UK Property Market London & South East August 2009

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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

The UK stock market has seen a broad rally over the last month as investors become more optimistic following better than expected company results.

1 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 still suffering from the after-effects of the worst financial crisis in generations. The UK stock market has seen a broad rally over the last month as investors become more optimistic following better than expected company results. Unemployment is still rising but despite this house prices have levelled out for the time being with marginal increases in the last three months. Conditions in the commercial property market are more complex but there has been increased activity suggesting that some sellers have been tempted back into the market due to the weight of equity now seeking investment opportunities. The Bank of England has held Base Rate at 0.5% since March 2009 and has continued its policy of Quantitative Easing with a further 50 billion announced in August. Lenders continue to resist passing on these low interest rates to their customers and lenders margins now range from 200bps to 300bps. Current SWAP rates are higher than in April at around 3.00% for three years and 3.70% for five years. With increased margins and banks continuing to underwrite conservatively, all in borrowing costs are now in the range 5.75% to 6.50%. The volatility of investor sentiment in the commercial property markets continues. In May 2009 the IPF Consensus Forecast All Property total return for UK property forecast for 2009 fell to -15.1%, down from -11.3% as forecast in Q1. However, 2009 was forecast as the bottom of the market with positive total returns expected from 2010 onwards. Rental value growth was still forecast as negative across all sectors for the 3 years, and capital value growth remained negative for all

2 sectors until The five year view showed total returns were still forecast to be above the target rate of inflation of 2.5% for all sectors. Against this bearish outlook based on surveys early in the second quarter, later surveys are more optimistic. The CB Richard Ellis July survey reported that capital values were down 13.1% in the first half of the year, taking the total capital value correction from the market peak in June 2007 to -44.0%but in their August report, the Monthly Index of Total returns was positive for the first time in over two years at 0.8% for July. Capital values increased by 0.2%, the first positive movement at the All Property level since June By July property derivatives were also more optimistic forecasting a total return for 2009 of -10%, an improvement on the -15% forecast only one month earlier. However, All Property rental values continue to correct, falling by 0.4% in July, the lowest rate of decline this year. The All Property initial yield came in by 10bp over the month to 7.8%. The gap between the initial and equivalent yield narrowed further to 40bps in July, as reversions continue to decline, leaving the equivalent yield at 8.3%. Prime well leased property yields have hardened by between 0.5% and 0.75% since the first quarter of Indeed London & Stamford in its 31 March 2009 year end results reported a revaluation surplus for 1 Fleet Place, London EC4 of 7.6 million above the price of $74 million which they paid in January 2009, reflecting yield compression from 7.75% to 7.03% in only three months. We have also seen net yields dip below 7.0% for prime City properties with less than 10 years remaining on the leases. Central London Office Market Knight Frank reported that office take up across Central London rose in the second quarter 2009 by 30% over the very subdued first quarter to 1.7 million square feet. Although active demand levels have risen by more than 20% to 7.6 m sq ft, there are only a limited number of requirements focusing on the middle market, or units between 25,000 sq ft and 75,000 sq ft. In the City, most active requirements are for large, quality units as evidenced by Bank of Tokyo s recent acquisition of almost 180,000 sq ft at British Land s Ropemaker scheme and in July Nomura gave a much needed boost to the City of London by the announcement that it has committed to move back from Canary Wharf taking a lease of the whole of UBS Global Asset Management and Oxford Properties newly completed 525,000 sq ft Watermark Place, located near Cannon Bridge on north bank of the River Thames. In the West End the majority of demand is concentrated on units of less than 10,000 sq ft but there were deals over 20,000 sq ft in the second quarter of 2009, with the Youth Justice Board taking about 34,500 sq ft at 1 Drummond Gate in Pimlico, SW1 and Lowe Group Limited taking 34,300 sq ft at 60 Sloane Avenue, SW3. BNP Paribas Real Estate is forecasting the West End to turn the corner first with prime rents now of per sq ft reducing to by year end 2009 with recovery starting in 2010 due to limited new supply. In contrast their forecasts for the City and Midtown predict prime rents these markets bottoming out at per sq ft and per sq ft respectively during 2010 and Docklands/Canary Wharf falling to per sq ft before bottoming out maybe into Thereafter BNP Paribas are predicting more rapid rental growth in the West End than any of the other central London submarkets. See chart:

