Highlights• ReflectingthecoincidenceofanumberofmajortransactionsinQ3,totaltake-upin2010improvedsubstantiallyinallmarketscomparedwith2009’slow.IntheM4,2010take-upwas6%abovetheannualaverage,althoughintheM25andM3,2010take-upwas27%belowaverage.

• Activenameddemandreboundedby15%duringQ4tostandat5.9msqft.Manufacturing&Pharmaceuticalscontinuestoaccountforthelargestshareofdemand,makingupnearlyonethirdofthetotal.

• TheM25andM4sawamarginalincreaseinthevacancyrateduringQ4,risingto8.4%and11.7%respectively.IntheM3region,thevacancyratefellmarginallyfrom8.3% to 8.1% in Q4.

• Intheinvestmentmarket,Q4’sturnoverof£369.7mwasthehighestsinceQ42007,withseverallargedealskeytooverallactivity.PrimeSouthEastofficeyieldsremainat c. 6.25%, unchanged since Q1 2010.

Q4 2010

M25 OFFICESInvestment, development & occupier markets

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forecast at a glance• KnightFrankforecasttake-upof2.3msqftin2011,asteady5%improvementon2010.Whereasahandfulofmajor,opportunity-drivendealswerekeytotake-uplastyear,weexpectahigherfrequencyoftransactionsinthecore10,000to25,000sqftmarketin2011,evidencedbyimprovingsizeanddepthofthecurrentdemandprofile.

• Thefreezeondevelopmentactivityoverthelast12monthswillensurethevacancyratestaysunder9%in2011.However,weexpectrefurbishmentactivitytoincreasethisyear,asoccupiersseektoachievecostsavingsandmoreflexibleleasearrangementsattheirexistingspace.

• Prime,neteffectiverentallevelshavestabilised,fallingonly2%in2010comparedwitha21%fallin2009.Althoughrentsareexpectedtoremainbroadlyflatin2011,beforegatheringpositivemomentumin2012,pocketsofrentalgrowthwillbeevidentthisyearinkeytownsintheThamesValley,wheredemandhasbeenrelativelyrobustandnewandGradeAsupplyislimited.

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Figure3

M25 active named enquiries by sector

Source:KnightFrankResearch

M25 market• TotalM25take-upin2010reached2.16msqft,recoveringby35%on2009’srecordlow,but27%belowtheannualaverage.M25take-upinQ4of508,158sqftwas42%belowQ3,aquarterbuoyedbyfourtransactionsinexcessof100,000sqft.Notably,however,Q4’s35dealswascloselyinlinewiththe37seeninQ3.

• Stainesaloneaccountedfor26%ofM25take-upinQ4.JPKennyacquired68,224sqftatCompassPointatanagreedheadlinerentof£22.00persqft,whileCentricaacquired36,765sqftatOrbisOneandOrbisThree,followingtheir35,236sqftacquisitionatOrbisTwoinQ3.

• Activenameddemandreboundedby15%inQ4tostandat5.90msqft,reflectingbuildingconfidenceinoccupierdemand.ICTdemandhasalmostdoubledfromQ42009toaccountfor21%ofthecurrenttotal,whileFBSdemandhasincreasedby30%,tomakeup18%ofthecurrenttotal.

• TheM25vacancyrateincreasedmarginallyfrom8.3%to8.4%duringQ4.However,thevolumeofavailablenewandsecond-handGradeAspaceisfalling,withincreasestothevacancyrateinthelasttwoquartersdrivenbythereleaseofpoorerquality,GradeBspacetothemarketfollowingleaseexpiries.

• JustoneschemecommencedconstructioninQ4,BAMproperty’s81,544sqftChiswickGreeninWestLondon.While2010hasbeenahighlyinactiveyearfornewspeculativedevelopmentstarts,severalsignificantlanddealsoccurredinQ42010whichshouldlenditselftonewspacebeingdeliveredinChiswick,UxbridgeandtwootherkeyM25centresin2012.

In Q4, JP Kenny acquired 68,224 sq ft at Compass Point, Staines at an agreed headline rent of £22.00 per sq ft.

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Table 1

Key town prime rents & forecasts

Town Q4 prime Rent free rent (psf) (months)Basingstoke £18.00 4 32 4Bracknell £19.00 4 36 4Brentwood £21.50 4 24 4Chiswick £35.00 5 24 6Croydon £20.00 5 33 4Gatwick £21.50 4 28 5Guildford £27.005 24 4Hammersmith £31.50 5 24 6Heathrow £27.50 4 33 6Maidenhead £29.505 30 4Reading £30.00 4 30 6Slough £20.00 4 36 4Staines £28.00 5 30 6St Albans £21.50 5 24 4Uxbridge £27.505 24 4Watford £20.505 30 4WestMalling £21.004 21 4Based on new/Grade A building: 10,000sqft,10yrleasewithnobreaks Note:5=forecastfornext12months

