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Prospects for Property 2013 - Strutt & Parker

WelcomeAndy MartinStrutt & Parker


The wisdom of the crowdDavid LeppardStrutt & Parker


World economy


Q3-2012Q2-2012Q1-2012The US is the best performer amongstadvanced economies1061041021009896949290GDP Growth (Index, Q1 2007 = 100)Q4-2011Q3-2011Q2-2011Q1-2011Q4-2010Q3-2010Q2-2010Q1-2010Q4-2009Q3-2009Q2-2009Q1-2009Q4-2008Q3-2008Q2-2008Q1-2008Q4-2007Q3-2007Q2-2007Q1-2007United States United Kingdom Euro area (17 countries) JapanSource: OECD, Volterra


Prospects for the World economy to improve in 201310%8%201220132014GDP Growth, annual %6%4%2%0%-2%China India US Japan Brazil UK Euro areaSource: OECD forecasts


Eurozone


Jan-13Oct-12Jul-12Apr-12ECB intervention has calmed sovereign bondmarkets for now1,000800600400200010 year government bond spread v German bundJan-12Oct-11Jul-11Apr-11Jan-11Oct-10Jul-10Apr-10Jan-10Oct-09Jul-09Apr-09Jan-09Oct-08Jul-08Apr-08Jan-08Ireland Italy Spain France United KingdomSource: Eurostat, Financial Times


SpainItalyJul-12Apr-12Jan-12Oct-11Jul-11Spanish and Italian banks now rely heavilyon ECB funding450400350300250200£ billions150100500Apr-11Jan-11Oct-10Jul-10Apr-10Jan-10Oct-09Jul-09Apr-09Jan-09Oct-08Jul-08Apr-08Jan-08Source: Eurostat


Unemployment in the EU has hit record levels30Unemployment rate %, November 2012252015105026.626.016.314.613.210.911.19.410.57.37.85.65.44.02.8 2.5Spain Greece* Portugal Ireland Italy France United GermanyKingdomUnemployment rate Long-term rateSource: Eurostat* Data for September 2012


Government debt will rise in most EU countriesexcept Germany during 201320018020122013 (f)Gross government debt % GDP160140120100806040200Greece Italy Portugal Ireland US Spain France UK GermanySource: OECD


EU GDP forecast 2013, 20143%2%1%201220132014GDP Growth, annual %0%‐1%‐2%‐3%‐4%‐5%‐6%‐7%Source: OECD


UK Economy


Oct-12Jul-12Apr-12Rising employment points to an improving economy29292928282828UK employment, millions2827Jan-12Oct-11Jul-11Apr-11Jan-11Oct-10Jul-10Apr-10Jan-10Oct-09Jul-09Apr-09Jan-09Oct-08Jul-08Apr-08Jan-08Oct-07Jul-07Apr-07Jan-07Source: ONS


Nov-12Pound down 4.6% against theeuro in 2012.Sterling/EuroSterling/DollarPound down 2.6% against thedollar in 2012.Sep-12Jul-12May-12Mar-12Jan-12Nov-11Sep-11Jul-11May-11Sterling weakened against the dollar,euro during 20121.00.90.80.7GBP per $,€0.60.5Mar-11Jan-11Nov-10Sep-10Jul-10May-10Mar-10Jan-10Nov-09Sep-09Jul-09May-09Mar-09Jan-09Source: Bank of England


Sep-16May-16Jan-16Sep-15May-15Jan-15Inflation is forecast to continue to fall in 2013654321CPI annual inflation rate %0Sep-14May-14Jan-14Sep-13May-13Jan-13Sep-12May-12Jan-12Sep-11May-11Jan-11Sep-10May-10Jan-10Source: ONS, HM Treasury


Weakness in investment and exports drove thelatest recession4.03.02.0Contribution to GDP %1.00.0‐1.0‐2.0‐3.0‐4.0ConsumptionGovernmentInvestmentNet ExportsGDP growth %‐5.02007 2008 2009 2010 2011 2012Source: ONS


2013 will see a return to growth5%4%3.6%3%UK GDP Growth %2%1%0%-1%-1.0%1.8%0.9%0.0%1.1%1.7%2.0%2.1%-2%-3%-4%-5%-4.0%2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Source: ONS, HM Treasury


