Reimv - 20100813 - UK Spotlight - August 2010

Country Spotlights
Quarter 3 – August 2010
AXA Real Estate’s European Quarterly Country Review
United
Kingdom
Country Spotlights
QUARTER 3 - 2010
United Kingdom
Executive summary
 Quarterly UK economic growth looks as though as it has reached its peak in Q2 2010
 The largest and longest fiscal squeeze since the 2nd World War will hit the consumer in 2011
 The surge of large office lettings in London faded in Q2 2010 impacting on take-up levels
 Retailers warn of tougher trading conditions ahead. London is expected to be more resilient
 The recovery in property values is running out of steam. Anecdotal evidence points to yields
increasing by 25 basis points in some segments in June
Exhibit 1 Macro economic overview

Provisional Q2 2010 GDP data was much stronger than
UK quarterly GDP components expected, with the economy growing by 1.1% over the
% QoQ
2 quarter – the largest quarterly increase since Q1 2006. It
1 came as no big surprise that output in the manufacturing
0 sectors rebounded strongly, increasing by 6.6% and 1.6%
-1
Change in inventories and other
respectively. However, it was the sharper than expected
-2 Net Exports recovery in the service sector that surprised, growing by
Household consumption
Gov expenditure
-3
Capital expenditure 0.9% over the quarter after the lacklustre growth in the
GDP
-4 previous two quarters. This is now a private sector-led
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
recovery, with business services and finance leading the

Source : Datastream
way. Government expenditure is already slowing,
Note: seasonally adjusted, constant prices
accounting for only 0.2% points of the quarterly economic
growth.
Exhibit 2
However, economic growth will be less impressive in Q3
GBPbn UK Discretionary Policy Tightening 2010. The risks of a double dip recession may have
(cumulative)
140 Inherited
abated for this year, but the latest Purchasing Managers
120
Emergency Budget Index surveys are pointing to a slowdown in growth in both
Total
100
the service and manufacturing sectors.
80
The UK faces a tough time ahead, hampered by the poor
60 state of its public finances with the current public deficit to
1
40 reach record highs (113% of GDP ).
20
0
2010-11 2011-12 2012-2013 2013-2014 2014-2015 2015-2016
1
Source: Oxford Economics Estimates for 2009-2010 in HM Treasury Budget 2010, June
2010
-2-
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Disclaimer: © 2010 AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved. These pages are not
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The
information contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a
decision to enter into a transaction or for any investment decision. The analysis and recommendations express the views of AXA
Real Estate Investment Managers. Its application is adapted to each portfolio in order to optimise the management constraints which
are specific. The past performance of securities or other instruments does not guarantee or predict future performance. The
information contained on this page may not be reproduced or circulated without our written authority.
Country Spotlights
QUARTER 3 - 2010
United Kingdom (ctd.)
The new government has taken steps to address this

mountain of debt, outlining stringent measures in the
emergency budget in June (see Exhibit 2). Official Treasury
forecasts now expect the deficit to fall from GBP149bn this
year to GBP37bn in 2014-2015 in the largest and longest
austerity plan since the Second World War. The more
positive Q2 2010 GDP numbers will also support the
government’s decision to address the deficit faster than the
previous government had intended. However, the sheer
scale of the planned readjustment of public finances will not
just be felt in the coming quarters but over the coming
years.
Despite the unemployment rate stabilising at 7.8% over Q2

2010, another rise in unemployment is possible. According
to a recent survey, a third of employers are still planning to
There are signs of a slowdown in reduce staffing levels2. This will largely be driven by the
public sector and the forecast is for 600,000 public sector
the recovery of consumer job losses over the next five years. The net employment
spending. Also one in three employers index, which measures the difference between the
percentage of employers looking to hire and those
plans to reduce staffing levels
preparing to cut staff, was still very negative for the public
over the coming months sector at a net balance of -35.
The poorest prospects were in Local Government (net

balance of -74) and Public Administration and Defence (net
balance of -59). This suggests that the improvements in the
private sector might not be enough to offset the
deterioration in job prospects in the public sector. There is
also a risk of a slowdown in private sector employment, with
signs of a summer reduction in hiring in the City3.
Tax increases, such as the VAT increase from 17.5% to

