1. European Office Property Markets 2010/11

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King Sturge: European Office Property Markets 2010/11 ContentsExecutive summary 2 What are the main European real estate tax issues?37 Europe-wide analysis3 Courtesy of BDO LLP City summaries 13 Austria 40 Belgium 41 Western Europe 14 Bulgaria42 AustriaVienna14 Croatia 43 BelgiumBrussels14 Cyprus44 Cyprus Nicosia 15 CzechRepublic45 DenmarkCopenhagen15 Denmark 46 FinlandHelsinki16 Estonia 47 France Lyon16 Finland 48 Marseille/Aix 17 France49 Paris 17 Germany 50 GermanyBerlin18 Greece51 Frankfurt 18 Hungary 52 Munich19 Ireland 53 Greece Athens19 Italy 54 IrelandDublin20 Latvia55 ItalyMilan 20 Lithuania 56 Luxembourg Luxembourg21 Luxembourg57 NetherlandsAmsterdam 21 Netherlands 58 Norway Oslo22 Norway59 SpainMadrid22 Poland60 Sweden Stockholm 23 Romania 61 SwitzerlandGeneva23 Russia62 Zurich24 Serbia63 UK Belfast 24 Slovakia64 Birmingham25 Spain 65 Bristol 25 Sweden66 Cardiff 26 Switzerland 67 Edinburgh 26 Turkey68 Glasgow 27 UK69 Leeds 27 London28 Manchester28 Newcastle 29 ThamesValley 29 Central, Eastern and Emerging Europe 30 Bulgaria Sofia 30 CroatiaZagreb 30 CzechRepublic Prague31 EstoniaTallinn 31 HungaryBudapest32 Latvia Riga32 LithuaniaVilnius 33 Poland Warsaw33 RomaniaBucharest 34 Russia Moscow34 Serbia Belgrade35 Slovakia Bratislava35 Turkey Istanbul36 1 3. King Sturge: European Office Property Markets 2010/11 Executive summary ofarecoveryinofficedevelopmentactivity.This situationisunlikelytochangeinthenearfuture Greek crisis highlights economic divisionswith speculative funding remaining extremely within Europe scarce. Anorth-southdivideisemergingintheEurozone Acombinationofimprovingdemandandlimitedeconomy. Portugal, Ireland, Greece and Spainsupply is expected to bring a more widespread(PIGS)remainmiredinrecessioninto2011and declineinvacancyoverthenextyear.thecorerecoversatanunspectacularrate. Rents close to their trough Bycontrast,outsideofthesinglecurrencyarea, London and Paris have been the first westernthe UK and the Nordics post stronger-than-marketstoseeevidenceofaprimerentalupturnaverageperformancetoleadgrowthinthewest.inearly2010-mostothercentreshavebeenflat. CentralandEasternEuropean(CEE)economies InCEE,fortuneshavebeenmixed,withMoscowexperience the most vigorous rebound longerand Istanbul rebounding, but softer conditionsterm, registering GDP rises of more than twiceprevailinginothercentres.theEurozoneaverage. Even in the most vulnerable cities, the outlook Occupier demand set for slow recoveryisforstabilityovertherestof2010,thoughthe Therehavebeententativesignsofaturnaroundprospects for growth are expected to remaininwesternofficeoccupierdemand,ledbyCentralsubdued.London. Investment recovery broadens InCEE,therecoveryisnotaswellestablished, Sincemid-2009,therehasbeenahealthyrevivalbut activity is expected to move ahead by theinEuropeanofficeinvestmentactivity,spreadingendofthisyear,drivenbyWarsawandMoscow.fromwesttoeastasconfidencehasimproved. Witheconomicuncertaintyhigh,furtherrecovery Primeofficeyieldshavemovedsharplyinwardswillbegradual,butprospectswillbeunderpinnedin the west and are back to their long-termbytheresumptionofofficeemploymentgrowth.averagesinsomemarkets. Supply stabilises in 2010 In the east, prime yields moved outwards for Office vacancy rates have stabilised at high muchofthelastyear,thoughtherearesignsthatlevels over the last 12 months, with furthertheyhavenowpeaked.deterioration in some centres counter-balanced The outlook is for continued recovery, albeitbyimprovementinMoscowandLondon.cautious, with occupier fundamentals expected OutsideofCentralLondon,thereisnoevidencetodriveinvestmentperformanceacrossEurope. Prime office rents and yields 2010Q21,00016% /m2/annum Prime yield % 800 12%/m2/annum 600 8% 4004% 200 0 0%London West EndGenevaParis London CityZurich Moscow MilanLuxembourgFrankfurtStockholmDublinIstanbulOslo Munich Athens Madrid Manchester Edinburgh Thames ValleyBristol BirminghamLeeds Glasgow AmsterdamHelsinki Warsaw ViennaCardiffNewcastle Prague Bucharest BrusselsMarseille BerlinLyonSofiaBudapestCopenhagen Nicosia Riga Zagreb New BelgradeTallinnBratislavaVilnius Belfast Source: King Sturge Q2 2010 2 4. Navigating uncertain watersAllthePIGSaresetforprolongedrecession,withonlyIrelandemergingstronglyoverthelongerterm. Europes office markets and theSpain,oneofthestarperformersinthe2000sand economic recoverytheEurozonesfourthlargesteconomy,isexpectedtoexperiencethreeyearsoffallingoutput. Sovereign debt crisis highlights different speeds of recovery across Europe Table 1: GDP forecast 2010-15 Atthestartof2010,optimismabouttheEurozone Annual % GDP was growing. An upturn in world trade from mid- 20092010f 2011f 2012-15f 2009 had brought a return to growth, ending the Eurozone worst recession since 1945. There were hopesAustria-3.4 1.2 1.62.1 thatthelegacyofthefinancialcrisiswouldbeless Belgium-3.0 1.4 2.02.3 ofadragthaninotherpartsoftheworld,andthatCyprus -1.7 -0.31.83.3 the Continental economies would, for once, out-Finland-8.1 0.4 3.03.5 perform. France -2.5 1.2 1.72.1Germany-4.9 1.8 1.82.1The onset of the Greek debt crisis in the spring Greece -2.0 -4.3 -3.21.1Ireland-7.1 -1.02.83.8 has brought a more sober assessment of growthItaly-5.1 0.5 0.71.6 prospects. Greeces financial problems reached aLuxembourg -3.4 1.9 2.53.1 headinMay2010andeventuallyforcedaGerman-Malta-1.5 2.3 2.13.0 ledEUbail-out.But,this110bnassistancepackageNetherlands-4.0 1.2 2.02.4 has yet to narrow bond spreads in the exposedPortugal -2.6 -1.1 -1.51.5 economies, indicating markets are unconvincedSpain-3.6 -0.6 -0.21.7 thattheproblemhasdisappeared.Slovakia -4.7 3.0 4.04.6Slovenia -8.1 0.8 1.52.9 There are a number of reasons for the lingeringEurozone -4.1 1.0 1.22.1 concern.ThecontagionthreatfromGreecetootherOther Western Europe largernationsisthemainworry,withSpain,Ireland,Denmark-4.9 1.2 2.22.5 ItalyandPortugalalsostrugglingtomeettheirfiscalNorway -1.5 0.7 2.32.4 targets. In addition, big EU banking exposures -Sweden -4.7 0.8 2.82.4 notably in France and Germany - have raised the Switzerland -1.51.8 1.72.1 spectreofasecondfinancialcrisisiftherewereaUK-4.91.1 2.33.2 sovereign bond default. Many countries have alsoCentral and Eastern Europe respondedtoGreecesproblemsbytighteningtheirBulgaria-5.0-1.03.76.4 fiscalpolicy.ThishasbroughtanabruptendtotheCzechRepublic-4.11.7 3.24.4 stimulusofthelastyearormore,andisexpectedto Estonia-14.10.5 3.65.2 dampentherecovery. Hungary -6.20.9 2.84.5Latvia -18.0-3.52.26.3 North-South divide in the Eurozone Lithuania-14.80.2 3.96.4 BetterthanexpectedQ2datahaveeasedthefears Poland1.9 3.0 3.44.9 of a double-dip recession, but Eurozone growthRomania -6.9-1.82.75.7 forecastshavegenerallymoveddownwardssinceEU-27-4.2 0.9 1.62.4 the spring. The impact of these revisions has not Other CEE beenevenacrossthesinglecurrencyarea,however, Russia-7.85.0 4.85.0 withadistinctnorth-southsplitemerging(table1). Turkey-4.75.9 5.86.7Croatia -5.8-0.52.64.5 Inthesouth,theso-calledPIGS(Portugal,Ireland,Serbia-3.01.5 3.04.5Source: Oxford Economics, Summer 2010 Greece and Spain) have been downgraded most because they face the toughest fiscal challenges.3 5. King Sturge: European Office Property Markets 2010/11 By contrast, the core Continental nations areconditions.Thisgrowthisexpectedtobesustained. holdingupbetter.Germany,FranceandtheBenelux By contrast, Serbia and Croatia are recovering countriesareduetoexperienceasteadyrecoveryat a more lacklustre pace, with demand weighed overthenexttwoyears.Theseeconomiesshoulddownbyfiscalconcernsandexternalvolatility.EU alsoseeareturntojobcreationbynextyear.Theconvergence goals ensure a strong recovery from laggardisItaly,wherestructuralproblemsaremore next year, but they will remain vulnerable in the seriousandGDPgrowthweaker,butitseconomyisshort-term. settoemergefromrecessionin2010. Employment drivers point to robust office Overall,EurozoneGDPisforecasttogrowby1.0%demand thisyearand1.2%in2011,withareturntotrend TotalemploymentissettolagtherecoveryinGDP growth of around 2.0% a year over the medium this year, but the worst impact has been outside term. Employment continues to contract into of traditional office occupier sectors (chart 1). 2011, but hiring resumes thereafter. This is still a Office employment in the EU-27 fell last year as solid performance, but less impressive than wasthefinancialcrisishithardandafurtherdeclineof expectedbeforeGreecestroublesflaredup. -0.5%isexpectedthisyear1.Butfrom2011,office hiringresumesandcontinuesataratethatexceeds Outside the single currency area in the west, themostothersectors.Asincreasesinheadcountare outlookisbetter.TheUKhasbenefitedfromsterlingassociated with rising take-up, these projections depreciationandrecentdecisivefiscalaction.From indicatehealthyfundamentalsforoccupierdemand. 2011,bothGDPandjobgrowthout-stripthoseof allitslargerEUpartners.TheNordiceconomiesare Chart 1: Employment growth in EU27 all sectors and office jobs alsoemergingfromtherecessionmorevigorously.4 Theprospectthereisforannualgrowthofalmost Forecast3 2.5%overthenextfiveyears,wellabovethesingle currencyaverage.2 annual % change1Eastern bloc emerges strongest 0 EmergingeconomiesinCentralandEasternEurope -1(CEE) saw some of the deepest contractions in -2outputlastyear,asmanufacturingwasdecimated -3200120022003 20042005 20062007 20082009 20102011 20122013 20142015 bytheglobalslump.Afteratentativestartthisyear,All sectors however,thesenationsaresettoseethestrongest Office jobs growthratesintherecovery,withGDPincreasesofSource: Oxford Economics 5%ayearormoreinprospectoverthelongerterm. This begs the question of which European office Central Europes largest economy, Poland, was centresarelikelytodobestinfuture.Anindication the only EU nation to avoid recession in 2009of this is provided by breaking down forecasts to and sees a rapid return to health, along with the a regional level. Office activity is concentrated in Czech Republic and Slovakia. The Baltic States,urbanareasandbecauseofthisgrowthinalmost RomaniaandBulgariacontinuetostrugglein2010, allofEuropescitycentresexceedstheEUregional but experience expansion rates far in excess of averages. Table 2 gives a ranking of forecasts for western norms thereafter. Hungary manages toselectedEUcitiesupto2015. postdecentgrowthtoo,despitepersistentbudget deficitproblems. Onthesemeasures,thelargerinternationalcentres inthewestperformwell,inlinewithrecentmarket Elsewherethepictureisalsohealthy.Onthefringesevidence. London is the second fastest growing ofEurope,RussiaandTurkeyhaveshownastrong 1 Office employment consists of financial and business rebound in 2010 on the back of improving globalservices plus public administration jobs 4 6. cityandbyfarthelargestcreatorofofficejobs.Butinofficetake-upforthreeyearsin2010(chart2)2. Frankfurt,Paris,Amsterdam,MunichandMilanareTherecoveryiscurrentlypatchy,butwithevidence alsosettoexpandathealthyrates,despitesluggishof improving sentiment. A majority of centres national performance. Here the key is the globalexpect activity to revive over the rest of the year reachofthesemarkets,allowingthemtoriseaboveandoveralltake-upisprojectedtoexpandby10% anuncertaindomesticoutlook.on2009.In