The corporate sector has been saving ratherthan borrowing25 00020 00015 00010 0005 0000- 5 000- 10 000- 15 000- 20 000Net lending/ borrowing by sector * (£ millions)2012 Q32012 Q12011 Q32011 Q12010 Q32010 Q12009 Q32009 Q12008 Q32008 Q12007 Q32007 Q12006 Q32006 Q12005 Q32005 Q12004 Q32004 Q12003 Q32003 Q12002 Q32002 Q12001 Q32001 Q12000 Q32000 Q1UK non-financial corporations UK households* 4 quarter moving averageSource: Bank of England


Government borrowing projections1,6001,4001,200OBR Forecast£1,186bn£1,270bn£1,362bn£1,442bn£1,498bn1,000£1,025bn£ billions8006004002000£121bn £81bn £99bn £88bn £73bn£49bn2011-12 2012-13 2013-14 2014-15 2015-16 2016-17Public sector net borrowing Public sector net debtSource: Office for Budget Responsibility


Property outlookAndy MartinStrutt & ParkerMr Blue Skies?(apologies to ELO)


Britain’s doing betterThe Global Competitiveness Index 2012-2013 rankingsGCI 2012-2013 GCI 2011-2012Country/Economy Rank Score Rank ChangeSwitzerland 1 5.72 1 0Singapore 2 5.67 2 0Finland 3 5.55 4 1Sweden 4 5.53 3 -1Netherlands 5 5.50 7 2Germany 6 5.48 6 0United States 7 5.47 5 -2United Kingdom 8 5.45 10 2Hong Kong SAR 9 5.41 11 2Japan 10 5.40 9 -1Qatar 11 5.38 14 3Denmark 12 5.29 8 -4Taiwan, China 13 5.28 13 0Canada 14 5.27 12 -2Norway 15 5.27 16 1Source: World Economic Forum


World Economic Forum - Global CompetitivenessInstitutionsInnovationInfrastructureBusinesssophisticationMacroeconomicenvironmentMarket sizeHealth andprimaryeducationTechnologicalreadinessHealth educationand trainingFinancial marketdevelopmentLabour market efficiencyGoods marketefficiencyUnited KingdomInnovation-driven economiesSource: World Economic Forum


A year in performanceTotal Returns2010 2011 2012IPD monthly 14.5% 8.1% 2.4%Real Estate equities 7.0% -8.8% 30.6%All shares 14.5% -3.5% 12.3%Gilts 5-15yrs 9.1% 15.6% 4.2%Source: IPD, Financial Times


IPD against quoted indicesTotal ReturnsIndex 2012IPD monthly 2.4%Real Estate equities 30.6%Global Real Estate 26.7%North American Real Estate 16.3%Asia Real Estate 43.3%AREF All Property Fund Index 1.1%Source: IPD,FTSE EPRA/NAREIT,AREF,Strutt & Parker


A year in performanceYieldsYield at Start of yearYield at end of yearIPD monthly EY 7.2% 7.4%Real Estate equities 4.5% 3.8%All shares 3.5% 3.6%Gilts 15yrs 2.5% 2.3%Source: IPD, Heriot-Watt University, Financial Times


Value recovery?140Property120EquitiesGilts100Real Estate EquitiesIndex Dec 2006=10080604020Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012Source: IPD, Strutt & Parker


Value recovery?120110Shopping CentresCity OfficesWest End OfficesIndex Dec 2006=100100908070PAS Rest UK OfficesIndustrial605040Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012Source:IPD, Strutt & Parker


Transactions by investor70,00060,00050,00040,00030,00020,000OthersOccupiersPrivate IndividualsOverseas InvestorsPrivate Prop CoQuoted Prop CoUK Institutions10,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: PropertyData,Strutt & Parker


The rise of the Overseas investorUK excl. LondonLondonAll InvestorsOverseas40,00035,00030,00030,00025,00025,00020,00020,00015,00015,00010,00010,0005,0005,00000Source: PropertyData,Strutt & Parker


Overseas Investor by Region25,00020,00015,00010,000OthersFar EasternMiddle EasternUSOther EuropeanIrishGerman5,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: PropertyData,Strutt & Parker


Traditional v New investors25,00020,00015,00010,000UK InstitutionsOverseas Investors5,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: PropertyData,Strutt & Parker


Some thoughts• What qualifies as a property investment?• Are investors changing the way they look at property?• Where does real estate fit in long term?• What will drive market in future?• Where do we stand with the regions, off prime and secondary property?• Do we need to re-categorise real estate as an investment class or just work harderat promoting it?


