8/9/2019 Reimv _20100813 - UK Spotlight - August 2010
1/14
Country Spotlights
AXA Real Estates European Quarterly Country Review
Quarter 3 August 2010
United
Kingdom
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The
information contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a
decision to enter into a transaction or for any investment decision. The analysis and recommendations express the views of AXA
Real Estate Investment Managers. Its application is adapted to each portfolio in order to optimise the management constraints which
are specific. The past performance of securities or other instruments does not guarantee or predict future performance. The
information contained on this page may not be reproduced or circulated without our written authority.
- 2 -
Uni ted K ingdom
Executive summary
Quarterly UK economic growth looks as though as it has reached its peak in Q2 2010
The largest and longest fiscal squeeze since the 2nd World War will hit the consumer in 2011
The surge of large office lettings in London faded in Q2 2010 impacting on take-up levels
Retailers warn of tougher trading conditions ahead. London is expected to be more resilient
The recovery in property values is running out of steam. Anecdotal evidence points to yields
increasing by 25 basis points in some segments in June
Exh ib it 1
UK quarterly GDP components
-4
-3
-2
-1
0
1
2
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Source : Datastream
Note: seasonally adjusted, constant prices
% QoQ
Change in inventories and otherNet Exports
Household consumptionGov expenditureCapital expenditureGDP
Exh ib it 2
UK Discretionary Policy Tightening
0
20
40
60
80
100
120
140
2010-11 2011-12 2012-2013 2013-2014 2014-2015 2015-2016
Source: Oxford Economics
GBPbn
(cumulative)
Inherited
Emergency Budget
Total
Macro economic overview
Provisional Q2 2010 GDP data was much stronger than
expected, with the economy growing by 1.1% over the
quarter the largest quarterly increase since Q1 2006. It
came as no big surprise that output in the manufacturing
sectors rebounded strongly, increasing by 6.6% and 1.6%
respectively. However, it was the sharper than expected
recovery in the service sector that surprised, growing by
0.9% over the quarter after the lacklustre growth in the
previous two quarters. This is now a private sector-led
recovery, with business services and finance leading the
way. Government expenditure is already slowing,
accounting for only 0.2% points of the quarterly economic
growth.
However, economic growth will be less impressive in Q3
2010. The risks of a double dip recession may have
abated for this year, but the latest Purchasing Managers
Index surveys are pointing to a slowdown in growth in both
the service and manufacturing sectors.
The UK faces a tough time ahead, hampered by the poor
state of its public finances with the current public deficit to
reach record highs (113% of GDP1).
1Estimates for 2009-2010 in HM Treasury Budget 2010, June
2010
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 3 -
United Kingdom(ctd.)
There are signs of a slowdown in
the recovery of consumer
spending. Also one in three employers
plans to reduce staffing levels
over the coming months
The new government has taken steps to address this
mountain of debt, outlining stringent measures in the
emergency budget in June (see Exhibit 2). Official Treasury
forecasts now expect the deficit to fall from GBP149bn this
year to GBP37bn in 2014-2015 in the largest and longest
austerity plan since the Second World War. The more
positive Q2 2010 GDP numbers will also support the
governments decision to address the deficit faster than the
previous government had intended. However, the sheer
scale of the planned readjustment of public finances will not
just be felt in the coming quarters but over the coming
years.
Despite the unemployment rate stabilising at 7.8% over Q2
2010, another rise in unemployment is possible. According
to a recent survey, a third of employers are still planning to
reduce staffing levels2. This will largely be driven by the
public sector and the forecast is for 600,000 public sector
job losses over the next five years. The net employment
index, which measures the difference between the
percentage of employers looking to hire and those
preparing to cut staff, was still very negative for the public
sector at a net balance of -35.
The poorest prospects were in Local Government (net
balance of -74) and Public Administration and Defence (net
balance of -59). This suggests that the improvements in the
private sector might not be enough to offset the
deterioration in job prospects in the public sector. There is
also a risk of a slowdown in private sector employment, with
signs of a summer reduction in hiring in the City3.