20% in January, and the public sector squeeze will hit the
UK consumer. According to the latest Bank of England
agents’ report, there were signs that consumer spending
had already dropped over the second quarter.
2
Labour Market Outlook, August 2010, Chartered Institute of
Personnel and Development and KPMG
3
Hiring Slows - Usual Summer Downturn, Or More Worrying?,
Here is the City, August 10th 2010
-3-
intended as an offer or solicitation, or as the basis for any contract, for the purchase or sale for any fund or instrument. The information
contained in these pages shall not be deemed to constitute advice and should not be relied upon as the basis for a decision to enter into
a transaction or for any investment decision. The analysis and recommendations express the views of AXA Real Estate Investment
Managers. Its application is adapted to each portfolio in order to optimise the management constraints which are specific. The past
performance of securities or other instruments does not guarantee or predict future performance. The information contained on this
page may not be reproduced or circulated without our written authority.
Country Spotlights
QUARTER 3 - 2010
This, combined with the first signs of a stalling in the

recovery in house prices and signs of mortgage credit
tightening, points to a tough time ahead for consumers.
Demand for Central London The occupier markets
offices fell by 40% during Q2 2010 Offices
4
given the sharp decrease in the Take-up of Central London offices fell by 40% over Q2
2010 – a weak quarter which was 20% below the long term
number of large deals. This swing was trend. This was driven by the surge of large deals in Q1
most marked in the City with only one 2010, fading away in Q2 2010. As an example, there was
deal above 50,000 sq ft only one deal signed in Central London in Q2 2010 of over
100,000 sq ft (Shell leasing 187,000 sq ft in the Docklands)
compared to nine in the first quarter. The fall in active
requirements was because of a partial satisfaction of pent
up demand of companies that have been looking for space
Exhibit 3
for several years before committing this year.
City take-up and availability ratio
m sq ft % The financial and business services sectors accounted for
2.5 Grade A Grade B Grade C Availability Ratio (RHS) 14.0
28% of take-up in Central London in Q2 2010 (a sharp fall
12.0
2.0 from 40% in Q1 2010). The manufacturing/energy sector’s
10.0
1.5 share increased to nearly 20% but this was largely
8.0
6.0
attributable to the Shell deal.
1.0
4.0
0.5 The large deals in Q1 2010 skewed quarterly take-up levels,
2.0
0.0 0.0
and we expect there to be quarterly swings in take-up,
especially in the City. For example, despite take-up in the
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
City falling by two-thirds over the quarter, there is evidence

Source: DTZ Research
already for a stronger third quarter with the stock under
offer in the City alone increasing from 930,000 sq ft to 2.1m
sq ft. This was fuelled by the UBS (700,000 sq ft) and
Bloomberg (500,000 sq ft) deals. There is also an
5
additional 3m sq ft of structural demand in the pipeline for
the City over the next three years (Exhibit 5), which alone
will support three quarters of demand (of long-term average
take-up).
Encouraging signs have also emerged for smaller deals in

the City, with demand for offices below 25,000 sq ft
4
DTZ, PMI, June 2010
5
Drivers Jonas Deloitte, City of London, Q2 2010
-4-
Country Spotlights
QUARTER 3 - 2010
increasing by 8% quarter-on-quarter. 95% of lettings in the

City since 2004 have been for lot sizes below 25,000 sq ft,
Exhibit 4 and demand for such sizes is more indicative of underlying
demand than the somewhat erratic larger deals.
West End take-up and availability ratio
m sq ft % In contrast, demand in the West End increased over the
0.9 Grade A Grade B Grade C Availability Ratio (RHS) 10.0
0.8 9.0
quarter but still remained 15% below the long-term trend.
0.7 8.0 Two-thirds of take-up (compared to the long term trend of
0.6 7.0
0.5
6.0 40%) was for Grade A space as there was a recognition
5.0
0.4
4.0
that availability was becoming more limited, but also
0.3 3.0 signalling that rental values for this type of stock were likely
0.2 2.0
0.1 1.0 to increase. Such a tenant’s perspective is reinforced by a
0.0 0.0 record low of 125,000 sq ft of new supply due in the West
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
End in 2011 (compared to the long term average of 1.2m

