UK Property Market London & South East October 2009

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UK Property Market London & South East October 2009 Current Market Conditions The optimism we expressed in our last report dated August 2009 has been confirmed with a return to modest capital growth

The UK stock market has continued to attract investors with the FTSE 100 closing above 5000 for the first time since 22 September 2008 on 11 September 2009 and has remained above that level since

1 UK Property Market London & South East October 2009 Current Market Conditions The optimism we expressed in our last report dated August 2009 has been confirmed with a return to modest capital growth across all sectors of the UK property market despite continued weak occupier demand apart from Central London where there was a substantial increase in leasing activity in the third quarter. The UK stock market has continued to attract investors with the FTSE 100 closing above 5000 for the first time since 22 September 2008 on 11 September 2009 and has remained above that level since with the exception of a dip of less than 2 points below 5000 on 2 October Unemployment is still a concern but UK house prices have continued to firm over the last quarter lead by active demand and a shortage of stock in London and the south-east. Commercial property investment yields have continued to harden during the third quarter of 2009, more than offsetting the reduction in rental values which continue to drift downwards. The Bank of England has held Base Rate at 0.5% since March 2009 and continued its policy of Quantitative Easing with around 162 billion of the 175 million committed to date. The 0.4% drop in GDP in the third quarter, contrasted with City and Bank of England expectations of a 0.2% rise, has prompted speculation about a further boost to the money supply by the Bank. However, a recent research note from Goldman Sachs stated that the GDP figures were not only inconsistent with the purchasing managers surveys, which suggested growth of up to 0.7% in the quarter, but that they were hard to square with other official data. Nevertheless, the figures could tip prompt the Bank s monetary policy committee (MPC) to continue its policy of quantitative easing when it next meets on November 5. 3 month LIBOR at below 0.6% over the last month is at historically low levels and SWAP rates have also eased since the beginning of August. 3 year Swaps now stand at 2.61% and 5 years SWAP rates are at 3.34% compared to about 3.0% and 3.7% respectively in August. Savills reported the number of banks willing to lend more than 20m has almost

2 doubled to 23 since March. Their research reveals that German banks lending on their own or with another lender continue to dominate the 23 20m-plus lenders. Despite the easing of credit the Banks continue to underwrite conservatively and all in borrowing costs are still in the range 5.50% to 6.25% dependent on how long the rate is fixed. Capital values have hardened across all sectors of the market and the IPD Monthly Index for September showed an increase in UK capital values of 1.1%, the largest monthly rise since June Office capital values only grew by 0.8%, the lowest of the three property sectors, but this was the first monthly increase in UK office values since July However rental values continued to fall in September with a loss of 0.6% compared to 0.5% in August. Central London Office Market Despite these falls in rental value, or maybe due to the continued increase in affordability and significant inducements such as long initial rent free periods, leasing activity across the whole of Central London was reported by CB Richard Ellis to have strengthened over the third quarter to reach 2.7m sq ft, a 61% improvement on the previous quarter. The City, where take-up reached an above trend 1.5m sq ft, accounted for 55% of demand. Overall, however, take-up in Central London remained below the long-term average. The amount of space under offer also showed signs of improvement and at the end of the third quarter stood at 2.4m sq ft, nearly 0.8m higher than last quarter. The continued improvement in take-up combined with a diminishing development pipeline led to a reduction in vacancy rates across the main Central London markets with the overall rate for Central London reaching 7.2%. The City showed the largest drop with the vacancy rate falling from over 10% to 8.8% followed by the West End where the vacancy rate fell to 6.7%. In the West End, Strutt & Parker reported that the volume of second hand Grade A accommodation fell for the first time since Q suggesting a slowing of tenant-offered space coming to the market. In their view, tenant offered space has played a central role in forcing vacancy levels up over the past two years. They also report that the volume of accommodation under construction in the West End has fallen dramatically over the past 12 months from 2.12 million sq ft in Q to 1.41 million sq ft in Q3 2009, and from 49 projects to just 24. Significant leasing deals in the West End included Bain Capital lease of 18,000 sq ft on the 5th floor at Devonshire House, Mayfair Place, W1 at a headline rent of psf. It is believed that significant incentives were conceded by the landlord in order to maintain this headline rent. At 23 Savile Row also in Mayfair, D2 Private has completed two more lettings. Clive Cowdery s Resolution has taken 9,000 sq ft at per sq ft on a 10-year lease with 15 months rent free and private equity firm General Atlantic Partners has taken 8,900 sq ft on an 11-year lease at 85 per sq ft with 12 months rent free. In addition it is widely understood that Pembroke s 49 Park Lane has received offers of over per sq ft. West End take up for Q at 650,000 sq ft equalled the combined total of both Q1 and Q2 bucking the trend of falling take up since Q4 2007, and bringing take up levels back up to those last seen in Q Strutt & Parker are optimistic about the fourth quarter with a good level of accommodation believed to be under offer and due to transact over the coming months. They also expect incentives to reduce as supply tightens and landlords become more optimistic. 2

