Research report

EPMREconomic & Property Market Review

Q3 2012

Declining economic output for the third consecutive quarter was not unexpected but the magnitude of the decline at -0.7% in Q2 was a shock. The extra bank holiday and bad weather no doubt caused much of the decline, but even allowing for this the GDP figure was very weak.

As the first chart shows, the weakest sectors in Q2 were Construction (-5.2%) and Production (-1.3%). The only positive sectors were Government and other services (+0.3%), consistently the strongest sector over the last 12 months, and Business Services and Finance (+0.1%) which moved into positive territory (just) after two quarters of decline.

Economic output is now slightly weaker than it was two years ago when the present government came to power, whereas over the previous year output increased by 2.1%, as the economy recovered from the recession. Public sector net borrowing over the first quarter of this financial year is actually running at a higher underlying level than it was a year ago, because receipts are growing at a slower rate than the Office for Budget Responsibility (OBR) expected in the March budget, as a result of the recession.

Employment growth, in marked contrast to GDP growth, has surged in recent months, which should be good news for the property market. This increase is difficult to reconcile with an economic recession and suggests that either this is due to special factors such as the Olympics or that GDP data, which is provisional, may be revised up in subsequent months. Unlike the situation a few months ago most of the increase of 182,000 over the latest three month period comprised full time workers (+133,000) rather than part time workers (+48,000).

There was also good news on unemployment, with total unemployment falling by 65,000. This brings the rate down to 8.1%, although claimant count unemployment in June actually increased by 6,100, a similar increase to that occurring in May.

Inflation has also provided some good news with further large falls in CPI and RPI inflation (see second chart). CPI inflation has fallen to 2.4% pa in June from 3.5% pa three months ago and a peak of 5.2% pa nine months ago. Similarly RPI inflation has fallen to 2.8% pa from 5.6% pa nine months ago.

Average earnings growth (excluding bonuses) in May remained weak at 1.8% pa. With inflation at 2.4% pa, earnings growth in real terms remains negative, although much less negative than it has been over the last 12 months (see second chart). Further falls in the inflation rate are likely, and so positive real income growth looks probable in the latter half of 2012. This is good news for the retail sector in particular.

The UK economic outlook, according to the latest consensus view of economists and also the IMF, is noticeably weaker over the short term than it was a few months ago, despite the positive news about employment growth and inflation. Three months ago economic growth was forecast to be 0.6% in 2012 and 1.7% in 2013. The latest figures are 0.1% and 1.4% (see third chart).

The reasons are many: the scale of spending cuts and tax increases at home and throughout much of Europe, plus the lack of decisive positive action required by Eurozone governments to sort out the Eurozone crisis, are the main ones. But also worrying is the economic slowdown in China and in the US.

There is also a growing concern over the looming “financial cliff” in the US at the end of the year. Automatic spending cuts and tax increases will occur unless there is political agreement to the contrary. This seems unlikely in a presidential election year with such major differences between Democrats and Republicans.

Economic trends

02 I GVA 10 Stratton Street London W1J 8JR

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

UK sector growth

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Earnings & Inflation

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Economic output and all property rents

Source: ONS

Source: ONS

Source: ONS, Treasury, OBR, IPD, REF Ltd, GVA

Latest Consensus Forecasts, July 20122011 2012 2013 25 year trend

Economic growth (GDP) 0.7% 0.1% 1.4% 2.7% pa

Private Consumption -0.7% 0.2% 1.2%

Employment growth 0.2% 0.7% 0.3% 0.7% pa

Bank base rate (Q4) 0.5% 0.5% 0.7%

CPI – Inflation (Q4) 4.6% 2.0% 2.0%

RPI – Inflation (Q4) 5.1% 2.3% 2.6%

House Price Inflation (Q4) -0.6% -1.4% 0.8%

Source: HM Treasury (compilation of forecasts), GVA

Recent occupier market trends

The economic backdrop remains challenging for occupiers, but there are some positive trends for occupational demand. The recent robust numbers for employment growth and some mildly encouraging retail sales figures are good examples.

Retail sales volumes were up 1.4% over the three months to June compared with the same three months of 2011. But non-store sales grew by a much stronger 11.8%, highlighting the challenge store-based retailers face to retain market share.

The sharp fall in overall UK construction activity in Q2 highlights the weakness of the development sector, and the level of new construction orders for commercial property remains historically low. Although very little development is coming on stream outside of central London, subdued occupier demand means that vacancy rates are still rising across many UK markets.

In terms of institutionally-held stock, the IPD database shows the office market outside London and the South East as having the highest void rates. This contrasts with central London, where our data shows that the overall office vacancy rate has held steady at around 6% for the last year, well below previous peaks of 9% in 2009 and nearly 14% in 2003.

Overall office take-up has held steady during Q1 and Q2 this year. This can be seen in the first chart, which shows quarterly office take-up in central London and across our ‘Big Nine’ regional office centres.

