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News Release

London

Direct Investment in UK Commercial Real Estate to Stand at c. £23bn in 2009

Investment volumes comparable to 2001 levels, according to Jones Lang LaSalle


London, 9th December 2009 – Jones Lang LaSalle expects total direct investment in commercial real estate in the UK to total around £22bn - £23bn by the end of 2009, which is comparable with turnover in 2001. Compared with 2008’s total of £21bn, this represents a 10% rise.

Julian Stocks, Head of Capital Markets England, Jones Lang LaSalle said: “2009 has been a year of two halves. The first six months of the year were characterised by low investment volumes, falling prices and worsening occupational markets. However, over the second half of the year investor sentiment dramatically changed and a confidence formed over the summer resulting in demand for stock outstripping supply. This wave of optimism has resulted in higher prices and rising activity.”

The current weight of money and the supply and demand imbalance has resulted in sharp compression of prime yields across the three major sectors. Prime yields in the West End and the City office market have moved in by 50 basis points to 5.00% and 6.25% respectively over the last six months.
Julian Stocks concluded: “"Next year should be a more balanced market and we expect more stock to be released both by the banks and other vendors as the market continues to improve.  Retail funds, REITs and private investors will all remain active and we expect turnover to be close to £30 billion."

Looking ahead Jones Lang LaSalle expects the following:

• Investors will remain confident that UK commercial property, particularly at the prime end, offers an income return that compares well against other assets and very low interest rates.  The strong inflows which retail funds are currently attracting suggests that investor demand will remain strong in the short term.  Furthermore, the major REITs have recapitalised and are starting to become active. Overseas investors continue to view the UK market as a safe haven and will remain significant investors in our view.

• As investors have been frustrated by the difficulty in sourcing prime product, they have already started to look at other opportunities which do not fulfil the criteria they were originally seeking. This includes taking a view on income risk through shorter leases or considering markets and towns traditionally regarded as more secondary. This is broadening the definition of prime although lenders and investors remain nervous about taking on exposure to truly secondary assets at the present time, given the weak economic environment.

• Although supply of good quality product remains limited, we expect this to improve in 2010.  Prices have recovered enough for banks and other opportunistic sellers to now consider taking advantage of a rising market. Therefore, this should re-balance the market and may help reduce the pressure on yields next year.

• One issue the market will have to contend with going forward is the greater degree of volatility in investment flows. The rapid withdrawal and return of retail investor flows highlights the environment in which the asset class now has to operate. Whilst the rental payments are expected to deliver solid stable income, the pricing of these payments will be affected, as never before, by the flow of funds to and from the sector.  This may well result in the supply-demand imbalances we have witnessed in recent months becoming a more regular feature of the market. In this event, stock selection and liquidity will be more crucial than ever.