Tax increases, such as the VAT increase from 17.5% to
20% in January, and the public sector squeeze will hit the
UK consumer. According to the latest Bank of Englandagents report, there were signs that consumer spending
had already dropped over the second quarter.
2Labour Market Outlook, August 2010, Chartered Institute of
Personnel and Development and KPMG3Hiring Slows - Usual Summer Downturn, Or More Worrying?,
Here is the City, August 10th 2010
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 4 -
United Kingdom(ctd.)
Demand for Central London
offices fell by 40% during Q2 2010
given the sharp decrease in the
number of large deals. This swing was
most marked in the City with only one
deal above 50,000 sq ft
Exh ib it 3
City take-up and availability ratio
0.0
0.5
1.0
1.5
2.0
2.5
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Source: DTZ Research
m sq ft
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
%
Grade A Grade B Grade C Availability Ratio (RHS)
This, combined with the first signs of a stalling in therecovery in house prices and signs of mortgage credit
tightening, points to a tough time ahead for consumers.
The occupier marketsOffices
Take-up of Central London offices fell by 40%4
over Q2
2010 a weak quarter which was 20% below the long term
trend. This was driven by the surge of large deals in Q1
2010, fading away in Q2 2010. As an example, there was
only one deal signed in Central London in Q2 2010 of over
100,000 sq ft (Shell leasing 187,000 sq ft in the Docklands)
compared to nine in the first quarter. The fall in active
requirements was because of a partial satisfaction of pent
up demand of companies that have been looking for space
for several years before committing this year.
The financial and business services sectors accounted for
28% of take-up in Central London in Q2 2010 (a sharp fall
from 40% in Q1 2010). The manufacturing/energy sectors
share increased to nearly 20% but this was largely
attributable to the Shell deal.
The large deals in Q1 2010 skewed quarterly take-up levels,
and we expect there to be quarterly swings in take-up,
especially in the City. For example, despite take-up in the
City falling by two-thirds over the quarter, there is evidence
already for a stronger third quarter with the stock under
offer in the City alone increasing from 930,000 sq ft to 2.1m
sq ft. This was fuelled by the UBS (700,000 sq ft) and
Bloomberg (500,000 sq ft) deals. There is also an
additional 3m sq ft of structural demand5
in the pipeline for
the City over the next three years (Exhibit 5), which alone
will support three quarters of demand (of long-term averagetake-up).
Encouraging signs have also emerged for smaller deals in
the City, with demand for offices below 25,000 sq ft
4DTZ, PMI, June 2010
5Drivers Jonas Deloitte, City of London, Q2 2010
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 5 -
United Kingdom(ctd.)
Exh ib it 4
West End take-up and availability ratio
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Source: DTZ Research
m sq ft
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
%
Grade A Grade B Grade C Availability Ratio (RHS)
Exh ib it 5
Central London structural demand
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
2020f
m sq ft
Source: Drivers Jonas Deloitte
City West End
increasing by 8% quarter-on-quarter. 95% of lettings in theCity since 2004 have been for lot sizes below 25,000 sq ft,
and demand for such sizes is more indicative of underlying
demand than the somewhat erratic larger deals.
In contrast, demand in the West End increased over the
quarter but still remained 15% below the long-term trend.
Two-thirds of take-up (compared to the long term trend of
40%) was for Grade A space as there was a recognition
that availability was becoming more limited, but also
signalling that rental values for this type of stock were likely
to increase. Such a tenants perspective is reinforced by arecord low of 125,000 sq ft of new supply due in the West
End in 2011 (compared to the long term average of 1.2m
sq ft p.a.6).
This has worked through to falls in vacancy in the West
End, as illustrated in Exhibits 4, whilst vacancy rates in the
City stabilised over the quarter given the large increase of
second-hand space (+17%) being released back onto the
market over Q2 2010. Nonetheless, availability of new units
of over 100,000 sq ft has remained tight with only 15
options available in Central London at the end of June(stable over the quarter).Availability is even tighter for units
over 200,000 sq ft, with only one building available on the
market (Central St Giles).