3 Investment Market Activity The CBRE Prime Yield and Rent Monitor for September 2009 reported investment into UK commercial property rose by 28% in Q3 with around 5.7bn worth of transactions completed. This increased demand resulted in a marked downward pressure on prime yields. Overseas investors accounted for around 60% of the Q3 total, with a concentration in Central London. For the second successive quarter Central London investment turnover rose sharply to reach 2.7bn by the end of the third quarter, the highest level since Overseas investors accounted for 82% of Central London transactions, which was the largest recorded share of investment by foreign investors in the Central London market. Reflecting the stronger demand for Central London; property yields decreased to 5.25% in the West End and 6.5% in the City, both down by 25 basis points from the previous quarter. Outside London, yields remain higher than in London but have moved in nearly 50 basis points over the year to date with South East prime office yield in the second quarter standing at 7.25%. In provincial cities prime yields at the end of Q stood at 6.75% in Birmingham and Manchester and at 7.0% in Bristol, Edinburgh and Glasgow. However, with the shortage of investment stock sub-7% yields have been achieved in all these markets where there are long leases to creditworthy tenants. A schedule of Recent UK Investment Transactions is attached at the end of this report. Outlook In August we reported that yields had hardened at the prime end of the market where there are long leases and credit rated tenants. Since then we have seen cash buyers in the form of the UK institutions, including REITs, and German open ended funds returning to the market. As a result we have seen sales of properties with significantly less than 10 years remaining on leases, even though finance is not available from the usual lending sources. The return of cash buyers and the optimism shown by some investors has resulted in sales at prices which may not fully reflect the potential for future vacancies and the costs of refurbishment as and when existing tenants move out. There is also still potential for a price correction within the next 6 to 12 months as the banks get to grips with their portfolios of loans which cannot be refinanced and a number of larger investors are holding off in the hope that there will be opportunities to buy into the market within this timeframe. Nevertheless, it seems clear that we are through the worst of the recession and investors able to take a 5 to 7 year view, there will continue to be opportunities to invest in UK property at significant discounts to the prices paid in Recent UK Investment Transactions City of London Broadgate Estate, EC2 Blackrock acquired a 50% share in British Land s Broadgate valued at 1.07 billion, the largest deal of the quarter. Blackrock paid 77 million for its stake and assumed responsibility for 987 million of the existing debt. The estate comprises 14 buildings with leases running on average for another 11 years at an overall average rent of about 47 per sq ft. 3

