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UK & European Markets

Islamic Real Estate Finance 2004 London, 29 th June. UK & European Markets. Robin N Goodchild PhD FRICS Head of European Strategy. Agenda – Real Estate in UK, EuroZone and Central Europe. European Economy & Capital Markets Offices Retail Warehouse Investment Markets Best Picks.

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UK & European Markets

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  1. Islamic Real Estate Finance 2004 London, 29th June UK & European Markets Robin N Goodchild PhD FRICSHead of European Strategy

  2. Agenda – Real Estate in UK, EuroZone and Central Europe • European Economy & Capital Markets • Offices • Retail • Warehouse • Investment Markets • Best Picks

  3. A Good 2004 But With Rising Risks • 2004 set to see global economic growth rise at its fastest level since boom of 2000 • US elections means highly simulative fiscal policy… for this year • Global growth further buoyed by Japan, China and South East Asia • Eurozone remains depressed, strong euro dampens prospects for export led recovery • Terrorism, oil prices, US hangover ~ anything to look forward to in 2005? • Stronger growth to resume 2006/7 Source: EIU

  4. The Europe and especially the EuroZone will Lag GDP % Source: EIU, March 2004

  5. The Fringes Continue To Grow Faster Core Europe are the laggards Source: PMA Source: LaSalle Investment Management

  6. Business Confidence Indicators Improving Balance Source: DataStream

  7. Consumer Confidence Index – Moving Sideways Balance Source: DataStream

  8. UK House Price to Earnings Ratio – well into uncharted water 3.64 Source: LaSalle Investment Management

  9. The Shape of the Recovery: The Economy • UK at heart of global recovery – key risk its housing market • Europe will take several years to get back to trend • In a low inflation world low cost providers will do well - the fringe • But there are still some sweet spots : • provision of modern space : logistics, multi-anchored retail, big box • local 'monopolies' : Brussels as EU capital (particularly CBD) • corporate sale and leaseback : provincial markets - growth + yield • capacity constrained markets bounce back in 2005/06 : Barcelona, Paris, Stockholm, Madrid?

  10. 5 Year Swap Rate – 2002 to date Source: Thomson DataStream

  11. Office Markets

  12. Summary of Q1 2004 : the Roller Coaster Reaches Bottom • Prime rents down just 0.4% in most Western markets • European vacancy rate has increased from 9.1% to 9.4% • JLL “showings” index has turned up in London • Office investment totalled at €36 billion, down by 17% on 2002. Cross-border deals accounted for 50% of the market.

  13. Prime Office Rents Bottom, Incentives will Reduce Before Growth Recovers € Source: Jones Lang LaSalle

  14. Vacancy Rates Peaking % Source: Jones Lang LaSalle

  15. Office Take-Up Trends : a Patchy Recovery (‘000 sqm) Source: Jones Lang LaSalle

  16. Years to Absorb Office Space Coming Available in 2004/05 Years of Take-Up* * Based on average gross take-up 1998/2003 Source: LaSalle Investment Management

  17. New Supply Set To Fall Source: PMA European Office Stock Completions - 18 largest markets

  18. Jones Lang LaSalle Short Term Rental Cycle Q1 2004 Antwerp, Copenhagen OFFICES Moscow Lisbon Brussels Rental growth slowing Rents falling Frankfurt, Munich Amsterdam, Düsseldorf Dublin, Milan, Rome Barcelona, Madrid Rental growth accelerating Rents bottoming out Paris, Berlin, Hamburg Edinburgh, Lyon, Helsinki • Note: • This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end March 2004. • Markets can move around the clock at different speeds and directions. • The diagram is a convenient method of comparing the relative position of markets in their rental cycle. • Their position is not necessarily representative of investment or development market prospects. • Their position refers to Prime Face Rental Values Athens Oslo, London, Luxembourg, Warsaw Stockholm Prague, Budapest

  19. Office Yields Still Resisting Upward Pressure but for how Long? Source: Jones Lang LaSalle

  20. Retail Markets

  21. Cross Border Investment in European Shopping Centres

  22. High Street Retail Yields Are Falling Except in Germany – is Value Emerging in German Retail? except in Germany Source: Jones Lang LaSalle

  23. Development Activity Strong in Southern Europe SC completions 2004 By size band (m²) • 40 k 10 to 40 k Source: PMA

  24. Retail Provision: Still Below Par Spain Italy Euro Average Euro Average Source: PMA

  25. Shopping Centres: Rental Growth Rental Growth 2004/07 Prime Yield (%) 6.3 6.3 6.0 6.3 6.3 5.8 6.3 Expected Inflation “focus on Southern Europe, with possible exception of Sweden” Source: LaSalle Investment Management

  26. Emerging Trends • Aging Core : Experiential retail : mixed use Population • Increasing : Multifunctional trips : mixed use or out Congestion of town • Collapse of the : Growth of new : flexible space big brands - C&A, formats - Inditex provision M&S…..Carrefour? • Slower Growth Core : increased focus on : out of town value for money • Faster growth fringe : main demand for : logistics manufactures relocation?

  27. Warehouse Markets

  28. European Comparison: Rental Levels and “Growth” Source: Jones Lang LaSalle

  29. Warehouse Yields : Yields Still Falling Source: Jones Lang LaSalle

  30. Forecast Prime Warehousing Rents 2004-2007 Nominal Rental Change Prime Yield (%) 8.75 8.9 8.1 8.5 8.4 8.1 7.1 % pa * Rental growth does not match inflation over the forecast period “focus on markets that have not yet started to outsource to specialist operators” Source: LaSalle Investment Management

  31. The Pull to the East Main Markets Significant Markets Source: Eurostat Source: King Sturge

  32. France: Main markets RUHR LONDON ROTTERDAM • Current Stock • Principal Distribution Hubs • Secondary Road Hubs • Secondary Maritime Ports LOMBARDY BARCA

  33. Ile-de-France: Investment Yields ~ Stability & Still a Significant Yield Gap Warehouse 8.50-8.75% OAT 4.38% 21.05.04 Source: Jones Lang LaSalle

  34. Investment & Future Prospects

  35. UK Property: Capital & Rental Value Movements Quarterly trend pa Source: IPD Monthly

  36. Capital Flows into German Open-Ended Funds Source: BVI, LaSalle Investment Management

  37. Drivers of Property Yields (+ ve ) • Inflation/Inflationary Expectations • Real Risk Free Rate – Index Linked Gilts • Property Yield / 5 Year Swap Rate Spread • Acceleration in Rental Growth - ve - ve + ve

  38. UK Long Run Yield Comparison Source : Thomson Financial, IPD

  39. Conclusions on Yields • 2004 UK returns 12 - 15% • Property Yields shouldn’t go lower – IPD Monthly 6% initial yield key threshold • Number of Signals Pointing to Higher Yields: • Rise in Index Linkers Yields in 2004 • Narrowing of 5 Year Swap spread over Equivalent Yield • Strong Momentum could well take the Market to Irrational Levels • Continuing Track Record • Improving Fundamentals • New Forms of Vehicle: PIFs, New Authorised PUTs

  40. UK Total Returns Forecasts - Risks Source: IPD, LaSalle Investment Management Source: LaSalle Investment Management

  41. European Property 2004 – Best Opportunities • Exploit office market recovery • London, Madrid, Paris • But avoid Germany • Retail for core stable returns • Warehouses for a leveraged income play • especially in France • Key Property Risks • scale of new spec development • attitude of the banks on new lending • housing market correction

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