SECTORAL BUYING AND SELLING PREFERE. Buying Preferences

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1 A shift in the mindset of seasoned commercial auction buyers and sellers looks poised to trigger uplifts in transactions in 13. CBRE's in-depth review of investor sentiment, finance and buying and selling preferences, shows the majority of buyers at our commercial auctions have low levels of debt and an appetite to invest. Some 6% of our respondents have less than 2 debt in their portfolios and less than half are sourcing debt from traditional lenders. Though highly selective, they see 13 as a time for balancing risk with reward. Cash rich buyers are and will remain the dominant buying force at auction, but the report shows the emergence of two buyer types. Whilst one retains a traditional defensive strategy, preferring quality over risk, the other is more entrepreneurial, acquiring riskier properties they know well and can asset sweat. John Townsend, Head of Commercial Auction ns, CBRE SECTORAL BUYING AND SELLING PREFERE ENCES IN 13 Buying Preferences Selling Pr references Out of town offices 4% Leisure/licence Retail Supermarkets 1 Development sites Distribution Ground rents Healthcare/care homes Retail Out of town offices Leisure/licence Supermarkets Development sites 6% Distribution 6% Ground rents 4% Healthcare/care homes 1 High Street Shops 2 1 High Street Shops In town offices % In town offices % Percentage of debt secured on property portfolio % 51-7 More than 7 This is the first CBRE Commercial Auction survey exploring private investor finance and investment strategy. Some 159 investors incorporating private individuals and private property companies took part in the survey at the beginning of January. It provides the most incisive snapshot of sentiment in the opening weeks of the auction calendar, exploring the pressures private investors face in securing debt and focusing upon the buying preferences likely to stimulate activity in 13. Some 61% of respondents described themselves as established buyers in the commercial auctions sector. Of this, % had between - years experience, while 4% had bought and sold via auction for more than years. Some 61% of respondents said their portfolios had low debt, with levels of finance secured at below 2. Just a fifth of those requiring funding were securing loans from traditional lenders including banks. Trust and track record appear central to the individual s capacity to secure funding, the survey showed, as some 44% of those who had successfully acquired debt in 12 named their existing relationship with lenders as the key to success.

2 Private investor sentiment is widely regarded as the litmus test for confidence in the market. As a barometer of likely activity in the next year, the report points to a change in momentum and an increased acceptance of the need for active asset management in order to enhance returns, as well as a willingness to take more risks. The report showed a significant uplift in numbers contemplating buying and selling at auction in 13 and a proportionate drop in numbers planning to hold stock this year. 8 of those who responded planned to trade at auction in the next 12 months. This indicates an encouraging change in outlook for the commercial auction sector which, according to latest Essential Information Group results raised 1.24bn in 12, less than the 1.77bn in 11. The report showed that the growing demand for high yielding property, asset management lots and well located stock in the regions was set to continue. Activity fanning out from the South-East to other selected regional hotspots including parts of the South-West and parts of East of England and the Midlands will prevail in 13. PROPERTY BUYING AND SELLING BY SECTO OR AND REGION Regional buying preferences in the next 12 2 months Regional selling preferences s in the next 12 months Scotland North East Yorkshire and Humberside North West Wales South East 2 North East Yorkshire and Humberside Scotland Wales Northern Ireland South East 24% West Midlands North West East Midlands East of England South West 1 West Midlands East Midlands % East of England South West 2 In recent years a wait and see approach has contributed to a slowdown in transactions at commercial auctions. The latest Essential Information Group data published in shows 6,234 commercial lots were offered for sale at auction nationally in 12. This was just under less than the 6,535 lots offered in 11. Of this, 4,626 and 4,813 respectively were sold in 12 and 11, reflecting a drop in transactions of about 4%, a small decrease compared to the large fall in volumes being traded through private treaty. Security remains an important driver for investors. However, the report shows an increasing inclination towards a less riska limited debt market, cash rich averse strategy. With average capital values estimated to fall between 3- in 13 and buyers are increasingly looking for better returns on their money. There are two buyer-types currently in the market who are equity rich: the first, with a more defensive risk-averse strategy and the second, looking more aggressively, acting entrepreneurially to acquire riskier properties with active management opportunities. Some 8 of respondents planned to trade at auction in 13. More than a quarter ranked high yielding property at the top of their buying criteria, widening the drivers for acquisition beyond the fundamentals of location and capital growth, to chase income through active asset management. As a barometer for future intent, the survey points to an uptick in volumes being offered at auction in the forthcoming 12 months. During 12, 4 of those questioned bought at auction, 2 sold and 3 held onto stock. In 13, momentum looks set to increase. 8 intend to trade (with two thirds of those showing a preference towards buying) and just 1 intend to hold. This provides an encouraging indicator of confidence and momentum in the sector and the likelihood of increased traffic volumes to be offered and sold. The quest for improved income returns will prompt buyers to look beyond the South-East and may see growing numbers looking beyond the region at other areas perceived as offering security and potential for improved revenues.