the east, structural change has meant that theThere remain important differences between rapid GDP growth has not always translated into western cities. The most significant increases in officejobs.Butthissituationischanging.Bucharest demandareexpectedinthelargerglobalcentres, is expected to see the highest growth of any notably Central London and Paris. These markets major office centre over the next decade, albeitwent into the downturn earliest and hardest as fromaverylowbase.Thisexpansionisdrivenbythefinancialcrisishit.Butastherecoveryinworld exceptionallystronggrowthintheunderdevelopeddemandhasgatheredpace,ledbyemergingAsia, businessservicessector.Budapest,Warsaw,Sofiatheyhavealsoseenthequickestturnaround,with andPraguewillalsoseedynamicconditions. demandpickingupinLondonfrommid-2009.Table 2: Office hotspots 2010-15Elsewhere, the upturn is more gradual, but there are signs of recovery in Stockholm, Copenhagen,Office jobsOffice jobNew officeLyon, Munich and Berlin. More surprising, some in 2009/ growthjobs created1,000s2010-15 by 2015 cities in the beleaguered PIGS economies are /%pa/1,000s expected to record growth, Dublin notably. By Bucharest 2516.5109 contrast,themainlaggardsareVienna,Amsterdam London 1,249 2.6212 andUKregionalcentres,whichremainwellbehind Helsinki2062.6 32 Londonsupturn. Frankfurt 2682.4 37 Budapest3192.4 47Chart 2: Western EuropeGrowth in total office take-up index Munich3442.246140 Amsterdam 3282.247120 Warsaw3742.253100 Index 2000 = 100 Sofia 2462.1 35 Trend line 80 Prague3311.8 35 60 Paris1,204 1.3 96 Milan 5551.2 49 40EU2748,9511.23,910 20Source: Oxford Economics, July 2010, based on NUTS3 regions01996 1998 2000 2002 2004 2006 2008 2010 Source: King SturgeSlow office recovery led by global centres DemandinCEEhasfollowedadifferentprofileto Occupier markets have been struggling against thewest(chart3)3.Thesedevelopingofficemarkets a challenging economic background since 2008. sawalmostuninterruptedexpansioninthedecade The slowdown in leasing activity accelerated last beforethecreditcrunchandremainedresilientinto year,whenasharpdropintotaltake-upsawmany 2008.Butbylastyear,theglobaldownturnledtoan centresattheirlowestebbsincetheearly1990s. Theinitialsignsfor2010havebeenmorepromising, however,andtheoutlookfortheyearasawholeis2 Western centres are Amsterdam, Athens, Berlin, Birmingham, Bristol, Brussels, Copenhagen, Dublin, Edinburgh, Frankfurt, generallymorepositiveacrossthecontinent. Geneva, Helsinki, Leeds, London City, London West End, Luxembourg, Lyon, Madrid, Marseille/Aix, Milan, Munich, Estimates from the King Sturge network in the Nicosia, Paris, Prague, Stockholm, Vienna, Zurich. 2010 figures are based on H1 data and an estimate for the rest of majorwesternEuropeancitiesindicatethefirstrisethe year. 5 7. King Sturge: European Office Property Markets 2010/11 evenmoreabruptslowdownthaninthewest,with the recovery in a challenging economic climate. totaltake-updroppingbyaboutathird. Whilethisupturnisexpectedtoremaincautiousand unevenwithverydifferentratesofimprovementin Recent indications from the CEE have beendifferent cities, fundamentals remain supportive more positive, but so far recovery is also moreof continued expansion. With office employment uneven than in the west. A dramatic rebound in expectedtoresumeitsexpansionfromnextyear, Moscowsvolatileofficemarkethasbeenthemostthis should support underlying activity over the encouraging feature, along with impressive take- mediumtolongterm. upinWarsaw.Onthebasisofthelatestevidence, renewedexpansionisalsoprojectedforBucharestVacancy to stabilise in 2010 andBratislavabytheendof2010. The supply situation has been different in the currentcycle.Officevacancyratesrosesharplyin But other CEE cities are expected to see take-up thedownturnof2008and2009,butareexpected dip further, including Prague and Budapest. This to flatten off this year. An unweighted average of is partly because these markets saw a milderwestern European cities shows rates stabilising correction last year and in both activity remains at just over 10.0% of stock, with CEE levels also close to the historic average. Elsewhere, activity steadyataround16.0%. is heavily dependant on re-negotiations and lease extensions from existing tenants, with scant new ComparisonswithpreviousrecessionsinWestern demand.Chart3showsanunderlyingriseinCEEEurope suggest that availability is flattening off demandofonly1%,suggestingthatthesemarkets earlierthistime.Thislargelyreflectsdevelopment remain 6-12 months behind the recovery in the trends. Office construction was booming until the west. onset of credit crunch in August 2007. But this meant that the supply pipeline was abruptly cut Chart 3: Central and Eastern Europe Total office take-up indexwellbeforerecessionbroughtacollapseindemand400in late 2008. Construction activity and office350completions have since dwindled to low levels300acrossmanyEuropeancities. Index 2000 = 100250Trend line200Asidefromafewisolatedexamples,notablythere-150activationofofficeschemesintheLondonmarket,100 developmentactivityremainsatlowlevelsandnew 50 supplywillbelimited.Europeanbanksarestronger01996a 1998a 2000a 2002a 2004a 2006a2008a 2010a thanayearago,butfinanceforspeculativeprojects Source: King Sturge remains scarce. With bank balance sheets further damagedbytheGreekcrisis,thereislittleprospect An encouraging aspect of this upturn is thatofadramaticturnaround,leavingnewdevelopment European office take-up has been in line with reliantonbuild-to-suitschemes. the economic upturn, rather than a year or two behindasinthepast.ThisinpartreflectsstrongerThere are wide disparities in city vacancy rates. corporate sector balance sheets emerging from The highest western rates are in Dublin and this recession, making it easier for companies to Birmingham, where more than a fifth of office takeadvantageofthetroughinrentsandthewide spaceisunoccupied,thoughthesearesettofallby choiceofofficesupply. end-2010.Bycontrast,vacancyisexpectedtorise to 18.0% this year in Frankfurt, with Amsterdam This has led to speculation about the durability ofnotfarbehind.3 CEE centres are Belgrade, Bratislava, Bucharest, Budapest, Other markets are now seeing supply tightening. Moscow, Riga, Sofia, Tallinn, Vilnius, Warsaw, Zagreb. Note this index figure excludes Moscow market. InCentralLondon,boththeCityandtheWestEnd 6 8. Chart 4: European office vacancy rates 35% 2009 30% 201025% 20% 15% 10%5%0%SofiaAmsterdam Athens Belgrade BerlinBirmingham BratislavaBristolBrusselsBucharest BudapestCardiff CopenhagenDublinEdinburgh Frankfurt Geneva Helsinki LeedsLondon City London West End LuxembourgLyonMadrid Marseille/AixMilanMoscow Munich Newcastle NicosiaParisPrague RigaStockholm TallinnThames ValleyViennaVilniusWarsawZagreb Zurich Source: King Sturge areexpectedtoseeadeclineinavailabilitythisyear,Rents close to a trough with vacancy now close to the long-term averageEuropean prime office rents declined by 20% on in both markets. Paris is also expecting a decline, average during 2009, reversing the gains of the along with Lyon and Marseille. Vacancy rates inprevious upturn in many markets. Falling demand Switzerland,whichremainthelowestinEuropeby andrisingavailabilityduringtherecessionbolstered somemargin,arealsofalling. the bargaining position of tenants throughout lastyear, pushing rents down and incentives up. But A flood of development activity in the mid-2000s thereisnowgrowingevidencethatthebottomhas left supply looser in CEE centres, but again therebeenreachedinmanycities. are big contrasts. After peaking at over 35% last year, the recovery of office demand in MoscowBy mid-2010, prospects for rents looked healthier is expected push vacancy down to 15% in 2010. across Europe. In the west, the largest centres RatesarealsosettodipinWarsaw,which,along haveseenearlysignsofrecovery,withprimelevels withZagreb,remainsoneofthefewCEEcitiesto pushingaheadinCentralLondonandParis.Thereis still enjoy single-digit rates. Elsewhere, the trendalsomoretentativeevidenceofimprovementinthe has been upwards, albeit at a much slower rateSwiss and Nordic cites. Most other centres have thanayearago. yettoregisterarise,thoughonlyafewvulnerablemarkets such as Dublin have continued to see A combination of improving demand and limited downwardpressure.Eveninthese,theprospects newsupplyisexpectedtobringamorewidespread areforprimerentstostabiliseovertherestof2010. reduction in European office vacancy next year. This downward movement comes earlier thanCEErentshavealsolevelledoutsincethestartof in previous cycles, chiefly reflecting the unusualtheyear,thoughthepictureismixed.Primerents officedevelopmentcycleandsubduedspeculativehave increased in those centres where economic activity.7 9. King Sturge: European Office Property Markets 2010/11Chart 5: European office rents 1,0009002009 8002010 700600/m2 500400300200100 0London West EndGenevaParis Zurich Moscow MilanLuxembourgFrankfurtStockholmDublinIstanbulOslo Munich Athens Madrid Manchester Edinburgh Thames ValleyBristol BirminghamLeeds Glasgow AmsterdamHelsinki Warsaw ViennaNewcastleCardiff Prague Bucharest BrusselsMarseille BerlinLyonSofiaBudapestCopenhagen Nicosia Zagreb New BelgradeTallinnBratislavaVilnius BelfastLondon CitySource: King Sturgegrowth has rebounded, notably Istanbul andfocussedonwell-letofficeswithsecureincomein Moscow, though levels remain far below their thecorelocations. previous peeks. Elsewhere the correction has continued,albeitatamuchslowerrateand,inline Chart 6: European office investment transactions and yields withthewest,prospectsareforastabilisationover 45 8% therestof2010.4035 7% After this year, aside from those lead markets 30 Billions25 where prime rents are already responding, the 20 outlook in most European cities is for a subdued15 6%upturn in prime rents. As noted, the recovery in1050 demandisexpectedtoberelativelypatchyacross5% 0 Europe.Sowithvacancydecliningearlier,themost07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 likely upside for rents is from supply constraints,Volume Cap rateSource: RCA especially in cities where Grade A shortages re- emergeafterthelongdevelopmentpause. Underlying transactions volumes have increased over the last year, though levels are still well Investment upturns spreads across Europebelow their previous highs (chart 6). UK office Theearlysignsofarecoveryininvestmentmarketsmarketpurchasesledtheupturnin2009,butwere werevisibleayearago,mostobviouslyinCentral increasingly supported by activity in the rest of London. Since then, the recovery has gatheredwesternEurope. momentumonthebackofrevivedsentimentand attractive pricing, with yields starting at historic By early 2010, investors were becoming more highs and returns on other assets low. Investor adventurous. CEE acquisitions also experienced interest remains highly selective, however,a revival, albeit tentative. Despite the continued 8 10. Table 3: Major office investment transactions Market DateProperty Name m2Price m London Nov-09HSBCHQ 109,996 862 Berlin May-10SonyCentre 132,496 570 ParisFeb-10HSBCFranceHQ33,165400 ParisNov-09VelizyCampus 139,000 382 London Jul-10Tower4230,100366 