6
Source: DTZ Research
sq ft p.a. ).
This has worked through to falls in vacancy in the West

End, as illustrated in Exhibits 4, whilst vacancy rates in the
City stabilised over the quarter given the large increase of
second-hand space (+17%) being released back onto the
Exhibit 5 market over Q2 2010. Nonetheless, availability of new units
of over 100,000 sq ft has remained tight with only 15
Central London structural demand options available in Central London at the end of June
m sq ft
4.0 City West End (stable over the quarter). Availability is even tighter for units
3.5
over 200,000 sq ft, with only one building available on the
3.0
market (Central St Giles).
2.5
2.0
Several developers in the City have been waiting until
1.5
1.0
rental values exceed GBP55/sq ft/year before committing
0.5 to building new schemes. Two such schemes are UBS
0.0 agreeing terms at GBP54.50/sq ft/year in Q3 2010, and
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
2020f
signs of the Pinnacle tower starting construction.

Source: Drivers Jonas Deloitte Commercial developers in London recorded the fastest
increase in construction activity over the last seven months
7
across the UK in July . Even so, developers will still be
restricted by the lack of development finance and still need
to have their scheme pre-leased by at least 50%.
Nonetheless, the limited development pipeline for 2010-
2012 will support further rental growth for offices in the
short term as new supply continues to be absorbed, and
demand recovers.
6
CBRE, Central London office report, July 2010
7
Savills, Commercial Development Activity, August 2010
-5-
Country Spotlights
QUARTER 3 - 2010
The timing of entry and exit is crucial for developers, with a

potential wave of new supply due to come on stream in
2013/2014.
As new supply levels remain constrained, prime headline

rental values in Central London increased by 5% over the
quarter whilst incentives fell from 30 to 24 months rent-free
incentive on a ten year lease in the City, and from 21 to 18
Exhibit 6
months in the West End.
IPD City and Midtown & West End rental growth
(% quarterly annualised) The regional markets are continuing to lag London,
%
10 Midtown & West End Offices City Offices
especially those with high levels of exposure to the public
5 sector. Anecdotal evidence from brokers indicates that
0 public sector occupiers in the regions are already reviewing
-5
their space requirements, which may result in space being
-10
bought onto the market, raising void rates in the short term.
-15
Co-location is also on the agenda with 80% of councils
-20
-25
already considering sharing offices with other public bodies
8
to make efficiency gains . Only Thames Valley evidenced
May-10
Jul-09
Aug-09
Sep-09
Nov-09
Dec-09
Feb-10
Mar-10
Jun-09
Oct-09
Jan-10
Apr-10
Jun-10
an increase in take-up, albeit from a low base with 359,000

Source: IPD
sq ft leased in Q2 2010, up from 299,000 sq ft in Q1 2010.
However, this is still 20% below the long term average, and
with the vacancy rate continuing its upward trend to 12.9%,
rental values are not expected to recover in H2 2010.
Retail
The prospects of the fiscal squeeze ahead have not,

apparently, reduced consumer spending. Retail sales grew
by 1.7% in Q2 2010, compared to the 2.5% fall
experienced during the first quarter (albeit dampened by
factors such as the VAT rise and poor weather). On the
other hand, consumer confidence fell to its lowest levels for
almost a year and house prices have started to weaken,
with the RICS reporting the first fall for a year in July. The
outlook for the remainder of the year looks challenging,
with the Bank of England’s agents witnessing ‘...some
signs that consumer spending growth had slowed through
Q2’ and recent data from the British Bankers’ Association
indicating that households saved an even smaller share of
their income in the second quarter.
8
Capita Symonds Survey, July 2010
-6-
Country Spotlights
QUARTER 3 - 2010
Despite the conflicting messages, tax increases, benefit

cuts and the public sector squeeze will start coming into
effect next year. Major retailers, such as Debenhams, Next,
and Carpetright, have started to warn of a cooling in
consumer demand. Next and Carpetright reported falls in
underlying sales in their respective reporting periods in Q2
2010 and are both forecasting further falls in the second half
of 2010. Interestingly, Next has warned that the prices of
clothes could increase by 5-8% next year because of higher
cotton costs and VAT increases. However, the experience
of the VAT increase at the start of 2010 would lead us to
conclude that the relevant price increases were already
being factored in before the next VAT rise due at the
beginning of next year.
Primark has coped better than might have been expected

