european real estate strategic outlook - consent and country

RREEF Real Estate

RESEARCH REPORT

www.rreef.com

March 2012

European Real Estate Strategic Outlook

RREEF REAL ESTATE European Real Estate Strategic Outlook | March 2012 i

Table of Contents

Executive Summary ............................................................................. 1

The Economy ....................................................................................... 3

Real Estate Performance ..................................................................... 8

Property Market Fundamentals ............................................... 10

Capital Markets ........................................................................ 11

Office .................................................................................................. 17

Retail .................................................................................................. 22

Logistics ............................................................................................. 27

Alternative Sectors ............................................................................. 31

Investment Opportunities by Sector and Risk .................................... 35

Sustainability ...................................................................................... 38

Appendix: Important Notes ................................................................. 40

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Prepared by:

Mark G Roberts

Managing Director

Global Head of Research

[email protected]

Simon Durkin

Director

Head of European Research

[email protected]

Jaroslaw Morawski

Vice President

European Research

[email protected]

Gianluca Muzzi

Chief Investment Officer, Europe

[email protected]

Maren Vaeth

Vice President

European Research

[email protected]

Simon Wallace

Assistant Vice President

European Research

[email protected]

Nazanin Nobahar

Analyst

European Research

[email protected]

mailto:[email protected]�

RREEF REAL ESTATE European Real Estate Strategic Outlook | March 2012 1

Executive Summary The external environment The pace of economic activity has been slowing throughout much of Europe in recent months and we now expect that the Eurozone fell into recession during the final quarter of 2011. This second recession is expected to be relatively moderate and short (lasting only two to three quarters). We believe that a gradual solution to the Eurozone crisis will emerge, following which Europe will enter a period of slow recovery.

Eurozone is forecast to contract by 0.7% in 2012. Within the currency area, we expect to see a significant divide in performance between the core and periphery countries – with Germany, Finland or Austria experiencing marginal growth and Greece contracting 6.5 percent. The European economy and financial system is highly integrated and interdependent, and so no country is expected to be immune from the current downturn.

In parallel with the economic environment, real estate capital markets were looking particularly bullish towards the end of the second quarter of 2011. It also seemed evident that investors, faced with increasingly aggressive pricing for core properties, began to look for alternative opportunities higher up the risk spectrum.

This emerging optimism changed course rapidly during the summer as it became clear that the economic distress in Europe had not abated but was poised to move to another more significant level, even threatening the viability of the common currency. Once again, risk aversion has spiked, investor sentiment has weakened and the focus has moved back to core, prime quality assets with secure income.

Outlook for direct real estate returns ▪ Real estate performance across much of Europe will most likely weaken further in

2012 and recover slowly from 2013 onwards. In general, capital values will most likely be stagnant in the north of the continent and fall in the south over the coming 12 to 24 months. Subsequent growth should result mainly from the fundamental recovery and increasing rents

▪ For office and logistics assets, the moderate mid-term yield decompression will likely have a negative impact on values but should be compensated by increasing income streams starting 2014. We expect retail, in particular prime shopping centres, to outperform over the next five years due to the combination of a relatively stable yield outlook and comparatively high income returns

▪ Value growth in Southern Europe is likely to remain negative in 2012 resulting in weaker total returns. Near term weakness creates the potential for longer term outperformance. An economic recovery translating into rent growth and improving investor sentiment could lead to double digit total returns in the medium term

▪ Top performers in the second half of our forecasting period are markets such as Dublin office or Spanish shopping centres. However, the risks to this forecast are obviously the highest with significant variability around this view. Outside of the Eurozone Periphery, London office is likely to perform well over a five year horizon along with offices in regional France and Warsaw as well as prime retail schemes in Central Eastern Europe, the United Kingdom or Brussels. Germany is once again expected to substitute higher returns for greater resilience and the lowest levels of downside risk


Strategic Recommendations Pricing of prime properties in key European markets is increasingly aggressive and driven not by a strong fundamental outlook but mainly by risk aversion from those investors seeking capital preservation rather than chasing total returns. For these properties, the already low level of cash flow returns can be further eroded by the gradual yield decompression in the medium term. On the other hand, secondary schemes in fringe markets, although attractively priced, involve the very real risk of long term vacancy. In our view, the most attractive opportunities currently lie between these two extremes: in established markets and submarkets which are sufficiently attractive to tenants but not perceived as typical prime and hence not suffering from overpricing.