Source: Knight Frank Research

Table 2

Demand & Supply

Take-up M25 NW SW NE SE M3 M4

Sqft 508,158 203,841 299,063 0 5,254 288,992 286,412Change Q4 10 vs Q3 10 -42% 6 -67% 6 46% 5 0 34 -90% 6 40% 5 -66% 6Change Q4 10 vs Q4 09 1% 5 54% 5 -6% 6 -100%6 -83% 6 106% 5 -8% 6Q4pre-let(sqft) 0 0 0 0 0 0 0Q4%take-upnew&pre-let 8% 6% 10% 0 0% 11% 16%

Forecast2011take-up(msqft) 2.3 – – – – 0.6 1.8

Availability M25 NW SW NE SE M3 M4

Sqft 10,931,116 5,067,558 4,427,928 484,663 950,967 3,416,421 7,456,443Change Q4 10 vs Q3 10 1% 5 2% 5 1% 5 11% 5 -7% 6 -2% 6 1% 5Change Q4 10 vs Q4 09 9% 5 3% 5 18% 5 3% 5 4% 5 7% 5 0% 34Q4 % new 15% 16% 16% 11% 7% 14% 26%Q4%second-handGradeA 51% 56% 48% 53% 33% 40% 53%Q4%second-handGradeB 34% 28% 36% 36% 59% 46% 21%Q4 vacancy rate 8.4% 5 10% 5 10.8% 5 2.7% 5 4.7% 6 8.1% 6 11.7% 5(5/6movementfromQ310)

Under construction M25 NW SW NE SE M3 M4

Sqft(netapprox) 161,544 81,544 40,000 0 0 80,000 81,544Change 12 months -62% 6 -53%6 -80%6 – -100% 6 -62% 6 -90% 6Pre-let 40,000 0 40,000 0 0 40,000 0

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M3 & M4 VIEW• IntheM4corridor,KnightFrankforecasttake-upof1.8msqftin2011,closelyinlinewith the2010total.Thisreflectsanimprovementofactivityinthecore10,000sqftto25,000 sqftmarketintandemwithfewer100,000sqft+dealsthanlastyear.TightlysuppliedmarketsinWestLondon,namelyChiswick,UxbridgeandHammersmith,offerthebestprospectsforrentalgrowthin2011.

• IntheM3,0.6msqftoftake-upisforecastfor2011,afallof15%onthe2010total. Theweakeroutlookreflectsalackofdepthindemandcoupledwiththepredominance ofpoorerqualityofsupply,particularlyinthemid-sectionoftheM3corridor.However,demandisexpectedtoremainrobustelsewhereintheM3region,notablyalongthe LondonsideoftheM3includingStaines,RichmondandWeybridge.

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In Q4, Knight Frank acted for the vendor over the £3.3m freehold purchase of Drayton Hall, West Drayton, totalling 29,792 sq ft.

M4 & M3 markets• 2010take-upintheM4totalled1.75msqft,87%higherthanthelowpointof2009and6%abovethetenyearaverage.Q4take-upof286,412sqftappearedsubduedincomparison withQ3,whensixdealsinexcessof100,000sqftcontributedtorecordquarterlytake-upof847,355sqft.

• AsinQ3,out-of-townaccommodationwaskeytoQ4take-up,accountingfor88%oftheM4total.Readingwasparticularlyactive,accountingforfiveofQ4’s19deals.Ofthese,PegaSystem’s22,589sqftacquisitionatOneReadingCentral,raisedthetown’sheadlinerentto£30.00persqft.

• TheM4vacancyrateincreasedmarginallyto11.7%inQ4,from11.6%inQ3.However,with justasingleschemehavingcommencedin2010,theamountofnewspaceavailablewillbeeroded in 2011.

• IntheM3region,Q4take-upwas288,992sqft,up40%onQ3andthestrongestsinceQ42008.ThistooktheM3totalfor2010to694,676sqftor27%belowtheannualaverage.Overthelasttwoyears,thesouthernsectionoftheM3regionhasseenthemajorityoftake-up,withthecoreM3corridorarea,stretchingfromCamberleytoBasingstoke,performingrelativelypoorly.

• TheM3vacancyratefellfrom8.3%to8.1%duringQ4,buoyedbyrelativelyhealthytake-upinthesouthernsectionoftheM3region.However,incontrastwiththeM4,poorerqualitysecond-handGradeBspacemakesupclosetohalfoftotalavailabilityintheM3,withnewspaceslippingtojust14%ofthetotal,thelowestonrecord.

