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problems that the real estate market faces, not just in the UK but globally is finance. We have talked about it earlier with regard to the need to reduce costs but the latest Bank of England lending figures show that bank lending (in Sterling) to real estate in Q2 2010 has dropped by £3.5 billion following a slight improvement in Q1 2010. This represents the biggest drop in a single quarter since the series began in 1987. Total lending outstanding reached £244 billion (including lending by building societies) at the end of June 2010. UK bank exposure to real estate (ie, the


proportion of lending to real estate as a percentage of total lending) has declined from a high of 11.8% in mid-2009 to 11.2% at the end of June 2010. This is likely to drop further in the near future as banks continue to manage their balance sheet exposure to real estate and deal with the legacy of distressed loan portfolios. These statistics are not necessarily a reflection of the reluctance of banks to lend to real estate. Bank debt is still available for property investors purchasing prime assets at sensible loan to value. Instead, the figures represent the fact that banks are beginning to actively deal with problem loans on their balance sheet. Whilst the Bank of England figures suggest that lending to Real Estate has reduced, this indicates that lenders are slowly starting to solve their problems. In the medium to long term this is positive news for UK real estate. In the short-term, however, the market for lending is likely to remain restricted to prime assets, and net lending may continue to reduce. According to the latest Jones Lang


LaSalle Quarterly Index, all-property total returns slowed to 3.6% in Q2 against 6.2% in the previous quarter. Capital value growth decreased to 2.0%, as the pace of yield compression continued to diminish. Comparable returns on equities were -11.8% and gilts 6.4%. The equity market struggled in May and June recording a combined negative total return of -10.6%. The poor return partly


Given the large number of projects that were


postponed during the credit crunch, a shortage of new supply is anticipated as early as 2011 in some markets. Conversely, the supply of second hand space is likely to increase further in some markets during 2010 as occupiers seek to rationalise or even upgrade their space. As a consequence Grade A supply is likely to continue to decline but the overall vacancy rate will remain above average until after 2014.


reflected concern over the Eurozone and the impact of our own austerity measures. Returns on gilts improved considerably over the quarter; as a result gilts were the best performing asset class in Q2.


The retail sector recorded the strongest


returns at 4.1%, reflecting capital value growth of 2.5%. The office and industrial sectors recorded comparable returns of 3.8% and 2.0% respectively. Although average rental growth for all property remained negative in Q2 2010 at -0.1%, the office sector continued to record positive quarterly growth at 0.1%. This largely reflects the considerable improvement in rents in the City and West End office markets. The industrial and the retail sectors recorded falls of - 0.4% and -0.2% respectively.


PM-Select: Is the picture the same across Europe?


Tim Tourville: Whilst austerity measures and concerns surrounding sovereign debt in European economies triggered a new wave of economic uncertainty and volatility in financial markets; positive signs increased in the office markets during Quarter 2 (Q2) 2010 according to our European Property Clock. Office take- up in Europe for Q2 2010 increased marginally to 2.6 million m2


, up 6% on


the previous quarter and 34% on Q2 2009. Take up for H1 2010 is now 38% higher than for the same period in 2009, having improved in both Western Europe and CEE up by 32% and 73% respectively over the same period. Prime rental levels stabilised in the majority of locations in Q2 and the Office Index, based on the weighted performance of 24 markets, increased by 2.6% quarter-on-quarter, building upon the growth seen during Q1 and showing the first positive growth (+2.1%) on an annual level since Q3 2008. The biggest rise in rents was seen in London’s West End (13.3%), Paris (7.1%), City of London (5.3%) and Dusseldorf (2.3%). Quarterly rental falls were however recorded in Dublin (-


12 l Property Management Select l september 2010 l www.pm-select.co.uk


5.3%), Frankfurt (-2.9%), Madrid (-2.6%), Barcelona (-2.4%) and Hamburg (-2.2%). Incentives offered by landlords also stabilised with some markets seeing incentives reducing such as London City, London West End, Bucharest and Hamburg. Signs of economic recovery are beginning to feed through into office demand, but occupiers still remain cautious and we expect annual volumes to be slightly below the five year average of 11 million m2 million m2


. Approximately 1.4 of new stock was added in Q2,


a 25% increase on the first quarter. Despite this new stock, tightening supply of quality space is driving rental stability and even growth, but there are significant differences in current total supply levels – and sentiment - across the region, which has led to differences in outlook. The average European vacancy rate


remained stable in Q2 at 10.2%, despite these additions, the same level as in Q1 10 and Q4 09. The vacancy rate increased slightly to 9.8% in Western Europe but fell substantially in CEE from 16.4% to 14.6%. This decline was particularly driven by decreases in Moscow and Budapest, whilst increases where recorded in both Prague and Warsaw. High vacancy rates, of over 15%, can still however be found in Amsterdam, Dublin, Budapest and Moscow and there remains a significant spread across Europe with Paris now showing the lowest vacancy rate at 6.8%. Given the large number of projects that


were postponed during the credit crunch, a shortage of new supply is anticipated as early as 2011 in some markets. Conversely, the supply of second hand space is likely to increase further in some markets during 2010 as occupiers seek to rationalise or even upgrade their space. As a consequence Grade A supply is likely to continue to decline but the overall vacancy rate will remain above average until after 2014. Over the short to medium term we anticipate the rental differential between prime and secondary locations to widen.


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