There was a clear change in sentiment in the commercial property investment market during 2009 as the economic environment showed signs of improvement. During the first half of the year, capital values continued the pattern of decline seen in 2008 as yields moved out and rental values weakened. However, in the second half, with improved investor confidence, investment turnover picked up substantially. Activity was initially led by overseas investors and then, towards the end of the year, UK investors became more active, particularly the domestic financial institutions. The attraction for investors was the relatively high level of income returns and the perceived value offered by the commercial property sector after the substantial capital value declines from the market peak in mid-2007. This increased demand, coupled with a lack of good quality property, led to capital value growth from yield compression in the second half of 2009.

The group’s investment portfolio was valued at £1.92bn at 31st December 2009. There was a valuation deficit of £72.5m for the year, before lease incentive adjustments of £8.6m, giving a total movement of £81.1m. Whilst the underlying valuation movement over the year was a 3.3% decline, this was an improvement on the 22.1% fall in 2008 and was an outperformance against the IPD Central London Offices Capital Growth Index, which declined by 5.4% in 2009. Significantly, the valuation decline of 12.3% in the first half was substantially reversed in the second half with a 9.8% increase which was dominated by yield compression. As a result, the revaluation surplus for the second half of 2009 was £177.8m.

By location, our West End properties decreased by 2.8% over the year. Again there was a reversal of performance, from a 12.7% decline in the first half to a 10.9% gain in the second half. In our City borders properties, 21% of the portfolio, values fell 5.3% over the year. The balance of the portfolio, now all in Scotland and representing just 5% of the total portfolio value, declined by 2.5% in 2009.

Within the investment portfolio, the development properties, principally Arup Phase III, the Angel Building and the Charlotte Building, were valued at £167.8m at the year end and showed a decrease of £4.0m or 2.3% over the year. After a decrease of 17.8% in the first half, there was a 14% valuation increase in the second half. Both Arup Phase III and the Charlotte Building were completed towards the end of the year and this drove the valuation improvement.

The portfolio’s estimated rental value decreased by 11.4% in the first half of the year and 2.9% in the second, giving an overall annual decline of 14.0%. In 2008, the annual decline was 3.4%.

The portfolio’s initial yield, based upon the annualised contracted rental income and after rent free periods, was 6.0% at 31st December 2009, a similar level to last year. This would rise to 6.2% after letting the vacant available space and to 6.7% upon full reversion. The portfolio’s true equivalent yield was 6.4% at the year end, a decrease from both the 7.1% at the start of the year and the 7.3% at the half year.