Transactions by type60,00050,00040,00030,00020,000MixedLeisureIndustrialRet WareShop CentreUnit ShopOffice10,00002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: PropertyData, Strutt & Parker


Population EstimatesSource:ONS


The demographic effect 1Source: Federal Reserve Bank of San Francisco (Liu & Speigel)


The demographic effect 2Source: Federal Reserve Bank of San Francisco (Liu & Speigel)


Attractiveness of different sources of money raising806040200-202007Q32007Q42008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q22011Q32011Q42012Q12012Q22012Q3Bank borrowingBond issuanceEquity issuance-40-60-80Source: Deloittes, Bank of England


Yields realistically attractive?10.09.08.07.06.0IPD InitialIPD EquivalentReal Estate EquitiesEquities All ShareGilts 15 yrs%5.04.03.02.01.00.0Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012Source: IPD, Strutt & Parker


PropertyEquitiesDec 2012Performance – total returns120010008006004002000Dec 1986Dec 1988Dec 1990Dec 1992Dec 1994Dec 1996Dec 1998Index Dec 1986=100Dec 2000Dec 2002Dec 2004Dec 2006Dec 2008Dec 2010Source: IPD monthly, Strutt & ParkerGiltsRPI


IPD Universe, proportion of total contractedrent by remaining lease length - Q3 20127%9%16%41%


Loan to value ratios of outstanding debtEnd 2011Mid 20129%11%13%less than 50%51-70%9%8%19%14%71-85%86-100%13%16%37%101-120%121%+16%35%Source: De Montfort University, Strutt & Parker


The cost of borrowing- lending margins430410390Prime Office370350Prime RetailBasis points330310290270250230210190Prime IndustrialSecondary OfficeSecondary RetailSecondary IndustrialResidential Investment1701501301109019992000200120022003200420052006200720082009201020112012 mid-yearSource: De Montfort University, Strutt & Parker


Non-investment gradeInvestment gradeAverage estimated spreads on syndicated loans6005004003002001000Mar 2003Jul 2003Nov 2003Mar 2004Jul 2004Nov 2004Mar 2005Jul 2005Nov 2005Mar 2006Jul 2006Nov 2006Mar 2007Jul 2007Nov 2007Mar 2008Jul 2008Nov 2008Mar 2009Jul 2009Nov 2009Mar 2010Jul 2010Nov 2010Mar 2011Jul 2011Nov 2011Mar 2012Jul 2012Nov 2012


More equity required!Loan-to-value ratio84%82%80%78%76%74%72%70%68%66%64%62%60%58%56%Prime OfficePrime RetailPrime IndustrialSecondary RetailSecondary OfficeSecondary IndustrialResidentialInvestment1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012midyearSource: De Montfort University, Strutt & Parker


INREV - Planned terminationsSource: INREV, Strutt & Parker


Long term rental and capital movements350Capital Growth300Rental GrowthIndex 1980=1002502001501001980 1984 1988 1992 1996 2000 2004 2008 2012 2016Source: Strutt & Parker IPD model


UK non discretionary spending(% of post-tax income)727068666462605856541988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Source: Oriel Securities


2010-112009-10What movers did3.02.52.01.51.00.50.01999-002000-012001-022002-032003-042004-052005-062006-072007-08millions of households2008-09owner occupiers social renters private renters millionsSource: English Housing Survey


Household projections by type (‘000’s)30,00025,00020,00015,00010,000Female One personMale one personOther multi personLone parentCouple5,00002006 2016 2026Source: University of Cambridge


So in conclusion• Markets survived everything thrown at them last year• We still need confidence with central policies here and abroad• Question mark is not over volumes but with who is buying and where• No recovery in prospect in less well followed “local” markets• Evidence that contra cyclical and value focused investors looking wider than prime• Demographics will hold keys to new property plays• Do offices become a new opportunity with reversions fixed against residential developmentvalues?• Is it time we spent our efforts repositioning real estate again?