Prime shopping centres will outperform the other two sectors according to our five year forecast driven mainly by a more stable yield outlook combined with moderate rent growth. Generally, we expect this property type to deliver positive value growth across the continent, but the outperformers will be found in more dynamic Central and Eastern Europe economies, in particular Poland and the Czech Republic, or in some of the countries hit worst by the downturn and expecting strong recovery, in particular Spain and Ireland.

While historical growth rates for logistic properties have been relatively low, they have been compensated by higher cash flow returns. As stronger income component can prove attractive in times of uncertainty, and well located logistic schemes can be seen as a defensive play. In the near term, key logistic hubs in Northern European countries, such as Paris, Hamburg or Stockholm, are expected to outperform.

While offices in London, Stockholm and Berlin are still expected to be among the outperformers, other office markets in the top performance quartile of our forecast are those that usually receive slightly less attention from international investors such as Warsaw, Dublin, or regional French markets (Lyon, Marseille). In other cities interesting investment opportunities can arise just outside of the prime locations which tend to receive less attention from investors and trade at less aggressive yields.

In the weakening economic environment certain real estate assets are expected to come under particular strain as debt covenants are breached and refinancing remains in short supply. While banks still remain the most important source of financing in Europe, more stringent lending standards and new regulation will likely create a gap which can be filled by other private lenders. This type of real estate investing can provide major opportunities for both defensive and more risk-prone investors.

For those investors looking to move up the risk curve, RREEF Real Estate’s research suggests that this point in the cycle may prove a favourable time to make opportunistic investments. In the markets which are seeing the greatest distress, certain assets are showing an initial yield that is well above historic average levels and this has typically led to well above average rates of return over the following years.


The Economy The pace of economic activity has been slowing throughout much of Europe in recent months and we now expect that the Eurozone fell into recession during the final quarter of 2011. This second recession is expected to be relatively short and moderate. We believe that Europe will enter a period of slow recovery once there is a convincing solution to the current Eurozone crisis.

Eurozone Crisis The current crisis in the Eurozone is principally the result of a systemic failure in the region’s monetary construction. Long held fears that currency union without political union is unworkable have largely proved correct. However, we maintain the view that the Eurozone will not break apart, and all current members will continue using the currency.

Although parts of the Eurozone, particularly the periphery, will require a long and painful period of economic and structural adjustment, some of the core countries within the region remain some of the most competitive and highly developed in the world. It is also important to remember that the weakest parts of the periphery make up a relatively small part of the Eurozone. A closer examination of the debt position of the four largest economies suggests that on aggregate, the Eurozone debt position is potentially more sustainable than other developed economies. In 2010, government debt as a share of GDP in Germany, Spain and France was below that of Japan and the United States. Furthermore, according to the latest IMF forecasts, the Italian debt to GDP ratio will have fallen to 114 percent in 2016, while the US ratio will have increased to 115 percent.

Chart 1 – Government Finance Forecasts 2011f (% of GDP)

Source: IMF (World Economic Outlook Database, September 2011).

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Given the interdependency of the Eurozone economies, the extensive risks of a break-up and the extensive political capital invested in the currency, we believe a solution to the current crisis is the most likely outcome. This solution is not likely to emerge quickly. It will be the result of a gradual combination of greater fiscal union, an enhanced bailout package, increased support from the ECB and a long process of reform and austerity. There are clear risks to this view, with the first half of 2012 likely to prove particularly difficult in the face of refinancing requirements. However, because currency collapse could lead to a period of widespread depression, we believe policy makers will eventually take all of the necessary steps required to preserve the integrity of the euro.

Economic Outlook The current weakness is expected to persist throughout the first half of 2012. The widely followed Purchase Managers Indices has weakened across Europe in recent months, with the Composite Eurozone Index below 50 (the level of economic expansion) for the fourth month in a row during December 2011. In the face of the escalating sovereign debt crisis, both consumer and business confidence have fallen sharply across the continent, weighing upon household and business spending. In addition, with governments attempting to preserve debt market credibility, austerity programs will be intensified and as such further job losses will be recorded across both the public and the private sector.

Eurozone is forecast to contract by 0.7% in 2012. Within the currency area, we expect to see a significant divide in performance between the core and periphery countries – with Germany, Finland or Austria experiencing marginal growth and Greece contracting 6.5 percent. The European economy and financial system is highly integrated, and no country is expected to be immune from the current downturn. However, economies outside of the Eurozone are forecast to be relative outperformers, benefiting from independent monetary policies, relatively less exposure to the crisis and in Central and Eastern Europe, continued economic convergence.

Chart 2

Euro Zone Consumer and Business Confidence Quarterly GDP Growth (QoQ)

Source: OECD, Eurostat. As of January 2012.

Beyond 2012, the key driver of the economic recovery will be the rebuilding of confidence following an assumed stabilization of the financial system. Led by the core Eurozone and supported by very loose levels of monetary policy, households and businesses, having retrenched for the previous eighteen months, are expected to tentatively increase spending from 2013.

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In addition, by the end of 2013 some of the better financed governments such as in Germany, the Netherlands and Poland should be starting to draw their austerity programs to a close, and increase government spending growth. Other countries will follow as the forecast period progresses, and although government spending is not expected to be a major driver of European economic expansion, by the end of the forecast period it should no longer be a negative drag on headline GDP.

Since peaking in May, both the euro and sterling currencies fell sharply against the dollar, and could fall further given expectations of weak growth and looser monetary policy. Furthermore, with the U.S. recovery forecast to gain transaction from 2013 and large emerging markets maintaining rapid expansion, Europe is also set to benefit from an improving trade environment.

Finally, by the end of the forecast period, current reforms taking place in the periphery of the Eurozone should be starting to pay dividends. These reforms, if implemented fully, should help to reduce current structural disincentives to invest and take on new employees, and as such should gradually boost productivity and support higher levels of employment. The impact of successful reform is expected to have a slow, cumulative impact on the competitive position of Europe, lasting well beyond 2016.

Chart 3 – Annual Average GDP Growth

Source: Global Insight,

Note: f indicates forecast. As of January 2012.

The return of positive economic growth will gradually improve labour market conditions during the second half of the forecast period, reducing unemployment and supporting above inflation wage growth. Having been through a prolonged period of reform and structural adjustment since the late 1990s, the German labour market has been one of the best performing in recent years, and is set to continue to do well, with the unemployment rate forecast to be one of the lowest in Europe by the middle of the decade. At the other end of the spectrum, Spanish unemployment is expected to remain extremely high throughout the next five years. However, with the unemployment rate at nearly 22 percent today, the forecast for unemployment to be 17 percent in 2016 represents an additional one million people in formal employment.

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Chart 4 – Annual Average Unemployment Rate

Source: Global Insight,

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Monetary Policy Outlook Eurozone inflation was 2.8 percent in December 2011, well above its 2.0 percent target. Given the worsening economic environment and potentially negative annual commodity price growth, it is expected that headline inflation will move back to target during 2012. Beyond 2012, the forecast recovery in global and domestic activity may put upwards pressure on prices over the medium term, but domestically, a large amount of spare capacity across the European economy should help keep price rises relatively modest despite a continuation of very loose monetary policy.

In response to the worsening economic climate, European central banks loosened monetary policy during the final part of 2011. With the Eurozone expected to have entered recession, there is a growing possibility that the ECB will continue to cut interest rates to new record low levels in 2012, and could introduce other measures to loosen monetary policy. However, as the pace of recovery gathers, European central banks are likely to start to gradually tighten policy in the view of maintaining its inflation target over the medium term. The ECB in particular remained vigilant in inflation targeting throughout the downturn, and therefore is unlikely to lessen its stance during a period of recovery.

The bond yield outlook differs widely at a national level. As monetary policy is tightened, bond yields are expected to rise in those core markets which have experienced falls in recent years, but are set to fall in the periphery countries as financial systems stabilize and the threat of default fades.

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Risks to the forecasts Eurozone crisis escalation: Should policymakers fail to provide sufficient support to stem the crisis, there is a risk that some of the weaker peripheral members will be forced to default on their debt and leave or be forced out of the Euro. The severity of the resulting downturn will depend upon which countries leave the Euro and the ability of European institutions to manage the exit process and immunize other countries from the risk of contagion. In the best case scenario, one or two of the smaller peripheral nations go through a period of managed exit, leading to severe recessions in these countries and a deeper recession across the rest of Europe. In the worse case, a chain of defaults leads to an uncontrolled collapse of the Euro, resulting in a severe global recession, depression across much of Europe and potentially political and social disorder.

China hard landing: The Chinese economy has shown signs of slowing in recent months. Should this slowdown be exacerbated by underlying imbalances, this could lead to a rapid deceleration in growth, with a knock on impact on Europe. European countries most affected would likely be France and Germany, each sending around 5 percent of all exports to China. On the upside, slower Chinese growth could have a significant impact on commodity prices, reducing inflation, boosting real incomes and providing central banks with more room to keep interest rates low.

Middle Eastern political change: Should the political change that gripped large parts of North Africa and the Middle East spread to a major oil producing country such as Saudi Arabia, the price of oil would jump, possibly beyond €200 per barrel. This would lower economic activity across almost all of Europe – With the possible exception of oil and gas producers such as Norway and Russia – As already weakened household budgets are squeezed, business costs rise and higher inflation limits central bank monetary policy.

Faster bounce back: Following the deep recessions experienced by most European economies and the likelihood of further output declines in early 2012, many economies are operating well below full capacity. Should the Eurozone crisis be comprehensively solved, monetary policy remain accommodating and external inflationary pressures subdued, recent events have highlighted the speed at which sentiment can change. As such, despite a difficult current economic climate, upsides over five years should not be discounted.


Real Estate Performance The European IPD Index returned 8 percent in 2010, and returns were positive everywhere except Ireland. 2011 results were not available at the time this report was published, however judging from the dynamics of rents and yields in the key markets, returns have also been positive although not quite as high as in the previous year, possibly in the range of 5 to 7 percent. This expectation is reinforced by mid-year results in those countries, where more frequent indices are available.

In the United Kingdom, the annual IPD all-property total return was 7.8 percent in 2011 compared to 15.1 percent in 2010. The French bi-annual index delivered 4.0 percent in the first half of 2011 down from 6 percent in the second half of 2010. The Dutch third quarter index recorded the highest quarterly return since 2008, but followed two quarters of much weaker performance, so that 2011 is still likely to fall behind 2010. As expected, weak performance continued in the peripheral European markets as Italy delivered only 2.8 percent in the first half of 2011 (marginal improvement compared to 2010), and Ireland’s all property return remained deep in the negative. Generally, retail tended to outperform industrial and office across most markets. A distinct exception was the United Kingdon, where London offices delivered nearly 14%, still behind last year’s figure of nearly 25 percent.

We expect real estate performance in Europe to weaken further in 2012 and recover slowly from 2013 onwards. In general, capital values will most likely be stagnant in the north of the continent and falling in the south over the coming 12 to 24 months. The subsequent growth should result mainly from the fundamental recovery and increasing rents. For office and logistics, the moderate mid-term yield decompression will likely have a negative impact on values but should be compensated by increasing income streams starting in 2014. We expect retail, in particular prime shopping centres, to outperform over the next five years due to the combination of a relatively flat yield profile and comparably high income returns. Assuming a more vibrant economic environment after 2015, logistics could take over as the top performer towards the end of the forecasting period. The office sector is generally set to underperform, but there are a number of significant exceptions, among them London, Warsaw, and Dublin.

Chart 5 – Expected European Market Total Returns 2005-2016f

Sources: RREEF Real Estate Research (forecast data), PMA (historic data). As of December 2011. Note: European average weighted by stock; based of changes in prime rents and prime yields; f indicates forecast.

F = forecast. There is no guarantee the forecast returns shown will materialise.

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In terms of relative performance by geography, we do not expect many surprises. Given the distress in the South, value growth is likely to remain negative in this part of the region in 2012 resulting in correspondingly weaker total returns. However, near term weakness creates potential for longer term outperformance. An economic recovery translating into rent growth and improving investor sentiment could lead to double digit total returns in the medium term. In fact, the top performers in the second half of our forecasting period are markets such as Dublin office and Spanish shopping centres. However, the risks to this forecast are obviously the highest with significant variability around this forecast. Outside of the Peripheral nations, London office is likely to perform well over a five year horizon along with offices in regional France and Warsaw as well as prime retail schemes in the Central and Eastern Europe region, the United Kingdom or Brussels. Germany is once again expected to be among the weakest performers, but it should be noted that this is also the most resilient market with the lowest downside risk and volatility.

Chart 6 – Expected European Market Total Returns 2011-2016f

Office Shopping Centre Logistics

Source: RREEF Real Estate Research. As of December 2011. Note: European average weighted by stock; based of changes in prime rents and prime yields.

f = forecast. There is no guarantee the forecast returns shown will materialise.

Core properties can be expected to continue to outperform in 2012. As a recovery on the occupier markets seems to be delayed by at least a year compared to our forecast from 12 months ago, more risky strategies may struggle to maintain positive performance in the near term. However, in the medium term, core plus strategies provide attractive risk adjusted returns. In the same period, even value-added strategies may become increasingly attractive but will rely upon good timing on execution and a pro-growth cycle to succeed.

While pricing remains aggressive in the prime segment of the market, value growth prospects are rather limited. At the same time, low yield levels result in lower income returns. In contrast, market values of properties not considered to be core due to either the technical condition, duration of income or location are still depressed in a number of markets and income returns look attractive. However, risks are also correspondingly higher in these markets and will not moderate before a more stable fundamental recovery is in sight, which we do not expect much before 2014.

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Property Market Fundamentals Rental value growth in the office, industrial and retail sectors averaged approximately 1.0 percent in 2011, up from 0.1 percent in 2010. European offices contributed most with average growth of 1.9 percent, although slightly lower than the level recorded in 2010. The industrial and retail sectors each saw rental growth of around 0.5 percent, following a decline in 2010.

Overall, market performance weakened during the second half of 2011, losing momentum due to concerns over the sovereign debt crisis and the slowing global economic recovery. Low business and consumer confidence, combined with high unemployment has put downward pressure on market demand.

Tight credit markets continued to restrict development activity in 2011, a trend that is expected to continue into 2012. Low supply levels have resulted in lower vacancy rates across many markets with the exception of offices in Italy, Spain, Portugal and some regional markets where demand also remains weak.

With office occupiers likely to delay hiring decisions, a difficult consumer environment with weakening retail sales and estimated decline in European trade volumes, occupiers are expected to behave cautiously in their expansion or renewal plans. In such circumstances, demand is set to remain moderate across all sectors in the near term. However, improvements in the European economy over the back end of the forecasting period are set to return Europe to a period of more sustainable rental recovery.

Chart 7 – Average European Prime Rent Growth by Sector 2004-2016f

Source: PMA, RREEF Real Estate Research. As of December 2011.

f = forecast. There is no guarantee the forecast shown will materialise.

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Capital Markets The first and fourth quarters of 2011 could not have been more different. In parallel with the economic environment, real estate capital markets were looking particularly bullish towards the end of the second quarter of the year. In our previous Strategic Outlook, dated April 2011, we reported increasing investment volumes and rising capital values in the prime segment of the market. It also seemed evident that investors facing increasingly aggressive pricing for core properties, were beginning to look for alternative opportunities higher up the risk spectrum. This relative optimism changed rapidly during the summer as it became clear that the economic distress in Europe had not abated but was poised to move to another level, even threatening the common currency. Once again, risk aversion has spiked, investor sentiment has weakened, liquidity has been withdrawn and the focus has moved back to core, prime quality and secure income.