Several developers in the City have been waiting until
rental values exceed GBP55/sq ft/year before committing
to building new schemes. Two such schemes are UBS
agreeing terms at GBP54.50/sq ft/year in Q3 2010, and
signs of the Pinnacle tower starting construction.
Commercial developers in London recorded the fastest
increase in construction activity over the last seven months
across the UK in July7. Even so, developers will still be
restricted by the lack of development finance and still need
to have their scheme pre-leased by at least 50%.
Nonetheless, the limited development pipeline for 2010-
2012 will support further rental growth for offices in the
short term as new supply continues to be absorbed, and
demand recovers.
6CBRE, Central London office report, July 2010
7Savills, Commercial Development Activity, August 2010
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Country SpotlightsQUARTER 3- 2010
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 6 -
United Kingdom (ctd.)
Exh ib it 6
IPD City and Midtown & West End rental growth
(% quarterly annualised)
-25
-20
-15
-10
-5
0
5
10
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Source: IPD
%
Midtown & West End Offices City Offices
The timing of entry and exit is crucial for developers, with a
potential wave of new supply due to come on stream in2013/2014.
As new supply levels remain constrained, prime headline
rental values in Central London increased by 5% over the
quarter whilst incentives fell from 30 to 24 months rent-free
incentive on a ten year lease in the City, and from 21 to 18
months in the West End.
The regional markets are continuing to lag London,
especially those with high levels of exposure to the public
sector.Anecdotal evidence from brokers indicates that
public sector occupiers in the regions are already reviewing
their space requirements, which may result in space being
bought onto the market, raising void rates in the short term.
Co-location is also on the agenda with 80% of councils
already considering sharing offices with other public bodies
to make efficiency gains8. Only Thames Valley evidenced
an increase in take-up, albeit from a low base with 359,000
sq ft leased in Q2 2010, up from 299,000 sq ft in Q1 2010.
However, this is still 20% below the long term average, and
with the vacancy rate continuing its upward trend to 12.9%,
rental values are not expected to recover in H2 2010.
Retail
The prospects of the fiscal squeeze ahead have not,
apparently, reduced consumer spending. Retail sales grew
by 1.7% in Q2 2010, compared to the 2.5% fall
experienced during the first quarter (albeit dampened by
factors such as the VAT rise and poor weather). On the
other hand, consumer confidence fell to its lowest levels for
almost a year and house prices have started to weaken,
with the RICS reporting the first fall for a year in July. The
outlook for the remainder of the year looks challenging,with the Bank of Englands agents witnessing ...some
signs that consumer spending growth had slowed through
Q2 and recent data from the British Bankers Association
indicating that households saved an even smaller share of
their income in the second quarter.
8Capita Symonds Survey, July 2010
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
www.axa-realestate.com
Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 8 -
United Kingdom(ctd.)
Exh ib it 7
Like-for-like Retail Sales growth year on year
-2
0
2
4
6
810
12
14
16
October
November
December
January
February
March
May
June
Source: BCG-KPMG
%
UK London
The most high profile retailer administration over Q2 2010
was Faith shoes (78 stores and 120 concessions).Debenhams purchased 115 of the concessions located in
their stores on a sale and leaseback arrangement, with the
CEO reporting that the price paid was not a fortune12
.
Competition for the top prime properties has remained
strong, and focused on London. According to CBRE, high
street rental values were stable over Q2 with Londons
rises balancing out the declines in the North East and
Wales, whilst prime shopping centres and retail warehouse
rental values fell by 0.5% and 1.4% respectively. In terms
of the big box retailers, B&Q are utilising market conditions
to increase their market share in urban areas. They have
just announced13
that they will be trialling a new smaller
format (of below 40,000 sq ft) in 60 locations across the UK
having populations over 40,000 where there is no existing
B&Q within a 20-minute drive time. In particular, they will be
targeting London and market towns, to compete with
smaller Homebase and Focus DIY.
London is still outpacing the rest of the UK, with retail sales
dwarfing the UK average (Exhibit 7). Retail sales in the
West End are on course for a record year and are expected
to exceed GBP6bn in 201014. Chanel signed a lease in Q2
2010 for 25 years on the prime pitch on Bond Street, to
open a 10,000 sq ft flagship store, at a record high rent (for
this sized unit) of more than GBP800 per sq ft/p.a. (zone A).
