data centre operators in the coming months. Crucially, this mirrors the long term growth trajectory of the sector given it underpins and drives industry and business at large.

“In addition, the level of new colocation data centre supply coming to market has outstripped take-up for over a year in Europe which has led to an overall increase in available data centre capacity. In some respects, this reflects increased self-assurance from operators confident of filling the data centre space on offer. The current market anomaly is Amsterdam where available space has dropped to 25.3MW of space to let. Given the Dutch capital saw 22.3MW of take-up in 2014, there is a real fear that such a shortage in supply could lead to all space being filled in the next 12-18 months, which in turn could lead to price increases as competition intensifies. Whereas, London could experience the opposite challenge with current absorption rates providing market intelligence that the capital has over 3.5 years of available data centre space left.”

“Frankfurt has seen year-on-year growth in take-up for the last 5 years and this shows no signs of abating in 2015. The financial capital of Germany has become an increasingly attractive option in the European colocation market, through a combination of data protection regulation, excellent connectivity and its geographical position as an ideal strategic base between West and East Europe.”

“The size and scale of the data centre industry keeps expanding at pace. This is reflected by recent heightened industry M&A activity with news of Equinix, the global data centre group agreeing to purchase UK based TelecityGroup for £2.35 billion. The expectation is that we will see more investment activity and consolidation amongst European data centre operators in the coming months. Crucially, this mirrors the long term growth trajectory of the sector given it underpins and drives industry and business at large.”

View Andrew Jay’s biography and contact details here

 

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