Munich Mar-10SiemensCampus371,251 350 MilanOct-09MaciachiniBusinessCentre86,000300 London Jun-10ParkHouse28,799295 London Nov-091FinsburyAve44,592259 ParisMay-10Capital8Messine 18,000240 London Dec-095ChurchillPlace 29,171227 Source: RCAfreezeonfinance,largerdealshavealsobeenmore plentifuloverthelast12months(table3).Asthemarketrevivedfrommid-2009,officeyields peaked and then moved inward. This reversal was initially rapid. But with levels close to their historicaverageinmanymarkets,therateofyield compressionhasslowedin2010.On average, prime office yields in the west were down50basispointsbymid-2010,withonlyAthens bucking the downward trend in other cities. This representsasignificantunwindingofthe150basis pointsoutwardmovementseenovertheprevious twoyears.After unprecedented compression in the boom years, trends in CEE markets have been slightly different.Yieldswerestillslightlyhigheronaverage inmid-2010comparedwithayearearlier.Overall, thesemarketshavenowseenover350basispoints ofoutwardyieldmovementsince2007.Whilethereisnoprospectofareturntothedoldrums of 2008-09 and recovery is expected to continue, property investment markets face a number of challenges.Sovereigndebtjitters,scarcityofbank finance and a relatively slow economic upturn will not help investor sentiment. In addition, the potential for further yield compression is limited, particularly in some western centres. There will also be the impact of rising market interest rates to consider further out. As a result, the longer- term outlook for property investment will depend critically on stronger occupier markets and rental growth.9 11. King Sturge: European Office Property Markets 2010/11 Prime rents and yields - mid-2010 306344 5.75%6.00%135 Glasgow Edinburgh 7.00%Belfast UNITED KINGDOMIRELANDNewcastle 257 350 6.75% Dublin6.00% 375 LeedsManchester 331 7.00% 6.50%257Birmingham 6.50%331 300 Cardiff6.00% 6.50%BristolNETHERLANDS337 Amsterdam5.75% LondonCityWest End624885 Thames ValleyBrussels5.25%4.75% 250 BELGIUM3436.25%6.25%LUXEMBOURG LuxembourgParis 420700 6.00% Frankfurt5.25% 3905.25%620 4.25% FRANCE860Zurich 4.25%GenevaSWITZERLANDLyon 230 6.35%Milan4505.00% Aix Marseille250360 6.50%5.75% MadridSPAIN 10 12. FINLANDPrime rentRents ( /m2/annum) quoted refer to headline rents inhigh quality buildings situated in prime locations and areNORWAY 285assumed to be over 500m2 362 5.90% 6.00%Helsinki Oslo 390 Prime yield5.25%Investment yield (in%) quoted refer to a valuation ofStockholm Tallinnoffice property let at full market value which is of the175 best physical quality, in the prime location, and with the SWEDEN 8.00% ESTONIA best tenants covenant and contemporary lease terms.Generally, a benchmark with which to compare otherproperties. 20415.00%Riga LATVIA Moscow DENMARK600 12.00%Copenhagen 208LITHUANIA 5.00%VilniusRUSSIA1508.50% 246 5.50% Berlin POLAND2766.35%WarsawGERMANY 252 7.00%PragueCZECH REP. 360 5.00%174SLOVAKIAMunich7.25%ViennaBratislava 265 AUSTRIA 5.50%Budapest216HUNGARY 8.00% Zagreb ROMANIA192 CROATIA8.50%Belgrade2529.50%1809.50% BucharestSERBIA ITALY BULGARIASofia2289.00%Istanbul 369 7.75% TURKEY GREECE Athens3607.25% 2046.50%CYPRUSNicosia11 13. King Sturge: European Office Property Markets 2010/11 12 14. European City Summaries 15. AUSTRIA - Vienna BELGIUM - BrusselsContact:AgencyandInvestment Alfons MetzgerContact:AgencyCdric van Zeeland MRGMetzgerRealittenBeratungsundInvestment:Jean-Philip Vroninks BewertungsgesellschaftmbH,GumpendorferStrasse72,1060 KingSturgeLLP,BastionTower,PlaceduChampdeMars5box Vienna(+4315975060)15(8thfloor),1050Brussels(+3222869182) In-town Out-of-town In-townOut-of-townPrimerent(/m/annum) 265120Primerent(/m2/annum)250165Primeyield(%) 5.50 6.00Primeyield(%)6.256.75 Viennahasanestimated10.5millionm2ofofficestock.Occupier Brusselshasanestimated13.4millionm2ofofficestockacross demandhasbeeninsteadydeclinesince2007andisforecastitscitycentreandout-of-townmarkets,whichincreasedin2009 toreachitslowestpointinthiscyclein2010,droppingtoaround duetothecompletionofdevelopmentsstartedduringtheboom 200,000m.Thiswouldrepresentareductionofaround9%from of2007-2008.Lastyear,officedemanddeclinedto413,500m the 2009 total, a smaller drop than in previous years. Despitefromatotalof475,000min2008.Thiswasthemostsubdued this low level of take-up, there are signs of recovery, such asannual take-up in Brussels for more than a decade and well stabilising rents and vacancy rates, and an upturn in business belowthefive-yearaverage. sentiment.Asaresult,activityisexpectedtoimprovetowards theendofthisyear.Inthefirstquarterof2010,keydealsincludedActivityremainedweakinearly2010,withjustover150,000m Wohnensigninganewleasefor2,100matGuglasse17-19andof take-up estimated in the first half year. This year, the most SOSKinderdorfleasing1,950matBrigittenauerLnde50-54. importantdealhasbeenthepre-lettoBNPParibasFortisattheBorealbuilding(35,793m)intheNorthStationdistrict.Thereare AvailabilityofofficeaccommodationinViennaroseslowlyfrom anumberofotherimportanttransactionsclosetofinalisation,so 5.0%to5.9%in2009.Ithasbeenstableinthefirsthalfof2010full-yeartake-upisexpectedtorisetowards400,000m,slightly andisonlyforecasttoedgeupslightlybytheendoftheyear,belowlastyearsfinalfigure. toreach6.1%.Constructionofnewofficespaceisforecastto flattenoutin2010atalevelofaround190,000m. Availabilityhasriseninthemarketdownturnandwasnothelpedby the high level (370,000m) of office completions last year. In 2010, the office market is perceived to have reached the This has helped push the office vacancy rate from its low of bottomoftherentalcycle.Rentsdropped12%frommid-2009 9.0%in2007tocurrentlevelsofaround13.0%ofstock.With to mid-2010, to reach their current level of 265/m/annum. demandimprovinganddevelopmentatalowerlevelthisyear, Primerentsareexpectedtoremainstableoverthesecondhalftheexpectationisthatthisratehaspeakedandwilleasebackto oftheyear.12.0%byyear-end.InvestmentvolumesforViennaofficesinQ12010wereupon Prime rents in-town peaked in 2007 at 295/m/annum and thesameperiodayearago.Domesticinvestorsaccountedforeased to the current level of 250/m/annum last year, since the majority of transactions, whilst German institutions werewhentheyhaveremainedunchanged.Rentsareprojectedtobe also active. Prime yields have stabilised at a level of 5.50%.stableovertherestofthisyear One of the largest transactions in the first half of 2010 was thepurchaseofa21,500mbuildingatObereDonaustraeforActive office investors remain focused on core prime assets 65mbyRaffaisen. across all classes. Yields in the CBD are at 6.25% for fully-letoffice buildings with a 3/6/9 year lease, an inward movementof25basispointssince2009speak.Forpropertiesout-of-townlevelsareslightlyhigheratanaverage6.75%,butthisisalsoareductiononlastyear.Weexpectlocalinstitutionalinvestorstoremainactive,focusingonprimeproduct,andprivateinvestorsto search for individual investment opportunities. As a result,yieldsarelikelytomoveinfurtheroverthenext6months. Vienna prime rents and yieldsBrussels prime rents and yields400 6.0400 8 300 5.5300 200 5.0200 6 100 4.51000 4.00 42006200720082009 Q2 2010 2006 20072008 2009 Q2 2010Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%) 14 16. CYPRUS - Nicosia DENMARK - CopenhagenContact:AgencyandInvestment Michalis Pantazis Contact:AgencyandInvestmentPeter Winther AMPAndreasPantazisLtd,PolitiaBusinessCentre,Alkeos23, Sadolin&AlbkA/S,NikolajPlads26,1067Copenhagen Office302,Egkomi2404,1642Nicosia(+35722676423)(+4570116655) In-town Out-of-townIn-townOut-of-townPrimerent(/m/annum) 204145 Primerent(/m/annum) 208 120Primeyield(%) 6.50 7.00Primeyield(%) 5.00 6.50 Nicosiahasanestimated520,000m2ofofficestock.Following Copenhagen has an estimated 11.2 million m2 of office stock. adramaticslowdownin2009,recoveryintheoccupiermarketFollowingtheglobaleconomicdownturn,theofficeoccupational hasyettomaterialise.Take-upin2010isforecasttobeinthe markethascontractedoverthepasttwoyears.Totaltake-upin regionof3,000m,whichis40%lowerthanlastyearand70%2009 fell to around 200,000m, a drop of 38% from the level lower than in 2008. This is expected to represent the bottomachieved in 2008. The forecast for 2010, however, is more ofthecycle,whichwillbefollowedbyagradualrecoveryover positive,withtake-upexpectedtoreach280,000m.Themajority thenextfewyears.Followingtherecession,manycompanies ofdemandinthefirsthalfof2010hasbeenformodernbuildings havebeenreluctanttorelocateanditiswidelyanticipatedthat ingoodcentralandsuburbanlocations.Activityisexpectedto newgovernmentmeasurestobringthedeficitundercontrolwill remain strong as many occupiers will try to secure leases at underminerecoveryandadverselyaffectinvestment. currentlowrents.Thesupplyofnewhighqualityofficespaceremainslimited,with Supply of office accommodation in Copenhagen has been themajorityofavailablefloor-platesbetween250-350m.Theresteadily rising over the past few years. The vacancy rate was is a constrained development pipeline scheduled for Nicosiaaround 6.8% at the end of 2009 and is forecast to rise to this year, which will bring a further 5,000m when completed.10.0%bytheendof2010.Itisexpectedthatvacancyrateswill Although lower than the average of previous years, this does stabilise, because of higher demand and slower construction. represent a significant increase when compared with theIn 2010 only 50,000m2 of new construction is forecast, which exceptionally low level of 2009. Weak demand has resulted in wouldrepresentadropofaround80%from2009. ampleavailabilityofsecondaryofficespace.Consequently,the vacancy rate is expected to increase from its present level ofPrime rents are around 208/m/annum and should remain 6.5%to7.0%overthecourseoftheyear.stableoverthenextsixmonths.Tenantincentives,whichhavebeensubstantial,shouldalsobecomelessgenerous. Rental levels for both in-town and out-of-town office accommodation declined last year, with prime rents in-town Thenumberofinvestmenttransactionswaslowatthestartof downto200/m/annum.Primerentshavesubsequentlyedgedtheyear,buthaspickeduplately.Institutionalappetiteforwell- up to 204/m/annum and are expected to remain stable overlet office buildings in good locations has increased, driven by thesecondhalfof2010. lowinterestrates.Primeyieldsremainstableat5.00%.Demandfor secondary properties is weaker, partly due to increased Therehasbeenonlylimitedinvestmentmarketactivityoverthe vacancy risks and partly because of lack of financing for more pastyear.Themostsignificanttransactionwasthepurchaseofa opportunisticinvestments.Anumberofmajortransactionsarein 4,400mofficedevelopmentbytheCyprusTelecommunications thepipeline,andprimeactivityisexpectedtosurge,dominated AuthorityPensionFundfor 19million.Currentyieldsfortownby domestic institutions, well-capitalized property companies stock have remained unchanged from last year at 6.50% andandprivateinvestors. areexpectedtostayatthislevelfortheremainderof2010.The investmentmarketappearstobeoncourseforaprotracted,but sustainable,longtermrecovery. Nicosia prime rents and yields Copenhagen prime rents and yields300 10 3008200200 8 6 1001000 6042006200720082009Q2 2010200620072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%) 15 17. FINLAND - Helsinki FRANCE - LyonContact: Advice Hannu Ridell Contact:InvestmentChristophe Audoux Newsec-MaakantaOy,Mannerheiminaukio1,00101Helsinki KingSturgeSA,36rueBrunel,75017Paris (+358207420400) (+33144557000) In-townOut-of-townIn-town Out-of-townPrimerent(/m/annum) 285 165Primerent(/m/annum)230 185Primeyield(%) 5.90 7.80Primeyield(%)6.356.85 Helsinki Metropolitan Area has an estimated 5.8 million m2 ofLyonhadanestimated4.95millionm2ofofficestockin2009.It office stock. The demand for new floorspace remains weak. isasignificantregionalofficemarketinFrance,withthecentre Many companies have reduced their overall requirements and dividedintospecialisedbusinessdistrictsdominatedbyindividual sub-letexistingspace.Meanwhile,newtenantsaretakinglongersectors such as financial, technology, R&D and biotech. There tomakedecisionsduetothewideselectionofavailabilityand isalsoanincreasingtrendforoccupierspreferringout-of-town adesiretogetthebestpossibledealfromlandlords.Theoffice locations,becauseofthebetterenvironmentandlowerrents. propertymarketisexpectedtofollowthesametrendduringthe secondhalfof2010. In 2009, take-up dipped to 164,000m, down a third on thepreviousyear.Thisyear,theoccupationalmarkethasbeenmore Inthefirsthalfof2010,vacancycontinuedtorise,eveninthe dynamic,withtransactionsinConfluence,GerlandandPart-Dieu central business district. The vacancy rate at mid-1010 was (CBD).Largerdeals(over2,000m),wheredemandslowedmore 12.5%, up from 11.5% at the end of 2009, and is forecast to sharplylastyear,haveaccountedforamoresignificantsliceof increasetoaround13.0%byend-2010.take-up in 2010, with an important proportion also in sales tooccupiers.Intheyearasawhole,officetake-upisprojectedto Thedevelopmentpipelineisnowbeingrestrictedwithprojectsrisetoaround200,000m,notfarfromitslong-termaverage. eitherpostponedorstopped.Weakerdemandoverthepasttwo yearshasmeantthatdevelopersarehesitanttocommittonew Vacancy rates climbed from a low of 4.7% to a historic high space.Thishashelpedtoeasetheimbalancebetweensupply of 8.0% of stock last year, though much of this excess is in anddemand.Thelevelofnewconstructionhasslowedin2010, peripheralmarketsnottheCBD.Thistrendhasbeenreversed withonly59,000mexpectedtobedelivered,adropof67%on in 2010, as firmer demand and limited new supply havetaken 2009. vacancy back to 7.5% by mid-year. With new completions atonly70%oflastyearslevelin2010andtake-upimproving,the Rental levels have declined since 2008 and at mid-2010 wereprospect is for a further decline in availability over the rest of around 285/m/annum, down from 296/m/annum a yearthisyear. ago. They may be subject to further downward pressure over H22010duetorisingavailability.Themarketdownturnhashitprimerentsforcityoffices,whichdeclinedfromtheirhighof260/m/annumayearagototheir OfficeinvestmentvolumesinHelsinkidecreasedsignificantlyincurrent 230/m/annum.Out-of-townrentsalsodropped,albeit 2009 and have not yet recovered. Prime yields have declinedless sharply, reaching 185/m/annum by mid-2010. With an overthepastyeartocurrentlevelsofaround5.9%.Therehave improving market balance, headline rents are expected to beenonlyafewofficetransactionsinthefirsthalfof2010.Thestabiliseinthenearfuture. most significant was the purchase by Aberdeen Investors of a 6,900m2 office building - Falcon Gentti, Vaisalantie 8, EspooInvestmentdemandisstrongerthanayearago,withprimewell- for 22million. There is still demand for high quality prime securedassetsfavouredbyinvestors.Atthemoment,foreign offices, but there are few such properties currently available. buyershavedesertedthisregionalmarket,thoughLyonisstill It is expected that the investment market will remain slow Frances second best performer after Paris. Prime yields have throughout2010,thoughinterestisimprovingandinternational fallenbyaround100basispointsoverthelastyear,butarelikely investorsareexpectedtoreturninthelatterpartoftheyear.tostabilisefortherestof2010.Lyonisexpectedtoremainakeyregional market, with investor interest concentrated on primecommercialassets.Helsinki prime rents and yieldsLyon prime rents and yields4008 300 10 200 2005 710002 0 4200620072008 2009Q2 2010200620072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum)Prime yield (%) 16 18. FRANCE - Marseille/Aix FRANCE - ParisContact: Agency&InvestmentJean CabreraContact:AgencyNicolas JeanJacques King Sturge Mditerrane SA, 14 rue Louis Astouin, 13002InvestmentPhilippe Semidei Marseille(+33488663030) KingSturgeSA,36rueBrunel,75017Paris(+33144557000) In-townOut-of-townIn-townOut-of-townPrimerent(/m/annum) 250180 Primerent(/m/annum)700500Primeyield(%) 6.50 7.25Primeyield(%)5.256.00 Marseille and Aix-en-Provence together had an estimated 2.8In 2009, Ile de France had an estimated 51.2 million m2 of millionm2ofofficestocklastyear.Therearemanydevelopmentcommercialofficestock,oneofthelargestmarketsinEurope.ParisandtheinnersuburbsincludingLaDfense,theWestern projectsplannedforthenearfuture,especiallyinMarseillecity, Business District and peripheral markets bordering Paris like thoughthesewillnotbeprogresseduntiltheeconomicupturn Saint-Denis, Montreuil or Montrouge - account for over 70% becomesmoresecure.Asaresult,theofficestockisexpectedofthis.MostFrenchcompaniesremainheadquarteredinParis, toremainbroadlyunchangedin2010. despiteincreasingcostcompetitionfromotherlocations. Take-up slowed to 1.8 million m during 2009, which was the Themarketsawdemandimproveinearly2010,whencomparedlowest annual out-turn in five years. In early 2010, activity has withthelowsof12monthsago.Mostoftherecenttransactions slightly increased, mostly for small and medium sized floor- have been in the Euromditerrane district of Marseille and in plates. There remains interest in new stock in peripheral and Aix-en-Provence.Theupturnisforecasttobesustainedforthe secondary markets with cost effective rents. But established wholeofthisyear,withtake-upestimatedat110,000m2,slightly office districts are also picking up, following a steep rentalcorrection.In2010asawhole,take-upisforecasttoedgeupto higherthanlastyearsout-turn.Thislevelofactivityisbelowthe 1.9millionm,justshyofthelong-termaverage(2millionm) peaksofthemid-2000s,butinlinewithhistoricmarketaverages.andinlinewithasluggisheconomicrecovery.Supply has remained relatively scarce, despite the economicTherehasbeenanincreaseinofficeavailabilityacrossParis.The downturn.Marseilles/Aixvacancyreachedanewhighof7.0% vacancyratefelltoalowoflessthan5.0%onlytwoyearsago.Butby2010H1ithadclimbedto7.0%,ashighasatanytime last year, but reversed in early 2010. By years end, a vacancysincethelate1990s.Withdemandrecoveringandspeculative rate of 6.5% is projected, assisted by lower levels of office developmentonhold,however,theprospectisforareversalin completionsandstrongerdemandthanin2009.Thistrendhasthis trend before this years end, when vacancy dips to 6.7%. supported prime market rents, which have edged higher overMoreover, with scant development pipeline, this rate will fall the last 12 months, reaching 250/m/annum, though tenantquickly as the market returns to normal and there is a risk ofspaceshortagesre-appearingfrom2012. incentivesremaingenerous.There have been early signs of a recovery in prime rents this The first half of 2010 saw limited investment activity in the year.Cityrentsdeclinedbyaboutafifthinthedownturn,though Marseille region. French investors continue to seek well-let levels held at 650/m/annum after mid-2009. These rents officepropertiesintheestablisheddistricts,whichhasbrought recordedtheirfirstrisefortwoyearsduringQ22010,withtheprospectoffurtherimprovementbyyearsendbothinandout- aboutafurtherdecreaseinprimeofficeyields(down75basisof-town.Thecurrentimbalancebetweendemandandsupplystill points on a year ago). Conditions are not expected to changefavoursoccupiers,however,andisreflectedinlongnegotiation radically over the rest of 2010, however, with yields set toperiodsandgenerousincentives. stabiliseattheircurrentlevels.Investment markets rebounded from Q4 2009, with primeoffice property seeing a surge in interest. The average size oftransactionhasalsogrown,asthefinancingoflargeacquisitionshasbecomeeasier.Yieldshavedecreasedbyaround100basispointsoverrecentquartersforwell-letandliquidprimeassets.Butinvestorscontinuetobeextremelyselectiveandtheyieldspreadremainslarge. Theinvestmentoutlookremainscautious.Volumesarelikelytoincrease slightly on 2009, though the progression is expectedto be moderate. Prime yields are set to fall moderately beforeflattening out later this year, while secondary markets willcontinuetolag.Marseille/Aix prime rents and yields Paris prime rents and yields3009 900 9200600 66100300 303 0 0200620072008 2009 Q2 20102006 20072008 2009 Q2 2010Prime rent ( /m2/annum)Prime yield (%)Prime rent ( /m2/annum) Prime yield (%) 17 19. GERMANY - BerlinGERMANY - FrankfurtContact:InvestmentSascha Hettrich Contact:InvestmentSebastian Ott King Sturge Hettrich GmbH, Jaegerstrasse 34-35, D-10117KingSturgeGmbH,Kaiserstrasse6,60311,FrankfurtamMain Berlin(+493023322211) (+496921659870) In-town In-town Primerent(/m/annum)246 Primerent(/m/annum) 390 Primeyield(%) 5.50 Primeyield(%)5.25 Berlinhasanestimated18.3millionm2ofofficestock. Frankfurt has an estimated 10 million m2 of office stock. As Germanys main financial centre, the city suffered badly from The office market is not experiencing a rapid recovery in theitsexposuretotheglobalbankingsectorlastyear.Buttherehas wakeoftheglobaleconomiccrisis.However,someencouragingbeenastabilisationsincemid-2009andlocaleconomicindicators signsareemerging.Take-upvolumesdeclinedto444,000min have improved. Nonetheless, activity in the citys occupier 2009.But,afterastrongstart,take-upforthisyearasawholeis market slowed to a five-year low of 335,000m last year, well forecasttoriseto500,000m.Oneofthemostsignificantdeals below the historic average of 550,000m. Office demand was ofQ12010wasthelettingofaround14,000mintheCityEast maintained in early 2010, but, even with a more vigorous H2 sub-markettothetelecommunicationcompanyNokia. inprospect,take-upisexpectedtobeflatat330,000mforthe yearasawhole. Thedevelopmentpipelineshouldseeanestimated125,000m- 150,000mofnewproductdeliveredtothemarketthisyear.As After a sustained decline from the mid-2000s, office vacancy aresult,thevacancyrate,whichhasbeenbroadlystablesincehas risen steadily over the last 2 years, reaching a rate of lastyear,isforecasttoedgeuptoaround8.4%bytheendof 17.0%lastyear.Thedevelopmentpipelineisexpectedtobring 2010.around 200,000m of new space to the market in 2010, with the continued impact of corporate failures and consolidation Stablesupplylevelsandincreasingdemandhaveledtoalevelling potentially adding further to supply. With demand subdued, a off of rents. Prime rents in the city declined from 276/m/furtherriseinvacancyisinprospectin2010to17.0%. annum(23.0/m/month)in2008to252/m/annum(21.0/m/ month)bytheendof2009.Theywerearound 246/m/annumWith the market balance continuing to favour occupiers, there (20.5/m/month)inH12010andareexpectedtostabiliseover hasbeencontinuedpressureonrents.Primeofficerentspeaked therestoftheyear.at 438/m2/annum (36.5/m2/month) in 2008, but fell sharply to 390/m/annum (32.5/m/month) early last year. Since Investor