The second chart shows short-term rental performance based on the IPD Monthly Index, and illustrates the contrast between the central London (office and retail) market, and the rest of the UK. In central London, growth has remained firmly in positive territory throughout the last two years and has actually accelerated a little in recent months. However across the rest of the UK rental values continue to fall, although at a modest pace.

Outlook for occupier market performance

As the short-term outlook for the UK economy has deteriorated over the last three months, so we have marked down our view on likely rental growth. We expect almost no change to all property average rental values for the rest of this year and in 2013 (see table).

Central London will continue to see more upward pressure on rental values than the rest of the UK, as the third chart illustrates, and rental values should be almost 15% higher than today by the end of 2016. Away from central London, our forecasts suggest that rental values will still be below their 2008 peak at the end of 2016, and only around 6% higher than current levels.

The low level of development activity means that the supply of high quality space is already diminishing. As economic recovery gets a firmer footing in the second half of our five-year forecast period, the demand for quality space will increase.

Other factors will add to supply pressures and are storing up a future market imbalance. The high number of lease expiries, the looming April 2018 deadline after which it will probably not be possible to lease a building with an EPC rating below ‘E’, and the need for retailers to adapt their offer in a world increasingly influenced by internet sales are just three reasons why we think demand for prime space will rise significantly as we emerge from recession.

As the gap between London, the South East, and the rest of the UK continues to widen, the market will become increasingly segmented, both by location and asset quality.

Commercial property market

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Rental value growth over three months

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Office take-up in central London and the ‘Big Nine’

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Average rental value growth forecasts

10 Stratton Street London W1J 8JR GVA I 03

Research EPMR UK

All property rental growth forecasts2012 2013 2014 2015 2016

Consensus

Maximum 0.3% 2.3% 2.5% - -

Minimum -3.0% -1.3% -1.5% - -

Average -0.9% 0.4% 1.3% - -

GVA (July) -0.3% 0.5% 1.5% 2.3% 2.8%

Source: GVA

Source: IPD, GVA

Source: IPD, REFL, GVA

04 I GVA Grimley Ltd 10 Stratton Street London W1J 8JR

Recent investment performance

The level of commercial property transactions has stabilised at around £7.5 billion per quarter, as the first chart illustrates. Overseas investors have remained highly active in the UK market. Q2 saw more than £4.5 billion purchased by overseas investors. This accounted for more than 60% of total market activity.

Taking properties sold into account, the net increase in overseas holdings during Q2 was more than £2.5 billion, the highest quarterly increase since 2009. Over the 12 months to June 2012, overseas investors have increased their exposure to UK commercial property by an impressive £7 billion (source: Property Data).

Strong overseas interest in the London market is buoying overall demand. In general, transaction levels are being held back by the scarcity of debt finance, the lack of quality product and by high levels of investor uncertainty.

Average all property yields as monitored by the IPD Monthly Index shifted upwards in June for the eighth consecutive month. This has driven a modest fall in capital values of -2.1% between October 2011 and June 2012, reversing the trend seen throughout most of 2010 and 2011. The change in the level of all property capital values over the last decade is illustrated in the second chart.

Yields at the very prime end of the market held broadly steady during Q2, but elsewhere they continued to soften, and so the gap between prime and secondary property widened further. However, yields are difficult to quantify in some markets due to low transaction volumes. The total all property return for the first six months of 2012 was 1.2% (IPD Monthly Index), well below the year-on-year figure for June of 4.8%.

Investment market outlook

In the central London market, rental growth will continue to have a positive impact on performance over the next two years. But the relatively strong growth rates seen last year are unlikely to be repeated in the short term. Away from central London and parts of the South East, rental growth is likely to remain elusive in most markets. However, we expect the rate of inflation to continue slowing and this will help performance when viewed in real terms.

We expect average capital values to fall in the second half of this year, by a similar amount to the first six months, taking the figure for 2012 to around -4%. The income side is producing a healthy return of almost +6% pa, and so we expect total returns of nearly +2% for the whole of 2012.

Our central view is for little change to either rental or capital values next year, with a total return of +5.6% forecast. But we are clearly in very uncertain times and the IPF consensus forecasts reflect this, with views ranging from +4.4% to -2.0% for this year and a range nearly as wide for next year (as the table shows).

The market will continue to be polarised. Prime assets, particularly those with long leases and strong covenants, as well as quality assets in central London, will continue to attract strong investor demand but supply will be limited. At the secondary / tertiary end of the market, supply will be steadily fed to the market as banks work their way through their distressed asset portfolios and pricing will need to be realistic to attract buyers.

All property total returns forecasts2012 2013 2014 2015 2016

Consensus (May)

Maximum 4.4% 8.5% 10.3% - -

Minimum -2.0% 3.3% 5.8% - -

Average 1.4% 6.0% 7.8% - -

GVA (July) 1.8% 5.6% 8.0% 8.7% 9.0%

Published by GVA - 10 Stratton Street, London W1J 8JR©2012 Copyright GVA

GVA’s award winning Research team provides high quality research and analysis to the business and its clients. Our market commentaries, thought leadership pieces and consultancy advice drive industry debate, distinguish GVA from its competitors and add value for our clients.

gva.co.uk 08449 02 03 04

08639

This report has been prepared by GVA for general information purposes only. Whilst GVA endeavour to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. GVA assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation GVA exclude all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from GVA to reproduce material contained in this report. GVA is the trading name of GVA Grimley Limited © GVA 2012.

