Organised by:

1. 14th October 2010 Organised by: BNP Paribas Real Estate Offices London Hosted by and in association with: Supported by: Recovery Summit 2010 is

2. WHAT LIES AHEAD FOR THE ECONOMY & PROPERTY MARKETS? Lucy O’Carroll Senior Economist Lloyds Banking Group

3. Three questions • Where are we today? • What does the future hold? • What are the key risks to the outlook?

4. UK Economy: Activity in 2010 H2 is likely to disappointThe strong first half of 2010 was largely due to restocking and volatile consumer and investment spending. Latest surveys of confidence and activity point to a slower outlook PMI surveys and consumer confidence GFK Consumer Confidence PMI survey Index

5. Fragile recovery in the labour marketPart-time employment has been underpinning the labour market. The proportion of individuals remaining jobless for more than 12 months is still rising, albeit at slower rate Unemployment by duration Employment by type in % q/q change;in 000s in % q/q change;in 000s Total employment annual growth (rhs) ILO unempl.rate (rhs)

6. Credit conditions remain weakCorporate lending shrank further during the summer, as demand appears to be growing at a slower pace than availability Net lending by sector BoE Survey on credit availability and demand Corporate lending*(medium-sized companies) Quarterly net lending flows(in £bn) Q1 2007 = 100 Creditdemand Creditavailability * Cumulative level of respondents reporting a rise as % of those reporting a decline; reporting on activity in previous 3 months.

7. Strong recovery in commercial property prices has now stalledConsensus forecasts for 2010 and 2011 capital value growth have declined over the past few months Commercial property prices and consensus forecasts* IPD Commercial propertycapital values index *Year-end IPF Consensus forecasts; linear interpolation for in-between months.

8. Residential property price inflation close to flatMortgage approvals at historic lows, declining down-payments, modest employment growth and uncertainty around price expectations explain subdued growth House prices against household income House price* as multiples of average earnings Monthly % change(3-month moving average) *Based on all-houses and all-buyers data.

9. Markets have shifted rate rise expectations further into the futureGiven contained inflation risks, uncertainty around spare capacity and weak credit growth, the yield curve has flattened further in recent months. Changes in the yield curve over the past 6 months UK Treasury Strip (yield to maturity; in %) ~110 bps Time to maturity

10. Three questions • Where are we today? • What does the future hold? • What are the key risks to the outlook?

11. Our base case scenarioGiven the way the recovery has shaped up so far, we remain of the view that it will be subdued by historic standards. However, we do not believe a ‘double dip’ is the most likely outcome for the UK economy Our ‘central’ scenario reviewed Real GDP growth • Global and UK monetary policy slightly more accommodative than expected. • Bank and consumer deleveraging slightly faster than anticipated. • Domestic demand marginally stronger than expected (so far). • Net trade weaker than expected. • Level of confidence broadly in line with expectations. • Policy rate rises likely to come later. • Outlook for property markets has weakened. Consensus Forecasts (as of Aug. 2010 ) LBG early-2010 forecast LBG mid-2010 forecast

12. Our base case for property marketsRecovery in both housing and commercial property expected to be subdued by credit constraints and fairly anaemic bounce back in wider economy House price forecasts Commercial property price forecasts % change on a year earlier (December) % change on a year earlier (December) Source: Halifax house price index, IPD commercial property price index, LBG forecasts

13. Three questions • Where are we today? • What does the future hold? • What are the key risks?

14. Just how uncertain is the outlook? The Bank of England’s ‘fan chart’ forecast for GDP growth is effectively an admission that economists are not very good at predicting the future… The fan chart depicts the probability of various outcomes for GDP growth. It has been conditioned on the assumption that the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion throughout the forecast period. To the left of the first vertical dashed line, the distribution reflects the likelihood of revisions to the data over the past; to the right, it reflects uncertainty over the evolution of GDP growth in the future. If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the mature estimate of GDP growth would lie within the darkest central band on only 10 of those occasions. The fan chart is constructed so that outturns are also expected to lie within each pair of the lighter green areas on 10 occasions. In any particular quarter of the forecast period, GDP is therefore expected to lie somewhere within the fan on 90 out of 100 occasions. And on the remaining 10 out of 100 occasions GDP growth can fall anywhere outside the green area of the fan chart. Over the forecast period, this has been depicted by the light grey background. In any quarter of the forecast period, the probability mass in each pair of the identically coloured bands sums to 10%. The distribution of that 10% between the bands above and below the central projection varies according to the skew at each quarter, with the distribution given by the ratio of the width of the bands below the central projection to the bands above it. In Chart 1, the ratios of the probabilities in the lower bands to those in the upper bands are approximately 6:4 at Years 1, 2 and 3. See the box on page 39 of the November 2007 Inflation Report for a fuller description of the fan chart and what it represents. The second dashed line is drawn at the two-year point of the projection.

15. What are the uncertainties around the economic outlook?The UK economy could move into a recessionary territory – if pushed there by austerity measures, sovereign defaults, ill-timed policies, a wholesale funding market crisis or a sudden unwinding of global imbalances Risks are skewed to the downside… Key risks • Fiscal policy configuration and impact • Consumers’ propensity to save • Banks’ rate of deleveraging • Monetary policy exit • Global imbalances unwinding (or lower) Probability

16. Some final thoughtsResults from the latest LTSB Commercial Property Confidence Monitor …tend to chime with forecast of continued, fairly subdued recovery • August 2010 Monitor shows large proportion of businesses expect a static picture in the next 3-6 months • With Fund Managers most likely to expect a fall in property values, and Major Businesses most resilient & optimistic • A small majority of Medium-Large businesses expect prices to fall, but the anticipated magnitude of decline is smaller than a year ago (1-5% fall) • Investment is most likely at top of the market (Major Businesses & Fund Managers) • Generally speaking, no strong regional differences – in contrast to past results • Outlook for House Building seen as strongest amongst Small & Medium firms • Whereas Fund Managers & Major Businesses favour Offices • Though a large proportion (38%) of respondents in London were not sure what the best-performing sector would be in the next 3-6 months

17. 14th October 2010 Organised by: BNP Paribas Real Estate Offices London Hosted by and in association with: Supported by: Recovery Summit 2010 is

18. How can banks make the recovery sustainable? Nick Robinson Consultant Blackstone Group

19. 14th October 2010 Organised by: BNP Paribas Real Estate Offices London Hosted by and in association with: Supported by: How can banks make the recovery sustainable?What is the outlook for the property sector in the coming months ? Nick Robinson Recovery Summit 2010 is

20. Key questions How important is this question? How is this playing out? What are the implications?

21. ~£160b ‘problem CRE loans’ in UK UK CRE Lending Market (£b) , 2010 Profile: • Secondary/tertiary and/or complex trading assets • Underinvested • Complex to value • Traditional buyers in short supply • Probably ~£120b net (needing about £40b of equity) Total lending ~£300b CMBS Distressed ‘Terminally over-leveraged’ Bank loans Performing

22. ~€110b of CRE disposal commitments Non-core disposal CRE portfolios - Global€b, H1 2010 (net of impairment) • Target date: 2017-20 • Target size: ~€0b • Target date: 2014 • Target size: £10-20b Disposal target Residual Residual Disposal target • Target date: 2013 • Target size: ~£5b Source: Interim results statements, and NAMA strategy document

23. Unsustainable bank debt Annual CRE Loan Origination (£ in billions) • Less than 10% of total debt • Hard to see new bank capacity coming into the market • Limited CMBS activity and outlook uncertain • Easy to see capacity slipping away further • New sources of debt likely to emerge, but unlikely to be material enough to bridge the gap ________________________________________________ Source: “The UK Commercial Property Lending Market”, De Monfort University.

24. What this all means… ~£120b (net) of ‘bank controlled’ assets need significant new equity in the next ~3-6 years – a lot! Many of these assets are tough and ‘not for the faint hearted’ Even if banks wanted to support all these businesses, balance sheet reduction targets will force disposals There will be very limited new debt through conventional bank channels

25. Key questions How will bank actions influence the real estate market and how material could these actions be? How is this playing out? What are the implications?

26. Third party pressures growing Central bank funding being withdrawn Replacement funding (CMBS, deposits) tough Balance sheet reduction commitments (EU State Aid remedies) stretching

27. So far very little has happened

28. The reasons for this are relatively clear

29. Key questions How will bank actions influence the real estate market and how material could these actions be? How might this all play out? What are the implications?

30. This will happen in slow motion Catalysts • Financial incentives in the right direction • Loss Provisions • Swap provision • Capital release • Pressure on banks • Analysts/regulators • Central banks • Peers Likely to build steadily (no dam busting event foreseen)

31. Lessons from recent disposals Assets - a disproportionate prime (or good secondary) Buyer – property companies Valuations –sold at or above the valuation Process - administrator/ receiver led auction-type processes Stapled debt – virtually none And, it will be different from last 12 months Next 3 years.. • Assets – often secondary or tertiary • Buyers – often opportunity funds • Valuations – often too high • Process - more complex (often consensually) • Stapled debt – many will require stapled debt

32. And debt will be tough to come by… For restructures, debt will often have to be left behind in order to ensure returns to buyers For ‘new deals’ different sources of debt will need to be found (e.g., life and pension funds, leveraged finance markets, public markets) ‘…the supply of bank lending to businesses during the recovery is likely to be more expensive than it was pre-crisis and possibly constrained in quantity…’ (Paul Fisher - BoE Director of Markets, 30/9/2010)

33. Implications… There is unlikely to be a flood of distressed assets onto the market, but there will be a steadily increasing volume (and may be the majority of transactions in 12-24 months time) The mechanisms through which these assets get recapitalised will be varied and often quite different from models of the past Access to debt will be critical for those who depend upon it for their returns – there simply won’t be enough

34. 14th October 2010 Organised by: BNP Paribas Real Estate Offices London Hosted by and in association with: Supported by: Recovery Summit 2010 is

35. Banks: Where next? Chair: Mike Phillips, Property Week Stephen Eighteen, Royal Bank of Scotland Scott Stuart, Santander Corporate Banking Peter Denton, West lmmo

36. 14th October 2010 Organised by: BNP Paribas Real Estate Offices London Hosted by and in association with: Supported by: Recovery Summit 2010 is

37. Market analysis by sector Malcolm Frodsham Research Director Investment Property Databank

38. Market Analysis How has the property market been impacted by the recession? How has each sector been impacted by the recession? Opportunities & risks for each sector

39. Market Analysis How has the property market been impacted by the recession? Are rents & yields heading for the doldrums? Rally in pricing running out of steam? Fit-full progress in rental trends Domestic net investment holding steady Fair value reached? How has each sector been impacted by the recession? Opportunities & risks for each sector

40. Yields have fallen 69bps in the 1st half of 2010 following falls of 106 bps in the second half of 2009. Twelve month total returns to Q2 2010 up to +25%. (+24% to August) The 9th quarter of falling rental values pulling values down -10% overall. Are Yields & Rents Heading For The Doldrums? Source: IPD UK Quarterly Index (Sep-10 = last 3 months from IPD Monthly Index to August

41. Inward yield movement strongest on shopping centres in the 2nd quarter, over-taking the moderating rate of fall on central London offices. Yield falls also greater on the other retail formats than office assets outside of central London and industrials. Rally In Pricing Running Out Of Steam? Source: IPD UK Quarterly Index (Sep-10 = last 3 months from IPD Monthly Index to August

42. Further increases in office rental values – but growth focussed on London. Further rental falls in all retail and industrial formats but progress stuttering. Small rises registered over the quarter from both London shops & industrials. Fit-Full Progress In Rental Trends Source: IPD UK Quarterly Index (Sep-10 = last 3 months from IPD Monthly Index to August

43. Q1 & Q2 carbon copies: net investment at 1.5%, expenditure 3.3% & receipts 1.8% (all expressed as a percentage of capital value). Net Investment Holding Steady Source: IPD UK Quarterly Index

44. Equivalent yield down over the quarter from 7.5% to 7.3% Gilt yields edge up from 3.8% to 3.9% Yield gap falls to 341 bps Fair Value ‘Equator’ Crossed Property equivalent yield & yield gap vs gilts Source: IPD UK Quarterly Index

45. Market Analysis How has the property market been impacted by the recession? How has each sector been impacted by the recession? Total Returns By Segment Drivers of Capital Growth The 1990s & 2000s rental cycles compared City Office Unit Shops Industrials Domestic Investment Opportunities & risks for each sector

46. A ‘bunching up’ across the segments - only a 3pp spread from worst to best market, below the long run average of 4pp. City offices lead the way for the second quarter running whilst rest of south east offices limp past regional offices to move off the bottom of the rankings. Total Returns By Segment Q2 2010 % Total returns for Q2 2010 Source: IPD UK Quarterly Index

47. Yield falls most focussed on central London offices where rental value growth is also contributing to positive capital growth Further yield falls elsewhere responsible for positive capital growth rather than rising rents Drivers of Capital Growth Q2 2010 % Source: IPD UK Quarterly Index

48. Rental trends improved in the 2nd quarter particularly on unit shops, offices and industrials in the south east City office rental values grew less quickly than in the 1st quarter Rental Value Change, % Source: IPD UK Quarterly Index (Sep-10 = last 3 months from IPD Monthly Index to August

49. Rental value in City offices broke into positive territory after only 7 quarters of falls… …but from May to July 1994 and from February to August 1996 rents on City offices also rose, only to fall back. City Offices - The 1990s & the 2000s – Rental Cycles Source: IPD UK Monthly Index

50. Standard retail trend bottomed out at a more significant -9% pa. Trajectory the same as the 1990s – if so should we pencil in further small falls in rents until May 2011? Standard retail - The 1990s & the 2000s – Rental Cycles Source: IPD UK Monthly Index