The sectors - IntroductionAndy MartinStrutt & Parker


ResidentialPolicy and economicsPaul OrmerodVolterra


Despite the fall in mortgage rates, access to creditremains tight…Floating mortgage rateFixed mortgage rateOverall mortgage rateBank Rate76543Interest rate %210Sep 2012May 2012Jan 2012Sep 2011May 2011Jan 2011Sep 2010May 2010Jan 2010Sep 2009May 2009Jan 2009Sep 2008May 2008Jan 2008Sep 2007May 2007Jan 2007Sep 2006May 2006Jan 2006Sep 2005May 2005Jan 2005Source: Bank of England


OtherRemortgagingHouse purchaseOct 2012Jul 2012Apr 2012Jan 2012Oct 2011Jul 2011… which is why mortgage lending remainsconstricted25201510£ billions50Apr 2011Jan 2011Oct 2010Jul 2010Apr 2010Jan 2010Oct 2009Jul 2009Apr 2009Jan 2009Oct 2008Jul 2008Apr 2008Jan 2008Source: Bank of England


UK residential property is becoming more affordablefor the highest earners0.60.5Annual earnings to house price ratio0.40.30.20.10.0average annual earnings/ house pricetop 10% earnings/ house priceSource: Nationwide, ONS


Funding for lending scheme having some impacton mortgages but not business lending2.5%2.0%1.5%1.0%0.5%0.0%-0.5%-1.0%-1.5%-2.0%BarclaysStock of loans as of June2012 (£m)% change in lending relativeto stock of loans% change in lending relative to base stock of loansNationwide BuildingSocietyBarclaysRBS Group Lloyds Banking Group SantanderNationwideBuildingSocietyRBS GroupLloydsBankingGroupSantander188,453 152,155 214,816 443,255 189,3392.0% 1.2% -0.3% -0.6% -1.8%Source: Bank of England


London housing market still outperforming regions1.0%LONDON0.8%SOUTHWESTSOUTHEASTWESTMIDS EAST MIDS NORTHNORTHWESTEASTANGLIAYORKS &HSIDE WALES SCOTLAND0.5%0.2%0.0%Annual Price Growth %-0.5%-1.0%-1.5%-2.0%-0.2%-0.8%-0.8%-1.2%-1.6%-2.0%-2.5%-3.0%-2.4%-2.7%-3.5%-3.3%Source: Nationwide (Q4 2012)


ResidentialReal EstateStephanie McMahonStrutt & Parker


Key points• London prices increasing whilst rest of UK flat-lines• Transaction volumes half across Rest of UK and have fallen in PCL• For 2013 barriers been reduced although risks remain• Global wealth is the key driver for new homes and is not going away


London House Price Growth by Borough14Annual Change in House Prices (January 2013)12108• London prices increased 5% pa• Rest of UK 0.9%• 2013 forecast similar scenario with upside• PCL will outperform6420Kensington &ChelseaIslingtonHammersmith &FulhamWandsworth Newham Tower Hamlets GreenwichSource: Land Registry


Who is buying?8%2% 1%2%7%18%3%AfricaAsiaEuropeRussiaUnited Kingdom25%59%Middle EastNorth AmericaPacific Islands Australia14%61%Source: Strutt & Parker


Construction in London of Private New Homes18000160001400012000Private Sector Starts in LondonLondon new home construction isincreasing but is still not meetingdemand (18,000 pa needed[government statistic]).10000800060004000200002001 ‐ 2006averageSource: Molior2007 2008 2009 2010 2011 2012


New Private Residential Sales in London5000450040003500London new home sales have beensteadily increasing since late 2008.300025002000150010005000Source: Molior


Map of Central London new homes supplyEnfieldG. LondonHarrow111,500BrentHillingdonEaling500 units plusPlanning permissions,HounslowConstruction or completeand unsoldRichmondUpon-ThamesBarnetHammersmith& FulhamCamdenCity ofWestminsterKensington& ChelseaWandsworthHaringeyIslingtonCity ofLONDONLambethWalthamForestWestminsterHackneySouthwark3,400TowerHamletsLewishamNewhamAll unitsConstruction orcomplete andunsoldRedbridgeGreenwichBarking &DagenhamBexleyHavering12,000New home startsand sales perannumMertonKingstonUpon-ThamesBromleySuttonCroydon


Total global household wealth fell by5.2% between mid11 and mid12.