and has outperformed its rivals at the discount end of the
market, with reported like-for-like sales in its spring quarter
increasing by 7%. However, it also urged caution over the
economic conditions ahead. In previous cyclical downturns,
with less spending power, consumers have tended to buy
fewer high-quality, longer-life items. Primark’s success
9
seems to point otherwise, and despite LVMH reporting a
53% increase in global net profits (H1 2010 v H1 2009)
thanks to increased demand from Asia, specialists are still
forecasting a tapering off in demand for luxury goods in the
10
second half of this year .
Nonetheless, retailers are in better health than they were a

year ago – or, at least, the survivors are. According to the
11
latest Red Flag Alert , levels of financial distress have
significantly reduced amongst retailers. The retail sector
showed the strongest improvements over the year to Q2
2010 of those sectors tracked, and the number of retailers
facing financial distress has fallen by 26% quarter-on-
quarter.
9
Louis Vuitton Moet Hennessy
10
According to US consultants Bain & Co reported at the Reuters
Global Luxury conference in Paris on 2 June 2010
11
Begbies Traynor, Red Flag Alert, July 2010
-7-
Country Spotlights
QUARTER 3 - 2010
The most high profile retailer administration over Q2 2010

was Faith shoes (78 stores and 120 concessions).
Debenhams purchased 115 of the concessions located in
their stores on a sale and leaseback arrangement, with the
12
CEO reporting that the price paid was ‘not a fortune’ .
Competition for the top prime properties has remained

strong, and focused on London. According to CBRE, high
street rental values were stable over Q2 – with London’s
rises balancing out the declines in the North East and
Wales, whilst prime shopping centres and retail warehouse
rental values fell by 0.5% and 1.4% respectively. In terms
of the big box retailers, B&Q are utilising market conditions
to increase their market share in urban areas. They have
13
just announced that they will be trialling a new smaller
format (of below 40,000 sq ft) in 60 locations across the UK
having populations over 40,000 where there is no existing
B&Q within a 20-minute drive time. In particular, they will be
Exhibit 7 targeting London and market towns, to compete with
smaller Homebase and Focus DIY.
Like-for-like Retail Sales growth year on year
% London is still outpacing the rest of the UK, with retail sales
16 UK London
14 dwarfing the UK average (Exhibit 7). Retail sales in the
12 West End are on course for a record year and are expected
10 14
8
to exceed GBP6bn in 2010 . Chanel signed a lease in Q2
6 2010 for 25 years on the prime pitch on Bond Street, to
4 open a 10,000 sq ft flagship store, at a record high rent (for
2
0
this sized unit) of more than GBP800 per sq ft/p.a. (zone A).
January
February
May
March
June
October
November
December
-2 Apple also opened its largest global store (28,000 sq ft) in

Covent Garden in August. These examples illustrate the
Source: BCG-KPMG continuing strength of London, especially at the luxury end,
catering for the increased demand of overseas shoppers.
Chinese shoppers, for example, are now the most prevalent
15
overseas shoppers for luxury goods in London , as they
are drawn by the favourable exchange rate and wide
selection of high-end luxury retailers.
12
Financial Times, 1st July 2010
13
Reuters, June 21st 2010
14
New West End Company, June 2010
15
FDKG survey, June 2010
-8-
Country Spotlights
QUARTER 3 - 2010
Beyond London, regionally dominant shopping centres

continue to do well alongside easily accessible prime retail
parks for their ‘once-a-month’ large non-food shop.
Hammerson’s management commented during the H1
2010 results meeting that its retail park gross rental values
had increased by 5.7% during H1 2010 on a like-for-like
basis, largely attributable to asset management initiatives.
They confirmed that rent reviews were being agreed in line
with ERVs, although short-term shopping centre rents were
still being agreed at 20-30% below the previous passing
rent. At the other end of the spectrum, secondary retail
locations that do not offer the full retail experience with a
wide selection of retailers nor offer the ease of accessibility
and parking, continue to suffer.
Colliers have estimated that the average retail vacancy

16
rate in the UK increased from 11.1% in October last year
to 11.4% in June (almost double the pre-recession levels).
This is largely attributable to the continually increasing
levels of voids in secondary and tertiary locations –
whereas voids for prime locations are falling and are at
lower levels. Retailers are focusing on a narrower
selection of locations, looking at the best properties in the
strongest trading locations in the UK. This has, in turn,
exacerbated obsolescence of high streets in secondary and
tertiary locations. Consumers are now more likely to visit
larger regional shopping centres that have a wider
selection of retailers and then supplement this with local
convenience shopping. Medium-sized shopping centres in
suburban locations are at particular risk.
Average vacancy rates can also be misleading as

geographical polarisations continue across the UK. For
example, Cardiff is struggling to absorb the second phase
of the 1m sq ft St David’s scheme, and its vacancy rate has
doubled to 17.1% over the last year.
Oxford Street, on the other hand, only has a void rate of