3 Investment Market Activity The CBRE Prime Yield and Rent Monitor for June 2009 reported investment into UK commercial property down again in Q2, with little over 3 billion worth of transactions. However, they see this as the low point for investment volumes in this market cycle, with more positive signs starting to emerge in the Central London office market in recent months. Overseas investors made up a sizable proportion of total UK investment, accounting for 45% of the 7 billion invested into property so far this year. Investment turnover in Central London more than doubled the previous quarter s total reaching 1.6 billion for the second quarter, only just below the level achieved in the same quarter a year ago. After a quiet first quarter, Middle Eastern investors have returned to the market accounting for 47% of purchases in the second quarter. The largest deals of the quarter were Hammerson s sale of a 75% share in the 445 million Bishops Square development in the City to the Oman Investment Fund and the acquisition of Portman House in the West End for 160 million by the Libyan Foreign Investment Company. UK investors also returned to the market and accounted for 23% of purchases with Irish investors a further 11%. However, UK investors were net sellers accounting for three-quarters of all sales over the second quarter. German investors were much less active and accounted for only 6% of purchases. Prime yields in the City stand at 6.75% and in the West End the prime yield is 5.50%, although there are examples of sales at yields of up to 7.4% in the City and Midtown and close to 7% in the West End, where there is either an element of over-renting or leases with less than 10 years remaining eliminating debt dependent buyers. Outside London, yields remain higher with South East prime office yield in the second quarter standing at 7.50% having shifted up by 275 basis points from their lowest level in over 30 years of 4.75% in July In provincial cities prime yields at the end of the second quarter 2009 stood at 7.00% in Birmingham, 7.25% in Manchester and 7.5% in Bristol, Cardiff, Leeds, Edinburgh and Glasgow, but in nearly all these centres sub-7% yields have been achieved where there are long leases to creditworthy tenants. A schedule of Recent UK Investment Transactions is attached at the end of this report.

4 Outlook We have seen yields hardening at the prime end of the market where there are long leases and credit rated tenants. These financeable deals will continue to dominate the investment volumes although turnover is likely to remain subdued as lenders resist forcing owners to sell where loans are being serviced despite Loan To Value covenants having been breached. In all markets values for properties with short lease expiries have seen higher yields and in some cases prices paid have been close to or below replacement cost, especially where there is exposure to risk of vacancy or tenant s only being prepared to renew at substantially lower rents in the foreseeable future. There is potential for better value yet to come in this sector of the market as lenders force owners to sell where loans are no longer being serviced and there is little prospect of the lender being able to nurse the loan until a general market recovery is in sight. There will still be opportunities for purchases at good value over the coming months but the recovery will be slow and there could be turbulence along the way as different sectors of the economy continue to adjust to survive with occupiers continuing to concentrate on cost cutting and reducing staffing levels which will impact on their occupancy requirements. Recent UK Investment Transactions City of London Bishops Square, Lwondon EC1 The largest deal of the year to date was the million purchase of a 75% interest in Hammerson s Bishops Square development by the Oman Investment Fund in June based on a net yield of 7.33%. The property comprises 774,000 sq ft offices leased to solicitors, Alan & Overy with 50,000 sq ft retail space. 107 Cheapside, London EC2 Carlyle reported in May that the sale of its 184,000 sq ft office development from its Carlyle European Real Estate Partners Fund to Irish investor Menolly Investments had finally completed at 150 million, although the sale was agreed as a forward purchase at the top of the market back in One Wood Street, London EC2 Land Securities sold One Wood Street, a 177,000 sq ft of office building let to law firm Eversheds to fund manager Aerium for million. The property is held on a long lease from The City Parochial Foundation for a remaining term of 156 years, at a ground rent geared to 10.85% of rental income. Milton Gate, 1 Moor Lane, London EC2 UBS sold the freehold interest in the 201,666 sq ft Milton Gate office building to Evans Randall to Evans Randall for 127 million reflecting a yield of 7.46%. Evans Randall bought the building on behalf of a Middle Eastern consortium that included Bahrain financial institution Al Salam Bank Bahrain. The property is let to law firm Addleshaw Goddard at 53.50/sq ft.