4 10 Gresham Street, EC2 Union Investment Group has completed the purchase of this 250,000 sq ft (23,225 sq m) multi-tenanted office block for a price of 141 million to show a net yield of around 7% and equating to around 564 per sq ft. Broken Wharf House, High Timber Street, EC4 UK fund manager Hermes has reportedly purchased the Freehold interest for 12.8 million reflecting a net initial yield of 7.2%. The property comprises an office building extending to 40,900 sq ft (3,800 sq m) and was substantially refurbished in 2002/3. 29% of the income is secure until March 2016, 21% until 2014 and rest is subject to a tenant s break option in The price equates to about 315 per sq ft. Midtown Centrium, 61 Aldwych, WC2 German fund, BVK International Immobilien-Spezialfonds is reported to have purchased Tishman Speyer s Centrium building for 128million to show a net initial yield of around 7.25%. The 182,000 sq ft (16,908 sq m) property was developed by Tishman Speyer and is fully let on a floor-by-floor basis. The purchase price equates to about 700 per sq ft. 5 Strand, London WC2 LaSalle Investment Management has sold 5 Strand for 44 million reflecting an initial yield of 6.5%. The property was sold on behalf of a retained pension fund client to a private individual. The 72,215 sq ft (6,709 sq m) building is situated between Trafalgar Square and Charing Cross Station and is leased to Land Securities for a further nine years. The sale price equates to about 610 per sq ft. West End, London 103 Mount Street, W1 Kajima Properties has purchased this 31,000 sq ft (2,880 sq m) office and retail building located opposite the Connaught Hotel from Prupim for just over 31.5 million to show a net initial yield of around 6.6%. The purchase price equates to just over 1,000 per sq ft. 12 Stanhope Gate, W1 This multi-tenanted building comprising 7,299 sq ft (678 sq m) of offices on ground to 5 th floors with a 1,100 sq ft (102 sq m) residential flat on the 6 th floor has been sold by Astra Zeneca to an overseas investor for 9.25 million reflecting a net yield of only 3.0% although that should increase when the vacant space is leased. The price equates to around 1,100 per sq ft Eastbourne Terrace, W2 Malaysian investors are reported to have paid 62 million to show a net yield of about 7.0% for these two buildings originally constructed in the late 1950 s and totalling about 146,830 sq ft (13,640 sq m). The multi-tenanted block is located opposite Paddington Station. The sale price equates to approximately 422 per sq ft. 39 Victoria Street, London SW1 British Land, the UK REIT, paid Aviva Investors million for the Freehold interest in 39 Victoria Street reflecting a net initial yield of circa 8.4%. The 73,450 sq ft (6,823 sq m) building constructed in 1987 is leased until July 2012 to the Bank of America, which is no longer in occupation, but the building is fully sublet to nine other tenants including Finmeccanica, Last Minute.com, Aegis Defence Services and the Labour Party. The price equates to approximately 548 per sq ft. 4

5 South-East Regional Sales Aurora, Uxbridge Road, Ealing, Middlesex Royal London Asset Management has sold this 50,206 sq ft (4,664 sq m) office building constructed in 1996 to UK fund manager, Threadneedle for 15.3 million reflecting a net initial yield of 8.20%. The building is leased until May 2016 to Dunnhumby Limited, a marketing and advertising company 85% owned by Tesco, at a rent of per sq ft overall. The purchase price equates to 305 per sq ft SABMiller House, Woking, Surrey This 64,144 sq ft (5,960 sq m) office building, refurbished in 2006 and leased to SAB Millier for a further 9.75 years at a rent of 23 per sq ft, has been sold by Invista Investment Management to Threadneedle for 16.9 million to show a net initial yield of 7.70%. The purchase price equates to 263 per sq ft. Tempus Court, Guildford, Surrey Liverpool Victoria has sold this 26,825 sq ft (2,492 sq m) office and restaurant building,, to Henderson Global Investors for 7.48 million reflecting a net initial yield of 8.20%. The building was constructed in The offices are leased to a law firm and an actuarial company and the weighted average lease expiry is 8.7 years if a tenant option to break is exercised. The purchase price equates to 279 per sq ft. Contacts Peter Dewar peter@cohlondon.com Dick Grillo dgrillo@cohlondon.com

UK Property Market London & South East August 2009

UK Property Market London & South East August 2009 Current Market Conditions Since our last report in April 2009, we have seen a return to a more stable economic background even though the UK economy is