1%, with London vacancy recently estimated at 4%. In
terms of formats, Local Shopping, a REIT that specialises
in local convenience stores, reported a fall in the overall
16
Colliers Midsummer Briefing presentation, June 2010. This
vacancy rate is a measure of the floorspace of vacant units as a
proportion of total retail floorspace
-9-
Country Spotlights
QUARTER 3 - 2010
vacancy rate from 11.9% in March to 11.7% at the end of

July.
Development activity has remained limited, with no major

Exhibit 8 schemes completed in Q2 2010. 7.9m sq ft of retail space
was categorised as being under construction in June
Shopping Centres and Retail Park space under
construction
(Exhibit 8) – the lowest levels since 2002. Excluding
m sq ft
25 Retail Parks Westfield Stratford (1.7m sq ft due to be delivered in 2011),
Out-of-Town SC completions will be staggered from 2013 onwards as the
20 Town Centre SC
majority of projects have been delayed or deferred, as
15
developers wait for the market to improve.
10
Encouragingly, Land Securities has recently announced
5
that they would re-start construction this year on the Trinity
0
Square scheme in Leeds, a 750,000 sq ft scheme located
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: CBRE
in the city centre and now due to be delivered in 2013.
Land Securities lifted its traditional pre-let target before
starting from construction to 40% given the challenging
economic environment and, by the end of July, they had
43% of this scheme pre-let with a further 4% in solicitors’
hands.
Industrial
Take-up of warehouse units sized above 50,000 sq ft was

8.8m sq ft in Q2 2010, an increase of 14% from the
17
previous quarter . This was above the 7.7m sq ft quarterly
average over the last two years, pointing to a mild recovery
in tenant demand. Good quality second-hand stock is also
in demand, with over half of this take-up completed on
second-hand stock during Q3 2010. However, this has
18
been more marked in London and the South East .
However, new occupier demand has been limited by the

uncertainty of the pace of the economic recovery. July’s
Purchasing Managers Index, the new export order index,
fell to 50.7 (above 50 indicating growth), its lowest level
since August last year. There are concerns that the
weakness of domestic demand in the eurozone combined
with the appreciation of sterling over the last two months
19
may be adversely impacting export orders .
17
BNP Paribas Real Estate, June 2010
18
CBRE UK Industrial Market Update, June 2010
19
Capital Economics UK Data Response, August 5th 2010
- 10 -
Country Spotlights
QUARTER 3 - 2010
Net absorption of logistics space has remained limited as

Exhibit 9 the market continued to be driven by business
rationalisation. At the prime end of the market, demand is
UK industrial take-up mainly from occupiers wanting to benefit from the more
m sq ft
16 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 attractive lease terms available as well as with the objective
14 of consolidating supply chains to reduce property costs.
12
10
The majority of the second quarter’s demand was focused
8 on the London & South East markets (1.8m sq ft) and the
6 North West (1.6m sq ft). The latter was dominated by large
4
2
deals, with two-thirds of lettings being of units over 250,000
0 sq ft in size including the M&S distribution centre in Stoke-
South
Region
North
North
Scotland
Yorkshire
Midlands
Wales
London &
South
West
West
East
Humber
M27
on-Trent, which was developed by ProLogis.

& The
South
East
Source: BNP Paribas Real Estate

Virtually no speculative development is taking place, with
built-to-suit projects accounting for an increasing share of
lettings – including the aforementioned M&S letting.
According to JLL, the proportion of built-to-suit in deals of
New occupier demand for logistics units of above 100,000 sq ft increased from 10% to 30% of
space has been limited. take-up during Q2 2010.
Consolidation and business Availability, on the other hand, increased by 3% over Q2

