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News Release

London

Increasing discrepancy in investment performance between prime and secondary assets

According to Jones Lang LaSalle’s Q1 2009 UK Property Index



London, 5th May 2009 – According to the latest Jones Lang LaSalle Quarterly Property Index, the pace of decline in all-real estate total returns slowed to -6.4% compared to -12.8% in the previous quarter. This translated into annual total returns of -22.4%, the lowest ever on record (since 1978).  The impact of rental decline on capital values intensified with rents falling by -2.8% against -1.6% in Q4 2008. This coupled with rising yields resulted in capital values dropping by -8.2% in Q1 2009 and 27.5% over the last twelve months.

Equities suffered over Q1 2009. Comparable returns on equities were -9.1% and gilts 2.2%. The equity market struggled in January and February recording a combined negative total return of -12%. Markets have since picked up, however, with a total return of 3.3% in March. It is too early to tell whether this improvement will be sustained. Returns on gilts also improved considerably in March recording a total return of 8.7% on the back of the quantitative easing scheme.

The office sector recorded the biggest fall in capital values, followed by the retail sector at -8.9% and -8.0% respectively. It is worth highlighting that the capital value fall in the retail sector would have been more pronounced if shopping centres were included in the sample. The Jones Lang LaSalle Retail Index does not include any shopping centres. Industrial capital values fell by -7.2%. The rise in yields slowed across all three sectors, whilst rental decline has gathered pace. The office sector saw the largest fall in rents with rents falling by -4.8%. The retail and the industrial saw rents falling by -1.6% and -0.9% respectively.

Mike Penlington director in Jones Lang LaSalle’s Valuation Advisory team said; “The Jones Lang LaSalle “style index” showed increasing discrepancy in investment performance between prime and secondary assets. Secondary assets (value properties) continued to struggle with total returns of -8.3%, reflecting a double digit fall in capital values of -10.3. Total returns on prime assets (growth properties) were -5.5% with a -7.2% drop in capital values.

Mike concluded: “Over the course of this year we will continue to witness increasing price discrimination and prime assets with longer leases on secure covenants will be on the list of the investors who now have cash to spend. For secondary product, however, the outlook remains challenging. With increased risk from corporate insolvency and a lack of interest from investors, the floor for secondary yields is less clear.”