MarketView UK Monthly Index

CB RICHARD ELLIS

September 2011

SUMMER LULL FOR UK PROPERTY

The UK property market experienced a slight slowdown in performance during August, with total returns of 0.5% down from 0.6% last month. This slowdown was largely as a result of weakening retail returns, which fell to 0.4% in August, whilst office returns stayed firm and industrial returns improved to 0.7%. There is currently very little in the way of downward pressure on equivalent yields, leaving them unchanged at 6.6%. Offices were again the best performing sector in August, but returns remain significantly weaker than the figures seen at the beginning of the year. This is a fair reflection of wider market trends, with all three sectors seeing total returns slowing considerably since Q1. Central London offices remained the strongest sub-sector in August with total returns of 0.8%, but the level of outperformance has been cut dramatically in recent months amid fears over the economic recovery. Capital values were again driven forward by rental growth, but even this was more muted, growing just 0.2%. Retail performance suffered in August as a result of a weakness in High-street shops, where values fell for a second consecutive month. Industrials saw a mild improvement, with capital growth of 0.1% and total returns of 0.6%. All Property rental values were flat this month, and remain flat over the year. This continues to hide the diverging trend between a more buoyant Central London office occupier market, and the rest of the property sectors.

Investment Market Returns , YoY % (End August)

Total Return Property Equities Gilts 9.4 7.3 4.3

Capital Growth 3.1 3.8 -0.7

Source: Macrobond, CB Richard Ellis

CB Richard Ellis Short Term Indicators, (3 Month Annualised)

Capital % All Offices Central London Offices Standard Shops Retail Warehousing All Industrial All Property
Source: CB Richard Ellis

Rental % 2.5 6.2 -2.6 -0.2 -0.6 -0.2

3.7 6.9 -2.2 2.1 0.2 1.3

All Property Short Term Indicators

Market Background
3 month annualised % change

Rental Growth (LHS)

Capital Growth (RHS)

After suffering a 13.9% collapse at the beginning of the month, the FTSE All share rallied over the second half of the month, with a gain of 7.7% leaving the index just 7.2% below the end of July level. As expected, August was a quiet month for investment into commercial property, in view of the quiet holiday season. This saw just over 1.5bn worth of property bought, a significant weakening on the 2.7bn in the same period last year. Year to date, the investment total stands at 20.3bn, slightly behind this time last year.

15 10 5 0 -5 -10 -15 -20 Feb-09 Feb-10 Nov-08 May-09 Nov-09 May-10 Nov-10 Feb-11 May-11 Aug-08 Aug-09 Aug-10 Aug-11

40 30 20 10 0 -10 -20 -30 -40 -50

3 month annualised % change

Source: CB Richard Ellis

2011, CB Richard Ellis, Inc.

OFFICES

Annualised Capital Growth

Retail Office Industrial

MarketView UK Monthly Index

Office total returns held firm at 0.7% in August, with capital growth remaining at 0.2% for the month. Despite industrial property seeing an improvement in performance this month, offices retained their advantage, with total returns of 6.8% in the year to date.
%

30 20 10 0

Aug-08

Aug-09

Aug-10

Occupier markets were more subdued in August, with rental values up just 0.1%, following the 0.3% seen last month. The normally dominant Central London sector saw rents increase by only 0.2%, as renewed economic and financial turmoil impacted on new space requirements. Outer/London / M25 offices saw rents fall 0.1%, whilst Rest of UK offices saw rental values hold firm in August. In the year to date, offices have seen market rental values grow by 1.7%, largely as a result of strength in Central London, which has offset declines elsewhere. Office sector equivalent yields remained unchanged over the month at 6.3%. RETAIL Retail property performance dipped in August, with total returns of 0.4%. Capital values were unchanged over the month. Like the wider property market, retail has seen increasingly subdued performance over the course of 2011, with growth in values gradually coming to a halt. Over the year to date the retail sector has seen capital growth of 1.6% and total returns of 5.5%, only marginally ahead of the industrial sector. High Street shop values fell 0.2% in August, following a 0.1% fall last month. This is in response to mounting investor concerns over the outlook for the consumer sector and retail rents. Shopping centres saw zero capital growth and returns of 0.5% for August, whilst retail warehouses continued to grow in value, albeit modestly at 0.1%, with total returns of 0.5%. Equivalent yields remained unchanged for All Retail at 6.3%. INDUSTRIAL
%

Source: CB Richard Ellis

Annualised Rental Growth

Retail Office Industrial

5 0 -5

-10 -15 -20 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 Aug-11

Source: CB Richard Ellis

Annualised Total Return

Retail

Office

Industrial

40 30 20 10 0 %

-10 -20 -30 -40

September 2011

Aug-10

Aug-08

Feb-09

Aug-09

Feb-10

Like the wider property market, industrial yields stayed flat in August, remaining at 7.9% for the sixth month.

