Q4 2013 GLOBAL VISION The Investment Outlook For Major Property Markets DISCLAIMER Forecasts and projections regarding the likelihood of various sectoral, market and investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. CBRE Global Investors' clients may have acquired properties in the sectors and regions described in this research report. In addition, CBRE Global Investors is continuously marketing to new clients that will invest in properties within the sectors and regions covered. CBRE Global Investors Middle East Limited provides this material on behalf of CBRE Global Investors. CBRE Global Investors Middle East Limited is regulated by the Dubai Financial Services Authority. This marketing material is intended only for Professional Clients (as defined by the DFSA), no other persons should act upon it. Past or projected performance is not necessarily a reliable indicator of future results. GLOBAL VISION | Q4 2013 WELCOME TO GLOBAL VISION I’ve always believed that retail is by far the most complex of the four major property sectors. I still do, but as I travel the globe I’m convinced the world’s office markets are increasingly complex. This complexity provides challenges and opportunities for real estate investors. The U.S. is a prime example. Four years into the economic recovery, the overall office market has improved only haltingly. Net absorption has been held back by cyclical and structural factors – only moderate employment gains, “shadow “ space that needs to be backfilled before firms take on new commitments, and denser office utilization trends. But the anemic top line demand masks a complex story. Absorption has been highly concentrated in certain metro areas – primarily ones with large concentrations of technology and energy companies. Within metro areas, there’s also a huge variation by submarket. Neighborhoods that weren't even considered office locations a few years back are thriving while many traditional financial districts languish. Examples of these emerging areas abound throughout the States – Manhattan’s Flatiron and Meatpacking districts, the Seaport in Boston, Silicon Beach on L.A.’s Westside, Lake Union in Seattle, River North in Chicago. All have much tighter vacancies than their overall metros. Why? They attract expanding creative and tech industries by providing the “work/live/play”, non-corporate environments the firm’s tech-savvy younger employees seek. A similar phenomenon is evident on the other side of the pond. In London, the banking and finance sector has receded as the primary source of demand, while tech, media and telecom (TMT) are burgeoning. TMT firms have tended to cluster in locations not popular with traditional office occupiers in places such as Shoreditch or Soho, but this too is changing. Overlaying the demand shift, London is undergoing substantial transportation infrastructure changes. The under construction Crossrail rapid train route will make formerly underutilized locations across Central London increasingly more accessible. The appeal of alternative, non-corporate environments with cutting edge amenities alongside upcoming transport improvements is re-writing the office market. Amazon, Goldman Sachs and Google’s recent commitments to the still somewhat gritty Farringdon and Kings Cross neighborhoods are testaments to the trend. Even the definition of the formerly sacrosanct West End is expanding as occupiers jump north of Oxford Street. In Asia, circumstances are somewhat different. In Tokyo, tech firms prefer edgier locations, like youthful Shibuya or Roppongi – known only for its bars ten years ago, but now attracting the likes of Apple and Google. But overall the region is experiencing much more net demand than in the States or Europe. Firms are generally trying to upgrade their space – sometimes in less dense layouts to attract premium talent. Building quality, efficient floorplates, reliable HVAC and seismic safety are all key to attract tenants. Even in relatively stable Tokyo, many buildings are being torn down for new, higher quality construction. And in China, developers are constantly putting up “better mousetraps.” These global trends challenge investors. Many traditional “main and main” financial districts populated with an older stock of buildings will be less competitive, and thus relatively less valued going forward. But with informed local insight, metros, submarkets and buildings with the right characteristics can be identified. These assets can outperform even in anemic or highly competitive office conditions. One thing is for sure – office is not the commodity it was once perceived to be. As with all sectors and markets, one must dig to find the best opportunities. At CBRE Global Investors, our goal is to provide insight to help unearth the gems. Doug Herzbrun Global Head of Research GLOBAL VISION | Q4 2013 GLOBAL VISION | Q4 2013 GLOBAL VISION Q4 2013 TABLE OF CONTENTS GLOBAL ECONOMIC OUTLOOK ...................................................................................1 GLOBAL & ASIAN CAPITAL MARKETS ..........................................................................3 U.S. & EUROPEAN CAPITAL MARKETS ..........................................................................5 RETURN FORECASTS ......................................................................................................7 NORTH AMERICA UNITED STATES ........................................................................................................9 EUROPE UNITED KINGDOM ............................................................................................... 11 GERMANY ............................................................................................................. 13 FRANCE ................................................................................................................ 15 NETHERLANDS ...................................................................................................... 17 SPAIN.................................................................................................................... 19 ASIA PACIFIC JAPAN ................................................................................................................... 21 CHINA .................................................................................................................. 23 AUSTRALIA ............................................................................................................ 25 SOUTH KOREA ...................................................................................................... 27 GLOBAL VISION | Q4 2013 GLOBAL ECONOMIC OUTLOOK There are two major economic stories that will color the real estate investment backdrop in every major market: the U.S. taper and the China rebalancing. As we suggested in the last Global Vision, the U.S. is the first major market to enter a sustained economic recovery and, therefore, the first to normalize interest rates. Despite Washington’s shutdown and the inactivity on the debt ceiling, we believe that this will pass, and with Bernanke’s warning of a QE tapering as soon as this quarter, bond markets and most commentators are now pricing in a first rise in the policy rate in 2015. This expectation has pushed up the bond yield curve, with the result that 10 year bond yields are a percentage point higher than in Q2, and Moody’s Analytics is forecasting that they will rise to 5% in 2016. (Figure 1) We will discuss the implications of this for U.S. real estate pricing on page 9, but if unchecked, such a rise in borrowing costs will likely take some of the heat out of the U.S. housing-led recovery – and indeed the threat that this is already happening is arguably behind the Fed’s inaction in September. The normalization is also having an impact on smaller, highly open emerging markets that rely on U.S. Dollar liquidity and run current account deficits, such as India and Turkey. Moreover, a rise in U.S. interest rates could have implications for those parts of the global economy that are importers of U.S. monetary policy, such as Hong Kong and Singapore. However, history shows that if rates rise because of a strong economic recovery (and one can’t imagine why the Fed would raise rates under any other conditions), this could actually be positive for real estate markets in those countries. Even in developed markets, with the US setting the global price of debt, we will see upward pressure on bond yields. This will be of particular concern in the more fiscally challenged parts of the Eurozone and the UK, which are highly sensitive to a rise in their borrowing costs. The second major story of the past quarter was the Chinese central bank inducing an interbank crunch, making clear its commitment to reduce credit growth and, more widely, to better regulate the shadow banking sector. This is part of a laudable strategy to create better balanced but lower growth, as China moves beyond the rapid catch-up of years of industrialization into a more mature phase of domestic-demand-led growth. However, as the “Shibor shock” in June showed, the strategy is not without its risks. We are likely to experience sporadic bursts of financial market volatility as markets adjust to the new regime. Moreover, at the real economy level, the rebalancing toward domestic demand has already manifested itself in weaker demand for commodities, which has in turn had a knock-on impact on growth in Australia and Brazil. (Figure 2) The upshot is that since the last edition of Global Vision, we have seen substantial downward revisions to the economic forecasts for China, and therefore Brazil, Hong Kong and Australia, as well as more minor downward revisions for Canada. (Figure 3) In contrast, the EIU has markedly upgraded its forecasts for the UK economy, reflecting high frequency data that has consistently surprised on the upside for the past two quarters. The recovery appears to be broad-based. That said, the regional picture is not as balanced, with a continued and marked southern bias. Moreover, we remain concerned about how far the recent positive momentum can be sustained given the planned fiscal austerity measures. (Figure 4) The picture in the Eurozone is also positive. The region emerged from recession in Q2 and the monthly data suggest that Q3 will also deliver weakly positive growth. Germany continues to be in the vanguard, while France surprised on the upside. Perhaps even more significantly, we are starting to see the fruits of structural reform and austerity measures taken in the South. Lower relative costs, shrinking primary budget deficits and lower current account deficits speak to a region that has taken tough action and is finally moving through its crisis. (Figure 5) Finally, in Japan, while Shinzo Abe has succeeded in buoying confidence and asset prices with his expansionary fiscal and monetary policy, the jury is still out on whether he will push through much-needed structural reform. Meanwhile, the economic forecasts have been revised up purely on the renewed momentum, particularly in the business services sector, which should feed through into office demand. Overall, there has not been a significant change to the relative macro-economic outlook for the major markets. The U.S. still has a relatively good performance outlook, but Japan now looks equally strong. We expect that Europe is preparing to enter a recovery period. (Figure 6) GLOBAL VISION | Q4 2013 | 1 GLOBAL ECONOMIC OUTLOOK – CHARTS FIGURE 1 US FED FUNDS RATE History Moody's