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Commercial Real Estate Shows Further Signs of Slowdown

According to Jones Lang LaSalle’s latest UK Property Index

London, 3rd August 2010 - 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 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. 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 The Jones Lang LaSalle “style index” continues to show discrepancy in investment performance between prime and secondary assets. Growth properties have accelerated ahead of value stocks again, representing strong returns in the office sector.  Quarterly returns were 4.0% for growth properties and 2.6% for value properties.  The difference in capital growth has also widened with 2.5% for growth properties compared with 0.7% for value properties.   A similar trend was also reflected in the latest Jones Lang LaSalle auction market report. According to the Q2 2010 ARAS report the margin between prime and secondary yields widened further over the quarter to 352 basis points as investors continued their flight to quality. Looking ahead, Jones Lang LaSalle anticipates price discrimination to be substantial and rents for more secondary assets in weaker locations will remain under downward pressure.

Mike Penlington, director in Jones Lang LaSalle’s Valuation Advisory team, said; “The Jones Lang LaSalle Style Index highlights the continuing trend that investors continue to focus on prime, or well let stock as secondary assets remain at risk from weak occupational demand. We expect price discrimination to remain substantial as the weight of money which fuelled investor demand at the start of the year tails off. Investors will try and identify opportunities in a market where rents and values for assets in weaker locations will remain under downward pressure.”