Apple also opened its largest global store (28,000 sq ft) in
Covent Garden in August. These examples illustrate the
continuing strength of London, especially at the luxury end,
catering for the increased demand of overseas shoppers.
Chinese shoppers, for example, are now the most prevalent
overseas shoppers for luxury goods in London15
, as they
are drawn by the favourable exchange rate and wide
selection of high-end luxury retailers.
12Financial Times, 1st July 201013Reuters, June 21st 201014
New West End Company, June 201015
FDKG survey, June 2010
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 9 -
United Kingdom(ctd.)Beyond London, regionally dominant shopping centres
continue to do well alongside easily accessible prime retail
parks for their once-a-month large non-food shop.
Hammersons management commented during the H1
2010 results meeting that its retail park gross rental values
had increased by 5.7% during H1 2010 on a like-for-like
basis, largely attributable to asset management initiatives.
They confirmed that rent reviews were being agreed in line
with ERVs, although short-term shopping centre rents were
still being agreed at 20-30% below the previous passing
rent. At the other end of the spectrum, secondary retail
locations that do not offer the full retail experience with a
wide selection of retailers nor offer the ease of accessibility
and parking, continue to suffer.
Colliers have estimated that the average retail vacancy
rate16
in the UK increased from 11.1% in October last year
to 11.4% in June (almost double the pre-recession levels).
This is largely attributable to the continually increasing
levels of voids in secondary and tertiary locations
whereas voids for prime locations are falling and are at
lower levels. Retailers are focusing on a narrower
selection of locations, looking at the best properties in the
strongest trading locations in the UK. This has, in turn,
exacerbated obsolescence of high streets in secondary and
tertiary locations. Consumers are now more likely to visit
larger regional shopping centres that have a wider
selection of retailers and then supplement this with local
convenience shopping. Medium-sized shopping centres in
suburban locations are at particular risk.
Average vacancy rates can also be misleading as
geographical polarisations continue across the UK. For
example, Cardiff is struggling to absorb the second phase
of the 1m sq ft St Davids scheme, and its vacancy rate hasdoubled to 17.1% over the last year.
Oxford Street, on the other hand, only has a void rate of
1%, with London vacancy recently estimated at 4%. In
terms of formats, Local Shopping, a REIT that specialises
in local convenience stores, reported a fall in the overall
16Colliers Midsummer Briefing presentation, June 2010. This
vacancy rate is a measure of the floorspace of vacant units as aproportion of total retail floorspace
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 1 0 -
United Kingdom(ctd.)
Exh ib it 8
Shopping Centres and Retail Park space under
construction
0
5
10
15
20
25
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: CBRE
m sq ft
Retail Parks
Out-of-Town SC
Town Centre SC
vacancy rate from 11.9% in March to 11.7% at the end of
July.
Development activity has remained limited, with no major
schemes completed in Q2 2010. 7.9m sq ft of retail space
was categorised as being under construction in June
(Exhibit 8) the lowest levels since 2002. Excluding
Westfield Stratford (1.7m sq ft due to be delivered in 2011),
completions will be staggered from 2013 onwards as the
majority of projects have been delayed or deferred, as
developers wait for the market to improve.
Encouragingly, Land Securities has recently announced
that they would re-start construction this year on the TrinitySquare scheme in Leeds, a 750,000 sq ft scheme located
in the city centre and now due to be delivered in 2013.
Land Securities lifted its traditional pre-let target before
starting from construction to 40% given the challenging
economic environment and, by the end of July, they had
43% of this scheme pre-let with a further 4% in solicitors
hands.
Industrial
Take-up of warehouse units sized above 50,000 sq ft was
8.8m sq ft in Q2 2010, an increase of 14% from the
previous quarter17
. This was above the 7.7m sq ft quarterly
average over the last two years, pointing to a mild recovery
in tenant demand. Good quality second-hand stock is also
in demand, with over half of this take-up completed on
second-hand stock during Q3 2010. However, this has
been more marked in London and the South East18
.