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Value of investment transactions

Source: Property Data

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

All property capital values

Source: IPD, GVA

GDP

OBR forecasts

GDP 25 year trend

All property rents

-20

-15

-10

-5

0

5

10

15

20

2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 % g

row

th p

a

Rest of Commercial Property Central London Offices

2008

OBR (March) Consensus(July)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009 2010 2011 2012

% c

hang

e q

uarte

r on

qua

rter

GDP GDP Quarterly Trend (1983-2011)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012 2014 2016

Rent

al G

row

th (%

pa

)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

0 5 10 15

92

94

96

98

100

UK Recessions and recoveries comparedPeak in output = 100

Months from start of recession

1 year 2 years

1990-1993

1973-1976

1930-1934

1979-1983

OBRProjection

ConsensusProjection

2008-2013/14?

3 years 4 years 5 years 6 years 7 years

20 25 30 35 40 45 50 55 60 65 70 75 80 84

-6.0

-4.0

-2.0

0.0

2.0

4.0

Gro

wth

ove

r 3 m

ont

hs, %

Central London Offices All other property

'000

sq

ft

West End City Docklands Regional CBD Regional out-of-town

0

1,000

2,000

3,000

4,000

5,000

6,000

Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12

Central London Big Nine

UK Overseas Central London Rest of Commercial Property

Central London Rest of Commercial Property

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 200

7

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q1 201

0

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

£ m

illio

n

0

1

2

3

4

5

6

7

8

9

10

Mar 2

002

Mar 2

003

Mar 2

004

Mar 2

005

Mar 2

006

Mar 2

007

Mar 2

008

Mar 2

009

Mar 2

010

Mar 2

011

Mar 2

012

%

15-Yr Gilt Yield IPD Equivalent Yield

Mar 200

9

Jun 2

009

Sep 20

09

Dec 20

09

Mar 201

0

Jun 2

010

Sep 20

10

Dec 20

10

Mar 201

1

Jun 2

011

Sep 20

11

Dec 20

11

Mar 201

2

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

'000

sq

ft

-4

-3

-2

-1

0

1

2

3

4

5

6

Jan-

07

Mar-07

May-07

Jul-0

7

Sep-0

7

Nov-07

Jan-

08

Mar-08

May-08

Jul-0

8

Sep-0

8

Nov-08

Jan-

09

Mar-09

May-09

Jul-0

9

Sep-0

9

Nov-09

Jan-

10

Mar-10

May-10

Jul-1

0

Sep-1

0

Nov-10

Jan-

11

Mar-11

May-11

Jul-1

1

Sep-11

Nov-11

Jan-

12

Mar-12

May-12

Inflation adjusted earnings Average earnings (ex bonuses) CPI Inflation

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016 Re

nta

l Gro

wth

(% p

a)

Tota

l Re

turn

(% p

a)

Total Return (lhs) Rental Growth (rhs)

% p

a

-15

-12

-9

-6

-3

0

3

6

9

12

-5

-4

-3

-2

-1

0

1

2

3

4

2007 2005 2009 2011 2013 2015

% p

a (R

ent

s)

% p

a (G

DP)

-10

-8

-6

-4

-2

0

2

4

6

8

-25

-20

-15

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010 2012 2014 2016

Ren

tal G

row

th (%

pa)

Tota

l Ret

urn

(% p

a)

Forecasts for all property rents and returns Source: IPD, REFL, GVA

Total Return (lhs) Rental Growth (rhs)

0

20

40

60

80

100

120

140

160

180

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Ind

ex,

Jun

e 2

012

= 1

00

Rent

al v

alu

es,

end

201

1=10

0

80

85

90

95

100

105

110

115

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q2 200

7

Q3 200

7

Q4 200

7

Q1 200

8

Q2 200

8

Q3 200

8

Q4 200

8

Q1 200

9

Q2 200

9

Q3 200

9

Q4 200

9

Q3 200

9

Q2 201

0

Q3 201

0

Q4 201

0

Q1 201

1

Q2 201

1

Q3 201

1

Q4 201

1

Q1 201

2

Q2 201

2

£ m

illio

n

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09

Mar-10

Jun-

10

Sep-1

0

Dec-10

Mar-11

Jun-

11

Sep-11

Dec-11

Mar-12

Jun-

12

Rent

al g

row

th o

ver t

hre

e m

ont

hs (%

)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2008 2009 2010 2011 2012

GDP Business & Financial Services Manufacturing Output Construction

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

% c

hang

e q

uarte

r on

qua

rter

Forecasts for rents and returns

Source: IPD, REFL, GVA

Investment market commentary