Autumn/Winter 2006 Market Commentary

Market Overview News

During the third quarter of 2006 the UK continued to experience robust economic growth with Gross Domestic Product (GDP) increasing by 0.7%, which is a slight decrease on the previous quarter. On an annualised basis the rate of growth now stands at 2.8%. The continued growth is largely being driven by the business services sector, which is beginning to benefit from the strength of the global economy and as a result saw growth of 1.4% over the quarter. The Manufacturing sector experienced a slight downturn in output during the last month of the quarter but still experienced overall growth of 0.6% during the quarter. Despite a recovery in consumer sales during the summer month’s retail sales have been modest during the past quarter with the volume of sales increasing by 0.6%, which is a slight decrease on the preceding quarter.

The current Inflation rate stands at 3%, which is a full 100 base points above the Bank of England’s target rate of 2%. As a comparison the rate of inflation the previous quarter stood at 2.4%. Inflationary pressures continue to come from energy price rises which again climbed during the quarter, and other household costs such as DIY materials and rents. Price reductions for the cost of DVD’s, CD’s, digital cameras and petrol were also not as large as the same period last year, which also fuelled the rate. Interest rates have increased to 5.25% from 4.75% since our last report. The Bank of England cited firm economic growth, a positive global outlook and the continued rise in asset prices among its reasons. Many analysts have also speculated that a further increase in interest rates may be needed if inflation continues to increase.

The property investment market has lost little momentum over the past quarter and has continued to deliver the strongest returns in the investment market. According to the IPD total year on year returns are 20.6% outperforming equities with returns of 14.7% and gilts returning 2.5%. Quarterly returns see all property returning 3.8%, equities 3.6%, and gilts 2.4%.

The office sector has continued to be the best performing property sector with total returns for the calendar year to the end of September of 24.4%. The industrial sector remains the next best performing asset with total returns of 19.6%, whilst the retail sector remains in third place with total returns of 19%.

All property sectors have experienced rental growth in the year up to September and once again the Office sector has been the best performing seeing a growth of 4.6% in the year to September. This sector is benefiting from the continued growth within the financial and business services sectors, also meaning that take up levels have increased and vacancy rates are continuing to decline.

Retail rental values have increased by 3.3% in the year, which is a decrease of 0.5% for the same period in 2005. Poor sales continue to dominate the retail market, and with the growth in online purchases continuing and diverting sales away from the high street, conditions for retailers are likely to remain tough.

A slight upturn in rental growth in the industrial sector has been experienced for the year up to September with 1.3% growth being achieved. This is partly being driven by a recovery in the manufacturing sector, which is benefiting from the strong economy and an improvement in exports.

During the past quarter the pace of investment yield hardening has slowed down across all sectors and the all property equivalent yield now stands at 5.5% for the year up to September. For the retail sector this stands at 5.1%, the office sector stands at 5.6%, and for the industrial sector it stands at 6.3%.

We are now seeing investors relying more on rental growth rather than capital growth to drive returns. This is putting the office market at the forefront of investor’s minds with more focus being placed on the actual income producing potential of the property. Demand for prime investments remains strong but there has been a slight weakening in prices for secondary location property.

Figures for the quarter for the UK housing market show that house prices rose once again albeit at a slightly lesser rate than before, however the annual price inflation rate rose from 8% to 8.6%. The strongest price rises are still within the South of England and in particular London. The average house price in the UK now stands at £184,924 which is 0.78% increase on the previous quarter.

House prices in the East Midlands have also seen increases with the average price now standing at £163,075, which is a quarterly change of 4.4% and an annual change of 4.8%. The City of Nottingham has particularly done well over the past quarter with a 6.4% increase in prices.

Up to the end of November the FHP Office and Industrial team completed transaction with a total capital value circa £135.67 million, which is year on year increase of 17%. During November itself deals were completed with a capital value of £42.3 million. This is an approximate increase of 330% on the corresponding month during 2005. Enquiries were 10% down year on year, whilst viewings remained at a similar level.

Over the same period the FHP Retail & Leisure team have completed transactions with a capital value circa £52.15 million. This is 6% less than the same year on year period for 2005. Enquiries are also slightly down (7%) as are viewings (10%).