sentiment has significantly improved in the first halfthen, top rents have held up, though incentives have become of 2010, as have transactions, boosted by a couple of largemoregenerousandsecondarypricescontinuetofall.Rentsare portfoliodeals.Expectationsforthecomingmonthsarepositive expectedtostabiliseataroundthislevelfortherestofthisyear. andtheinvestmentmarketshouldcontinuethisupwardcourse in H2 2010. The largest transaction in H1 2010 was the sale SentimentintheFrankfurtinvestmentmarkethassignificantly of The Sony Center in Berlin to a Korean pension scheme for improved in recent months and activity has been revived. The 572million.Primeyieldshaveremainedstableonlastyearat salesofParkTower(foraround130million)andtheWestpol 5.50%,butmaybesubjecttodownwardpressureoverthenext buildinghavebeenimportantsignsofrevival.Financingremains 12months.difficult, but the outlook is for further improvement in the rest of2010.Primeyieldsshiftedoutto5.50%inFrankfurtlastyear, though this was a modest movement compared with other European markets. Since then there has been a slight inward shiftto5.25%,withtheprospectoffurthercompressionasthe yearcontinues. Berlin prime rents and yields Frankfurt prime rents and yields 300 6700 8225525150 4350 6 751750 20 42006200720082009 Q2 20102006 200720082009Q2 2010Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%)18 20. GERMANY - MunichGREECE - AthensContact: InvestmentSascha Hettrich Contact:AgencyandInvestment Thomas Ziogas King Sturge Hettrich GmbH, Jaegerstrasse 34-35, D-10117KingHellas,7Evinoustr,AthensTowerBuildingC,Athens115 Berlin(+493023322211) 27(+302107711204)In-town In-townOut-of-townPrimerent(/m/annum) 342 Primerent(/m/annum)360228Primeyield(%) 5.00Primeyield(%)7.257.75 Munich has an estimated 13.3 million m2 of offices in its city2010 is set to be another difficult year for the office property centre market. Last year, there was a marked deceleration inmarketinAthens.Theshrinkingeconomyhasledtoaslumpin demand,withtake-updecliningto375,000mfollowingsixyearsdemand.Officetake-upattheendof2009fellto40,000m,the ofaverageincreasesinexcessof550,000m.Occupiersremainsecondconsecutiveyearofdeclineand36%belowthefiveyear very cautious. But activity was more encouraging at the start average.Demandwillpersistatlowlevelsin2010,withtake-up of2010.Theexpectationisthattake-upwillriseto425,000mforecastatjust30,000m,whichwouldrepresentafallof25% intheyearasawhole,stillbelowthehistorictrend,butaboveonthe2009level. 2009levels. Supply of new and existing buildings has increased. The rise Supply has risen sharply in the downturn. The vacancy rate, consists mainly of secondary buildings, with the level of new whichhadhitalowof7.0%in2007,roseto8.7%lastyear.New constructionfalling.Manycompaniesaredownsizingandputting completionsofofficespacewererelativelymodestlastyear,butplanstomoveonhold.Asaresult,thevacancyrateisexpected a further 250,000m is planned for delivery during 2010. As atorisefrom5.0%attheendof2009to6.0%bytheendof2010. result,theimprovementindemandisnotenoughtopreventthe vacancyrateclimbingtoaround9.5%thisyear. Rents in secondary buildings have been in decline, although prime rents have held stable over the past year and at mid- With supply rising and demand subdued, rents are expected2010were360/m/annum.Rentsareexpectedtocomeunder to remain under pressure in Munich. Prime office rents fell tofurtherpressureoverthenextyearduetoweakerdemandand 360/m/annum (30/m/month) in 2009, a four-year low, andrising supply. Occupiers have been able to press landlords for had declined a further 5% by mid-2010 to 342/m/annum rentreductionsandincentivesareexpectedtoplayanimportant (28.5/m/month).roleintheyearahead.TheinvestmentmarketinGermanyhasseenareboundinearly Theinvestmentmarkethasbeenquietoverthepastyear,with 2010, with some large transactions and renewed internationalthe majority of transactions involving small offices taken by interest. Munich has seen a few deals, including the Eisbachdomesticpurchasers.Thereremainsashortfallofqualityoffice Officessoldfor33milliontoGermanfundmanagerKGALinproductonthemarket.Primeinvestmentyieldshavemovedout Q2 2010. Expectations are for continued transactional activityby75basispointssincemid-2009andfurtherincreasesarein over the coming months. Prime yields for in-town offices sawprospect anoutwardshiftof75basispointsto5.50%betweenmid-2008 and mid-2009. Since then yields have moved in by 50 basis pointsto5.00%andthislevelisexpectedtobemaintainedover therestof2010. Munich prime rents and yields Athens prime rents and yields500 8 600 8400 250 5 62000 2 0 42006200720082009 Q2 20102006 20072008 2009 Q2 2010Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%)19 21. IRELAND - DublinITALY - MilanContact:AgencyDeclan OReilly Contact: Agency and Investment Inara Jucinska / Giorgio InvestmentAdrian Trueick Lazzaro HTMeagherOReillyLtd,20-21UpperPembrokeStreet,Dublin GabettiPropertySolutionsAgencyS.p.A,ViaBernardoQuaranta, 2(+35316342466) 4020139Milan(+3902.77.55.243)In-townOut-of-town In-townOut-of-townPrimerent(/m/annum)375215 Primerent(/m/annum) 450210Primeyield(%)7.008.00 Primeyield(%) 5.00 7.60 Dublinhasanestimated3.25millionm2ofofficestock.Lastyear Milan has an estimated 11.7 million m2 of office stock. Office wasoneoftheworstonrecordforactivityintheDublinoffice occupier demand was fairly muted in 2009, with total take-up market,withoccupiertake-upslumpingtoaround75,000m,the of around 190,000m. However there are encouraging signs lowestlevelsince1994. ofarecoveryinthemarketin2010,witharound220,000mof take-upforecastfortheyearasawholewhichwouldrepresent Therehasbeenarevivalduringthefirsthalfof2010,asaresultan increase of 16%. Demand is predominantly for new and of increased business confidence and activity from overseas centrally-located office space between 400 and 500m, with occupiers. Office take-up for 2010 is forecast at around mostoccupierspreferringtoleaseratherthanpurchase.There 100,000m, which would represent an increase of 33% on isverylittletake-upofolderofficesinperipherallocations. lastyear.Manyoccupiersarelookingtotakeadvantageofthe favourablerentaldealsthatarecurrentlyavailable.Activitytends Availability in the Milan office market increased significantly in tobefocussedontheprimedistrictsofDublin2and4.2009, as a result of increased levels of vacancy and delivery of around 220,000m of new office space. Many occupiers Followingthesteepdropinoccupierdemandlastyear,aroundahave started to reduce employee numbers and space, while fifthofallofficespaceinDublinisnowvacant.Thedevelopmentrenegotiatingmorefavourabletermsonleases.Thevacancyrate pipeline, which has been in decline since 2008, is forecast to atmid-2010was9.4%.Itisexpectedtoremainstableatthislevel halveagainin2010toaround50,000m.Thisreduction,combined fortherestof2010owingtoaslowdownofdevelopment,an withincreasedoccupierdemand,shouldresultinastabilisation upturnindemandandchangesofusefromofficetoresidential. oftheofficevacancyrateat21.0%fortheremainderof2010. Primein-townrentswerearound 450/m/annumattheendof Primerentsforpremium-quality,in-townofficeaccommodationH12010andareexpectedtoremainstablefortherestofthe fellto 375/m/annumbytheendofH12010,andareexpectedyear.However,rentsforsub-standardspacearelikelytocome to remain at this level for the second half of the year. Out-of-underincreasingpressure. town rents declined to 215/m/annum by mid 2010 and are alsoexpectedtoholdsteadyfortheremainderoftheyear. Office investment activity in early 2010 was better than the same period a year ago, although not quite as high as in Q4 Theinvestmentmarketremainedsubduedoverthefirsthalfof2009. There were several transactions of small-medium size, 2010, with restricted availability of good quality stock. Despitespreadacrossthecity.Themostactiveplayersweredomestic the lack of product, the number of overseas investors activelyfunds accounting for approximately 70% of total investments. investigating the market has increased, with a number of Overthenextsixmonthsasimilarlevelofactivityisexpected, European funds in discussions with Irish developers and theirwith domestic investors (funds in particular) disposing of and bankstosecureoff-markettransactions.acquiringimportantinvestmentopportunities.Investmentturnoverislikelytoincreaseinthesecondhalfofthe year,withbothIrishandinternationalbankslikelytoencourage borrowers to offload their income-producing assets to reduce borrowings. Prime yields for long term secure income are likely to strengthen, with a number of buyers actively looking for suitable product. Yields for short term income and heavily over-rented buildings will, however, continue to struggle as confidenceinthelettingmarketremainsfragile.Dublin prime rents and yields Milan prime rents and yields800 8 6008 6006 400 4006 4 200200 0 2 042006 20072008 2009 Q2 2010200620072008 2009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum)Prime yield (%)20 22. LUXEMBOURG - NETHERLANDS - Luxembourg Amsterdam Contact: AgencyandInvestmentMichael Chidiac Contact:AgencyandInvestmenting Merijn F. Hartog RealCorp Luxembourg SA, 22 Avenue Monterey, L-2163DRSMakelaars,Amsteldijk194,1079Amsterdam Luxembourg(+352262729) (+31206405252) In-townOut-of-town In-townOut-of-townPrimerent(/m/annum) 420 300Primerent(/m/annum) 300 190Primeyield(%) 6.00 7.50Primeyield(%) 6.50 7.50 Luxembourg has an estimated 3.05 million m2 of office stock. Amsterdamhasanestimated7.0millionmofofficestock.The Office occupier take-up underwent a significant reduction in Dutcheconomyshrankby4%over2009andthishadastrong 2009,onlyreaching110,000m,a57%decreasefrom2008.Take- impact on both the occupier and investment markets. Annual up in the first six months of 2010 amounted to approximatelytake-updroppedsharplyovertheyearto192,000m,wellbelow 50,000m.Thisreflectsaslightreboundinthemarket,withQ1thefiveyearaverageof327,000m. take-upat20,000mandQ2take-upat30,000m.Followingtherecession,occupiersremaincautious.Therehave Supply has trended upwards and is now at a new high. The beenincreasedlevelsofleaserenewals,asexistingoccupiers vacancy rate at mid-2010 rose to 8.0% and this is forecastpostponere-locationtosavecosts,whilstnewtenantsaretaking to increase again, to around 8.2% by the end of 2010. Theadvantage of increased incentives and lower rents. Overall, development pipeline remained at a reasonable level in 2009,occupieractivityisforecasttoslowtoaround180,000mduring with around 140,000m of new stock delivered to the market,2010. themajorityofwhichwasspeculative.Thisrepresentedonlya smalldroponthepreviousyearandanadditional125,000misTheavailabilityofofficespaceinAmsterdamisincreasingdue forecasttocomeonlinebytheendof2010. to a rising level of tenant-released space. As a consequence,thevacancyratehasincreasedfrom9.0%attheendof2008to Rentsforprimelocationshaveheldstableat420/m/annum.16.5%attheendof2009.Itisforecasttorisefurther,toaround However,duetothepatternofrisingsupplyandfallingtake-up, 17.0%bytheendof2010. itisexpectedthattheremaystillbesomedownwardpressure overthenextsixmonths.Prime rents have remained stable at 300/m/annum for overa year, but remain under pressure as a result of increased