Source: CB Richard Ellis

2011 CB Richard Ellis, Inc.

Feb-11

Industrial property saw a degree of improvement in August, as capital values grew 0.1%, producing total returns of 0.6%. Year to date, total returns have been 5.2%, with capital values up 0.7%.

Aug-11

Feb-09

Feb-10

Feb-11

Central London offices were again the strongest subsector, with total returns of 0.8% and capital growth of 0.4%. Performance improved in the Outer London / M25 market, with capital growth increasing to 0.1% in August, after a 0.1% decline seen last month. Total returns were 0.7%. The Rest of UK office sector was the weakest office sub-sector, with total returns of 0.4% and capital values falling by 0.1% in August.

-10 -20 -30 -40

PMI Surveys: Manufacturing and Services

ECONOMY AND INVESTMENT MARKETS

MarketView UK Monthly Index

65 60 50 = no change 55 50 45 40 35 30 Aug-00 Aug-01 Aug-02

Manufacturing

Services

Global economic conditions are once again giving rise to growing concern, on the back of both weakening output growth and the threat posed by the as yet unresolved Eurozone sovereign debt crisis. Output growth has slowed across the US, Eurozone and the Far East. US GDP growth for Q2 was revised down to an annualised 1.0% from 1.3% previously, while the main engines of growth in the Eurozone, Germany and France, stagnated over the second quarter. The UKs unrevised 0.2% growth for Q2 was similarly weak. For the UK, hopes for some improvement in the third quarter are far from encouraging, with the August PMI for the key services sector slowing to 51.1 from 55.4 in July, while the manufacturing sector showed declining output for the first time in over two years. Consumers have also shown signs of increasing fatigue, with July retail sales volumes unchanged on a year ago. Purchases of food and household goods declined over the year, pointing to a picture of increasingly strained household finances. Unemployment also rose by 38,000 to a total of 2.5m in the three months to June, with the overall jobless rate rising to 7.9% from 7.7%, pointing to increasing weakness in the labour market. Despite these growing signs of renewed economic distress, the housing market managed to show a modest improvement in July, with the BoE reporting mortgage approvals up slightly to over 49,000. Overall however, housing market activity remains very subdued and prices remain under downward pressure, with the Nationwide index down by 0.6% in August and 0.4% on a year ago. Weaker growth hasnt relieved the upward pressure on prices, with the rate of CPI inflation increasing to 4.4% in July from 4.2% the previous month. The Bank of Englands MPC left interest rates at 0.5% once again this month as was widely expected. Nonetheless, the weakness across a broad range of economic indicators has raised market expectations of a further round of quantitative easing or government asset purchases in the Autumn if conditions dont improve soon. Property Derivatives Derivative pricing has remained bearish this month, with post-2011 contracts all pricing in falls in capital values for the next four years. Prices rose slightly towards the front end of the curve, with the 2012 annual contract rising from 1% total return to 1.5% and 2011 contracts up 10bps. Towards the back end of the curve there was a marginal dip of 20bps, to a price of 4.3% total return for 2013 and 2014. Pricing remains on the cautious side whilst there are high levels of uncertainty in the wider market. 2011, CB Richard Ellis, Inc.

Aug-03

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10
2014

Source: Markit / CIPS PMI Survey

House Prices and Retail Sales

40 30 3 month % annualised change 20 10 0

Annual House Price Growth (LHS) Annual Retail Sales Volume (RHS)

Aug-11
12 9 6 3 0 -3 -6 -9 3 month % annualised change

-10 -20 -30

Annual IPD Implied Returns from Derivative Pricing

8 7 % Annual Growth 6 5 4 3 2 1 0 Aug-10 May-11 Nov-10 Mar-11 Aug-11 Jan-11 Dec-10 Feb-11 Jul-10 Jun-10 Sep-10 Oct-10 Apr-11 Jun-11 Jul-11

Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
Source: Macrobond

2011

2012

2013

September 2011

Source: CB Richard Ellis, GFI

PROPERTY INVESTMENT YIELDS, SEPTEMBER 2011

MarketView UK Monthly Index

Equivalent Yields % September 2011

Prime Shops Good Secondary Shops Secondary Shops Prime Shopping Centres Best Secondary Shopping Centres Secondary Shopping Centres Retail W/H: Prime restricted user Retail Parks: Prime open user Retail Parks: Prime restricted user Retail Parks: Secondary 4.75 6.00 8.75 5.50 6.25 8.25 6.00 5.00 5.75 8.25 Leisure Centres: Prime Offices: West End Offices: City Offices: M25/South East Offices: Major Provincial Offices: Secondary Prime: Distribution Unit Prime Industrial Estate (Greater London) Prime Industrial Estate (Ex Greater London) Older Industrial Estate (20 years old)

Equivalent Yields % September 2011

6.25 4.00 5.00 6.00 6.00 10.50 6.50 6.00 7.00 11.00

Note: Prime yields refer to an equivalent yield for a prime (well specified, well located and rack rented) property let to a financially strong tenant on a lease with a minimum of 15 years unexpired.

CB RICHARD ELLIS MONTHLY INDEX, AUGUST 2011

Sectors
All Offices CL Offices All Retail Shops Retail W/H Industrial All Property

TR
0.7 0.8 0.4 0.2 0.5 0.6 0.5

%, 1 Month CG RG
0.2 0.4 0.0 -0.2 0.1 0.1 0.1 0.1 0.2 -0.1 -0.1 0.0 -0.1 0.0

%, Year-to-date TR CG RG
6.8 9.1 5.5 3.8 6.4 5.2 5.9 2.7 5.4 1.6 0.0 2.5 0.7 1.8 1.7 4.5 -0.9 -0.9 0.3 -0.4 0.0

TR

%, 12 Months CG RG
5.4 11.1 2.6 0.8 4.3 0.6 3.1 2.2 6.8 -1.4 -1.2 0.4 -1.3 -0.3

Index, Dec 1999=100 TR CG RG

218.9 240.3 223.0 221.3 253.0 236.3 223.8 100.4 117.3 108.7 110.5 125.5 100.9 104.4 92.3 87.6 111.3 105.9 119.9 104.6 103.4

11.7 17.0 8.7 6.5 10.4 7.5 9.4

TR Total Returns, CG Capital Growth, RG Rental Growth

KEY ECONOMIC INDICATORS

Monthly Data
Retail Sales Volume - inc fuel (Jul) RPIX (Jul) ILO Unemployment Rate (June) Manufacturing Output (Jul) Base Rates (September)
Source: ONS

M-o-M %
0.2 0.1 0.5

Y-o-Y %
0.1 5.0 7.9 2.0

Quarterly Data
GDP (Q2 2011) Household Expenditure (Q1 2011) Business Investment (Q1 2011)

Q-o-Q %
0.2 -0.6 -3.2

Y-o-Y %
0.7 -0.3 2.7

AVERAGE NEW INDEPENDENT FORECASTS FOR UK ECONOMY (% Y-o-Y)

2011
GDP Private Consumption % Unemployment Q4, mns Manufacturing output % Employment growth % Inflation % CPI Q4 Official Bank Rate Q4 % 1.3 -0.4 1.55 3.2 0.5 4.5 0.6

HM TREASURY CONSENSUS FOR UK GDP

2.5 2010 2011 2012

2012
2.0 1.4 1.53 2.6 0.3 2.3 1.3
1.0 Aug-10 Sep-10 % 1.5 2.0

Actual: +1.3%

Nov-10

Dec-10

Jan-11

Feb-11

Jun-11

Jul-10

Oct-10

Apr-11

Source: HM Treasury, Comparison of Independent Forecasts, July 2011.

September 2011

For more information regarding the Monthly Index, please contact: Nick Parker David Wylie Nick.Parker@cbre.com David.Wylie@cbre.com Disclaimer 2011 CB Richard Ellis

CB Richard Ellis St. Martins Court 10 Paternoster Row London EC4M 7HP

Tel 020 7182 2000 F ax 020 7182 2001

Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis. Copyright 2011 CB Richard Ellis CB Richard Ellis is the market leading commercial real estate adviser worldwide - an adviser strategically dedicated to providing cross-border advice to corporates and investment clients immediately and at the highest level. We have 400 offices in 58 countries across the globe, and employ 24,000 people worldwide. Our network of local expertise, combined with our international perspective, ensures that we are able to offer a consistently high standard of service across the world. For full list of CB Richard Ellis offices and details of services, visit www.cbre.com

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