However, new occupier demand has been limited by the
uncertainty of the pace of the economic recovery. Julys
Purchasing Managers Index, the new export order index,
fell to 50.7 (above 50 indicating growth), its lowest level
since August last year. There are concerns that the
weakness of domestic demand in the eurozone combined
with the appreciation of sterling over the last two months
may be adversely impacting export orders19
.
17BNP Paribas Real Estate, June 2010
18CBRE UK Industrial Market Update, June 2010
19Capital Economics UK Data Response, August 5th 2010
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
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Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 1 1 -
United Kingdom(ctd.)
Exh ib it 9
UK industrial take-up
0
2
4
6
8
10
12
14
16
Midlands
London&
South
East
South
West
M27
Region
South
Wales
North
West
Yorkshire
&The
Humber
North
East
Scotland
m sq ft
Source: BNP Paribas Real Estate
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
New occupier demand for logistics
space has been limited.
Consolidation and business
rationalisation are driving demand
Exhib i t 10
Number of years of industiral supply at Q1 2010
0
2
4
6
8
10
12
NorthEast
Yorkshire& The
Humber
SouthWales
NorthWest
Scotland London &SouthEast
SouthWest
Midlands M27Region
Source: BNP Paribas Real Estate
Years
Net absorption of logistics space has remained limited as
the market continued to be driven by business
rationalisation.At the prime end of the market, demand is
mainly from occupiers wanting to benefit from the more
attractive lease terms available as well as with the objective
of consolidating supply chains to reduce property costs.
The majority of the second quarters demand was focused
on the London & South East markets (1.8m sq ft) and the
North West (1.6m sq ft). The latter was dominated by large
deals, with two-thirds of lettings being of units over 250,000
sq ft in size including the M&S distribution centre in Stoke-on-Trent, which was developed by ProLogis.
Virtually no speculative development is taking place, with
built-to-suit projects accounting for an increasing share of
lettings including the aforementioned M&S letting.
According to JLL, the proportion of built-to-suit in deals of
units of above 100,000 sq ft increased from 10% to 30% of
take-up during Q2 2010.
Availability, on the other hand, increased by 3% over Q2
2010 to over 140m sq ft. Second-hand space dominates
this availability, accounting for 70% of the vacant space.
This has been exacerbated by the volume of large deals
over 250,000 sq ft, especially in the Midlands and the North
West, which resulted in space returning to the market.
The
widening gap between prime and secondary was
underlined by ProLogis European Fund reporting 96%
occupancy in March (for modern stabilised developments in
the UK) compared to the 15% market vacancy in the UK.
Incentives remained stable, with CBRE reporting 12
months rent free being offered for every five years of a
lease. Rental value falls in Q2 2010 were marginally more
significant for average IPD rental values (-0.5%) than for
prime stock (-0.220
). In both cases, London and the South
East witnessed a stabilisation of rental values first.
20CBRE Q2 2010, UK Rents and Yields Index
8/9/2019 Reimv _20100813 - UK Spotlight - August 2010
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
www.axa-realestate.com
Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 1 2 -
United Kingdom(ctd.)
Exhib i t 11
Real estate investment activity
The IPD Monthly index reported a slowdown in capital
growth in Q2 2010 (1.9% over the quarter) compared to Q1
2010 (3.9%), emphasising that the UK recovery is slowing.
This was the lowest quarterly growth since the recovery in
property values started in summer last year (see Exhibit
11). Reflecting the role that capitalisation yields continue to
play in value changes, the slowdown is attributable to
yields stabilising, and this is most notable in the industrial
and the retail sectors, where capital growth averaged 1%
and 1.9% respectively over the second quarter (compared
to offices at 2.3%).
The retail ex-London segment was the first segment in the
IPD Monthly Index to report negative capital growth over
the month of June (-0.2%) its first monthly fall since
August 2009. This has been corroborated by broker reports
that yields of high street retail property in the regional
markets had increased by 25 basis points in July. Investors
are cautious about the occupier outlook given the
consumer squeeze ahead, especially in the northern
regions where public sector cuts are expected to be most
marked. Anecdotal evidence in this sector (and to a lesser
extent in the other sectors) of a sharp fall in the number of
bids per property has also started to feed through to market
pricing as buyers are not bidding as aggressively for assets
as they did at the turn of 2009/2010.
