1. Page 0 Re-examining the modelling of yields in a volatile market by Ben Burston DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: ben.burston@dtz.comben.burston@dtz.com Kostis Papadopoulos DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 2329 Email: kostis.papadopoulos@dtz.comkostis.papadopoulos@dtz.com & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 2314 Email: tony.mcgough@dtz.comtony.mcgough@dtz.com Paper presented at the 17 th European real Estate Society Conference, Milan, Italy – June 23 rd 26 th 2010. Draft paper: Not to be quoted without permission from the authors.

2. Page 1 Introduction Methodology Model Impact of global volatility Implications of modelling output

3. Page 2 Introduction Previous model (Hicks & McGough 2005) provided a framework for our yield analysis Previous equation looks at impact of Rental expectations Bond prices Fixed risk premia via constant Present model Incorporates transaction volumes Money supply Methodology

4. Page 3 Issue of pricing of risk

5. Page 4 Yield history and financial pricing within markets Source :DTZ Research

6. Page 5 Source :DTZ Research Testing for a breakpoint in 2003

7. Page 6 Data used Variables RR = real rents Bond = 10 year government bond Divy = Dividend Yield Trvn = transaction volume numbers RMoney = Real money supply Time Series Quarterly 1997 2009 London Office rents

8. Page 7 Yield equation to 2003 - bonds Source :DTZ Research

9. Page 8 Source :DTZ Research Yield equation to 2003 - bonds

10. Page 9 Source :DTZ Research Yield equation to 2003 – dividend yields

11. Page 10 Source :DTZ Research Full model to 2009 Q4 - bonds

12. Page 11 Source :DTZ Research Full model to 2009 Q4 – dividend yields

13. Page 12 Source :DTZ Research Full model to 2009 Q4 – key findings Changes in relationships Bond relationship turns negative Dividend yield relationship insignificant Serial correlation appears Why? Chasing the yield Outward movement of yields following financial crisis

14. Page 13 Source :DTZ Research Full model to 2009 Q4 – solutions Need to incorporate other variables into this analysis In particular risk measures and time varying premia

15. Page 14 Risk pricing from near zero to 400 bps

16. Page 15 Source :DTZ Research Full model to 2009 Q4

17. Page 16 Source :DTZ Research Full model to 2009 Q4

18. Page 17 Conclusions Source: DTZ Research London (City) London (West End) Madrid Paris Sydney Frankfurt New York Shanghai Tokyo Structural break found in yield relationships using old methodology Previous relationships have changed in the current environment More sophisticated modelling of risk needed to take into account more volatile risk markets