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News Release

MIPIM, Cannes

Two Sides of the Same Coin: Key Real Estate Occupational Market Prospects & the Impact on Investors

Jones Lang LaSalle MIPIM Media Briefing

Jones Lang LaSalle’s EMEA business leaders today outlined their expectations for occupational markets in Europe in 2009 and the implication for investors, at the firm’s MIPIM media briefing.  After substantial yield decompression across the region, Jones Lang LaSalle believes the behaviour and direction of the occupational markets over the next 12 months will be a key consideration for investors.  Jones Lang LaSalle’s presentation confirmed the diversity of real estate markets across Europe, reflecting the varying impact of the credit crunch in each country and the speed at which each of Europe’s economies and real estate markets are being affected.

Nigel Roberts, Chairman EMEA Research at Jones Lang LaSalle opened the briefing with comment on the economic and financial context across Europe: “Today’s economic outlook is more challenging than many of us have ever encountered. We are in the midst of an unprecedented global economic downturn. The impacts are reaching far and wide into the fabric of our economies, and occupiers of all kinds are impacted. For many, space requirements are on hold, property costs are under pressure and new demand is a rare commodity. Whilst many forecasters are predicting a return to economic growth sometime during 2010, this will require a return of liquidity and confidence; two essential ingredients for the effective functioning of our economies and real estate markets. In this respect, the immediate future is very much in the hands of our banks and the success of government support.”

Tony Horrell, Head of Capital Markets at Jones Lang LaSalle commented: “Opportunities at pricing levels not seen for many years will begin to emerge this year. The large western investment markets that are re-pricing the quickest will attract most attention from the investor community. Emerging markets will come back in time but we expect greater volatility in the short term, and they will attract investors who buy the medium term story and lower relative cost base.  Re-pricing and FX benefit continues in London which accounts for the strong interest from the international investor community; it offers long-term secure income at yields not experienced for some time.  Paris is less exposed to the financial turmoil than London and has a wide tenant base seeking value-for-money quality accommodation.  Munich is a stable market with low volatility and lower rental levels than other key European markets which will remain attractive to some investor types.  Despite not being immune from economic risk, Central and Eastern Europe now has a strong history in outsourcing which should place it in a strong position over the next several years.”

Paris: Focus On Quality in the Periphery

Benoit du Passage, Managing Director of Jones Lang LaSalle France considered the Paris market: “There is preference amongst occupiers for new developments located outside the centre of Paris, which are easily accessible. Typically occupiers are focusing on high environmental standards which are provided by new schemes and expect to pay rents below €350 sq m pa. Occupiers are being driven by cost reduction and rationalisation of their businesses and we expect these issues to move even further up the corporate/ agenda this year and in 2010. The developers and landlords who can offer space that meets these demands will be best placed.”

Looking ahead to the full year 2009 he continued: “We expect take-up in greater Paris to be down 20% in 2009 compared to last year, from 2.35 million sq m in 2008 to approximately 1.8 million sq m 2009, but we expect the number of deals over 5,000 sq m to be similar to 2008.  Some sector changes will continue to emerge in 2009, including government sales of some assets in Paris, for example the government has plans to reduce real estate operating costs by moving out of central Paris. Financial companies will continue to look for cost reductions and ways to rationalise their business and banks will relocate from the traditional business district to less expensive areas.  We believe caution and hesitation in the legal sector in medium-term will lead to job losses and company restructuring.”

Munich: A Port in a Storm?

Marcus Lemli, Head of Capital Markets Germany spoke about trends in the occupational market in Munich which, although not set to escape unscathed from current economic turmoil, is historically a steady market and is set to remain so: “Munich’s healthy fundamentals, with a growing population, employment prospects above the German average, a diverse economic base and high consumer spending power are all positive factors which should help the market to weather the storms of 2009 and beyond. On the positive side we do not expect oversupply, our office demand is broadly spread across a number of sectors such as IT, business services, banking, insurance and manufacturing and rents are at affordable levels (prime face rent currently stands at €366 sq m pa) and we expect only a slight correction to around €350 by the end of 2009.”

Central and Eastern Europe: The Leading Outsourcing and Shoring Destination

John Duckworth, Managing Director of Jones Lang LaSalle CEE assessed the situation across this region, which is unique thanks to the growth and continuing potential of the outsourcing and shoring markets: “GDP figures, while decreasing, are looking more positive for CEE countries than for Western Europe and overall we expect the recession to have a less drastic impact on occupier demand than elsewhere in Europe.  We expect development volumes to slow down over the next three years but prime rents in the region to remain lower than those in Western Europe (at an average of €180 - €300 sq m pa) for equivalent international quality buildings.” 

He concluded: “The key differentiator for these CEE occupational markets is that they are a proven destination for delivering lower-cost business processes which is going to be the number one priority for corporates globally over the next year to 18 months. We expect activity from the Outsourcing and Shoring sectors to accelerate as occupier conditions become more favourable and weakening CEE exchange rates will help to further soften labour costs.”

London: Europe’s Financial Heart

Neil Prime, Head Office Agency England at Jones Lang LaSalle wrapped proceedings up with his take on the London occupational markets: “On a positive note occupiers in London have choice: top quality product is being delivered.  What’s more, they have value: in real terms, net effective rents will soon be as competitive as they have ever been in the City.  Our forecasts show a bottoming out in rents in both the City and the West End in 2010 and 2011, and then rebounding in 2012, with a rapid acceleration in 2013.  At the moment occupiers have the upper hand and they are in an excellent negotiating position as landlords chase the demand that will transact this year. We believe that employment will continue to contract over the next couple of years with 2009 likely to be the worst. This headcount reduction, coupled with a resistance to sanction major capital expenditure, will have a significant impact on take-up levels.”

He continued: “However, there always is and will still be a market in London. Activity will be driven by structural events and physical obsolescence rather than growth and expansion. We anticipate seeing continued consolidation and acquisition in the financial and insurance sectors, some of which will generate property requirements.  The legal sector has entered a period of caution and in the short term further job losses are expected, but requirements remain. The media sector has been under real cost pressure in its core markets over the last two years and had to weigh up preferred product versus preferred location.  There was a mismatch but the recent reduction in rents in their core markets has eased this pressure.  However a note of caution to occupiers, the upper hand they currently have will not last forever. With no new construction underway and almost none anticipated to start for the foreseeable future, the current supply will gradually be eroded and by 2012 occupiers could be faced with a lack of availability, rents that will grow rapidly and reducing incentives - possibly at a time when their businesses are beginning to expand again. Planning ahead of this curve will be key."