Tuesday 29th September 2015
Global Real Estate Trends
and Opportunities for
2015/2016
Steven Cox, Of Counsel, K&L Gates
Sabina Kalyan, Global Chief Economist, CBRE Global Investors
Peter Hobbs, Managing Director, Real Estate Research, MSCI
Mike Phillips, Editor, EuroProperty Magazine
Kristina Baurschmidt, Partner, K&L Gates Berlin
© Copyright 2015 by K&L Gates LLP. All rights reserved.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL
ESTATE OUTLOOK
SEPTEMBER 2015
Presented by:
SABINA KALYAN, GLOBAL CHIEF ECONOMIST
The Great Fall Of China
MSCI China & Shanghai Composite Rebased to 100 at Jan 14.
260
240
220
200
180
160
140
120
100
80
Jan-14
May-14
Sep-14
Shanghai Composite
Jan-15
May-15
Sep-15
MSCI China
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 2
Another 20%?
CNY/USD Spot Rate.
0.170
0.165
0.160
0.155
0.150
0.145
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 3
Abenomics Is Doing A Lot
Tankan Survey.
60
40
20
0
-20
-40
-60
-80
Aug-90
Aug-93
Aug-96
Aug-99
Non-manufacturing
Aug-02
Aug-05
Aug-08
Aug-11
Aug-14
Manufacturing
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 4
Except What It’s Meant To Do
Monthly Cash Earnings, % y/y.
4
3
2
1
0
-1
-2
-3
-4
-5
-6
Aug-10
Aug-11
Aug-12
Nominal
Aug-13
Aug-14
Aug-15
Real
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 5
The USA Struggles To Reach Escape Velocity
ISM Business Activity Surveys.
65
60
55
50
45
40
35
30
Aug-00
Aug-03
Manufacturing
Aug-06
Aug-09
Aug-12
Aug-15
Non-manufacturing
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 6
Monetary Tightening Threatened By Global Pressures
Market Implied Path of US Interest Rates, %.
4
31 Dec 13
3
30 Jun 15
31 Dec 14
2
25-Sep-15
1
0
1 Mo
3 Mo
6 Mo
1 Yr
2 Yr
3 Yr
5 Yr
7 Yr
10 Yr
20 Yr
30 Yr
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 7
Meanwhile The UK Is In Rude Health (But Still Indebted)
Average Earnings, % y/y.
6
5
4
3
2
1
0
-1
-2
-3
-4
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Nominal
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Real
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 8
And Wrestling With The Same Policy Dilemma As The USA
Real Effective Exchange Rate Indices.
120
115
110
105
100
95
90
85
80
75
95
97
99
01
03
GBP
05
07
09
11
13
15
USD
Source: Thomson Reuters DataStream.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 9
By Contrast The Eurozone Is At The Start Of Its Easing Cycle
Ratio of Central Bank’s Government Bond Purchases To Net Bond Issuance.
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Fed QE3
Fed QE2
BoE QE2
BoJ 2013
BoE QE1
BoJ 2014
ECB QE1
Source: Gavekal.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 10
The Demand For Credit Is Recovering
Net Change In Demand For Credit.
Loan Growth, % y/y.
20
30
20
15
10
0
10
-10
5
-20
-30
0
-40
-50
-5
-60
07
08
09
10
Large firms
Source: European Central Bank.
CONFIDENTIAL AND PROPRIETARY
11
12
Small firms
13
14
15
Consumers
04 05 06 07 08 09 10 11 12 13 14 15
Consumer credit
Mortgage debt
Corporate credit
Source: European Central Bank.
THE EUROPEAN REAL ESTATE OUTLOOK 11
And Frankly There Isn’t Much Between The USA & The Eurozone
GDP Forecasts, % pa.
7
6
5
4
3
2
1
0
2015
2016
2017
2018
2019
2015-2019
Sourec: OEF except USA which is Moody’s.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 12
So Where Does Europe Stand Relative To Its Global Peers
THE EUROZONE
•
EASY MONETARY POLICY
•
WEAKENING EXCHANGE RATE
•
RECOVERING DEMAND
•
AND DESPITE BREXIT & GREXIT, COMPARABLY STABLE POLITICAL & LEGAL BACKDROP
THE UK
•
MONETARY POLICY CYCLE EXTENED BY GLOBAL VOLATILITY
•
LATE CYCLE BUT DEMAND STILL SURPRISINGLY STRONG
•
BACK TO A SAFE HAVEN ONCE THE EU REFERENDUM IS TRAVERSED (?)
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 13
The Problem Is That Europe’s Attractions Are Not Unnoticed
Investment Volumes, % y/y.
Investment Volumes,
EUR bn per quarter.
90
80
80
60
70
40
60
20
50
0
40
-20
30
-40
20
-60
10
-80
0
06
07
08
09
10
11
12
13
14
15
-100
'06 '07 '08 '09 '10 '11 '12 '13 '14 15
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 14
Closed End Funds Are Back And Targeting Europe
Closed End Fund Dry Powder,
EURbn.
300
Closed End Fund Dry Powder By
Region, % Of Total.
100%
250
90%
80%
200
70%
60%
150
50%
40%
100
30%
50
75
34
0
06
07
Europe
08
09
10
11
North America
12
Asia
13
14 H1
15
Rest of World
20%
10%
30%
20%
0%
06 07 08 09 10 11 12 13 14 H1
15
Europe
North America
Asia
Rest of World
Source: Preqin.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 15
Desperate Investors Are Using Portfolios To Place Capital Quickly
Top 15 Portfolio Investors In Europe
In H1 2015, EURbn.