FIGURE 2: CHINESE DAILY INTEREST RATES Market Implied EIU O/N Shibor 16% 7% 1m T-bill 14% 6% 12% 5% 10% 4% 8% 3% 6% 2% 4% 1% 2% 0% 0% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 08 09 10 11 12 13 Sources: Reuters (history); forecasts as shown Source: Reuters FIGURE 3: ODP FORECAST REVISIONS SINCE THE Q3 GLOBAL VISION, PP FIGURE 4: UK FISCAL AUSTERITY AS A % OF GDP 2013 F 1.0 2014 F 0.5 -2 0.0 0 -0.5 2 -1.0 4 -1.5 6 -2.0 8 10 Other Spending Debt interest Benefits Sources: Moody’s Analytics (USA); Economist Intelligence Unit (all others) Source: Bank of England August Inflation Report FIGURE 5: EUROPEAN BUDGET DEFICITS AS A % OF GDP FIGURE 6: GDP FORECASTS, % YOY Northern Creditors Maastricht Treaty Floor Southern Debtors 2012 2013 F 2014 F Investment Taxes LT Average 10% 2% 8% 0% 6% -2% 4% -4% 2% -6% 0% -8% -2% -10% -12% 01 03 05 07 Source: Economist Intelligence Unit 09 11 13 15 17 Sources: Moody’s Analytics (USA); Economist Intelligence Unit (all others) Countries ranked left to right on 2013 and 2014 relative to LT average GLOBAL VISION | Q4 2013 | 2 GLOBAL & ASIAN CAPITAL MARKETS Global direct transaction volumes came in at USD234bn in Q2 2013, down 2% on the quarter but up 23% on the year. The region with the fastest growth was Asia, but once we strip out the rapid increase in Chinese land sales, the region actually saw a 5% YOY fall in transactions. By contrast, the Americas saw a c20% YOY increase in deals, but this actually signaled a loss of momentum from the very strong recovery seen in 2010 and 2011, perhaps reflecting lower cap rates and a more uncertain policy climate. Meanwhile, in Europe transaction volumes rose 10% YOY in both Euro and US Dollar terms. (Figure 1) If we turn first to the Asian capital markets, in the last edition of Global Vision we wrote that while there had been an improvement in sentiment and investor confidence in Japan, we had not yet seen the pick-up in occupier demand. Since then, we have started to see tangible signs of improvement, with rents bottoming out, and maybe even increasing in the office sector. The investment market remains strong, driven by domestic institutional demand. All this is evidenced in the Japanese IPD valuations based indices. They show that total returns to investors on institutional grade property have risen to 4.5% YOY – their highest level since August 2008, with residential property returning 7% and retail and other (mainly industrial) 6.2% compared to offices, the laggard at 2%. (Figure 2) Cap rates are starting to fall, running at just over 5% in retail and residential, and just under 5% in the office sector. However, with the all-in cost of debt near 1%, the income premium still looks attractive, with a likely rental recovery adding to the sector’s attraction. In Australia, despite the modest economic slowdown, total returns have held steady at around 9% YOY on the IPD Quarterly Index. Striking convergence across the sectors hides the underlying story. In the industrial sector, Western Australia continues to see returns of over 25% despite the waning commodity boom. And at the other end of the spectrum, smaller regional malls are the worst performing property type as the housing slowdown impacts spending. (Figure 3) Looking ahead, the economic slowdown is arguably boosting returns thanks to the impact of cheaper debt financing as the central bank cuts interest rates, lowering the all-in cost of debt to sub 5%. This has been especially beneficial to Asian investors, particularly from Singapore, who typically use local debt as a natural hedge to the currency. Moreover, Australian yields remain relatively high compared to other major regional markets. (Figure 4) In Emerging Asia, we saw deal volumes fall, partly because of one-off policy changes. For instance, in Hong Kong, we saw the introduction of double stamp duty, and in Taiwan the introduction of a minimum commercial property yield for domestic institutional investors. Meanwhile in China, the deal volumes ex land fell modestly, but conversely we are seeing increased investor interest, particularly from the U.S. Accordingly, we should see volumes pick up in 2014. As Figure 4 shows, within the Emerging Markets, Chinese industrial offers the most attractive yields, with good structural underpinnings: strong demand from retail distributors but a scarcity of good quality space. We have seen an upturn in capital raising in the region, which should in turn flow into increased deal activity in 2014. In particular, we have seen U.S. investors back in the region favoring unlisted funds targeting Japan and China. The secondaries opportunity has, however, largely closed up. In the listed space, Japanese REITs massively outperformed the other Asian markets in the 12 months to the end of July, with returns of c70%. This made for an attractive environment in which to list, and Prologis brought its Nippon Industrial REIT to the market in February. That said, we did see the equity market pull back over the summer as the initial run up in the wake of Abenomics faded. In Australia and Hong Kong, REITs just under-performed the broader market thanks to the housing-led slowdown and stamp duty rise respectively. However, the broader picture from Figure 5 is that bond yields are starting to rise, and returns fall, in reaction to the US taper, making listed and unlisted real estate an attractive alternative, particularly in markets such as Hong Kong and Singapore which are more exposed to U.S. monetary policy tightening. Moreover, as Figure 6 shows, Asian listed securities, even in Japan, are still trading at significant discounts to NAV that are in most cases larger than the long-run average. GLOBAL VISION | Q4 2013 | 3 GLOBAL & ASIAN CAPITAL MARKETS – CHARTS FIGURE 1:TRANSACTION VOLUMES, % YOY Europe (EUR) Asia ex China land (USD) FIGURE 2: JAPANESE TOTAL RETURNS, % YOY Americas (USD) Retail Office Residential Other 20% 200 15% 150 10% 100 5% 50 0% 0 -5% -50 -10% -100 08 09 10 11 12 05 13 06 07 08 09 10 11 Source: Real Capital Analytics Source: IPD Japan Monthly Sourcebook FIGURE 3: AUSTRALIAN TOTAL RETURNS, % YOY FIGURE 4: PRIME VALUATION YIELDS, % (as of Q2 2013) Retail Office Office Industrial Retail 12 13 Industrial 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 25% 20% 15% 10% 5% 0% -5% -10% 03 04 05 06 07 08 09 10 11 12 13 Source: IPD Australia Quarterly Digest Source: CBRE Global Research FIGURE 5: TOTAL RETURNS, % YOY AT END JULY 2013 FIGURE 6: LISTED PROPERTY SECURITIES NET ASSET VALUE PREMIUM/DISCOUNT BY REGION 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Listed Real Estate Main Index Bonds Sources: S&P, MSCI, JP Morgan, returns in local currency 31st July 2013 10 Year Average 20% 10% 0% -10% -20% -30% -40% Sources: Factset & Bloomberg, as of 07/31/2013 *Average since Dec 2004 GLOBAL VISION | Q4 2013 | 4 U.S. & EUROPEAN CAPITAL MARKETS The U.S. capital markets remain robust despite the fact that pricing on many quality assets has fully recovered. Cap rates for multi-family and gateway market grade A offices are back to 2007 levels. And, as is natural at this point in the cycle, we are now seeing yield compression in “next tier” markets. In addition, at the margin, we are seeing a rotation out of multifamily and into sectors such as industrial and retail where there is more room for cap rates to decrease. Indeed, we can see something of this in the sharp upturn in the retail capital value index produced by Moody’s/RCA, while U.S. super-regional malls have been strong performers on the IPD Index. (Figures 1 and 2) The uncertainty surrounding US monetary policy has resulted in bond yield volatility and this is already having an impact on the stability and level of the pricing of debt. On the other side of the coin, investing in and issuing real estate debt remain attractive, with mezzanine debt offering returns of c12-14%. In the unlisted fund market, there are very few closed-end funds coming to market, perhaps because boutique managers are still dealing with legacy issues. (Figure 3) That said, we sense that the appetite for value-add funds is increasing and the lack of product will become problematic for the consultant-led money. Open-ended funds are still in favor, with c$6bn of capital queued to get in. But the big story is really in the secondaries market, where a handful of large portfolio trades by public plans looking to withdraw from the market have garnered a lot of attention. These structured transactions have changed pricing, with traditional investors in secondaries struggling to compete with the portfolio investors. Meanwhile, as an interest-rate sensitive sector, listed real estate securities have suffered from the uncertainty surrounding the U.S. taper, returning c9% YOY to the end of July. This was lower than the wider equity market and one of the weakest performances globally. Turning to Continental Europe, although capital values have yet to recover, we are starting to see the preconditions for that – greater investor interest, liquidity and transparency. Improving sentiment has dropped safe rates and spreads throughout Europe. In the direct market, the number of bidders has increased – even in Spain, where there is greater visibility on yields. And we are also seeing greater risk-appetite, particularly in Southern Europe, where investors are looking for opportunities to buy assets or loans from distressed sellers. (Figure 4) There has been limited issuance of new pooled funds, with more deal-led JV activity. To date, this has concentrated on the major Northern markets of the UK, France and Germany. (Figure 5) The most popular sectors are healthcare, student housing, retail, industrial, hotels and offices – especially for standalone deals. That said, we are seeing more funds close ahead of target, with markedly more interest from U.S. investors. One example is a Nordics logistics fund that came to the market in 2012 looking for EUR500m but closed in H1 2013 four times oversubscribed. Secondaries are being priced at anywhere from a 15% to 40% discount to NAV depending on whether the buyer is institutional or opportunistic, and the quality of the portfolio. Activity remains concentrated in the core funds, with very little interest in the value-add or opportunistic funds, despite the fact that they have started to seriously tackle their structuring problems and work out portfolios. (Figure 6) In the listed market, investors are still sticking to core, income producing assets in the stronger Northern markets. German residential remains hot, but still represents value given that the underlying market has cheaper relative capital values and affordable rents. We have seen two German residential REITs IPO, and an Irish REIT. The Irish REIT is up 20% even though it hasn’t bought an asset yet, but the strategy is to buy prime Dublin at c7-8%. There hasn’t been much bond issuance in the listed sector – a big theme from 2012 – although Unibail-Rodamco just placed a large bond at 1.875% fixed. Also, GAGFA issued two CMBS, with interest rates in the 2 to 3% range – a dramatic change from a year ago when it was doubtful if they would be able to refinance at all. All issues were heavily over-subscribed. Meanwhile, in the UK, prime yields are still edging lower though near their previous historic trough, and even major regional cities are seeing strong price increases. We are, therefore, seeing a move up the risk curve in unlisted fund origination and in the REIT market, with strong performance of small cap stocks. The impact of the