Adropindemandcombinedwithalackofsuitableinvestmentincentivesandhighlevelsofsupply.Theoutlookisforcontinued product has meant that investment in the Luxembourg officestabilityovertherestoftheyear. market has been weak over the past year. The largest office transaction of 2009 was the acquisition of 12,000m of officeLowinvestmentvolumeshavebeenrecordedoverthefirsthalf spaceatPlateauduKirchbergbyBefimmoSCAfor 85million. of2010,althoughthereisevidenceofimprovementcompared There have been no significant office transactions in the firstwith the same period a year ago. However, the majority of halfof2010.Themarkethasnotbeenabletooffertheproduct transactions were small and dominated by private investors. ofotherEuropeancitiesandissufferingfromalackofbuyers.Foreign investment volumes were constrained, as buyers German open-ended funds, which used to account for around soughtmainlylong-leasedpropertiesinprimelocations,which 80%ofallinvestments,havenotyetreturned. have been in short supply. Key investment deals included thepurchaseofHetParcbyHannoverLeasingfor19million,thepurchaseofLauriergracht49byDomusMagnusfor12millionand the purchase of Herengracht 440-442 for 4.2million byLloydsACSBeheer. Luxembourg prime rents and yieldsAmsterdam prime rents and yields5008 40082506 200604 04200620072008 2009Q2 2010 200620072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%) 21 23. NORWAY - Oslo SPAIN - MadridContact:AgencyandInvestmentNils Arne GundersenContacts:Agency&InvestmentEmma Jackson NewsecAS,Kronprinsensgate3,POBox1800Vika,0123OsloKingSturgeLLP,30WarwickStreet,London,W1B5NH (+4723003100) (+442070875518) In-town In-townPrimerent(/m/annum) 362 Primerent(/m/annum) 360Primeyield(%)6.00 Primeyield(%)5.75 TheNorwegianeconomyisfacingaweakandslowrecoveryinMadrid has an estimated 11.8 million m2 of office stock. 2010.TheofficerealestatesectorinOsloisfollowingasimilar Occupier demand in the Madrid office market was extremely pattern and is showing sporadic signs of recovery. Occupierweakduring2009,fallingbackto300,000m.Thisrepresenteda demand in 2009 remained subdued, but has been slowly 40%decreasefrom2008andthelowestlevelseensince1995. improvingsince.Recentlydealsinclude:AkerSolutionstakinga Theslowdownindemandreflectedincreasingoccupiercaution new22,400mbuildingtobecompletedin2012andDeloitteASinthefaceofprolongedrecessionanddemandissettoremain whowillmoveintoanew15,000mbuildingin2013. subdued.Vacancyintheofficemarketrosesharplylastyear.Thisincrease On the supply side, office availability continued to rise, as was caused by the weak level of demand and the delivery ofcompanies moved to more affordable locations or reduced 140,000mofnewofficestock.Tenantshavesubsequentlyhad occupational space to save costs. A spike in supply was awiderchoiceofofficepremisesandaretakinglongertosignrecordedinQ12010,whenaround80,000mofnewspeculative leases.Higherlevelsofoccupieractivityareexpectedduringthe officesweredeliveredtothemarket.Theseprojectshadalready second half of 2010, partly because most rental contracts are commenced before the worst of the economic and financial renewedatyear-end. difficultiestookhold.Buttheoverallforecastfornewsupplyin 2010asawholeisbelowthelongtermaverage.Manyprojects Prime rents in the central business district fell significantly inremainonholdduetothehighavailabilityrateandweakdemand. 2009, but have now stabilised at 362/m/annum. Over the New developments are now only possible after a significant next six months rents may be subject to upward pressure, asamountofthespacehasbeenpre-let. occupiers use weak market conditions and higher levels of availabilitytoupgradetheirspace. Theincreasedquantityofavailablespacehascontinuedtopush rentsdownwards.Primerentsstoodat360/m/annuminmid- InvestmentactivityinOslowaspositiveinearly2010andwell2010,comparedwith408/m/annumoneyearago. uponthepreviousyear.Thesecondquarterwasslower,butit iswidelyexpectedthatthemarketwillcontinuetorecoverover Investment volumes in the Madrid office market declined H22010.Themajorityofdemandremainsfromlocalinvestors.substantiallyin2009.Thisreflectedbothalackofliquidityand However,international investors continueto buyin Norway as lowavailabilityofqualityproduct.Aggressivedomesticbidders evidencedbythelargesttransactioninH12010,asaletoNIAM. also forced foreign investors completely out of the running. Lendingopportunitieshaveimprovedgraduallyandprimeoffice Yields for properties in the CBD were generally lower than investmentyieldshavemovedinwardsby50basispointsover required by foreign buyers. There has been evidence of prime thepast12months,tostandat6.00%inmid-2010. yieldcompression,withratesdownto5.75%byQ22010. Oslo prime rents and yields Madrid prime rents and yields500 8 60084006 250 6 20040 4 022006 200720082009 Q2 2010*2006200720082009 Q2 2010 Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%)22 24. SWEDEN - StockholmSWITZERLAND - GenevaContact:AgencyandInvestmentMarie BuchtContact:AgencyandInvestmentRobert Mathieson Newsec Advice, PO Box 7795, Regeringsgatan 65, SE-103 96 Key Real Estate Consultants, 8 Chemin de Blandonnet, 1214 Stockholm(+4684544000)Geneva(+41225455100) In-townOut-of-townIn-town Out-of-townPrimerent(/m/annum) 390 187 Primerent(/m/annum)860465Primeyield(%) 5.25 6.50 Primeyield(%)4.25 5.25 Stockholmhasanestimated11.9millionm2ofofficestock.In Geneva has an estimated 4.38 million m2 of office stock. H12010therewasasmall,butencouragingincreaseinactivityOccupierdemandinthefirsthalfof2010improvedslightlyon ontheofficeleasingmarket.But,overtheyearahead,take-upthe same period a year ago. Total take-up for 2010 is forecast isnotforecasttorisedramatically,asmanycompaniesremain at85,000m,whichwouldrepresentanupturnofaround13% cautiousandcost-sensitive.from2009levels.SupplyhassteadilyincreasedintheStockholmmarket.Between Market activity began to improve in 2009 with enquiries from 2008and2009thevacancyraterosefrom9.5%to11.5%andita broad range of tenants, many of which were converted into isforecasttoriseto12.5%bytheendof2010.Thedeliveryof leasesin2010.Interestfromfinancecompaniesforprimecity newofficespacein2010isforecastataround160,000m,whichcentre space has been strong, either for expansion or new ismorethandoublethe2009level.Theincreaseinnewoffice offices.Demandintheairportareahasbeennotedfromboth stock,combinedwithrelativelyweakoccupierdemand,arethefinancial companies (for high quality back office facilities) and keyfactorsdrivingthevacancyrateupin2010. industrial companies looking for modern accommodation. The increasingpressureonhousing,healthandotherservicesinthe The Stockholm service sector started to stabilise from early city is also pushing businesses to other locations in the Lake 2010 and prime office rents are expected to remain fairly Genevaregion. static at around 390/m/annum. However, tenants are still concentrating on increasing the efficiency of their premises. Inadditiontotheupturnindemand,thedevelopmentpipeline There is increasing differentiation between modern / efficientfornewofficesisexpectedtobemuchstrongerin2010,with premisesandolderoffices. an estimated 75,900m to be delivered to the market. This constructionmarks a significantupturn on the past two years. LiquidityintheSwedishinvestmentmarkethasincreasedsince Until this space comes on-line, the volume of good quality mid-2009,withhighqualitypropertiesingoodlocationsmostin accommodation will be constrained, which is expected to demand.Stabilisingrentsandlowerinterestratesarethemajor increasepre-letting,astenantsareforcedtoplanahead. factorsbehindtherecovery.Afurtherinwardyieldmovementis expectedinprimelocationswithstronginvestorinterestduring The increase in tenant demand expected over second half of 2010.Thelargestofficetransactioninthefirsthalfof2010was theyearwillresultinavacancyrateofaround4.0%bytheend thepurchaseof40,000mofspaceatFrosundavikBusinessPark of 2010, well down from the end of 2009. Competition from foraround113millionbyKLPFastigheterAB developments in the area between Geneva and Lausanne will continuetobesufficienttokeeprentsgenerallystable.The investment market has continued to be slow, with a low level of both number of transactions and their average size. In general, lack of stock coming onto the market and the gap between buyer and seller expectations have been the major constraints. Notwithstanding this, investor interest is strong, with international buyers returning and more transactions anticipatedovertherestoftheyear. Stockholm prime rents and yieldsGeneva prime rents and yields60081,400 63005 700502 04 2006 20072008 2009Q2 2010 2006 200720082009 Q2 2010Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%)23 25. SWITZERLAND - ZurichUNITED KINGDOM - Belfast Contact:AgencyandInvestmentRobert Mathieson Contact: AgencyandInvestmentRory McConnell KeyRealEstateConsultants,28rueduVillage,1214Geneva McConnell Martin, Metropole House, 95/97 Donegall Street, (+41225455100) Belfast(+442890205900) In-townOut-of-townIn-townOut-of-townPrimerent(/m/annum) 620 270 Primerent(/m/annum) 135 110Primeyield(%) 4.255.25Primeyield(%) 7.008.50 Zurich city has an estimated 7.5 million m2 of office stock. Belfasthasanestimated750,000m2ofofficestock.Theoffice The office market came alive again at the end of 2009 withmarketcontinuestoundergoaperiodofstagnationwithdemand enquiries from a broad range of tenants, many of which havefrom both the public and private sectors having virtually dried beenconvertedintoleasesinthefirsthalfof2010.Interestinup over the past 12 months. Take-up for 2009 reached just prime city space has come from finance, either for expansion7,430m,a60%decreaseonthepreviousyear,andtheoutlook or the setting up of new offices. Demand in Zurich West has for 2010 is bleak with activity levels likely to be below that beennotedfrombothfinancials,particularlythoseseekinghigh achievedlastyear. quality back office facilities, and industrial companies looking for modern accommodation. Other areas of interest include Government-ledtake-upusuallyaccountsfor50-60%ofoccupier Oerlikon,OpfikonandSeefeld.activityinBelfastsothepublicsectorcutswillhaveadevastating impact on the market with any existing requirements now on As tenant demand is good, further strong take-up is expectedhold.Inaddition,theprivatesectorcontinuestofocusoncost inthesecondhalfoftheyear,keepingtheofficevacancyratecutting and more economic use of space, further impacting stableat3.8%.Furthermore,thenumberofpre-letsisexpectedon the already subdued take-up levels. Only one deal of any toriseastenantsareforcedtoplanaheadinthefaceoflimited significancewasreportedduringH12010,namelythePassport quality accommodation, and the interest in projects such asOfficeacquiring2,462matLawSocietyHouse,VictoriaStreet. CSAMsPrimeTowerinZurichWestisstrong. TheBelfastmarketremainsoversupplied.Anumberofschemes Competition from new developments will keep rents stable inhavecompletedinthelastsixmonthsincludingObelTowerand Zurich, although an overhang of vacant offices in some areasTheBoatonDonegalQuayandTheSoloistandLanyonPlazaon willleavesomesecondarylocationsfacingdownwardpressure.Lanyon Place. These schemes remain vacant with substantial incentives on offer to tenants. Construction continues in the The investment market has