5 131 Finsbury Pavement, London EC2 Orion Capital Partners purchased IVG Investment s 131 Finsbury Pavement office scheme for 45.5 million at an initial yield of 7.0%, although the yield reflected the purchase through a Guernsey Property Unit Trust which exempts the share deal from British Stamp Duty Land Tax. The building is multi let with one main tenant, OMX 2 Technology whose lease expires in March Lombard Street, London EC3 This 9,490 sq ft building was brought to the market in May at a quoting price of 4.6 million to show a net initial yield of 8% taking account of the short term of only 6 years remaining on the main lease to Areal Bank, which accounted for 60% of the income with other leases expiring or tenant break clauses effective in 2012 or It is understood that a sale is proceeding at a price of over 5 million reflecting a sub- 7% yield. West End, London Portman House, 2 Portman Street, London W1 Land Securities sold Portman House on London s Oxford Street to the Libyan Foreign Investment Company (LAFICO) subsidiary Kinloss Property for 155 million, reflecting a yield of 7%. The building comprises a long leasehold 146,500 sq ft office building with a retail frontage to Oxford Street. Retail tenants include Boots, Russell & Bromley, Monsoon and La Senza and the office tenants include, Conoco Philips, Trafigura and Cluttons. 47/48 Grosvenor Street, London W1 In June the Grosvenor Mayfair Fund completed the sale of the 117 years leasehold interest in the 25,000 sq ft office building at 47/48 Grosvenor Street, leased to Investcorp until 2017, to Aerium at a price of 20.3 million to show a net yield of 6.75%. 27 Knightsbridge, London SW1 Aegon have sold the 133 years leasehold interest in the 65,300 sq ft office building at 27 Knightsbridge to private Russian investor at a price rumoured to be in the region of 56.5 million to show a net yield of 6.35%. The offices are leased to 5 tenants with average unexpired terms of 7 years and rents ranging from 60 per sq ft to over 100 per sq ft. 19 Buckingham Gate, London SW1 UK insurance company, Liverpool Victoria purchased this 6,840 sq ft office building leased to The Communication Group plc until 2017 at a price of 4.3 million to show a net initial yield of 6.43% 7-8 St Martin s Place, London WC2 Freehold office and retail building totalling 47,800 sq ft was purchased in June by an Italian investor for 33 million reflecting an initial yield of 6.95%. The offices were leased to Redwood Publishing until 2015 and the retails units to The Post Office and Prêt-a-Manger. 200 Hammersmith Road, Hammersmith, London W6 BP Pension Fund, purchased the 67,000 sq ft office building at 200 Hammersmith Road in London for 24.6 million from BlackRock s UK property fund at a net initial yield of 8.75%. The building is multi-let to seven tenants including Etihad Airways and Western Union.

6 Regional Sales Building 2, Vanwall Business Park, Maidenhead In May, Regent Square Estates purchased this 76,700 sq ft office building, leased to Abbot Laboratories for a further 16 years at a rent of per sq ft, for 26.3 million reflecting a net initial yield of 7.55%. New Uberior House & Princes Exchange, Edinburgh Investco is reported to be purchasing these two office buildings totalling 158,500 sq ft, leased to HBOS for a further 17 years, for over 55 million to show a net initial yield of around 6.75% Buildings 3 and 4, Callaghan Square, Cardiff MEPC has announced the sale of these office buildings to National Grid UK Pension Scheme for 22.6m at a blended net initial yield of 8.51%. Centrica occupies the whole of 4 Callaghan Square and 3 Callaghan Square is occupied by tenants including British Transport Police, the Commission for Equality and Human Rights, estate agents, Lambert Smith Hampton and architects, Scott Brownrigg. Crickhowell House, Cardiff Waterside Aviva Investors has been reported to have sold this 126,500 sq ft building, which is leased to the Welsh Assembly Government until 2032, to a foreign private investor for around 31m, reflecting a net initial yield of 6.25%. The government pays per sq ft with just one fixed rental uplift in Contacts Peter Dewar peter@cohlondon.com Dick Grillo dgrillo@cohlondon.com

UK Property Market London & South East October 2009

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