2010 to over 140m sq ft. Second-hand space dominates
rationalisation are driving demand
this availability, accounting for 70% of the vacant space.
This has been exacerbated by the volume of large deals
over 250,000 sq ft, especially in the Midlands and the North
West, which resulted in space returning to the market. The
widening gap between prime and secondary was
Exhibit 10
underlined by ProLogis European Fund reporting 96%
Number of years of industiral supply at Q1 2010
occupancy in March (for modern stabilised developments in
Years the UK) compared to the 15% market vacancy in the UK.
12
10 Incentives remained stable, with CBRE reporting 12

8 months’ rent free being offered for every five years of a
6 lease. Rental value falls in Q2 2010 were marginally more
4 significant for average IPD rental values (-0.5%) than for
2 prime stock (-0.220). In both cases, London and the South
0 East witnessed a stabilisation of rental values first.
North Yorkshire South North Scotland London & South Midlands M27
East & The Wales West South West Region
Humber East
Source: BNP Paribas Real Estate
20
CBRE Q2 2010, UK Rents and Yields Index
- 11 -
Country Spotlights
QUARTER 3 - 2010
Real estate investment activity
The IPD Monthly index reported a slowdown in capital

growth in Q2 2010 (1.9% over the quarter) compared to Q1
2010 (3.9%), emphasising that the UK recovery is slowing.
Exhibit 11
This was the lowest quarterly growth since the recovery in
property values started in summer last year (see Exhibit
% All Property (% quarterly annualised)
40 11). Reflecting the role that capitalisation yields continue to
30
play in value changes, the slowdown is attributable to
20
10
yields stabilising, and this is most notable in the industrial
0 and the retail sectors, where capital growth averaged 1%
-10 and 1.9% respectively over the second quarter (compared
-20 Rental value growth Capital value growth
to offices at 2.3%).
-30
Nov-09
Jun-09
Jul-09
Jan-10
Jun-10
May-09
Oct-09
Aug-09
Sep-09
Dec-09
Feb-10
Mar-10
Apr-10
May-10
The retail ex-London segment was the first segment in the

Source: IPD UK Monthly Index
IPD Monthly Index to report negative capital growth over
the month of June (-0.2%) – its first monthly fall since
August 2009. This has been corroborated by broker reports
that yields of high street retail property in the regional
markets had increased by 25 basis points in July. Investors
are cautious about the occupier outlook given the
consumer squeeze ahead, especially in the northern
regions where public sector cuts are expected to be most
marked. Anecdotal evidence in this sector (and to a lesser
extent in the other sectors) of a sharp fall in the number of
bids per property has also started to feed through to market
pricing as buyers are not bidding as aggressively for assets
as they did at the turn of 2009/2010.
Food supermarket transactions have proved to be the

exception in the retail sector, with evidence of keen yields
of 4.0%-4.5% being reported on sale and leaseback deals
on 25 to 30 year leases. Length and strength of income is
driving demand for such transactions and location is not as
strong a differentiator as might be expected. This is
because of the increased appetite for bond-type long
leased income producing properties.
The performance of offices have also been polarised with

capital growth during Q2 2010 for Central London offices
being more than double the All Property average (at 4.2%).
However, offices beyond London are lagging with capital
appreciation of a meagre 1% over the quarter. Recent
broker reports already point to prime yields in the regional
- 12 -
Country Spotlights
QUARTER 3 - 2010
office markets increasing by 25 basis points in June

21
Exhibit 12 alone .
This increased caution has yet to impact on deals being

Investment volumes UK
GBP bn recorded, with an increase of 24% in UK transaction
9 Office Retail Industrial Mixed Use Other/Unknown
8
volumes over Q2 2010 to GBP6.8bn (see Exhibit 12).
7 Quoted property vehicles were the most active purchaser
6 type, whilst investments by the public sector/government
5
fell by 47% quarter-on-quarter.
4
3 The largest deal this quarter was Avestus Capital
2
Partners (formerly Quinlan Private) selling the
1
0 Knightsbridge Estate (40 properties located between
2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 Harrods and Harvey Nichols) for GBP600m at an
Source: DTZ
estimated initial yield of 4% to a private Middle Eastern
investor. The second largest was the GBP209m
purchase of the Radial logistics portfolio by London &
Stamford and Anglesea Capital at an 8.75% initial yield.
Finally, the Chinese Estates Group is in exclusive
Exhibit 13 negotiations to acquire the landmark building Tower 42
for more than GBP300m at an estimated initial yield of
CBRE All Property capital values
Index = 100
6.6%. London offices remain in high demand and this
130 Low yield properties CBRE Monthly Index deal will add to the GBP2bn transacted in Central London
125 High yield properties offices in Q2 2010 alone.
120
115
Investors have become increasingly concerned about the
110
105 short-term outlook in the market, especially for poorer
100 secondary stock that may not have yet fully priced in the
95
risks in the occupational market. As can be seen in
90
Exhibit 13, the capital growth since August has
Nov-09
May-10
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
disproportionately at the lower yielding/more prime