3 Just over a quarter of those who responded (2) said they would prefer to purchase property in the South-East. Other regions perceived as appealing included the South-West (1), the East of England and the Midlands (both 1) with interest in high yielding or well located lots dispersing outwards from the South-East. However, activity is likely to be targeted specifically in locations within those areas regarded as more affluent, intimating that the polarisation witnessed during the past seven years, culminating in a North-South divide, should remain a feature of 13. INVESTOR OUTLOOK Property buying strategy by sector Factors influencing buying decisions Vacant stock - To hold Vacant stock - To let Vacant stock - To sell Development opportunities High Street Retail Income/Tenanted stock - Prime Income/Tenanted stock - Secondary Income/Tenanted stock - Tertiary Own occupation Offices Ground Rents 5 Lack of alternative investment Yield Covenant Lot size Location The pressures facing commercial investors at a time of continuing economic uncertainty has sharpened their focus on rents, finding and keeping suitable tenants and establishing value for money. With high street names including HMV, Blockbuster and Jessops falling into administration in January alone, private buyers are understandably cautious when contemplating where to put their equity within the hunting ground of the commercial auction sector. The Managing Director of one private property company called for an alignment in business rates to reflect rents in the current market. He voiced a concern shared by many respondents to the survey, saying: Rents have dropped in excess of 5% in some cases, outside prime Central London, over the last four years. Yet business rates on empty properties are based on rents that existed at the top of the market some five years ago. Business failures in retail are still in real danger with internet shopping taking an increasing share of certain sectors. Another agreed, adding: The issue of business rates is the greatest challenge for the commercial property recovery in 13. I do not think the minister responsible in the government understands or appreciates the seriousness of this factor which tenants, landlords and potential start-ups have to take into account. This is in addition to their rent or loan finance before taking into account salaries and other operating costs. A Northern based private investor echoed these concerns and added: Keeping vacancy rates down and retaining tenants in our property is a major issue for us. As an increasing number of properties become vacant in the high street and more and more businesses are struggling, it is becoming increasingly difficult to find good quality tenants. However one equity rich buyer summed up market sentiment in three commonly used words: Cash is King. He added: For us to invest our cash, the property really has to demonstrate its worth.

4 Investors anticipate the greatest challenges facing them in 13 will be: Falling rental values in a stuttering economy, at a time of rising inflation and reduced consumer spending. A frustrating lack of liquidity and available funding at a time when more distressed stock is being brought to the market. A shortage of quality stock prompting prices to climb sharply for prime investments and widening the current gap between prime and secondary. Subdued occupational demand, particularly for secondary and tertiary retail stock. The continuing gap between vendor aspirations and purchaser realism. Continued prevarication by banks, who are controlling loans secured on secondary stock which is incorrectly priced, thereby restricting the borrower s ability to sell. Continuing pressure on High Street retailers from internet retailers from certain sectors with the possibility of more failures and lower rentals, compounding the decreasing use of the high street versus the internet. CONCLUSION John Townsend, CBRE's Head of Auctions, said: With limited capital growth prospects, there has been a clear shift in the mindset of investors and a tangible appetite to actively asset-manage stock, not only in London and the South-East but regionally too. Many buyers have the funding in place to swiftly purchase property they perceive offers value for money or the opportunity to add value. This report points to a welcome uplift in their engagement in the commercial auction sector in 13. They are discerning, well-informed and conscious of the challenges facing the UK economy. They are highly attuned and sensitive to correct rental levels and pricing. Should more distressed stock come to the market, there are buyers out there willing to engage at auction. However, pricing remains a key issue in 13. While returns on long dated gilts and index linked gilts stay at a low and with yields on bank deposits at derisory levels and predicted to remain so until at least 17, the yields on commercial property offer excellent value to long term investors. The polarisation in the market, reflected in the highly elevated yield spreads between prime and secondary property, could represent a major opportunity for investors depending on their view of economic prospects. Notes and Contacts CBRE sent the survey to its commercial auction service database contacts via . A statistically representative sample of responses was received, collated and analysed to create a comprehensive assessment of the characteristics and trends within the commercial auctions marketplace from the buyers and sellers perspectives. The CBRE Commercial Auction Team would like to thank all those who made the time to complete the survey on-line and if you were unable to contribute, but would like to be kept in touch with future auction dates, catalogues and research, please call or the team on the numbers below. 13 Auction Dates Catalogue Entries Close Wednesday 27th February 13 Wednesday 22nd May 13 Monday 8th July 13 Tuesday 15th October 13 Wednesday 4th December 13 The above dates are subject to change. Please check on-line or with the Auctions team. Books closed Friday 19th April 13 Friday 7th June 13 Friday 13th September 13 Friday 1st November 13 For further marketing information or to enter a lot please call a member of the Auctions team on or log on to

5 AUCTION TEAM CONTACTS John Townsend BSc FRICS Executive Director & Auctioneer T: M: E: Chris Mills FRICS Executive Director & Auctioneer T: M: E: David Margolis Senior Director & Auctioneer T: M: E: Martin Christopher Senior Director T: M: E: Sarah Butterworth Associate Director & Manager T: M: E: Katheri ine Suker Auctions Administrator T: E: