Michael Haddock Stockholm 25 th June 2009 Are prime rents an adequate proxy for ‘the market’?

The Problem 1

CB Richard Ellis | Page 3 The Problem  Opaque markets  Incomplete information on transactions  Incomplete information on available properties  Short history of professional research If one wants to look at the evolution of markets over more than the last cycle, then the only data available is prime rents and prime yields… …but are they indicative of the behaviour of the market as a whole.

CB Richard Ellis | Page 4 The Problem  Need to test the hypothesis that prime indices are an adequate proxy for ‘the market’ for the purposes of – Measuring market behaviour – Forecasting market performance – Investment strategy  Analysis based on data for Madrid, Amsterdam and London

Madrid 2

CB Richard Ellis | Page 6 The Data Madrid  Leasing transactions since 1990  80%+ of all transactions  Date (quarter), Headline rent, Floor area, Submarket  Quarterly prime rent since 1973

CB Richard Ellis | Page 7 Madrid data series Source: CB Richard Ellis

CB Richard Ellis | Page 8 Madrid Conclusions  Peak (objective) and Prime (subjective) track closely. No evidence of observer bias. – prime rents appear to add value  Turning points track closely for Prime and Average – correlation 0.90 – prime rent may lead the market by 3-6 months  Volatility is similar for prime and average – prime may be slightly more volatile  Short-term growth rates are similar  Long-run growth rates seem to diverge

Amsterdam 3

CB Richard Ellis | Page 10 The Data Amsterdam  Leasing transactions since 1985  c55% of all transactions  Date (year), Headline rent, Floor area  Quarterly prime rent (since 1973)  ROZ/IPD annual rental growth (since 1994)

CB Richard Ellis | Page 11 Amsterdam data series Source: CB Richard Ellis

CB Richard Ellis | Page 12 Amsterdam Conclusions  Peak (objective) and Prime (subjective) track closely. No evidence of observer bias. – prime rents appear to add value  Turning points track closely for Prime and Average – correlation of 0.98 – no evidence that prime leads (although annual data)  Volatility is similar for prime and average – prime may be slightly more volatile  Long-run growth rates seem to diverge

CB Richard Ellis | Page 13 Amsterdam Conclusions v IPD  Prime rent shows a better correlation with IPD rental value growth than the peak or average rent series – correlation of 0.98 at t-1  Prime and average rents are a leading indicator (by 1 year) of IPD rental value growth  IPD rental value growth is less volatile than prime rents  Long-run growth rates seem to diverge Is this evidence of valuation smoothing and lag?

London 4

CB Richard Ellis | Page 15 The Data London  Quarterly prime rent (since 1976)  IPD Monthly rental value index (since 1985)

CB Richard Ellis | Page 16 London data series Source: CB Richard Ellis

CB Richard Ellis | Page 17 London Conclusions - City  Good correlation (0.87) between prime and IPD  Prime rents less volatile than IPD!  Prime rent is a leading indicator of IPD by 6-9 months – the lead time appears to be shrinking  Short-term growth rates are similar  Long-run growth rates seem to diverge

CB Richard Ellis | Page 18 London data series Source: CB Richard Ellis

CB Richard Ellis | Page 19 London Conclusions - City  Weaker correlation (0.80) between prime and IPD  Prime rents much more volatile than IPD!  Prime rent is a leading indicator of IPD by 3-6 months  The relationship changes radically after 2003

Conclusions 5

CB Richard Ellis | Page 21 Conclusions  Based on these three markets prime is an adequate proxy for ‘the market’ in the office sector  Turning points and volatility are similar  No evidence of observer bias in subjective prime rents  Prime may lead the market slightly  Prime appears to lead valuation based indices  The relationship can break down under some circumstances

Further Research 6

CB Richard Ellis | Page 23 Further Research  Analysis of more cities necessary to conclusively justify prime rents  Other sectors may (indeed probably will) behave differently  The long-term difference in growth rates needs to be investigated: – is it structural – is it cyclical  Prime yields!

Michael Haddock Stockholm 25 th June 2009 Are prime rents an adequate proxy for ‘the market’?