U.S. taper speculation has been seen more in the UK than in Continental Europe. However, it could just be that UK stocks have had such a run-up that there were looking for a trigger for a re-rating. GLOBAL VISION | Q4 2013 | 5 U.S. & EUROPEAN CAPITAL MARKETS - CHARTS FIGURE 1: MOODY’S/RCA CPPI CAPITAL VALUE INDEX Apartment Industrial Retail CBD Office FIGURE 2: U.S. IPD TOTAL RETURNS, % YOY Multi-family CBD Office Super Regional Mall 220 Industrial Suburban Office 30% 200 20% 180 10% 160 0% 140 -10% 120 -20% 100 -30% 80 04 01 02 03 04 05 06 07 08 09 10 11 12 13 05 06 07 08 09 10 11 12 Source: Moody’s/Real Capital Analytics Source: IPD USA Quarterly Digest FIGURE 3: U.S. VALUE-ADD GROSS RETURNS INDEX FIGURE 4: EUROPEAN BANK DISPOSALS, EURbn New Build Offices Shopping Centres Retail Warehouses All Property 120 100 30 Loan Sales 25 Other Bank Sales 13 Sales Out of Distress 20 80 60 15 40 10 20 5 0 0 04 05 06 07 08 09 10 11 12 09 13 10 11 12 13 Source: NCREIF-Townsend Value-weighted value-add closed-end fund index Source: Real Capital Analytics FIGURE 5: INVESTOR INTENTIONS & COMMITTED CAPITAL IN 2012 FIGURE 6: EUROPEAN BANK DISPOSALS, EURbn Investor Intentions Committed Capital Difference 40% 30% 20% 10% 0% -10% -20% Value Add Closed-End Funds Core Funds 60 50 40 30 20 10 0 01 02 03 04 05 06 07 08 09 10 11 12 13 Sources: INREV Investor Intentions Survey & Real Capital Analytics Source: INREV GLOBAL VISION | Q4 2013 | 6 RETURN FORECASTS METHODOLOGY SUMMARY OF RESULTS The charts in this section show the aggregate results of the CBRE Global Investors’ latest proprietary real estate forecasts. Asia Pacific is expected to outperform. Within Asia Pacific, the structural shortage of modern real estate stock, coupled with the large “catchup” potential, contribute positively to the real estate return outlook. These forecasts are for core investments, without leverage effects, held over a five year period, in local currency terms. Most importantly, these forecasts simulate a portfolio return to investors, taking into account prevailing lease practices and expense ratios in the different markets. This section shows our return forecasts by major geography and property type. We invite our clients to explore our more detailed forecasts for over 300 metro/property combinations as these will give a more nuanced and valuable insight into the most attractive core portfolio returns in the various markets. The return forecasts are a starting point in developing and managing an investment strategy. Submarket conditions and, to a greater extent, property-specific characteristics greatly impact overall returns. The U.S. results are driven by reasonable economic growth, low construction pipelines and generally attractive, below-replacement cost pricing. However, increasing fixed income yields over the forecast period are creating capital markets headwinds and total returns may be slightly lower than their long-term average. The headline result for Europe is slightly less positive than the U.S., although this forecast is an improvement from our Sping 2013 analysis. We are now finding some attractive opportunities to acquire high-quality properties in many of the Southern markets. The aggregate result continues to be influenced by the inclusion of residential with its structurally low in-going yields. FIGURE 1: ASIA PACIFIC EXPECTED TO OUTPERFORM 5 Year Forecast Annualized Return (2013-2017) 10% 8.9% 8% 7.2% 6.8% 6% 4% 2% 0% Asia Pacific U.S. Europe Source: CBRE Global Investors The Asia Pacific and Europe regional returns reflect the weighted average of country/sector returns within the respective region, weighted by the market share of the Global Investable Universe for real estate, as estimated by CBRE Global Investors. GLOBAL VISION | Q4 2013 | 7 5 Year Forecast Annualized Return 2013-2017 FIGURE 2: U.S. UNLEVERED CORE RETURNS BY PROPERTY TYPE 12% 10% 8% 7.7% 7.3% Office Industrial 6.7% 6.8% 7.2% Apartment Retail U.S. 6% 4% 2% 0% Source: CBRE Global Investors 5 Year Forecast Annualized Return 2013-2017 FIGURE 3: EUROPEAN UNLEVERED CORE RETURNS BY PROPERTY TYPE 12% 10% 8% 8.2% 6.7% 6% 7.2% 6.8% Retail Europe 4.5% 4% 2% 0% Office Industrial Residential Source: CBRE Global Investors 5 Year Forecast Annualized Return 2013-2017 FIGURE 4: ASIA PACIFIC UNLEVERED CORE RETURNS BY PROPERTY TYPE 12% 10% 10.1% 8.7% 8% 9.0% 8.9% Retail Asia Pacific 6.6% 6% 4% 2% 0% Office Industrial Residential Source: CBRE Global Investors GLOBAL VISION | Q4 2013 | 8 UNITED STATES The U.S. economy performed slightly better than expected in the second quarter and annualized GDP growth accelerated to 2.5%. Most economic indicators should begin to gain momentum in the near term as several positive trends remain on track: consumers are shrugging off the impact from higher taxes and lower federal spending, hiring remains relatively strong and rising home prices are boosting Americans’ confidence. (Figures 1 and 2) Further residential investment growth is expected and the bulk of the fiscal tightening may be over. Higher savings rates and a firmer labor market should help encourage businesses to continue a steady pace of restocking, and most of the military wind-down may be completed by the end of this year. Transaction volume increased to $71B in Q2, a 13% increase from a year earlier. Sales of development sites (particulary for apartments) dipped in the latest quarter. Recent data shows an increased appetite for risk: unanchored strip malls are outpacing the retail sector, unflagged hotels had the largest rise in sales volume among hotel types, and suburban office is outperforming CBD office. The ratio of the NCREIF Property Index valueweighted transaction cap rate to the risk free rate of return is tightening. The ratio of cap rates to corporate bonds is also falling. However, real estate continues to be an attractive investment relative to other fixedincome alternatives. (Figure 3) The recovery of the highly cyclical office market remains intact, boosted by an improving job market. Absorption continued to trend upward in the first half of 2013 and the vacancy rate declined to 15.2% – 170 basis points below its 2010 peak. The second quarter continued the pattern of a relatively slow and drawn-out recovery for the office market. Fundamentals continue to improve slowly as tenants adjust to the space overhangs that were left in the wake of the Great Recession. Demand is projected to gain momentum in 2014, which, along with modest supply, will drive the vacancy rate down to 12.3% by 2017. Office rent growth continued the positive trend. Rents are projected to increase by 4.2% per year through 2018, the highest of all the property types. (Figure 4) As the housing recovery has gathered momentum and retail sales have rebounded, the industrial sector has finally entered a period of accelerated recovery. As such, the decline of the national availability rate has picked up the pace, now at 12.0% at mid-year 2013, down 250 bps from the peak three years prior. Fort Worth (-290 bps), Trenton (-220), Raleigh (-200), Las Vegas (-180), Nashville (-190) and Fort Lauderdale (-170) have posted the largest declines in their availability rates during the first half of 2013. The national availability rate is projected to steadily decline as absorption strengthens, reaching 10.1% by 2016. Rent growth will be slow to accelerate, as the availability will still be relatively high near term. Over the next five years, rents are projected to increase 2.8% per year, the slowest of the major property types. (Figure 5) The apartment market is the only property sector where the current vacancy rate of 6.0% is lower than its long-term average (6.3%). The markets with the strongest absorption in the first half of 2013 included Dallas, New York, Houston, Atlanta, Seattle and San Antonio. San Francisco continues to have the lowest vacancy rate in the nation (3.5%, up slightly from the first quarter), followed by Boston, Seattle and the other metros in the San Francisco Bay Area region. As the recovery has matured and the development cycle has kicked in, the pace of decline in the vacancy rate and the pace of increases in rents has decelerated. The average vacancy is projected to remain in the mid-6% range for the foreseeable future. This relative balance between supply and demand will result in only modest rent growth going forward, averaging 2.9% per year. The U.S. retail sector suffered severely in the recession as retail sales, the prime driver of shopping center absorption, plummeted in 2008-09. Retail sales have since rebounded and are now well above pre-recession peaks, and the availability rate for neighborhood/community centers (12.3% at the end of the second quarter) is down 90 basis points from the peak two years ago. The availability rate fell by 50 bps in the first half of 2013. Some of the top performing markets in the first half were Louisville, Charlotte, Orlando, Fort Worth and Memphis. Strengthening consumer spending and very limited new construction will help drive the availability rate down. However, e-commerce is ever-expanding and is slowing sales growth at bricks-and-mortar stores. The U.S. availability rate is projected to correct down to 9.1% by 2018 and rents are projected to increase 3.4% per year. GLOBAL VISION | Q4 2013 | 9 UNITED STATES – CHARTS FIGURE 1: ANNUAL GDP GROWTH, %PA FIGURE 2: MONTHLY EMPLOYMENT GAINS/LOSSES NUMBER OF JOBS (000s) MOM CHANGE 5% 500 4% 300 3% 100 2% 1% -100 0% -300 -1% -500 -2% -700 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 -900 08 09 10 11 12 13 Source: Moody’s Analytics Source: Bureau of Labor Statistics FIGURE 3: ASSET CLASS YIELDS, % FIGURE 4: NATIONAL OFFICE ABSORPTION & VACANCY RATE FORECAST NCREIF Transaction Cap Rate Baa Corporate Bond 10-Year Treasury Yield 18% 16% Base Case Absorption 125 20% Vacancy Rate Office Absorption SF ( millions ) 14% 12% 10% 8% 6% 4% 18% 75 16% 25 14% -25 12% 10% -75 8% 2% 00 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Sources: NCREIF, Moody’s Analytics 200 100 16% 6% 14% 5% 12% 4% 10% 0 8% -100 -200 -300 00 02 04 06 08 10 12 14 16 Sources: CBRE Econometric Advisors, CBRE Global Investors 18 Availability Rate Vacancy Rate 300 04 06 08 10 12 14 16 18 FIGURE 6: FORECASTED ANNUAL RENT GROWTH FIVE YEAR AVERAGE (2014-2018) Base Case Absorption 400 02 Sources: CBRE Econometric Advisors, CBRE Global Investors FIGURE 5: NATIONAL INDUSTRIAL DEMAND & AVAILABILITY RATE FORECAST Absorption SF (millions) 6% -125 0% Vacancy Rate -3% -4% 4.2% 3.4% 2.9% 2.8% Apartment Industrial 3% 2% 6% 1% 4% 0% Office Retail Sources: CBRE Global Investors, CBRE-EA GLOBAL VISION | Q4 2013 | 10 UNITED KINGDOM In the Q2 2013 edition of Global Vision, we used the expression “unremittingly grim” to describe the austerity-induced outlook for much of the UK economy, suggesting the possibility of rapidly depreciating Sterling leading to stagflation. Given the recent steady stream of positive economic news, the tone we struck a mere half year ago looks decidedly spurious. A sustainable recovery is finally afoot in the UK. Output growth in the first two quarters of the year has been increasingly positive, and for the first time since 2010 economic expansion is not attributed to one-off factors. The trade deficit is narrowing and business surveys are rising, compellingly so in the all-important services sector. (Figure 1) Consumers are increasingly sanguine; spending more due to both stabilizing employment and rising house prices. Given that property performance is inextricably linked to the prospects of the underlying economy, these encouraging developments suggest that the case for investing in UK property is as strong as it has been in quite some time. To be fair, the recent spate of optimism has meant that the bad news – of which some certainly lingers – is being overshadowed. The recent revisions to output data, though negating a technical double dip recession, in fact mean that the economy is further away from its 2008 peak. (Figure 2) We are mindful that average earnings growth is below headline inflation, net business lending is at low levels and youth unemployment is uncomfortably high. Then, of course, there is the recent outward shift in the yield curve. (Figure 3) While some have interpreted this to be a vote of no confidence in the new Bank of England (BoE) governor, it could ultimately result in jittery capital markets. These factors coupled with the gross indebtedness across all sectors of the economy, which was rightfully emphasized in our Q2 Global Vision, counter some of the positive news that we have recently been enjoying. Much like the broader economy, commercial property performance is also surprising to the upside. At an all property level, total returns have been improving at a steady clip on a monthly basis. Rents appear to have reached a floor and capital values are finally growing, an important milestone in a market plagued by declines for a year and half. (Figure 4) Quite importantly, occupational markets are improving: new lettings are taking place and incentives packages are dissipating. Our experience in the multi-let industrial sector is particularly encouraging. Voids have been trending downward and, in contrast to other sectors, there doesn't appear to be a strong geographical bias in terms of activity. We are mindful that this slice of the commercial property market encompasses a wide range of UK industry. Resilience in this sector is a potentially powerful forward looking indicator, one which has favorable implications across all sectors of UK property. Improving investor sentiment is percolating through to the UK property market. There is a wall of money jostling to target segments perceived to have been disproportionally hit in valuations. Recently unsellable secondary assets are attracting greater interest from a spectrum of buyers. Smaller lot size assets, in particular, are often trading ahead of recent valuations while underwriting assumptions have seemingly softened. With in-going yields sufficiently high in many segments of the market, deals are often attracting all-cash offers and activity is no longer myopically constrained to London and the South East. Owing to these factors, a narrowing of the historically wide prime versus secondary yield gap is imminent. (Figure 5) Clearly how this manifests itself is linked to activity in other asset classes. Corporate bond yield spreads to property remain compelling in an historical context (Figure 6), which can be taken to mean that there are few fears about the viability of UK firms. Not only does this bode well for required property yields, but it should also support occupier demand, benefitting openmarket rental values. This is another reason to think that investor sentiment will continue to improve, with secondary assets in particular standing to benefit. The new “forward guidance” adopted by the BoE has restored some stability to the UK gilt market after the sell-off initially precipitated by the Fed’s signal to begin its QE taper. At a current yield of ca. 3.0%, ten year nominal gilt yields continue to reflect the BoE’s own ultra-loose monetary policy and mean that the spread to property’s net initial yields is still at a historically attractive level. More importantly, the expected rise in yields of ca. 2575bps over the coming five years is unlikely to derail a commercial property recovery. Arguably, it may take some heat out of Central London and other prime segments of the market that have been priced off of suppressed gilt yields. It may also further energize investor interest in regional or secondary assets, segments which at current in-going yields are much less sensitive to bond yield movements. We interpret both of these potential outcomes positively. GLOBAL VISION | Q4 2013 | 11 UNITED KINGDOM – CHARTS FIGURE 1: UK CIPS PMI SURVEYS. 50=BOOM-BUST LEVEL. 70 Manufacturing PMI 65 Services PMI FIGURE 2: REAL GDP REBASED TO 100 AT Q1 2008. 100 99 60 98 55 97 50 96 45 95 40 94 35 93 down 3.6% from Q1 2008 up 1.4% from Q2 2012 up 0.6% from Q1 2013 92 30 07 00 01 02 03 04 05 06 07 08 09 10 11 12 13 08 09 10 11 12 13 Source: Thomsom Reuters Datastream Source: National Statistics FIGURE 3: IMPLIED FORECASTS FOR THE UK POLICY RATE FROM BOND MARKET YIELD CURVES, %. FIGURE 4: UK PROPERTY CAPITAL VALUES, % 3M/3M. LATEST= Q2 2013. 30-Jun-11 29-Jun-12 30 Aug 13 5% 10% 30-Dec-11 31-Dec-12 July '09- Oct. '11 18% capital value rise 5% 4% Q2 13: 0.2% 0% 3% Nov. '11 - Apr. '13 5% capital value fall -5% -10% 1% -15% 0% -20% 0 12 24 36 48 June '07 - June '09 44% capital value fall Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 2% 60 Time to Maturity in Months Source: Bank of England Source: IPD Monthly Index FIGURE 5: PRIME AND SECONDARY VALUATION YIELDS, %. LATEST=SEPTEMBER 2013, ALL SECTORS. FIGURE 6: DIFFERENCE BETWEEN 10 YEAR UK GILTS, LINKERS & BBB CORPORATE DEBT AND THE IPD ALL PROPERTY INITIAL YIELD. 14% 12% 8% index-linked gilt yield 10 yr gilt yield BBB corp.debt 8% Prime 10% 6% 10% Secondary 6% 598bps Average: 260bps 4% 2% 4% 0% 2% -2% -4% 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: CBRE Valuation Team 05 06 07 08 09 10 11 12 13 Sources: Thomsom Reuters Datastream, IPD GLOBAL VISION | Q4 2013 | 12 GERMANY German economic growth improved again in the first half of 2013. After stagnation in Q1 real GDP growth increased to 0.7% QOQ in Q2, driven by rising exports and improving domestic demand. The economic outlook is solid. The recession in many European countries seems to be softening and German economic leading indicators have improved over the past months. Ongoing demand from economies outside the Eurozone and solid domestic consumer demand will support moderate growth in 2013. Stronger economic growth is expected from 2014 onward. (Figure 1) Modest economic growth in 2013 will prevent German consumer demand from growing strongly. Nevertheless, demand is expected to stay solid, with the unemployment rate down again to 6.8% (seasonally adjusted), the same level as the previous year (Figure 2), and further supported by wages expected to increase and moderate short-term inflation. Demand for German office space was solid in the first half of 2013, but somewhat below the same period last year. In the Big-5 German markets (Berlin, Frankfurt, Munich, Hamburg and Dusseldorf), take up decreased by 4% YOY during the first 6 months of 2013. Nevertheless, given low construction activity, vacancy rates came down in key markets, which then led to moderate nominal prime rent growth. Office demand is not expected to grow strongly in 2013 given the moderate economic growth scenario. However, the low development pipeline and sustained demand for prime space will put moderate upward pressure on prime rents. (Figure 3) Rents are forecast to increase modestly in core markets in 2013, and more notably thereafter, which is in line with the positive economic outlook. Real retail sales did not grow further over the first half 2013 YOY, but strong retailer demand and tight availability for prime retail space kept upward pressure on high street retail rents in 2013, which improved again by around 6% on average in German key cities during the H1 2013. For the coming years, prime shopping center rents are forecast to rise modestly. (Figure 4) High street rents in core markets are expected to continue to increase notably next year. Retailers with multi-channel expansion strategies are focusing on prime retail areas in Germany. Logistics demand picked up again. Take up increased by 15% on a national level H1 2013, which was mainly driven by owner-occupier demand. Leasing volumes came down by 11% YOY in the first half of 2013 in the Big 5 cities. However, the overall volume is still solid and above the 5-year average. Vacancy rates remained at low levels of around 4% in Q2 2013. As a result, prime logistics rents remained stable over the past quarters. The logistics leasing market is not expected to outperform the previous year, in line with the moderate economic growth expectations in 2013. Very low speculative construction activity is likely in the near-to-medium-term, so no downward pressure on rents is expected due to new supply. Rents are forecast to remain stable in 2013 and are likely to increase again in 2014, given the positive outlook for key logistics drivers in Germany post-2013. (Figure 5) The demand for German residential portfolios remained strong in H1 2013, driven by the appetite for income-driven investments in safe haven destinations. The total turnover was around €6 bn in the first half of 2013 and only 11% below the record level in 2012. German investors were most active, particularly the listed sector. The strong demand for German residential portfolios is expected to continue for the rest of the year. German commercial investment turnover outperformed and reached €12.6 bn in the first half of 2013, which is 35% higher than in the same period last year. Core acquisitions remained dominant and office was the most transacted asset class (44% of total transaction activity) followed by retail (33%). Retail remains the investor darling, but the availability of core assets is tight. Logistics investment turnover benefited and picked up, capturing 8% of total investments in H1 2013. Overall, prime property yields declined again in major office markets and for prime logistics. Prime retail yields have remained stable across the various retail types, but are expected to decline moderately in the second half of 2013. Next year’s demand for German real estate is expected to hold up well. Prime yields are forecast to remain at low levels in 2013/2014, as investor demand is not expected to weaken and economic growth strengthens. (Figure 6) Core real estate is still projected to offer favorable yields compared to competitive asset classes. The attractive risk-spread between property yields and bonds (government and corporate) is not expected to change soon. GLOBAL VISION | Q4 2013 | 13 GERMANY – CHARTS FIGURE 1: REAL GDP GROWTH, % YOY 6% FIGURE 2: UNEMPLOYMENT RATE, % 14% Long-Term Average 4% 12% 2% 10% Long-Term Average 8% 0% 6% -2% 4% -4% 2% -6% 0% 93 95 97 99 01 03 05 07 09 11 13 15 17 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Economist Intelligence Unit Source: Economist Intelligence Unit FIGURE 3: OFFICE NET ADDITIONS TO STOCK* (% OF STOCK) FIGURE 4: MARKET RENTAL GROWTH, % YOY 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Shopping Center (IPD) Office (Prime) Logistics (Prime) 15% Long-Term Average 10% 5% 0% -5% -10% -15% -20% 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 92 94 96 98 00 02 04 06 08 10 12 14 Sources: Property Market Analysis, CBRE Global Investors *Average German Big 5 markets Source: CBRE Global Investors FIGURE 5: KEY LOGISTICS DRIVERS (2007 = 100) FIGURE 6: PRIME NET INITIAL YIELD, % Office 150 Industrial Production 140 Import Volume of Goods Export Volume of Goods 130 Logistics 8% Real Private Consumption 120 Shopping Centres 9% 7% 110 6% 100 5% 90 4% 80 70 3% 07 08 09 10 Source: Economist Intelligence Unit 11 12 13 14 15 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: CBRE Global Investors GLOBAL VISION | Q4 2013 | 14 FRANCE The surprising performance of French GDP during the 2nd quarter has changed the economic growth scenario in France. Thanks to the improvement of export and domestic demand, the French recovery seems to be happening faster than expected. Consequently, after forecasting -0.2% during the 1st quarter, INSEE increased its GDP forecast to 0.1% for 2013. This assumption is partly based on the recent recovery of survey results among the purchasing managers of large companies (Services and Industry PMIs). The EIU has also improved its forecasts from -0.4% to -0.2% for 2013. (Figure 1) Despite the recent improvement in economic growth, retail sales are likely to remain subdued in 2013. (Figure 2) A recovery of retail sales is expected in 2014, when the economic rebound will allow an improvement in purchasing power. On the retail letting market, growth strategies have been replaced by streamlining and reorganization policies. Consequently, retailers are closing less profitable shops and are focusing on the best locations to consolidate or improve performance. Prime retail locations, especially high streets, continue to benefit from strong demand from retailers, supporting prime rents. However, secondary locations across all retail formats continue to suffer from low levels of demand and increasing vacancy. The office occupier market was not spared by the economic slowdown. Take-up of offices in Ile-de-France stood at 833,000 m² in H1 2013, i.e a fall of 19% compared to the same period in 2012. Most of the districts were affected by this decline. Some districts fared better, such as Paris CBD. Availability in Ile-de-France has risen since the beginning of the year (+2%) to 4.8 million m². Leasing transactions are likely to fall significantly over the full year 2013, probably to about 1.8 million m² (vs 2.4 million m² in 2012). Due to rising vacancy, office rents will likely decline in 2013, but we expect a mild recovery thereafter when the economic growth should spur company expansions. (Figure 3) Concerning logistics, 675,000 m² of warehouses were transacted in Ile-de-France in 1H 2013, i.e. a decline of 24% in one year. The market is, therefore, continuing the slide that started in 2011. Immediate supply has risen significantly (+14% YoY) and reached 1.5 million m². This increase in overall supply is affecting secondary and obsolete premises. However, the best locations remain resilient, with a stability of prime rents and yields. (Figure 3) In 2013, the deterioration of the economic situation and the lack of transparency will affect home sales. Futhermore, the new legislation project, currently being debated at the National Assembly, is likely to hinder the development of the market by limiting market rents, reinforcing control on market players or increasing the transfer tax. Thus, home sales are expected to decrease significantly in 2013 (between 15% and 20% compared to the long term average). Consequently, we expect a slight decrease of capital values in Île-de-France in 2013, while some other regions are likely to suffer from more significant depreciations. Transaction volumes should start recovering in 2014 as demand will be supported by the recovery of economic growth and a decreasing unemployment rate. (Figure 4) Regarding the investment market, commercial real estate in France has been particularly robust in this challenging context since the beginning of 2013. Indeed, € 8 bn has been invested during the first 8 months of 2013. (Figure 5) Île-deFrance accounted for the lion’s share (80%) of acquisitions in France. Most of investors are still focused on prime assets. Offices remain in the majority, attracting 67% of investment, retail remains favored with 17%. Despite the healthy performance of the market, the shortage of secure assets for sale is likely to limit the development of the investment market. The volume of investment expected in 2013 should remain stable compared to 2012 (around € 16 bn). As a result of scarcity of the prime assets at the best locations – especially Paris intra-muros – investors are going to extend their geographical criteria. They will remain focused on secured assets located in mature business districts close to Paris such as Paris Western business districts. Concerning prime yields, we forecast some slight contractions in 2013 in some submarkets such as Paris WBD or in such regions outside Îlede-France, but generally speaking, most prime yields are likely to remain constant. (Figure 6) In the medium term, despite the rise in bond yields, the trend of prime yields should remain quite stable, considering that the recovery of the economic situation will allow investors to accept a contraction of the risk premium. GLOBAL VISION | Q4 2013 | 15 FRANCE – CHARTS FIGURE 2: PRIVATE CONSUMPTION AND RETAIL SALES (% CHANGE YOY) FIGURE 1: REAL GDP GROWTH, % YOY 4% 3.0% France EU15 (Agg.) 3% Retail sales Consumption 2.5% 2% 2.0% 1% 1.5% 0% 1.0% -1% 0.5% -2% 0.0% -3% -0.5% -4% -1.0% -5% 05 06 07 08 09 10 11 12 13 14 15 16 17 05 06 07 08 09 10 11 12 13 14 15 16 17 Sources: INSEE, Economist Intelligence Unit (forecast) Source: INSEE, Economist Intelligence Unit (forecast) FIGURE 3: PRIME MARKET RENTAL GROWTH (% YOY) FIGURE 4: EXISTING HOUSING PRICE INDEX Office Logistics 15% Shopping Centres Residential 10% 5% Price index 100 = Q1 2010 150 Paris Ile-de-France excl. Paris 130 Regions 110 90 0% 70 -5% 50 -10% 02 05 06 07 08 09 10 11 12 13 14 15 16 17 03 04 05 06 07 08 09 10 Sources: CBRE, CBRE Global Investors Source: INSEE FIGURE 5: INVESTMENT VOLUME (€ bn) FIGURE 6: PRIME NET INITIAL YIELD (%) 30,000 Industrial / Logistics Retail Offices 25,000 20,000 9% Office High Street 11 12 13 Logistics 8% 7% 6% 15,000 5% 10,000 3% 4% 2% 5,000 1% 0% 0 05 Source: CBRE 06 07 08 09 10 11 12 13 YTD 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: CBRE, CBRE Global Investors GLOBAL VISION | Q4 2013 | 16 NETHERLANDS Most economic figures have been revised downward from the outlook six months ago. GDP growth is currently expected to end up at 1.4% for 2013. Although the outlook remains subdued for the remainder of the forecast period, economic growth is expected to enter positive territory from 2014 onward. (Figure 1) Unemployment continued to increase to 8.7% in July 2013. Our cautious view of a mild recovery in the medium term is underpinned by the movements of the OECD composite leading indicator for the Netherlands. This indicator, designed to provide early signals of turning points between expansions and slowdowns of economic activity, increased slightly in the first half of 2013. (Figure 2) Office take-up figures continued to be weak, as occupiers remain cautious and prefer to extend expiring contracts, often for a relatively short period at favourable terms. A number of trends in the office occupier market suggest that future demand for space will continue to be subdued. Trends such as the “New World of Working” (which includes more flexibility and work-fromhome options), cost consciousness of companies, concentration of office activities, mergers and acquisitions, and sustainability suggest that office space per employee will decline further in the future. Although overall vacancy remains at relatively high levels due to weak demand, there are significant differences between submarkets in this respect. Prime inner city and CBD locations in Amsterdam appear to be fairly resilient to falling demand, and vacancy in these prime locations continues to decline. (Figure 3) Following the substantial fall in real personal disposable income, retail turnover continued to decrease. Overall decreasing turnover was only mitigated by growth in the supermarket segments, whereas turnover of all other major categories remains particularly feeble. (Figure 4) Demand for prime retail locations from both domestic and international retailers remains relatively strong as these assure dense pedestrian flows and solid turnover. However, retail in secondary locations continues to suffer from lower retail spending levels. This is most clearly evident in the relatively high levels of vacancy at these secondary locations. Although the market outlook for prime retail areas is positive, prime yields saw an increase of 10 to 40 bp in Q2 2013. This increase is regarded a one-time correction, as yields are at relatively low levels and experienced almost no yield shift since 2010. Underpinned by scarcity, the logistics real estate sector is one of the most resilient real estate sectors. Take up so far in 2013 was solid despite weak domestic demand while the vacancy rate remained low at 6.5% (CBRE) compared to 6.3% as per Q1. As modern supply is tight, the development pipeline is predominantly pre-let and available space mostly relates to older stock, we maintain our expectation of single digit rental growth for the year 2013 for the main logistics markets in the South. The outlook for logistics drivers compared to last quarter deteriorated only slightly but some indicators are turning the corner. For example the Purchasing Manager Index at 53.5 per August points to stronger growth and was the highest reading in more than 2 years. (Figure 5) Investment demand is strong so far this year. With several portfolios trading or about to, we believe current pricing level will hold and even may sharpen further. The housing market reforms proposed by the new government have largely been approved by parliament. Most prominent measures are a gradual reduction of mortgage tax deductibility and a revised policy for the regulated rental market in which rental levels are more geared towards the property’s location and the tenant’s income. The latter results in higher rental growth prospects for regulated rental housing. However, part of the extra rental income will flow back to the government in the form of a landlord charge. Residential transaction volumes showed an upswing in the past few months, with the number of residential units sold being up 30% yoy in July and 19% yoy in August 2013 (Figure 6). Although this increase in activity mitigated negative price growth, house prices are still 3.6% down compared to year-end 2012. The negative outlook for the for-sale market led building production to drop to historically low levels, while the number of households continues to grow. This could lead to tight demand-supply ratios in the future. GLOBAL VISION | Q4 2013 | 17 NETHERLANDS – CHARTS FIGURE 1: REAL GDP GROWTH, % YOY FIGURE 2: OECD LEADING INDICATOR NETHERLANDS 2% 104 OECD Composite Leading Indicator 102 1% 100 98 0% 96 -1% Jan 2013 Jul 2013 -2% 2013 2014 2015 2016 2017 94 92 90 2009 2010 2011 2012 2013 Source: Economist Intelligence Unit Source: OECD FIGURE 3: FINANCIAL DISTRICT VACANCY RATES FIGURE 4: RETAIL TURNOVER, Q2 2013, YOY OFFICES Amsterdam A'dam South-Axis Rotterdam 30% A'dam Centre Schiphol The Hague 25% 4% 2% -12% Source: CBRE EMEA Research Source: CBS FIGURE 5: LOGISTICS FIGURE 6: RESIDENTIAL SALES AND PRICE GROWTH Feb-09 Feb-10 Sources: Markit economics / Nevi Feb-11 Feb-12 Feb-13 Aug-13 35 Feb-13 40 Aug-12 45 Feb-12 50 Aug-11 55 Feb-11 60 Feb-10 20 15 10 5 0 -5 -10 -15 -20 65 30 Feb-08 Total Monthly Transaction Volume (000's) (LHS) % Nominal House Price Growth (YoY) (RHS) 12% 9% 6% 3% 0% -3% -6% -9% -12% Aug-10 NL PMI Manufacturing Cons. electronics Do-It-Yourself Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 07 08 08 09 09 10 10 11 11 12 12 13 Home appliances -10% 0% Home furnishing -8% 5% Fashion retail -6% Non-food 10% Speciality stores -4% Supermarkets 15% Food -2% Total retail 0% 20% Source: CBS GLOBAL VISION | Q4 2013 | 18 SPAIN Although the process of correcting accumulated imbalances is still ongoing, the Spanish economy is benefiting from the easing of financial pressures and the gradual return of capital flows. The 2012 national reform plan has set the basis for a modest economic recovery that might occur during the next quarters thanks to the positive contribution of external demand. (Figure 1) However, private consumption is expected to remain weak and might slightly erode growth during the coming quarters, as the effect of the September 2012 tax increases will continue to impact private expenditure. (Figure 3) Despite that, the destruction of private-sector jobs is stabilizing due to the moderate deterioration of the economy, unemployment rates are expected to slightly increase as public employment is being affected by the fiscal consolidation. (Figures 2 and 4) Fiscal consolidation is expected to drain growth during 2013 and to a lesser extent during 2014. The recently approved extension of the deadline to reduce the public deficit to 3% of GDP might change the composition of the adjustment, reducing the tax burden and focusing the reductions on public expenditure. (Figure 2) In spite of a gradually improving economic outlook, expected and imminent growth is still very vulnerable. Risks remain on the downside, focused on the slow pace of constructing the European Banking Union, the sustainability of export growth and intensifying fiscal adjustments. Property markets continued performing negatively during the first quarters of 2013, although to a lesser extent than in previous years. The recent slowdown in rental declines and the stabilization of vacancy rates suggest a near term change in the property cycle. Vacancy rates remained stable between 11% and 15% in practically all sectors, helped by the almost non-existent pipeline counteracting the space rationalization process started by companies in early stages of the crisis. However, space availability is expected to slightly increase, especially in the office sector, as the rationalization public program progresses. Take-up levels were stable during the first half of 2013, aligned with the short term private consumption outlook hindering any increase in the demand for property space. The 50% increase in take up levels in the Madrid office market during the first half of 2013 is due to exceptional company re-allocations rather than market fundamentals. The stabilization of vacancy rates among practically all sectors has contributed to a slowdown in the correction in prime rents during the last quarters. Nevertheless, prime rents among sectors have registered 30% to 40% nominal accumulated falls since the peak and are likely to continue falling during the coming quarters, although at a slower pace. (Figure 5) Financing continues to be limited to core assets although expensive, with a limited contribution to property returns. This will create opportunities for investors chasing after refinancing situations. Loan applications are completely different from those from pre-crisis and focus in detail on micro factors. The sharp value correction in the Spanish property markets (between 40% and 50% accumulated value decline since the peak, depending on the sector) has pushed property values significantly below historical averages (circa 30%). In addition, property yields remain high when compared to pre-crisis levels (circa 250 bps higher) and still reflect a risk premium where other markets (government bonds) have already normalized. (Figure 6) Since the beginning of 2013, foreign investors sentiment has improved significantly due to reduced uncertainties (thanks to the ESM and the structural reforms undertaken) and the possible near term change in the cycle. Given the attractiveness of current prices and high income returns, demand for investing in Spanish real estate has increased rapidly since the beginning of 2013. Investors continue to be polarized into two segments, core and opportunistic. As the Spanish bad bank “SAREB” accelerated the disposal strategy at the start of the year, transactions have registered several portfolio deals (mainly residential) and others related to non-performing loans in the opportunistic niche. The tempting core play to secure income cash flows is becoming crowded and capital sources might be pushed up the risk specturem where there is currently very little competition. Investment volumes still remain low, also due to the lack of product restricting further transactions. However, with foreign investors returning to Spain, we expect volumes to increase in the coming quarters. GLOBAL VISION | Q4 2013 | 19 SPAIN – CHARTS FIGURE 1: REAL GDP GROWTH, % YOY FIGURE 2: BUDGET BALANCE AS % OF GDP Euro Area 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% 12% Spain 10.7% 9.5% 9% 7.2% 6.8% 5.7% 6% 3% 06 07 08 09 10 11 12 13 14 15 16 17 0% 11 12 13 14 15 Source: Economist Intelligence Unit Sources: Spanish Tesoro Publico and Economist Intelligence Unit FIGURE 3: PRIVATE CONSUMPTION GROWTH, % YOY FIGURE 4: UNEMPLOYMENT RATES 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Euro Area Spain 30% Spain Euro Area 25% 20% 15% 10% 5% 0% 06 07 08 09 10 11 12 13 14 15 16 9908 17 09 10 11 12 13 14 Source: Economist Intelligence Unit Source: Economist Intelligence Unit FIGURE 5: PRIME MARKET RENTAL GROWTH, % YOY FIGURE 6: PRIME NET INITIAL YIELDS 30% 20% Offices Shopping Centres Logistics 10% Offices Madrid Shopping Centres 15 16 17 Logistics Barcelona 9% 8% 7% 0% 6% -10% 5% -20% 4% -30% 06 07 08 09 10 11 12 13 14 15 16 17 Sources: CBRE Global Investors 3% 06 07 08 09 10 11 12 13 14 15 16 17 Source: Historic, JLL, CBRE, PMA; Forecast, CBRE Global Investors GLOBAL VISION | Q4 2013 | 20 JAPAN According to second estimates, the Japanese economy expanded much stronger than initially expected in Q2, as GDP revised upward from annualized growth rate of 2.6% to 3.7%. This was mainly led by a marked improvement in business investment. (Figure 1) In addition, consumer prices came out of deflation in June for the first time in twelve months with overall CPI rising 0.2% over last year, adding to growing signs that a solid recovery is underway. Although, concerns regarding a slow pace of overseas economic recovery remains a key downside risk, it is expected that the current recovery of the Japanese economy will likely be sustained over the medium term. According to Consensus Economics (as of August 2013), GDP growth of 1.9% and 1.5% is projected for 2013 and 2014 respectively. To add to the positive momentum, Tokyo was recently awarded the 2020 Olympics, which may further bolster optimism and boost consumer/business confidence. The Tokyo government estimates that the likely economic impact of hosting the Olympics to be approximtely 3 trillion yen, with an additional 150,000 new jobs. Real estate companies are expected to benefit from the new construction/renovation of sporting venues and athlete village. (Figure 2) Hotels and housing near the venues are also likely to benefit and may possibly lead to an increase in values. Rents for the overall Tokyo office market continued to fall but the rate of decline has narrowed, down only 1.2% in H1 2013 from H2 2012. Rents for large, high quality buildings continued to rise gradually, but a similar trend was also found in mid-to-large sized high quality buildings. Asking rents for mid- to-large sized new buildings have now increased by 14% in H1 2013 compared to H2 2012 (Figure 3), suggesting landlords have started to push up rents in buildings with superior quality facilities regardless of the sizes in good locations. Both landlords and tenants have realized that leasing inqueries have become more active and that the vacancy rate is evidently declining. Office supply in Tokyo 3 Wards over the next five years (2013 2017) is forecast to fall below the 1998 – 2012 historical average. Over the next four years, reconstruction projects will account for roughly 85% of the new supply within Tokyo 3 Wards. During the five year forecast period, Tokyo offices are likely to outperform the other major sectors as total unlevered returns are expected to average 8.3% annually. Rents for Tokyo Residential units are expected to pick up modestly in the near future although growth will likely be limited. In order for a robust recovery in residential rents to take place, household incomes would need to increase and trend upward. Cap rate compression for Tokyo residential has already progressed and cap rates are now quite low with some traded at NOI cap rates below 5%. During the five year forecast period, total unlevered returns are expected to average roughly 7.5% for residential assets located in Tokyo. As the window of opportunity to acquire Tokyo Residential continues to narrow, more domestic and foreign players have started to increase their investment allocations in secondary cities. (Figure 4) Hence, cap rates have started to compress for regional cities such as Osaka and Nagoya. Demand from internet retailers and third-party logistics companies continue to drive demand and the leasing market of logistics properties in Greater Tokyo displayed further improvement in Q2 2013. The average vacancy rate for multitenant logistics facilities located in Greater Tokyo declined to a record low 2.7% at the end of June 2013. (Figure 5) As the overall supply-demand balance remained tight, rents have started to marginally increase for all major cities within Greater Tokyo in Q2 2013. Despite there is a significant amount of supply expected to come into the market in the latter half of this year, going forward, a buoyant leasing market will likely continue in the near term as supported by solid demand. During the five year forecast period, we expect an average unlevered total return of 8.2% for logistics facilities located in Greater Tokyo. High street retail rents in Tokyo are at a historical low level but have recently witnessed a slight increase in rents, as they benefited from the improved consumer sentiment boosted by the measures of Abenomics. (Figure 6) Rents are expected to pick up for quality assets in good locations and cap rates are expected to compress moderately given that the debt supply and equity investments remain fairly strong. During the five year forecast period, total unlevered returns are expected to average roughly 7.1% for high street retail located in Tokyo. GLOBAL VISION | Q4 2013 | 21 JAPAN – CHARTS FIGURE 1: BREAKDOWN OF GDP BY COMPONENTS Growth Rate (qoq) Private Consumption Government Consumption Exports GDP FIGURE 2: PROPOSED OLYMPIC VENUES Business Investment Public Investment Imports 8% 6% 4% 2% 0% -2% -4% -6% 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 Source: Cabinet Office Source: Tokyo 2020 Olympics Bid Committee FIGURE 3: TOKYO 5 WARDS OFFICE RENT TRENDS FIGURE 4: JREIT RESIDENTIAL TRANSACTION TRENDS 40% 35,000 30% 30,000 20% 25,000 10% 20,000 0% 15,000 -10% 10,000 -20% % Share of Total Residential Transaction JPY per tsubo 40,000 % Change YoY Asking Rents (New Buildings) % Change YoY -30% 5,000 03 03 04 05 06 07 08 08 09 10 11 12 13 Regional Residential 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Avg. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 10 10 10 10 11 11 11 11 12 12 12 12 13 13 Note: refer to new office buildings with floor plate over 100 tsubo Source: Miki Shoji Source: ARES FIGURE 5: VACANCY TREND FOR GREATER TOKYO LOGISTICS FIGURE 6: TOKYO HIGH STREET RETAIL RENT TRENDS, YOY CHANGE All Facilities Existing Facilities 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Ginza Average Prime Rent Harajuku Average Prime Rent Omotesando Average Prime Rent Shibuya Average Prime Rent Shinjuku Average Prime Rent 40% % Change YoY 30% 20% 10% 0% -10% -20% -30% 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q 2Q 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 Source: CBRE -40% 07 08 09 10 11 12 1Q 13 Source: CBRE GLOBAL VISION | Q4 2013 | 22 CHINA China’s GDP grew by 7.5% YOY in Q2, slowing further from 7.7% YOY in Q1. This was primarily due to weaker exports as a consequence of a soft global demand and RMB appreciation. Domestic demand has stabilized with retail sales picking up modestly in Q2 from Q1. New starts in the property sector increased by 8.8% YOY in Q2, compared with a decline of 2.7% in Q1, also helped to support domestic demand. Latest economic data suggests a broad-based recovery with not only a rebound in the manufacturing sector but also stronger infrastructure investment. Consensus Economics’ latest mean forecast of full year GDP growth is 7.5% and 7.4% in 2013 and 2014 respectively. (Figure 1) CPI stabilized at 2.6% YOY in August while year-to-date average of 2.5% YOY CPI was recorded. Core goods and service prices stayed largely flat while food prices continued to be the driving force. Despite CPI possibly picking up in Q4 due to seasonal uptrend of food prices, overall inflation should remain within a comfortable range from a monetary policy point of view. Although real interest rates are currently positive, it is likely they will turn negative towards the end of this year (Figure 2) and that may force depositors to look for alternative ways to preserve their cash savings. China’s new bank loans amounted to RMB 711 billion in August, reflecting a steady growth of bank lending of 14% YOY. (Figure 3) Year-to-date new lending of RMB 6.5 trillion is inline with the seasonal pattern. Therefore, new bank loans are expected to slow gradually for the remainder of 2013. In contrast, medium & long term corporate loans have remained strong with growth picking up recently, supporting both public and private sector investment. Looking forward, the Beijing authority will likely maintain the current monetary stance with the focus of a more sustainable growth path. Transaction volume (excluding land sales) totaled over US $3.7 billion in Q2 (Figure 4), which saw a pick-up of 32% QOQ from Q1 but still down 53% YOY from a year ago. Retail overtook office to become the most traded sector with close to US $2 billion of transactions in the quarter. Indeed, investors showed high interest in value-add opportunities and retail projects that are targeting the fast growing middle class. The office sector also recorded US $1.4 billion of transactions in the quarter with investors now focusing more on quality offices in decentralized locations given there is currently a lack of available stocks for sale in the core CBD areas, especially in tier one cities. In contrast, land transactions continued to be very active in Q2 with a total volume of US $83 billion. Together with the US $83 billion volume in Q1, the land market is gaining momentum with a growth of 77% YOY in H1 2013. According to the National Bureau of Statistics, 66 of the monitored cities reported MOM residential price increases in August. In fact, the number of cities reporting MOM residential price increases outnumbered the number of cities reported MOM residential price decreases since June 2012. (Figure 5) Majority of the cities monitored registered a residential price rally for over a year now. Solid demand from both first time home buyers and upgraders is pushing up residential prices and has led to upbeat sentiment among developers in land acquisitions. As the national trend of service sector office demand expansion continues, remained broadly stable in the first half of 2013 with domestic companies and stateowned enterprises the key drivers in absorbing office space. The positive momentum continues in Beijing given limited new supply and solid demand. (Figure 6) In Shanghai, however, financial institutions and MNCs are generally more cautious given the higher than historical average of new supply that has led to flat rental performance in H1 2013. There have been divergent performances among the core CBDs and emerging new CBDs across China. Other than higher vacancies in the emerging new CBDs, a large amount of future new supply is also expected in these new areas thus exerting huge pressure on rents. GLOBAL VISION | Q4 2013 | 23 CHINA – CHARTS FIGURE 1: CHINA’S REAL GDP & COMPONENTS, %YOY Net Exports Gov't consumption Real GDP FIGURE 2: INFLATION, DEPOSIT RATE AND REAL* INTEREST RATE Fixed investment Private consumption CPI 1Y Deposit Rate Real Interest Rate 10% 8% 6% 15% 4% 10% 2% 0% 5% -2% 0% -4% -6% -5% 01 02 03 04 05 06 07 08 09 10 11 12 13 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Economist Intelligence Unit Source: CEIC FIGURE 3: CHINA NET NEW LOANS, BN RMB, OUTSTANDING LOAN GROWTH, %YOY FIGURE 4: CHINA INVESTMENT VOLUMES OF STANDING ASSETS, USD BN PER QUARTER Net New Loans (LHS) Outstanding Loan Growth (RHS) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 40% 10 30% 8 20% *“Real interest rate” defined as 1Y deposit rate minus CPI Office Retail Industrial Others 6 4 10% 0% 02 03 04 05 06 07 08 09 10 11 12 13 2 0 07 08 09 10 11 12 13 Sources: CEIC, CBRE Global Investors Sources: RCA, CBRE Global Investors FIGURE 5: RESIDENTIAL PRICE MOVEMENT IN 70 MAJOR CHINESE CITIES, MONTH ON MONTH PRICE TRENDS, # OF CITIES FIGURE 6: OFFICE RENTAL INDEX, 2003Q1=100 80 60 40 20 0 Jan-11 Jul-11 Jan-12 Sources: CEIC, CBRE Global Investors Jul-12 Beijing Shanghai 260 240 220 200 180 160 140 120 100 80 Price Decrease Price Stability Price Increase Jan-13 Jul-13 03 04 05 06 07 Guangzhou Shenzhen 08 09 10 11 12 13 Sources: CBRE Research, CBRE Global Investors GLOBAL VISION | Q4 2013 | 24 AUSTRALIA Australia’s economy achieved a growth rate of 2.6% in Q2 2013, roughly 100 basis points below its long term trend, as mining investments slow down. The Consensus Economics’ mean forecast for 2013 and 2014 (as of August 2013) is 2.6% and 3.0% respectively; while the EIU is also forecasting growth below its long-term average. (Figure 1) Despite low interest rates, business and consumer confidence remains low in H1 2013, reflecting a sluggish outllook for the economy over the next six months. Earlier in August, the Reserve Bank of Australia (RBA) cut its 2013 economic growth forecast from 2.5% to 2.25%, as the decline of the resources investment boom is having a negative effect on the broader economy. In response, the official cash rate was reduced by another 25 basis points, bringing it to yet another record low of 2.5%. The RBA expects growth to recover in the non-mining sectors in 2014, when the effects of the current policies begin to materialize. The AUD depreciation against USD by roughly 15% since May 2013, should aid exports in non-manufacturing sectors, as well as attracting inbound tourism, and other sectors including education (Australian universities have a high share of foreign students). However, the RBA is prepared to cut rates further in Q4 2013 if credit growth and business confidence remains subdued. Easing monetary policies should lead to lower government bond yields over the short term, however. With the expectation of rising interest rates in the US, Australian bond yields are forecast to rise in the medium term. (Figure 2) With the economic challenges, the labor markets have seen a slight increase in the official unemployment rate from 5.3% to 5.7% between January and June 2013. Over the next 12 months, the unemployment rate is anticipated to increase further, reverting to its long term trend of above 6% before stabilising. Attractive yields, and a wide yield spread to the risk free rate, across most sectors are attracting both offshore and domestic investors and thus investment activities remained active in H1 2013. It is likely that such a trend will persist in H2 2013 and 2014. International investors continue to be attracted to the relatively high and stable income returns offered by real estate, in addition to its large size, high transparency and high degree of liquidity. Asian capital sources alone purchased over USD 2.0 bn in real estate assets in H1 2013, according to RCA. The performance of most markets in H1 2013 has weakened slightly in spite of low supply pipelines. “All property” delivered total returns of 9.1% YOY in H1 according to the IPD/PCA index, down from the strongest post-recession return of 10.4% in 2011. (Figure 3) It is likely that a weak performance may persist over the next 12-18 months before a meaningful recovery. The office sector has recorded total returns of 9.4% YOY, with 7.3% derived from income and 2.1% from capital growth for the H1 2013. (Figure 4) The Sydney office market experienced weak leasing activity in Q2 2013, and face rents fell 0.9% for prime assets. Incentives invariably rose to attract tenants negatively impacting effective rents. The Finance and Insurance sector, accounting for 52% of CBD office space demand, is expected to cut jobs further as well as the public sector reducing employment numbers in the coming years. We expect the Sydney CBD office market to experience weak and even negative rental growth in 2013 and H1 2014, before a recovery in late 2014/2015. We are forecasting mid-high single digit total returns over the next five years. Retail continues to be the weakest performing sector, with weak job prospects and security causing consumers to cut down on discretionary spending. Leasing conditions are challenging and resulted in net effective rents declining by 4.1% in H1 2013. Even with aggressive interest rate cuts by the Reserve Bank, confidence levels remain low and caution prevails. Total returns of 8.8% in H1 2013 have been recorded and we continue to forecast weakness in Sydney and the other main shopping center markets in the coming few years. Total return performance over the next five years is well below its long term average (15 year) of 11%. (Figure 5) The Sydney industrial sector continues to experience moderate demand growth in H1 2013, particularly for quality assets, as vacancy is low and the supply pipeline over the next 12 months is limited; this will aid a rental rate increase in 2014. (Figure 6) All precincts recorded a fall in vacant space throughout the quarter. We expect this sector to deliver high single digit growth over the next five years, and larger space assets are likely to be in greater demand. GLOBAL VISION | Q4 2013 | 25 AUSTRALIA – CHARTS FIGURE 1: GDP GROWTH FORECAST, % YOY 7% Real YoY GDP Growth 10 Year Hist. Avg. 25 Year Hist. Avg. 6% 5% FIGURE 2: LONG TERM GOVERNMENT BOND YIELD 18% 16% 14% 4% 12% 3% 10% 2% 8% 1% 6% 0% 4% -1% 2% -2% 81 84 87 90 93 96 99 02 05 08 11 14 17 Long-term bond yield 10 Year Hist. Avg. 25 Year Hist. Avg. 0% 81 84 87 90 93 96 99 02 05 08 11 14 17 Source: Economist Intelligence Unit Source: Economist Intelligence Unit FIGURE 3: PROPERTY TOTAL RETURNS BY SECTOR FIGURE 4: SYDNEY OFFICE RENT AND CAPITAL VALUE GROWTH TRENDS 35% Retail Office Industrial 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 H1 Rent Capital Value LTA Rental Growth LTA Capital Value Growth 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Property Council of Australia/International