-13%1.3%-18%2.9%-8%-5%-2.5%


But millionaire households grewby 175,000


1.8%8.7%2.9%0.8%6.6%8.9%


Strong growth globally until 2050,real GDP (at PPP exchange rates)4.6% until 2030, 3.8% after.


Global corruption


Key points• London prices increasing whilst rest of UK flat-lines• Transaction volumes half across Rest of UK and have fallen in PCL in latter 2012• For 2013 barriers been reduced although future questions remain• Global wealth is the key driver for new homes and is not going away


40 years of superior growth, China’s realper capita GDP in 2050 will barely be50% of that of the US.


RetailPolicy and economicsPaul OrmerodVolterra


Christmas winners and losersOnline FashionDepartmentType of retailerASOS 34%FashionPrimark 25%Ted Baker 20.9%Next 3.9%JD Sports 3.2%M&S 1.8%Mothercare -5.9%HouseholdHalfords 1.0%16 weeks toJanuary 516 weeks toJanuary 58 weeks toJanuary 554 days toDecember 247 weeks toJanuary 513 weeks toDecember 2913 weeks toJanuary 1215 weeks toJanuary 11John Lewis 13%House ofFraser6.3%Debenhams 5%Argos 2.7%SupermarketsWaitrose 4.3%Tesco 1.8%Sainsburys 0.9%Morrisons -2.5%5 weeks toDecember 316 weeks toJanuary 55 weeks toJanuary 518 weeks toJanuary 56 weeks toDecember 246 weeks toJanuary 514 weeks toJanuary 56 weeks toDecember 30Retailer% changein like forlike salesPeriod% change in like for like sales> 106 to 103 to 50 to 2< 0Homebase -3.9%18 weeks toJanuary 5Source: Bank of England, company press releases


Online commerce continues to outperform bricksand mortar3530252015105Retail sales, annual growth %0Dec-12Nov-12Oct-12Sep-12Aug-12Jul-12Jun-12May-12Apr-12Mar-12Feb-12Jan-12Dec-11Nov-11Oct-11Sep-11Aug-11Jul-11Jun-11May-11Apr-11Mar-11Feb-11Jan-11Dec-10Nov-10Oct-10Sep-10Aug-10Jul-10Jun-10May-10Apr-10Mar-10Feb-10Internet sales All retailSource: ONS


Fashion retailing has shown the largest onlinesales growth70%60%57%50%2 year growth, %40%30%20%10%26%23%40%0%-10%All retailing excludingautomotive fuelPredominantly foodstoresNon-specialisedstoresTextile, clothing andfootwear stores-3%Household goodsstoresSource: ONS * Online retail sales growth since November 2010


RetailReal EstateStephanie McMahonStrutt & Parker


Key points• Demographics and consumer spend are changing the emphasis of those who shop• Technology is both driving the online market and virtual market• Vacancy headlines mask the reality of tight supply on our high streets• Core and Core plus are ones to watch in 2013


Retail overview 2012• Administrations removed several “zombie” retailers from the market• Retailers focus on key centres• Demand from best in class high street, aspirational, convenience, value• High street accommodating restaurant, coffee and leisure• Circa £7.0 billion invested across sector, decrease of 32% on 2011• Flight to “100% absolute prime” assets / secondary values dropped• Sovereign Wealth, REITs and Institutions dominated prime / PE funds secondary• Return of funding market - shopping centre developments in Hereford & Bradford


Demographics and shoppingSource: Verdict


Technology• PRODUCTS» Virtual Products» 3D Printing• MOBILITY» LTE (Long Term Evolution)» Digital Wallets» Social Websites and Apps• SPACE» Digitally Enhanced Stores» Showrooming Space• DELIVERY» Store / Click & Collect» Distribution / Lockers


High street vacancyMore than one in 10 high street shops left emptyThe Guardian, November 2012U.K. High-Street Woes DeepenWSJ, November 2012High street bloodbathThe Mirror, January 2013


Town Centre Vacancy Rates (% of Units)14%12%10%8%6%4%2%0%Major Towns / CitiesMedium TownsAll Towns Average (71 Centres)PrimeNon Prime19921993199419951996199719981999200020012002200320042005200620072008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q3Source: Property Market Analysis


Lease Event: What happened at lease end?


