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News Release

London

The Auction Room Nurtures Green Shoots of Recovery for Retail Assets

Jones Lang LaSalle and IPD Q1 2009 Auction Results Analysis System Report (ARAS)


London, 6th May 2009 – The auction market may be seeing the bottom of the pricing cycle for prime retail property while there is a continuing weakness for secondary assets according to Jones Lang LaSalle and IPD’s report Auction Results Analysis System (ARAS) Q1 2009, which charts the evolution of the UK’s commercial property auction market and trends in private investment.

Richard Auterac, Director and Auctioneer at Jones Lang LaSalle, said: “Cash-rich savvy buyers in the auction room are appreciating the real buying opportunities at the prime end of the retail market where prices have fallen substantially from their 2007 peak. Good quality products with long leases to desirable retailers continue to be in huge demand but there is a dearth of suitable quality product from which buyers can choose, and as a result competition is driving up prices. This trend can be demonstrated by the sale of a Tesco’s in Blackburn for £1.03m, reflecting a 5.78% yield at our last auction. However, a two-tier market has emerged in the auction market with falls in value for secondary retail properties. Despite this, current pricing is attracting some of the most experienced and liquid investors back into the market and it is only a matter of time before the secondary market witnesses a bounce-back.”

The retail sector, which continues to dominate the auction market, saw transaction volumes fall by 34% to £50 million during Q1 2009 compared with Q4 2008. However, the average lot size for retail assets over the first quarter compared to Q4 2008 rose 12% to £596,000 and yields moved in by 18 basis points to 7.1%.

Auterac continued: “Despite signs of confidence, investors still need to be alert to potential occupational hazards in the retail sector. With vacancy rates increasing, there will be further pressure on void rates as more retailers with weak business models go into administration in the short-term. The greatest challenges currently facing investors are the risk of defaults and a situation of oversupply. Those looking to buy retail assets at auction should adopt a flexible approach with existing tenants to minimise overhead costs, perhaps through a restructuring of modern leases.”

With cash returns on savings at an all time low and income returns on property comparatively higher, investors are increasingly looking to spend on real estate as it allows existing investments to throw off surplus cash to pay down debt or reward equity. ARAS reports that active demand in the auction room has remained healthy with sale rates improving to 77% in Q1 2009 compared to 64% in Q4 2008, with the number of properties sold between the £1 million and £2 million mark increasing by 18%.

Peter Cunliffe, Director and Auctioneer at Jones Lang LaSalle, concluded: “Since the start of the financial crisis, the commercial property market has been plagued by the lack of a functioning transactional market making it impossible for investors to determine actual values of real estate assets and when best to invest to take advantage of falling prices. The auction room however provides transparent signals of where the real market is, and the latest ARAS report demonstrates that auctions are leading the recovery with prices for prime assets starting to level out. Property values will always be determined by buyers and it is clear that many investors now perceive the bottom of the prime market in auctions has been reached, resulting in a push on prices for the best retail assets.”