continued its slow trajectory over TitanicQuarterwhereHarcourtachievedan11,150mlettingto thefirsthalfoftheyear.Agrowingnumberoftransactionsare Citibankin2009,whichadmittedlyhadbeeninthepipelinesince beingundertakendirectlybetweenprincipals,suchasthesale 2007. ofabuildinginBahnhofstrassebyCrditSuisse.Butingeneral thelackofstockonthemarketandthegapbetweenbuyerandPrime rents have fallen dramatically, dropping from 176/m/ sellerexpectationsarethemajorconstraints.Notwithstandingannum (14/ft/annum) to 135/m/annum (11/ft/annum) in this,interestisstrong,withinternationalinvestorsreturningtothe city centre over the past 12 months. Further downward themarket. pressureonrentsisexpectedoverthesecondhalfoftheyear, withcontinuinggenerousincentivespackages,inabidtosecure tenants.TheinvestmentmarketremainssubduedinBelfastwithprime yields moving out from 6.50% to 7.00% in the city centre, although there is limited evidence to support this. However, activitylevelsarelikelytoincreasewhenbanksstarttooffload distressed stock and there is some evidence that investment vulturesarebeginningtocircleBelfast. Zurich prime rents and yields Belfast prime rents and yields800 8200 8600 400 6100 6200 0 4200620072008 2009Q2 2010* 0 4200620072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%)Prime rent ( /m2/annum) Prime yield (%)24 26. UNITED KINGDOM - UNITED KINGDOM - Birmingham Bristol Contact:AgencyJonathan CarmaltContact: Agency Ian WillsInvestment Oliver Paine InvestmentRichard Goodall KingSturgeLLP,40BerkeleySquare,BristolBS81HU KingSturgeLLP,45ChurchStreet,Birmingham,WestMidlands, (+441179276691) B32RT(+441212332898) In-townOut-of-townIn-townOut-of-townPrimerent(/m/annum) 331 239Primerent(/m/annum)337 258Primeyield6.00 7.50Primeyield(%)5.75 6.25 TheBirminghamofficemarketsawareasonablestartto2010 Bristols occupier market was surprisingly resilient during the with the Office for Legal Complaints acquiring 3,775m in thefirsthalfof2010withaclutchofprimedealscompletinginthe city centre. However, demand generally remains subduedcitycentreduringthefirstquarterincluding2,044mtoErnst& withcentralBirminghamtake-upreaching26,460mduringH1 YoungatTheParagon,afurther2,230mtoNFUatTempleback 2010.Officeactivityinthesecondhalfoftheyearislikelytoand1,858mtoTheCollegeofLawatTempleCircus.Inaddition, remainfragilewithfewknownlargerrequirementsinthemarket afurther2,044mwastakenout-of-townatHarlequinBusiness coupledwiththeuncertaintyofpublicsectorcuts.Onthisbasis,ParkbythePoliceAuthority.Incontrastthemarketforsecond take-upfor2010asawholeisexpectedtobeintheregionofhandspacehasseenlimitedoccupierdemandsofarthisyear. 46,450m,24%downonthelevelachievedin2009.Take-up during 2010 is expected to be in line with the levels AvailabilityrosesharplyinBirminghamin2009followinganinflux achieved in 2009 when 30,380m was transacted in the city ofGradeBspacereturnedtothemarketandthecompletionofa centreand24,900mout-of-town.Bristolhasabroadoccupier numberofnew-buildschemes.Whilesupplylevelsnowappearbasesoisbetterplacedthansomecitiesbutmaysuffersome to have plateaued, the vacancy rate for central Birminghamdownturn in demand following restrictions in public sector wasintheregionof22.0%atmid2010,thehighestofallthespending. majorregionalcitycentres.Notsurprisingly,nonewspeculative schemesareexpectedtostartonsitefortheforeseeablefuture.BristolcitycentrehasthelowestvacancyrateintermsofprimeaccommodationofanyoftheBig6regionalcities,witharateof Despite difficult market conditions, a good range of office 10.0% (down from 12.0% in 2009) expected at year-end. The supply now exists together with some highly competitivespeculativestartonsiteinQ12010ofthe10,500mBridgewater occupier terms and there are early signs that some occupiers HouseatFinzelsReachdemonstratesconfidenceintheBristol areseekingtoforwardagreetransactionsinadvanceoftheend marketinlightofrelativelyconstrainedprimesupply.Thisisthe oftheircurrentleaseliabilitiesinordertotakeadvantageofsuch only new speculative development activity in any of the major terms.Primerentallevelsandtheincentivesofferedtotenants regionalcitycentresduringH12010andisdueforcompletion stabilised during H1 2010, although going forward the rentalin2011. outlook for Birmingham remains uncertain. Prime city centre rentsstoodat 331/m/annum(27/ft/annum)atH12010. Primecitycentrerentshaveseenaslightupliftoverthepast12monthsto337/m/annum(27.50/ft/annum)andareexpected The latter half of 2009 saw increased investor activity in to remain at this level throughout 2010. Out-of-town rents Birminghamandadramaticcompressionofinitialyieldsforprime have stabilised at 258/m/annum (21/ft/annum). However GradeAoffices.Therewereanumberofnotabletransactionsoccupiersareexpectedtocontinuetolookatdrivingdowncosts duringthisperiodincludingthesaleof7,8&10Brindleyplaceandobtainingrentalincentives,impactingonneteffectiverental (25,718m)for101.5m(7.00%).Bytheendof2009andintolevels. Q12010yieldshadmovedinsignificantlywithNo.2StPhilips PlaceacquiredbytheGermanfundSEBfor29m(5.85%)andThe weight of money continues to fuel demand for prime RutlandHousesoldtoAvivaInvestorsfor27m(6.10%). investment property in Bristol and during Q2 2010 the BritishSteelPensionFundpurchased1GeorgesSquareat5.75%.The However, with the continuing shortage of prime investmentcurrentcycleislikelytohavepeakedatthislevel,althoughthe opportunitiesinthemarketplaceandcontinuinguncertaintyover lack of prime supply will stabilise yields. Investor appetite for rentallevelsinanoversuppliedoccupationalmarket,asoftening secondaryandtertiaryspaceremainslimitedasvoidperiodsand ofprimeyieldstothelongtermaverageforthecityofbetweenweaktenantdemandareofconsiderableconcerngoingforward. 6.25%and6.50%isexpectedoverthelatterhalfof2010.Birmingham prime rents and yieldsBristol prime rents and yields5008 50082506 250604 04200620072008 2009Q2 2010 2006 20072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum)Prime yield (%) 25 27. UNITED KINGDOM - UNITED KINGDOM - CardiffEdinburgh Contact:Agency Andrew HayesContact:AgencyJohn Clement Investment Jonathan Phillips Investment Chris MacFarlane KingSturgeLLP,HaywoodHouse,DumfriesPlace,CardiffCF10KingSturgeLLP,7CastleStreet,Edinburgh,EH23AH 3UE(+442920227666) (+441312254221)In-townOut-of-townIn-townOut-of-townPrimerent(/m/annum)257 194 Primerent(/m/annum) 344 221Primeyield(%)6.50 7.00 Primeyield(%) 6.00 8.50 Cardiff continues to see subdued take-up levels as occupiersEdinburghhasanestimated2millionmofofficestock.Take-up remaincautious.Take-upfor2010isexpectedtobeintheregion heldupwellduring2009andreached46,450m,butremained of 32,000m, about 30% below the long term average. While30% below the long-term average. This steady level of take- there are limited new enquiries some occupiers, with breaks up was achieved despite the highly unfavourable economic or lease expiries, are taking the opportunity to trade up withconditions and Edinburghs exposure to the banking sector. extensiverentalincentivesonoffer,oftentheequivalentof2 Take-upfor2010isexpectedtobesimilarto2009,predominantly yearsrent. in transactions below 930m. There are very few corporateoccupierslookingforspaceinEdinburghatpresent,sodemand The widely anticipated public sector cuts are an additional isexpectedtocomefromtheindigenousmarket,typicallythe threat to demand for office space in Cardiff. The combinationlocalprofessionalsectors. ofreducedpublicsectoractivityandthelikelyreleaseofsecond handspacebacktothemarketbythissectorwillfurtherincreaseDuring2009anumberofnewschemescompletedinEdinburgh, theimbalancebetweensupplyanddemand. boostingthesupplyofGradeAspaceinthemarket.Thevacancyrate stood at 12% at mid-2010, its highest level since 2003. AnincreaseinavailablesecondhandspacehaspushedCardiffs However funding difficulties and low demand will continue vacancy rate up to 12.5% and this is expected to increase to to discourage new projects and the vacancy rate is therefore nearer 13.5% by year-end. However, available Grade A spacenot expected to rise further. Prominent available schemes remains relatively scarce, and limited development activity in Edinburgh city centre at mid-year include Exchange Place indicates there is likely to be a shortage going forward. The (19,500m),WaverleyGate(18,900m)andTanfield(17,700m). onlyspeculativeactivitycurrentlyonsiteisJRSmartsCapitalPrime city centre rents stabilised at 344/m/annum (28/ft/ Quarter,whichwillprovide3,425mofnewofficespacewhenitannum) during the first six months of 2010 but out-of-town completesinwinter2010.Whendeveloperconfidencereturnsrentshavefallento221/m/annum(18/ft/annum).Thelevel there are a number of oven ready sites in the city centreof incentives is typically three months for every year of the including MEPCs Callaghan Square and future phases of JRlease.Fortherestoftheyear,citycentrerentsareexpectedto SmartsCapitalQuarter.remain stable while out-of-town rents are likely to facefurtherdownwardpressure. At H1-2010 rents in the city centre stood at 257/m/annum (21/ft/annum),whilstout-of-townofficerentswere194/m/ Thecitysinvestmentmarketexperiencedastrongstartto2010 annum(15.75/ft/annum).Primeheadlinerentsremainsteadywith good interest from institutions in prime stock. Over the althoughincentivescontinuetocomeunderpressure. past 12 months prime yields have moved in from 7.25% to6.00%, as evidenced by the sale of Edinburgh Quay 2 at the Cardiffs investment market saw a bounce in activity levels endof2009for28million.Goingforwardtheprimemarketis during late 2009 and into the start of this year, resulting in aexpectedtostabilisealthoughtherewillbelimitedgoodquality significantyieldshiftto6.50%forcitycentreoffices(7.75%12stock for sale. The secondary market remains poor with yield months ago) and 7.00% out-of-town (9.00% 12 months ago). differentials widening to reflect the inherent risks associated However, there are concerns that this level of activity is nowwith this sector. The out-of-town market remains challenging, startingtofalter.Thereisstillaweightofmoneychasingprime which can be attributed to the short term nature of the lease investmentproductbutthemarketforsecondarystockislikely periodsonpropertieswhichhavebeenofferedonthemarket, tobecomeincreasinglypolarised.andreflectingthisyieldshavemovedoutto10.00%.Cardiff prime rents and yields Edinburgh prime rents and yields6008 50083006 250604 042006 20072008 2009Q2 2010200620072008 2009Q2 2010 Prime rent ( /m2/annum)Prime yield (%)Prime rent ( /m2/annum) Prime yield (%) 26 28. UNITED KINGDOM -UNITED KINGDOM - Glasgow Leeds Contact:Agency-Campbell Hart Contact:AgencyRichard Thornton InvestmentChris Macfarlane InvestmentAndrew Summersgill KingSturge,6thFloor,145St.VincentStreet,Glasgow,G25JFKingSturgeLLP,CityPoint,29KingStreet,Leeds,LS12HL (+441412042221)(+441132441441) In-townOut-of-townIn-townOut-of-townPrimerent(/m/annum) 306 190 Primerent(/m/annum) 331 221Primeyield(%) 5.75 8.00 Primeyield(%) 6.507.25 OccupieractivityinGlasgowheldupwellin2009despitedifficultFollowing a further deceleration in activity in 2009, the Leeds market conditions. City centre take-up reached 38,100m but market faces a subdued 2010 with take-up levels likely to be muchinlinewiththepreviousyear,intheregionof55,740m. wasskewedbyfourlargetransactionswhichaccountedforover