Source: UK CBRE Monthly Index
Index of capital values 100= June 2009 segment of the market. The values of higher yielding
properties have been stable. This suggests that further
de-pricing has yet to occur at the secondary end of the
market.
21
Business Briefing, Cushman & Wakefield, July 2010
- 13 -
Country Spotlights
QUARTER 3 - 2010
Other publications
Periodic
 At a Glance – a quarterly overview of the European real estate

markets in the context of an analysis of the European economy
 Looking Ahead – our quarterly house forecasts, covering the

European economies and the property markets
 Real Directions – building on our analysis and forecasts, offering

quarterly strategic recommendations and investment themes
Contact  Asian Eye and European Eye – two publications of five to seven
short research articles on items of topical interest to the industry
Author
Monika Ward Occasional notes
Senior Property Analyst
Tel: +44 20 7003 1361  Market Edge – dealing with particular market issues in greater depth
e-mail:
monika.ward@axa-im.com  Market Mechanics – dealing with technical issues of relevance to
the property industry
Alan Patterson
Head of Research and Strategy
Tel: +44 20 7003 1372
e-mail:
alan.patterson@axa-im.com
Client mailing list
Nathalie Androussevitch
Tel: +33 1 44 45 96 41
e-mail:
nathalie.androussevitch@axa-
im.com
- 14 -

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Country Spotlights

Quarter 3 – August 2010

AXA Real Estate’s European Quarterly Country Review

Exhibit 1 Macro economic overview

recovery, with business services and finance leading the

United Kingdom (ctd.)

The new government has taken steps to address this

Despite the unemployment rate stabilising at 7.8% over Q2

The poorest prospects were in Local Government (net

Tax increases, such as the VAT increase from 17.5% to

United Kingdom (ctd.)

This, combined with the first signs of a stalling in the

City falling by two-thirds over the quarter, there is evidence

Encouraging signs have also emerged for smaller deals in

United Kingdom (ctd.)

increasing by 8% quarter-on-quarter. 95% of lettings in the

End in 2011 (compared to the long term average of 1.2m

This has worked through to falls in vacancy in the West

signs of the Pinnacle tower starting construction.

United Kingdom (ctd.)

The timing of entry and exit is crucial for developers, with a

As new supply levels remain constrained, prime headline

an increase in take-up, albeit from a low base with 359,000

The prospects of the fiscal squeeze ahead have not,

United Kingdom (ctd.)

Despite the conflicting messages, tax increases, benefit

Primark has coped better than might have been expected

Nonetheless, retailers are in better health than they were a

United Kingdom (ctd.)

The most high profile retailer administration over Q2 2010

Competition for the top prime properties has remained

-2 Apple also opened its largest global store (28,000 sq ft) in

United Kingdom (ctd.)

Beyond London, regionally dominant shopping centres

Colliers have estimated that the average retail vacancy

Average vacancy rates can also be misleading as

Oxford Street, on the other hand, only has a void rate of

United Kingdom (ctd.)

vacancy rate from 11.9% in March to 11.7% at the end of

Development activity has remained limited, with no major

Take-up of warehouse units sized above 50,000 sq ft was

However, new occupier demand has been limited by the

United Kingdom (ctd.)

Net absorption of logistics space has remained limited as

on-Trent, which was developed by ProLogis.

Source: BNP Paribas Real Estate

Consolidation and business Availability, on the other hand, increased by 3% over Q2

10 Incentives remained stable, with CBRE reporting 12

Source: BNP Paribas Real Estate

United Kingdom (ctd.)

Real estate investment activity

The IPD Monthly index reported a slowdown in capital

The retail ex-London segment was the first segment in the

Food supermarket transactions have proved to be the

The performance of offices have also been polarised with

United Kingdom (ctd.)

office markets increasing by 25 basis points in June