Page 0 Modelling Effective Office Rents by Matt Hall DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0) & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)

Page 1 Introduction Data calculation Models Results

Page 2 Introduction Prime office rents are often questioned for lack of responsiveness to market pressures Issue

Page 3 Introduction Prime office rents

Page 4 Introduction Prime office rents are often questioned for lack of responsiveness to market pressures Some reasons Smaller markets struggle to get evidence of declines Less active market especially in quiet times But see some example of this even in London Asymmetric Properties of rental movement (Hendershott et al)2008 Definitely something there but a quantifiable known is effective rents Issue

Page 5 Introduction Incentives are used to hold up rents in downturns It is in landlord’s interests to maintain headline rents Supports capital value and provides a market floor Provides a lock in value for developers Market evidence used in rent reviews Especially with upward only rent reviews Impact and how to treat incentives for investment returns well documented (Brown) 1995 Effective rents

Page 6 Introduction Prime and effective office rents in London City Source: DTZ Research

Page 7 Data Collection Need to standardise approach Take account of standards – UK 3 month always free for fit out – Other markets in ‘turn key’ condition – No rent frees beyond first break (5 years in UK 3 years in Italy) Standardise lease lengths at 10 years – No rent frees beyond first break (5 years in UK 3 Calculate effective rent (((Lease length – (rent free period-fit out allowance))/lease length)*prime rent

Page 8 Models From this we calculate an implicit rent series of rent free months and model this Other variables used Availability Stock Main driver of prime rent – not the rent itself Lagged incentive

Page 9 Models Source :DTZ Research CoefficientStd. Errort-StatisticProb. C DLOG(UKLOOGVAJKL) UKLOCOAV/UKLOCOST LOG(UKLOCORF(-1)) R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob(F-statistic) London City

Page 10 Source :DTZ Research Results Paris IDF Office markets

Page 11 Source :DTZ Research Results Brussels Office markets

Page 12 Conclusions Rents are similarly volatile at effective rents level Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions Some markets (Madrid) do not use incentives and thus appear more volatile

Page 13 Source :DTZ Research Conclusions Madrid Office markets

Page 14 Source :DTZ Research Conclusions Manchester Office markets

Page 15 Source :DTZ Research Conclusions Manchester Office markets

Page 16 Conclusions Rents are similarly volatile at effective rents level Some markets (UK) have used incentives a long time but other markets (Belgium) are using them more – particularly in difficult conditions Some markets (Madrid) do not use incentives and thus appear more volatile Incentives are being increasingly used and this trend will continue