Themarketcontinuestobedominatedbysmallertransactions 50%oftotalactivity.DemandlevelsfellsharplyduringH12010 below 465m and there are few corporate requirements in with take-up for the market as whole reaching just 11,150m.excessof930m.Duringthefirstsixmonthsof2010therewere With little sign of new occupiers entering the market and notransactionsover1,400minthecitycentre. uncertaintyoverpublicsectoractivity,take-upfortheyearasa ThevacancyrateforLeedsstandsat13%and,whilethereisan wholeislikelytobeintheregionof37,160m.oversupplyofGradeAspace,themajorityofthisisoutsidethe traditionalcore.Withdevelopmentonholdandnonewactivity AtH12010therewas35,300mofnewGradeAspaceavailable expectedtostartonsite,anyfurtherriseinavailabilityinthecity for occupation in Glasgow and, given market conditions, centre will depend on second-hand space. Out-of-town supply competition for tenants is intense and incentive levels areremainsplentiful,withvacancyrateslikelytoremainhigherfor longer. commensuratelygenerous.However,adrydevelopmentpipeline throughto2011/12andsomestabilisingoftheeconomyislikely However there are tentative signs that business confidence is toleadtoashortageofGradeAspaceoverthistimeframewhich returningandasoccupiersadapttomarketconditionsthereis shouldencourageanotherdevelopmentcycle. likely to be some churn as they seek to exploit the incentives onofferorregearleasesonmorefavourableterms.Headline primecitycentrerentsrosemarginallyto331/m/annum(27/ ThecurrentsupplyofresidualGradeAspaceisputtingpressure ft/annum)overthe12monthstoendH12010whileout-of-town onheadlinerentalvalues.Overthe12monthstoendH12010,rentsfellto 221/m/annum(18/ft/annum).Bothmarketsare city centre rents reduced from 350/m/annum (28.50/ft/ expectedtofacedownwardpressureoverthenextsixmonths. annum) to 306/m/annum (25.00/ft/annum) but are likely to stabilise over the next six months. Out-of-town rents, skewedThe first quarter of 2010 saw an improvement in investment activity and further compression in prime yields as funds re- by oversupply in developments with Enterprise Zone status,entered the Leeds city centre market. In February 2010 No havefallento190/m/annum(15.50/ft/annum)andarelikely 1 Whitehall Riverside was sold to NFU Mutual for 51.3m, to ease back further to (153/m/annum (12.50/ft/annum). reflectingayieldof5.95%.WhileactivitylevelsslowedintoQ2, Incentivesremaingenerouswithtenantscomfortablyreceivingthereisevidenceofincreasedappetiteforgoodqualitymulti-let threeyearsrentfreeorcashequivalentona10-yearlease.citycentreopportunities,inparticularwherethereispotentialto addvalueandthereisaspreadofrisk.Primeyieldsareexpected toremainstableinthecitycentreoverthelatterhalfof2010but Glasgowsinvestmentmarketwasrevivedduringthelatterhalf thereislikelytobesomeoutwardmovementout-of-town. of2009andintoQ12010withcitycentreprimeyieldsmovingin from7.25%to5.75%.Anumberofcitycentrebuildingswere The first quarter of 2010 saw an improvement in investment soldforintheregionof6.00%andBroadwayOnewassoldto activity and further compression in prime yields as funds re- entered the Leeds city centre market. In February 2010 No KanAminJanuary2010for5.75%(51m).Out-of-town,where1 Whitehall Riverside was sold to NFU Mutual for 51.3 m, the concentration of prime stock is less, yields have moved reflecting a yield of 5.95%. During Q2, the BT building on in from 9.00% to 8.00%. Going forward the funds will remainSovereignStreet,whichislettoBTPlcforafurther10years, focussed on prime stock with solid fundamentals whilst the wassoldat40.175m,reflectinganinitialyieldof6.75%.While secondarymarketwillcomeunderpressureintermsofpricing.investmentactivitylevelshaveslowedslightlyoverthelasttwo quarters,thereisevidenceofincreasedappetiteforgoodquality multi-let city centre opportunities, in particular where there is potentialtoaddvalueandthereisaspreadofrisk.Primeyields areexpectedtoremainstableinthecitycentreoverthelatter halfof2010butthereislikelytobesomeoutwardmovement out-of-town. Glasgow prime rents and yieldsLeeds prime rents and yields6008500 83006250 6040 4200620072008 2009Q2 2010200620072008 2009Q2 2010Prime rent ( /m2/annum) Prime yield (%) Prime rent ( /m2/annum) Prime yield (%)27 29. UNITED KINGDOM -UNITED KINGDOM - Central LondonManchester Contact:AgencyMark Bourne/Chris Watkin Contact:AgencyChris Mulcahy Investment-James Beckham/Simon BeckettInvestmentSimon Merry KingSturgeLLP,7PrincesStreet,LondonEC2R8AQ KingSturgeLLP,OnePiccadillyGardens,ManchesterM11RG (+442077965454)-City(+441612368793) KingSturgeLLP,30WarwickStreet,LondonWIB5NH (+442074934933)WestEndCityWest EndIn-townOut-of-townPrimerent(/m/annum) 626885Primerent(/m/annum)350 227Primeyield(%) 5.25 4.75-5.00Primeyield(%)6.00 7.50 CentralLondonofficeshaveseenaturnaroundinfortunesover Manchestercurrentlyhasanestimated1.3millionmofoffice thelast12months.TheWest End occupiermarketperformedstock.Whiletake-upinthecitycentrewasdown10%in2009the betterthanexpectedinthefirsthalfof2010.ActivityinH12010widerManchestermarketboostedoveralltake-upto176,510m was close to the 2009 total and a decline to sub-6% vacancy withanumberoflargertransactionscontributingtothemarkets rateshasagainsignalledrentalgrowth.Primerentshaverisen resilience.However,occupierdemandhasnoticeablydropped by8%fromthelowsofend-2009(insterlingterms),andthere in2010withthelevelofenquiriesandcompletedtransactions are now super-prime deals signing in excess of 1,000m / reducing. City centre take-up is expected to be in the region annum.of 51,100m in 2010, down a third on the level achieved the previousyear. Inthesecond-halfofthisyear,rentalgrowthwillbedrivenbythe shortageofGradeAspace,particularlyintheCore.DevelopersThelargestdealoftheyearsofarinthecitycentreisMarksand arerespondingtothisandstartingnewschemes,whiletherewillSpencer acquiring 1,950m in Spinningfields for administrative be opportunities for landlords to bring quick refurbishments topurposes.Whereaspublicsectordemandboostedanotherwise market.Take-upmaymoderateinH22010,asthefirsthalfwas subduedcitycentremarketin2009,cutbacksinthissectorwill pepperedwithsomeunusuallylargedeals.Butthe307,000mhaveanegativeimpactondemandlevelsin2010. expectedisinlinewiththelong-termmarketaverage. However,thelevelofsupplyinManchesterisreducingsothe The City of London office market has also seen a markedmarket remains in balance. Vantage Point (4,580m), the only recovery.Lettingactivityhassurged,with250,000msignedfornew space under construction in the city centre, completed in H1 2010, while vacancy has declined to 8.9% as availability at the start of the year and the supply tap is now fully turned sunk to an 18-month low. As a result, prime rents have risenoff.TheGradeAlargefloorplatemarketisseeingthegreatest fromtheirtroughofjustabove500mtothemid-2010levelofreductioninavailability. 626m/annum. Following a decline in rents in 2009 there has been some With significant space under-offer, City take-up is expected tostabilisationinprimerents(atlocalcurrencylevels)during2010 reach a three-year high of 418,000m in 2010. An extremelyandduetoshortagesofnewGradeAspaceanincreaseinnet limiteddevelopmentpipelineintheyearsto2012impliesfurthereffectiverentallevelsisexpectedduringthelatterhalfof2010. strong rental growth ahead as well. In addition, with demandHeadline rents in the city core remained at 350/m/annum expectedtofaroutstripnewsupply,thereisalsoanexpectation(28.50/ft/annum) at mid-2010, while South Manchester out- thatpre-letswillreturntothemarketinthenearfuture. of-townrentsstabilisedat227/m/annum(18.50/ft/annum). The Central London investment market has remained healthy,Investor demand for prime central Manchester offices picked buildingonthestronginflowsofH22009.Withbuoyantdemand up during the first half of 2010 following two years of limited from both overseas and domestic investors, the result hasprimestockavailability.Thefirst6monthsof2010saw249.9 been a competitive market for prime stock and further yield million invested in 3 transactions, compared to a total of just compressionoverthelastsixmonths.Thishasbeenreinforced 166.0millionfortheprecedingtwoyears.Thelargestofthese by the healthy rental growth emerging in the occupationalwasAeriumsacquisitionof3HardmanStfromAlliedLondonfor market.Bymid-2010,primeyieldswerebelowtheirlong-term 182.5million(6.30%),theCityslargesteverofficeinvestment average in both City and West End. The uncertain economic transaction.Yieldsformodernwellletbuildingsareexpectedto climate,however,meansthatanyfurtherinwardmovementwill remainintheregionof6.00%-6.25%fortheremainderof2010 belimitedintherestof2010. withonebuildingunderofferat6.00%atend-Q2.London prime rents and yields2,000 8 Manchester prime rents and yields50081,000 52506 02 2006200720082009Q2 2010042006 20072008 2009 Q2 2010Prime rent - City ( /m2/annum) Prime yield - City (%)Prime rent - West End ( /m2/annum) Prime yield - West End (%)Prime rent ( /m2/annum)Prime yield (%)28 30. UNITED KINGDOM - UNITED KINGDOM - NewcastleThames Valley Contact: AgencySimon Taylor Contact: AgencyPiers Leigh InvestmentDickon Wood InvestmentAngus Minford KingSturgeLLP,51GreyStreet,NewcastleuponTyne,NE16EE KingSturgeLLP,30WarwickStreet,LondonW1B5NH (+4419112790011) (+442074934933) In-townOut-of-town In-townOut-of-townPrimerent(/m/annum) 257 193Primerent(/m/annum) 343306Primeyield(%) 6.75 8.00Primeyield(%) 6.25 7.00 Newcastle has an estimated 2.6 million m of office stock, of The Thames Valley has an estimated 5.7 million m2 of office which around 1.4 million m is located out-of-town, much of itstock. It covers a large triangular area of the South East of withinEnterpriseZones.UnlikethemajorityofotherUKoffice England, spreading westwards from London, roughly bounded centres, Newcastle had a strong 2009 with demand levels up by the M40 and M3 motorways, encompassing the important 49%onthepreviousyear.Thissurgeintake-upwasdrivenbyoffice markets of Reading, Maidenhead, Bracknell, Slough and activityintheout-of-townmarketincludingTescoBankacquiring Heathrow. 9,476matQuorum.Followingachallenging2009theThamesValleyexperienceda ActivitylevelsinNewcastlewillbemorerestrainedduring2010relativelystrongstartto2010,althoughtake-upremainsbelow with take-up levels expected to be in the region of 24,150m, the five-year quarterly average of 36,230m. During the first so down 64% on the exceptional level seen in 2009.The first six months of the year, 61,410m of office space was taken- halfof2010hasseenanabsenceofenquiriesover930mandupintheThamesValley,up42%onthesameperiodlastyear. unsatisfiedpublicsectorrequirementshavebeenputonhold.Take-up has been boosted by GE acquiring 11,446m at TheArk,Hammersmith;thelargestdealintheThamesValleysince Vacancy levels are comparatively low in Newcastle when Q2 2008. Going forward, at mid 2010 the Thames Valley had comparedtosomeotherUKregionalofficecentres.AtH1-2010 56,670munderoffer,thehighestlevelsinceourrecordsbegan the vacancy rate stood at 8.5% and is expected to increasein 2004. The increased activity shows corporate confidence to 9.0% by year-end. The supply of second hand stock is returningtothemarketafteraperiodofdelayeddecisionmaking. expectedtoincreaseasbreakclauses