5

Table 3

Key investment transactions Q4 2010

Building Size Price Net initial Vendor/ (sq ft) yield Purchaser

Apollo & Lunar House, Croydon 440,000 £78.00m 6.95% Green Properties / Harel

Adelphi House, Reading 29,792 £7.29m 7.65% Private Investor / F&C

IHG Group HQ, Broadwater Park, 97,233 £32.65m 6.93% Tritax / Denham Gatehouse Bank

BSI Tower, 389 Chiswick 143,410 £31.33m 9.35% Carlyle Group / High Road, Chiswick Canmoor & Harbart

Grosvenor House, Redhill 50,723 £12.60m 9.30% Wereldhave / Orbit

Q4 2010M25 OFFICESInvestment, development & occupier markets

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In Q4, Gatehouse Bank purchased the IHG Group HQ building at Broadwater Park, Denham from Tritax for £32.65m, reflecting a net initial yield of 6.93%.

Investment market

INVESTMENT VIEW• Q4’sinvestmentturnoverof£369.7mwasmorethantwicetheQ3levelandthehighestsinceQ42007.Withfivetransactionsofover£30m,largelotsizeswerekeytotheriseratherthananincreaseinthenumberoftransactions.

• Theprimeendofthemarketremainsstable,withprime15yearincomeyieldsholdingsteadyat6.25%inQ4andunchangedsinceQ12010.Anongoingshortageofprimeopportunities,coupledwithahealthylevelofrequirementsfromUKandoverseasfundsshouldensurethatprime yields at least remain stable in the coming year, with a slight hardening a possibility.

• Institutionalactivityisexpectedtoremainrobustduringthefirsthalfof2011,asfundsselloutofpoorerqualityassetsandcontinuetoinvestinprimeopportunities.Incomewillremainkey,withbuyersincreasinglyfocusedontheoccupationalandrefurbishmentrisksassociated with short let and secondary stock.

• Giventheshortageofprimestock,appetiteforhigheryielding,mid-termincomehasstrengthenedbothfromUKfundsandprivatebuyers.Yieldsforthistypeofproductrangebetween7.50%and10.00%,withpricingdependingonstrengthoflocation,likelyrefurbishmentcostsandthepotentialforleasere-gears.

Transaction Mean Mean volume lot size NIY

Q4 £369.65m £16.07m 8.16% 2010

Change 114% 5 77% 5 -11bps 63 mths

Change 23% 5 -20%6+38bps 512 mths

Technical Note

•KnightFrankdefinetheM4marketextendingfromHammersmith,westtoNewbury,incorporatingUxbridgeand High Wycombe to the north and Staines and Bracknell to the south. Reading is also included. Existing builtofficestockintheM4markettotals62,392,070sqft.

•TheM3marketincorporatesthemainSouthWestLondonboroughsandencompassesLeatherhead,GuildfordandBasingstokeextendingnorthtotheM4boundarydescribedabove.FarnboroughandCamberleyarealsoincluded.ExistingbuiltofficestockintheM3markettotals41,927,373sqft.

•Thefiguresinthisreportrelatetotheavailabilityofbuilt,up-and-readyoffice/B1accommodationwithin theM25market.Vacantpremisesandleasedspacewhichisbeingactivelymarketedareincluded.

•Themarketdefinitionused,showninthemaponpage3,isbasedonLocalAuthorityDistrictboundaries.•Allfloorspacefiguresaregivenonanetinternalareabasis(asdefinedbytheRICS).•Aminimum10,000sqft(net)cut-offhasbeenemployedthroughout.Majorandminorrefurbishmenthave beentreatedasnewandsecond-handrespectively.Dataispresentedonacentreandquadrantbasis.Classificationbycentrerelatestothelocationaldetailscontainedwithinthemarketingmaterialforavailableproperties.Classificationinthismannerisclearlysomewhatarbitrary.VacancyratedataisbasedonatotalM25stockmeasureof128msqft(net),anM4marketstockof63msqft(net)andanM3marketstockof 42msqft(net).

•Second-handfloorspacehasbeensub-dividedintoAandBgradeaccommodation,reflectinghighandlowqualityrespectively.Whilstsubjective,thiscategorisationisbasedonanassessmentofeachproperty’sage,specification,locationandoverallattractiveness.

•Pre-let=Thelettingofproposedschemesnotyetunderconstructionandthoseletduringtheconstructionprocess.

•All data presented is correct as at December 31st 2010.

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Commercial Research James Roberts Partner,HeadofCommercialResearch +44(0)2078611239 james.roberts@knightfrank.com

Oliver du Sautoy Associate +44(0)2078611592 oliver.dusautoy@knightfrank.com

Investments Peter MacColl Partner,HeadofInvestments +44(0)2078611211 peter.maccoll@knightfrank.com

Tim Smither Partner +44(0)2078611227 tim.smither@knightfrank.com

South East Offices Emma Goodford Partner,HeadofSouthEastOffices +44(0)2078611144 emma.goodford@knightfrank.com

Will Foster Partner +44(0)2078611293 will.foster@knightfrank.com

Landlord and Tenant John Woolsey Partner +44(0)2078611142 john.woolsey@knightfrank.com

Ashley Drewett Partner +44(0)2078611156 ashley.drewett@knightfrank.com

© Knight Frank LLP 2011

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