Shopping Centre outlook• 2012 volumes to £2.7bn, a fall of 27%, 2013 will be up slightly• Internet to continue to impact on traditional retailing• Prime assets will continue to dominate investor activity• Secondary values could stabilise during the second half of 2013• National multiples focused on dominant schemes within their catchment• Schemes with a clearly defined identity to the consumer to outperform• Towns and schemes that provide a quality leisure experience will continue to thrive


Shopping Centre Investment- The Risk CurveRISK PROFILEYIELDRENTAL GROWTH PROSPECTS


High Street outlook• 2012 volumes to £1.3bn, a 43% fall, 2013 will be similar• Institutions seeking £10m+ lot sizes / prime / prime geography• Private investors seeking sub £5m but remain cautious and very selective (outside ofLondon)• Internet shopping result in changed store portfolios – less and bigger• Pricing for prime assets stable in 2013 with widening definition of secondary andassociated outward yield shift• Selective quality opportunities will continue to become available in 2013• Retailers remain focused on the best pitch• Over 2011/12 parts of West End bucked the trend with an increase in demand andrental growth• The potential for growth in rents ‘off’ Regent Street, Bond Street and Piccadilly hasbecome very attractive for landlords and investors alike


High Street Investment- The Risk Curve 2012 DealsRISK PROFILEYIELDRENTAL GROWTH PROSPECTS


Out of Town & Food Store outlook• 2012 volumes to £1.42bn, a 32% fall, 2013 will be similar• Opportunities for Open A1 secondary schemes to re-base rent and re-position• Move to opportunity fund yield criteria (i.e. softening of yields) for leveraged buyers• Discount operators expanding aggressively, plus traditional bulky goodsFood Store:• 2012 volumes to £1.58bn, an 18% fall• Prime up and built yields static in 2012 and funding yields have plateaued• Prime yields on 25yr lease circa 4.50% NIY and remain stable during 2013• As such annuity and long income funds driving market• Stock will be derived from sale and leasebacks and development funding• Occupational consolidation post expansion, with tenants resisting paying premiumrents and continuing to move away from large format stores


Out of Town Investment- The Risk Curve 2012 DealsRISK PROFILEYIELDRENTAL GROWTH PROSPECTS


Retail – Prospects 2013Dec 11 Dec 12 Dec 13Shopping CentresPrime 5.50% 5.25% 5.00%Dominant Centres 6.25% - 6.75% 6.50% - 7.50% 6.50% - 7.25%Secondary 7.75% + 8.50% + 9.00%+High StreetWest End 3.00% 2.75% 2.75%Primary 4.65% 4.75% 4.75%Secondary 7.00% + 7.50% + 7.75% +Out of TownOpen A1 Parks Prime 5.00% 5.25% 5.25%Secondary 6.25% + 6.50% + 6.75% +Bulky Goods Parks Prime 6.00% 6.25% 6.25%Secondary 7.00% 7.25% + 7.50% +FoodStorePrime (25 year) 4.50% 4.50% 4.50%


Logistics and IndustrialPolicy and economicsPaul OrmerodVolterra


2012 Q32012 Q22012 Q12011 Q42011 Q32011 Q22011 Q12010 Q4The manufacturing rebound has stumbled12011511010510095902010 Q32010 Q22010 Q12009 Q42009 Q32009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q32007 Q22007 Q1manufacturing output GDPSource: ONS


Manufacturing jobs4,500,0004,000,000Workforce Jobs - Manufacturing3,500,0003,000,0002,500,0002,000,000Source: ONS


15401520Total employment (thousands)1500148014601440142014001380Jul-12May-12Internet sales vs. logistics employment10%9%8%7%6%5%4%3%% of total retail sales2%1%0%Mar-12Jan-12Nov-11Sep-11Jul-11May-11Mar-11Jan-11Nov-10Sep-10Jul-10May-10Mar-10Jan-10Value of internet sales Transport & storage employmentSource: ONS


Logistics and IndustrialReal EstateStephanie McMahonStrutt & Parker


Key points• Retail goods increasingly distributed direct to consumers from distributionwarehouses• Speculative development: not so risqué?• Rail freight to play a larger role in logistics


Online retail to drive near-urban logistics growth• Already discussed – online retail continues to grow market share• 24hr delivery key service requirement• How is this achieved?• Smaller, edge of city, sites to supplement national hub (Milton Keynes)?