Portfolio Acquisitions By Capital
Source, EURbn & Global as a % of
Total.
120
QIA
Klepierre
Deut. Ann.
Brookfield
Starwood
Lone Star
Blackstone
Greystar REP
CPPIB
NorthStar
Patrizia
Citycon Oyj
Cale Street
Cerberus
LGIM
37%
100
80
60
14%
40
20
0
08
0
1
Inst/Sov Wealth
2
3
Debt
4
REIT
5
6
7
Private Equity
09
10
11
12
13
14
15
8
Domestic
European
Global
Source: Real Capital Analytics.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 16
The Biggest Increase In Activity Has Been In The South
Investment Volumes,
% H1 2015/H1 2014.
200
750!
Market Share, % of Total.
60%
50%
150
40%
100
30%
50
0
26
20%
10%
0%
-50
H1 15
Average
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 17
But London Still Dominates Transaction Activity
Transactions In Europe In H1 2015.
€35B
€30B
Hamburg
Milan
€25B
London
Munich
€20B
Madrid
€15B
Frankfurt
Berlin
€10B
€5B
Paris
€0B
In H1’15 London accounted for more transaction volume than the next 7 European cities
combined.
Source: Real Capital Analytics.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 18
Pricing Is Reaching Record Levels
10
Prime EU-15 Yields, %.
Latest=June 2015.
Prime EU-15 Real Rents Rebased to
100 in 1986. Latest=June 2015.
225
9
200
8
175
7
150
6
125
5
100
4
75
3
88 91 94 97 00
Retail
Office
Industrial trend
03
06 09 12
Industrial
Retail trend
Retail trend
15
86
89
92
95
98
Retail
Office
Industrial trend
01
04
07
10
13
Industrial
Retail trend
Retail trend
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 19
Spain In Particular Has Seen Yields Compress At A Rapid Rate
Prime Office Yield Premium Over West End, bps.
300
250
200
150
100
50
0
-50
-100
06
07
Paris
08
Stockholm
09
10
Frankfurt
11
12
Amsterdam
13
14
Madrid
15
Prague
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 20
Prompting Some Investors To Take Profits
Private Equity Fund Transactions In Europe.
$250B
$200B
$150B
$100B
$50B
$0B
-$50B
-$100B
-$150B
2007
2008
2009
2010
Buying
2011
Selling
2012
2013
2014
YTD'15
Net
Source: Real Capital Analytics.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 21
Others Are Looking For Higher Yielding Assets
Yield Gap Over The Current Cycle.
450
400
350
300
250
200
150
100
50
0
Maximum
Minimum
Q2 15
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 22
Others Are Using Leverage To Increase IRRs
Prime Yield Spread Over Cost Of Debt, PP.
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Source: CBRE Global Investors Treasury Department.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 23
So Is There Still Embedded Value In This Market?
Real Prime Office Capital Values Per Sq M Rebased To 100 In Q2 2007.
120
Frankfurt
110
100
Amsterdam
90
London City
80
Paris
70
Prague
60
London West End
50
Madrid
40
30
20
06
07
08
09
10
11
12
13
14
15
Source: CBRE EMEA Research.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 24
We Are Still Early Cycle For The Rent Recovery
Real Prime Rent Growth, % cumulative, 2015-2019
20
15
10
5
0
-5
High Street Retail
Shopping Centre
Source: CBRE Global Investors.
CONFIDENTIAL AND PROPRIETARY
THE EUROPEAN REAL ESTATE OUTLOOK 25
European Real Estate Investment Themes
DOMINANT RETAIL CENTRES
PRIME LOGISTICS FACILITIES IN
MAJOR DISTRIBUTION HUBS
Retailers are concentrating their presence in
dominant retail locations/formats
Shortage of modern facilities and strong
demand driven by e-commerce
Preferred
Markets
Central London & Paris high
street retail
NW European dominant
shopping centres with asset
management potential
Southern Europe for yield
compression & rent growth
Preferred
Markets
Major NW European
markets
Warsaw and Czech Rep
Barcelona
Preferred
Investment
Themes
CYCLICAL OFFICE RECOVERY
NICHE RESIDENTIAL IN UNDERSUPPLIED MARKETS
Shortage of modern space in city centres
combined with strong demand from media
and tech companies in emerging locations
Demographic trends combined with shortage
of supply for Independent/assisted living
facilities and student accommodation
Preferred
Markets
London & Manchester
Amsterdam South Axis
Madrid & Barcelona
For higher risk-adjusted return
investors - Budapest
CONFIDENTIAL AND PROPRIETARY
Preferred
Markets
London residential
Student housing in NW
Europe
Senior living in the UK
Dutch social housing given
regulatory change
THE EUROPEAN REAL ESTATE OUTLOOK 26
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CONFIDENTIAL AND PROPRIETARY
Many factors affect performance including changes in market conditions and interest rates
and changes in response to other economic, political or financial developments. The target
returns are pre-tax and represent possible returns that may be achieved, but are in no way
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Assets under management (AUM) refers to current fair market value of real estate-related
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THE EUROPEAN REAL ESTATE OUTLOOK 27
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