Food supermarket transactions have proved to be the
exception in the retail sector, with evidence of keen yields
of 4.0%-4.5% being reported on sale and leaseback deals
on 25 to 30 year leases. Length and strength of income is
driving demand for such transactions and location is not as
strong a differentiator as might be expected. This is
because of the increased appetite for bond-type long
leased income producing properties.
The performance of offices have also been polarised with
capital growth during Q2 2010 for Central London offices
being more than double the All Property average (at 4.2%).
However, offices beyond London are lagging with capital
appreciation of a meagre 1% over the quarter. Recent
broker reportsalready point to prime yields in the regional
All Property (% quarterly annualised)
-30
-20
-10
0
10
20
30
40
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Source: IPD UK Monthly Index
%
Rental value growth Capital va lue growth
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Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
www.axa-realestate.com
Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
- 1 3 -
United Kingdom(ctd.)
Exhib i t 12
Investment volumes UK
0
1
2
3
4
5
6
7
8
9
2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2
Source: DTZ
GBP bn
Office Retail Industrial Mixed Use Other/Unknown
Exhib i t 13
CBRE All Property capital values
90
95
100
105
110
115120
125
130
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Source: UK CBRE Monthly Index
Index of capital values 100= June 2009
Index = 100Low yield properties CBRE Month ly Index
High yield properties
office markets increasing by 25 basis points in June
alone
21
.
This increased caution has yet to impact on deals being
recorded, with an increase of 24% in UK transaction
volumes over Q2 2010 to GBP6.8bn (see Exhibit 12).
Quoted property vehicles were the most active purchaser
type, whilst investments by the public sector/government
fell by 47% quarter-on-quarter.
The largest deal this quarter was Avestus Capital
Partners (formerly Quinlan Private) selling the
Knightsbridge Estate (40 properties located between
Harrods and Harvey Nichols) for GBP600m at anestimated initial yield of 4% to a private Middle Eastern
investor. The second largest was the GBP209m
purchase of the Radial logistics portfolio by London &
Stamford and Anglesea Capital at an 8.75% initial yield.
Finally, the Chinese Estates Group is in exclusive
negotiations to acquire the landmark building Tower 42
for more than GBP300m at an estimated initial yield of
6.6%. London offices remain in high demand and this
deal will add to the GBP2bn transacted in Central London
offices in Q2 2010 alone.
Investors have become increasingly concerned about the
short-term outlook in the market, especially for poorer
secondary stock that may not have yet fully priced in the
risks in the occupational market. As can be seen in
Exhibit 13, the capital growth since August has
disproportionately at the lower yielding/more prime
segment of the market. The values of higher yielding
properties have been stable. This suggests that further
de-pricing has yet to occur at the secondary end of the
market.
21Business Briefing, Cushman & Wakefield, July 2010
8/9/2019 Reimv _20100813 - UK Spotlight - August 2010
14/14
Country SpotlightsQUARTER 3- 2010
AXA Real Estates European Quarterly Country Review
www.axa-realestate.com
Disclaimer: 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
- 1 4 -
Other publ icat ions
Periodic
At a Glance a quarterly overview of the European real estate
markets in the context of an analysis of the European economy
Looking Ahead our quarterly house forecasts, covering the
European economies and the property markets
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quarterly strategic recommendations and investment themes
Asian Eye and European Eye two publications of five to seven
short research articles on items of topical interest to the industry
Occasional notes
Market Edge dealing with particular market issues in greater depth
Market Mechanics dealing with technical issues of relevance to
the property industry
Contac t
AuthorMonika WardSenior Property AnalystTel: +44 20 7003 1361e-mail:[email protected]
Alan PattersonHead of Research and StrategyTel: +44 20 7003 1372e-mail:
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Nathalie AndroussevitchTel: +33 1 44 45 96 41e-mail:[email protected]