South East - Major retailer / third party logisticsrequirements


DevelopmentDistribution» Third party logistics contracts don’t tally with long leases on design and build» Shortage of suitable turnkey sites around London» Risk capital needed but beware of building assets that are too bespokeMulti-Let» Development funding available» Reduced risk of income diversification


Multi-let estates– room for speculation in Greater London?


Multi-Let (Tottenham)


Rail freight to play a bigger role• Future environmental legislation to push cost balance in favour of rail on more journeys• Intermodal port facilities will assist shift to rail• Gov’t forecasts UK rail freight to grow to 179m tonnes by 2030• Lack of large-scale inland rail freight interchanges, especially in the South East


Key points• Online retail shifting space requirements within property market• Near-urban logistics will grow• Argument for speculative development of large distribution space• Scope for multi-let development within M25, and perhaps further afield• Structural issues, such as the growing use of rail as a freight transport mode…


Key market informationDec 11 Dec 12 Dec 13Distribution Warehouses*5 Years 8.00 8.00 7.7510 Years 7.25 7.25 7.2515 Years 6.50 6.50 6.5020 Years 6.00 6.00 5.7525 Years 5.75 5.75 5.50Multi-let EstatesGreater London 6.00 5.75 5.75South East 6.75 6.50 6.50Rest of UK 7.50 7.50 7.50* Assuming an institutional lot size and lease to a blue chip tenant with 5 yearly rent reviews not subject to minimum uplifts or other rental gearing.


OfficesPolicy and economicsPaul OrmerodVolterra


FBS employment above 2008 levels in The City andWestminster300,000250,000FBS employment200,000150,000100,00050,00002008 2009 2010 2011 2012Financial servicesProfessional ServicesSource: ONS Business Register and Employment Survey,Experian* Area includes Westminster, City of London and Tower Hamlets.2012 value based on FBS employment growth forecast from Experian.


London and New York the leading global financialcentres but Hong Kong and Singapore remain closecompetitorsCityGlobalFinancialCentres Index2012.5 RankGlobalFinancialCentres Index2012 RankGlobalFinancialCentres Index2011 RankGlobalFinancialCentres Index2010 RankGlobalFinancialCentres Index2009 RankLondon 1 1 1 1 1New York 2 2 2 2 2Hong Kong 3 3 3 3 3Singapore 4 4 4 4 4Seoul 5 6 9 11 16Tokyo 6 7 5 6 5Boston 7 11 11 12 12Zurich 8 5 6 8 8Geneva 9 9 14 13 9Frankfurt 10 13 13 16 14Paris 23 29 22 24 20Source: Z/Yen Group


OfficesReal EstateStephanie McMahonStrutt & Parker


Key points• Occupier confidence is key to long term demand• Vacancy rates polarised across the markets• Prime will attract investment activity, interest in secondary to increase• Residential conversion: risk or opportunity?


City 1994 - 2012Supply / Incentives / Take Up / Rental Values1470121024632246050Million sq ft.866403042021000Take Up Supply Prime RentRent free in monthsSource: Strutt & Parker


City Investment outlook• 2012 increased by 32% to £8.9bn, we forecast similar levels for 2013• Demand» Overseas investors (particularly sovereign wealth and institutional funds) for Core» Strong preference for larger ‘trophy assets’ with long, secure income» UK institutions / private investors active for lot sizes sub £50 million and ‘addvalue’ opps» UK institutions seeking long income• Potential yield compression given weight of funds / limited supply of quality assets• Infrastructure projects impacting from 2018, eg Moorgate


West End 1986 - 2013Supply / Vacancy Rate / Take Up / Rental ValuesTotal Availability 4.20 million sq ftSq Ft12,000,000£140.0010,000,00014.2%% Vacancy Rate£120.008,000,0008.95%£100.00Rent£80.006,000,0004,000,0005.42%£60.00£40.002,000,000£20.000£0.00Year EndedTake Up (Sq Ft) Supply Headline RentMayfair4.1%St James’s2.1%Soho2.9%Victoria3.6%Nox/Noho2.6%Covent G’den4%Source: Strutt & Parker


West End Investment outlook• 2012 core West End increased 31% to £5.9bn, prime rack rented yields c. 4.00%• Demand» Overseas investors for Core» UK Institutions and Prop Co’s seeking non-core West End with assetmanagement opps• Pricing for prime and secondary product may witness downward yield pressuredependant on levels of new stock• Residential influencing with change of use