Property Databank Source: CBRE Research, CBRE Global Investors FIGURE 5: SYDNEY SHOPPING CENTRE RENT AND CAPITAL VALUE GROWTH TRENDS FIGURE 6: SYDNEY INDUSTRIAL RENT AND CAPITAL VALUE GROWTH TRENDS Rent LTA Rental Growth Rent LTA Rental Growth Capital Value LTA Capital Value Growth Capital Value LTA Capital Value Growth 20% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 15% 10% 5% 0% -5% -10% -15% -20% 95 97 99 01 03 05 07 09 11 13 15 17 Source: CBRE Research, CBRE Global Investors 95 97 99 01 03 05 07 09 11 13 15 17 Sources: CBRE Research, CBRE Global Investors GLOBAL VISION | Q4 2013 | 26 SOUTH KOREA Real GDP growth far exceeded market expectations by rising 1.1% QOQ in Q2 (seasonally adjusted), the largest increase in over two years. The rise was mainly driven by a sharp boost from fiscal policy with public consumption rising 2.4% QOQ and overall construction investment up 3.4% QOQ. However, the underlying performance of the economy remains much patchier than indicated by the GDP figure. Export volume increased modestly but has outpaced imports, which were held back by destocking. Consumer spending rose 0.6% on the quarter after falling in Q1. While the economy is being supported by expansionary monetary and fiscal policy, as well as low inflation, it is currently being limited by subdued global trade flows, high levels of uncertainty, weak business sentiment and a lackluster trend in consumer spending. Bear in mind that falling housing prices are strongly correlated with rising household delinquencies, which puts the central bank in a difficult spot. It is unlikely to hike rates before the end of this year. The latest EIU forecast projects 2013 real GDP growth at 2.8% before picking up to 3.4% in 2014. (Figure 1) Consensus Economics’ forecasts of CPI growth for 2013 and 2014 are 1.6% and 2.6%, respectively. Over the outlook period (2013-17), employment is projected to increase at just 0.3% per year, however the unemployment rate is expected to remain at a very low level: around 2.6% on average over the same period. (Figure 2) Seoul’s Grade A office market showed a downturn in demand in Q2 compared to previous quarters, with absorption in all three districts amounting to approximately negative 2,637 sqm. CBD rental performance, take-up and Seoul average face rent all declined with the newly constructed N Tower entering the market at a face rent below market average. GBD continued its tenuous state with an increase in the vacancy rate affected by gradual move outs of tenants. YBD resolved a large amount of vacant space of Two IFC, thereby becoming the only district with a lowered vacancy rate. Seoul’s Grade A office market, with the continuation of its oversupplied status, is expected to be tenantdriven over the next few quarters. The overall vacancy rate of Seoul Grade A office averaged 8.6% in Q2. The YBD vacancy actually came down from the 10%-level to 8.6%, while CBD and GBD recorded 13.1% and 3.3% in average vacancy rate, respectively, rising modestly from the previous quarter. (Figure 3) Over the forecast period (2013-17), Seoul prime office rents are forecast to decline by 0.3% per annum on average, while prime rents in the CBD and YBD are expected to be weaker, with average declines of 1.8% and 2.5% per year respectively, with near term deterioration but positive growth returning in the latter part of the outlook period. (Figure 4) Despite weak domestic consumption, consumer sentiment has turned mildly positive since Q2, as the consumer sentiment index improved to 105 in July from 102 in April. Private consumption accounts for nearly 60% of GDP in Korea. Hence a small change in consumption tends to have a large impact on GDP. High household leverage and weak income growth will continue to restrain private consumption over the next several quarters. However, the central bank’s rate cut, along with selective tax reductions related to housing should put a floor on aggregate consumption in H2 2013. According to the EIU in September 2013, retail sales are projected to grow at 4.8% in 2013, in tandem with a resurgence in consumer expenditures at 8.2% in 2013. (Figure 5) New completions in Q2 2013 included Up Square mall in Ulsan. Local fashion brands are restructuring brand lines and re-launching existing fashion brands as SPA brands (specialty retailers of private label apparel) in order to gain competitiveness against global SPA brands in the midst of economic recession and sluggish consumer spending. Cap rates for standalone hypermarkets with key retailer anchors have considerably compressed to far below 6% since 2012. Recent bidding for disposing the four Tesco Homeplus stores suggests that tighter range of mid 5% or somewhat lower cap rate may be achievable later this year. In addition to declining interest rates, this cap rate compression is largely encouraged by the resurgence of riskaversion on the part of investors in the wake of global economic uncertainty, leading them to focus on what they perceive to be less-risky property types, with relatively stable dividend returns subject to long-term leaseback clauses. Cap rates for shopping malls in the Greater Seoul Metro ranged from 5.7-6.2% in Q2. Over the outlook period (2013-17), Seoul shopping mall rents are forecast to increase by 5.2% per year, while capital values are expected to grow at 6.1% per year. (Figure 6) So far in Q2 2013, there have not been any major logistics transactions, particularly by domestic institutional investors. However, local investors’ are increasingly searching for highquality distribution centres. GLOBAL VISION | Q4 2013 | 27 SOUTH KOREA – CHARTS FIGURE 1: GDP GROWTH FORECAST, % YOY Real GDP FIGURE 2: EMPLOYMENT GROWTH FORECAST & UNEMPLOYMENT RATE Ave. 2003-2012 Employment Growth (LHS) 5% Unemployment (RHS) 3% 5% 4% 4% 2% 3% 3% 1% 2% 2% 0% 1% 1% 0% -1% 0% 13 14 15 16 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 17 Source: Economist Intelligence Unit Source: Economist Intelligence Unit FIGURE 3: SEOUL PRIME OFFICE VACANCY RATES FIGURE 4: PRIME OFFICE RENT & CAPITAL VALUE TRENDS CBD GBD YBD Total 20% 15% Rental Growth 25% Capital Value Growth 15% 10% 5% 5% 0% -5% -5% Q1 02 Q2 03 Q3 04 Q4 05 Q1 07 Q2 08 Q3 09 Q4 10 Q1 12 Q2 13 -15% 03 05 07 09 11 13 15 17 Source: CBRE Research Source: CBRE Global Investors FIGURE 5: REAL RETAIL SALES & CONSUMER EXPENDITURE,% PA FIGURE 6: PRIME RETAIL RENT & CAPITAL VALUE TRENDS Retail Sales Consumer Expenditure 25% Rental Growth 30% Capital Value Growth 20% 20% 15% 10% 10% 5% 0% 0% -5% -10% -10% -15% -20% 03 05 07 09 Source: Economist Intelligence Unit 11 13 15 17 -20% 07 08 09 10 11 12 13 14 15 16 17 Source: CBRE Global Investors GLOBAL VISION | Q4 2013 | 28 CBRE GLOBAL INVESTORS CBRE Global Investors is one of the world’s largest real estate investment management firms with $88.2 billion in assets under management. 1 The firm sponsors real estate investment programs across the risk/return spectrum in North America, Europe and Asia for investors worldwide including public and private pension funds, insurance companies, sovereign wealth funds, foundations, endowments and private individuals. Programs include core/core-plus, value-added and opportunistic strategies through separate accounts and commingled equity funds, debt investment, global multi manager programs and listed global real estate securities vehicles. A cornerstone of CBRE Global Investors is a timely, disciplined research process. Our dedicated global Investment Research Group provides a strategic understanding of both local real estate markets and global economic and capital markets trends, which shapes highly informed real estate investment strategies and decisions. DOUG HERZBRUN, GLOBAL HEAD OF RESEARCH Mr. Herzbrun is responsible for CBRE Global Investors' research activities. He directs strategic analysis of the economies, capital markets and property markets in North America, Europe and Asia. These analyses support the portfolio management and acquisition processes, and the development of new product concepts. He communicates research insights to the firm’s clients and prospects, and to the real estate community. He serves on the Global, Americas and Global Multi Manager investment committees. Mr. Herzbrun has over 32 years of real estate investment research experience. He joined CBRE Global Investors in 1984 after four and one-half years with Coldwell Banker Real Estate Consultation Services. Mr. Herzbrun received a B.A. in History from the University of California at Berkeley and a Master of City and Regional Planning from Harvard University. He is a member of the Education Committee of the National Council of Real Estate Investment Fiduciaries (NCREIF) where he is an instructor at their Academy program series. He is also a member of the Research Affinity Group of the Pension Real Estate Association (PREA), and of the Urban Land Institute (ULI). SABINA KALYAN, GLOBAL CHIEF ECONOMIST Based in London, Sabina is responsible for developing CBRE Global Investors’ house views on the outlook for the global economy and financial markets, and analyzing their impact on real estate markets. She has been with the company for four years, and prior to this role, was the European Head of Research. Sabina joins CBRE Global Investors from IPD where she was Chief Economist. Prior to this she worked for Capital Economics, where she developed their UK residential and commercial property market analysis and forecasting service. Sabina studied economics at Lincoln College, Oxford University and is a member of the Society of Business Economists, the Society of Property Researchers and the Investment Property Forum. 1 Assets under management (AUM) refers to fair market value of real estate-related assets with respect to which CBRE Global Investors provides, on a global basis, oversight, investment management services and other advice, and which generally consists of properties and real estate-related loans; securities portfolios; and investments in operating companies, joint ventures and in private real estate funds under its fund of funds program. This AUM is intended principally to reflect the extent of CBRE Global Investors' presence in the global real estate market, and its calculation of AUM may differ from the calculations of other asset managers. As of June 30, 2013. GLOBAL VISION | Q4 2013 | 29 This document has been prepared by the Strategy & Research Team: Assia Amore Andrew Angeli Marije Braam Isaac Carrascal Juliet Cha Jane Dorrel Angela Du Doug Herzbrun Maarten Jennen Shubhra Jha Sabina Kalyan Johan Kamminga Charlotte Keeling Gerben Koops Danny Lee Miriam Leung Joaquin Linares Trey Long David Morrison Christian Muller Eugene Philips Chas Sun Els Swaen Shane Taylor Marcel Theebe Shinnosuke Tomita Ondrej Vlk Anthony Wirth Karel Zeman REGIONAL HEADS OF RESEARCH NORTH AMERICA EUROPE ASIA PACIFIC DOUG HERZBRUN Global Head of Research EUGENE PHILIPS Head of European Research SHANE TAYLOR Head of Asia Pacific Research TEL: + 1 213 683 4238 TEL: +31 20 202 2337 TEL: +852 2846 3042 douglas.herzbrun@cbreglobalinvestors.com eugene.philips@cbreglobalinvestors.com shane.taylor@cbreglobalinvestors.com GLOBAL VISION | Q4 2013 | 30 www.cbreglobalinvestors.com Americas EMEA Asia Pacific Los Angeles (HQ) Amsterdam (HQ) Hong Kong (HQ) Atlanta Brussels Melbourne Boston Budapest Seoul Dallas Dubai Shanghai New York Frankfurt Singapore Newport Beach Helsinki Sydney Philadelphia London Taipei Seattle Luxembourg Tokyo Washington, DC Madrid Milan Paris Prague Stockholm Warsaw 13:170