South East 2003 - 2012Supply / Take Up / Vacancy6,000,0004,000,000Sq Ft2,000,00010 yraverage5 yraverageTake-up3.2m sqftOver 60% OOTDemand210 enquiries / 4.8m sqftMajority sub 20,000 sqft,9 over 100,000 sqftActive sectors:• Oil• Comp/electronics• Services02003 2004 2005 2006 2007 2008 2009 2010 2011 2012Qtr1 Qtr2 Qtr3 Qtr4Reading16%Bracknell24%Maidenhead19%Windsor6%Egham/Staines11%H’smith3.5%Source: Strutt & Parker


Key South East Office Investment Activity1 Chiswick, W4£39psf, 15 yrs, 6.3%2 Stockley Park£26psf, 15 yrs, 6.35%3 Weybridge£24psf, 7.5 yrs, 7.5%4 Watford£20psf, 5 yrs, 9%5 Maidenhead£28psf, 9 yrs, 7.9%6 Bracknell£18.50psf, 5 yrs, 17%7 Redhill£21psf, 4.5 yrs, 10.2%8 Reading£29psf, 3 yrs, 15%


M&A activity: market share100%YearValue (£m)90%2007 420,0002008 270,00080%70%60%8%3%12%8%13%8%9%2009 256,0002010 206,0002011 230,0002012 240,00050%40%14%8%10%9%10%Industrials & ChemicalsTechnology30%18%14%11%Business Services20%Consumer10%20%26% 26%Financial ServicesEnergy, Mining & Utilities0%2010 2011 2012Source: Merger Market, UK M&A Roundup, Experian


Residential vs Office pricingCapital Values(per sq ft)Dec 2011 Dec 2012 Dec 2013Prime West End Office £1,900 - £2,000 £2,000 - £2,100 £2,100 – £2,200Prime West EndResidential£3,250 - £3,750 £3,750 - £4,000 £3,850 - £4,150Prime City Office £800 - £900 £850 - £950 £1,000 - £1,100Prime City Residential * £1,400 £1,500 £1,600Prime S. East Office -£400 - £450£400 - £500Secondary S. East Office £75 - £125 £50 - £100 £30 - £75Prime S. EastResidential- - £250 - £450* Estimates as of January 2013Source: Strutt & Parker


Westminster case study15002012 Westminster Planning Permissions130019110012Number of Intended Units90070050092648300100‐100Source: Molior23Hotel Land Office Parking Retail/Leisure Residential Mixed Use21Original Property Use2012 Permission Granted Residential Only 2012 Permission Granted Mixed Use No. of Physical1816


Summary dataDec 2011 Dec 2012 Dec 2013LondonPrime West End Office 4.00% 4.00% 4.00%Prime City Office 5.00% 5.00% 4.75%Secondary City Office 6.50%+ 7.00%+ 7.00%+South East 6.25% 6.25% 6.25%Source: Strutt & Parker


ForecastsPaul OrmerodVolterra


Total return since 199025201510Annual total return %50-5-10Forecast 2012 - 2017-15-20-25Retail Offices Industrial All property long-run average (1990 - 2012)Source: IPD, Volterra


Forecasts - Retail109.2%87.7%6.9%8.2% 8.3%64.7%Annual growth %423.5%02011 2012 2013 2014 2015 2016 2017-2-4Income return Capital growth Total returnSource: IPD, Volterra


Forecasts - Offices1087.0%6.9%8.2%7.4%7.8%64.5%Annual growth %422.4%02011 2012 2013 2014 2015 2016 2017-2-4Income return Capital growth Total returnSource: IPD, Volterra


Forecasts - Industrial1210.3% 10.1%1087.2%7.9%8.5%Annual growth %646.0%6.4%20-22011 2012 2013 2014 2015 2016 2017Income return Capital growth Total returnSource: IPD, Volterra


Forecasts - Rental value growth5%4.5%4%3.8%Annual growth %3%2%1%3.1%1.3%1.2%1.7%1.1%2.4%2.1%3.2%3.1%0%-1%-0.4% -0.3%-0.9%-0.2%-2%2011 2012 2013 2014 2015retail offices industrialSource: IPD, Volterra


ResultsDavid LeppardStrutt & Parker


Concluding thoughtsAndy MartinStrutt & Parker


Prospects forProperty 2013

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