Transaction Volumes

Real Capital Analytics (RCA) reports an overall European investment volume in 2011 of close to €130bn, roughly 8 percent more than in 2010. This moderately positive annual comparison masks the contrast between the two halves of the year. While the strong first quarter reflected improving sentiment and was almost 40% above the same period in 2010, the fourth quarter, which usually tends to be the most active period of the year, was this time level with the third quarter and 18 percent below the fourth quarter 2010.

Investors clearly favoured retail and office over industrial and residential; these two sectors accounted for roughly 42 percent and 28 percent of the total investment volume respectively. However, a shift in the structure of transactions towards retail and apartments, which had already been visible in 2010, was distinct also in 2011. This is clearly the effect of the flight into more stable, income producing investments which provide better protection in times of uncertainty.

Continued investor risk aversion is also evident from the geographic structure of transactions. Despite the moderate decline, the United Kingdom still accounted for roughly 29 percent of the total investments in the region. The focus was clearly on London where roughly 58 percent of the capital was deployed – A slow but steady increase compared with 50 percent in 2009, 47 percent in 2007 or 42 percent in 2005. The United Kingdom was closely followed by Germany which has become an increasingly popular investment target in Europe.

Investments in German real estate increased by almost 50 percent from just over €20bn in 2010 to nearly €30bn in 2011 with a major focus on retail including several large shopping centre deals like CentrO in Oberhausen, Skyline Plaza in Frankfurt and PEP in Munich. Poland is also quickly gaining popularity. Not surprisingly, the opposite holds for the distressed Southern European countries. The deal volume in this part of the continent is less than one third of the number registered back in 2007, reflecting the current investor sentiment. A quarterly survey of investor intentions by PMA shows clearly that geographical preferences lie in Germany, France, the Nordics and Poland.


Chart 8 – European Investment Volumes

By Region By Sector

Source: Real Capital Analytics . As of February 2011.

One of the effects of the severe crises in 2008 was the retreat of investors to their home markets. While domestic purchasers accounted for about 40 percent of activity in 2007, they increased to over 60 percent in 2009 and 2010. This trend slowly started to revert in 2011 as more international capital began to flow to Europe. Nevertheless, domestic investors were still in the majority (55 percent), and the largest share of foreign money was coming from within the continent (22 percent). Higher interest in European properties by American, Asian as well as Middle Eastern investors was reflected in higher purchases albeit the increase was moderate.

Given the increased economic uncertainty in Europe, we expect transaction activity to slow moderately in 2012. PMA’s investor intentions survey indicated a significant weakening of sentiment in fourth quarter – The balance of responses about the intention to buy or sell within the next 12 months fell to 50 percent, well below the long term average of 64 percent and the lowest level since 2008. While the situation is still far from the paralysis been following the failure of Lehman Brothers, some market players seem to be assuming a “wait-and-see” position. During 2012, the search for security will probably once again dominate the market generating demand for prime properties in more core liquid Western European centres, and limiting the activity in the periphery. The increased difficulty in obtaining bank financing, driven by risk aversion and regulatory changes (see below) has further decreased real estate investment activity.

Yield Outlook

Prime yields have been continuously declining since the peak in early 2009 across all markets and property types, but the end of 2011 brought some stabilization. In fact, yield levels are close to 2005 levels in a number of key markets including Central London and Paris, Stockholm and the major German destinations. Such aggressive pricing is the result of risk aversion which has been dominating investors’ actions over the past three years. Core has become not only the most popular but, in fact, almost the only active strategy in the market.

While increasing demand combined with a lack of product led pricing in some markets to be considered unsustainable based purely on fundamentals, the current situation must

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be viewed in the context of a broader economic capital market environment. Record low interest rate levels and a much smaller scope of investments which can be truly be described as low risk have tightened the ability of conservative investors such as pension funds and insurers to deploy capital. While a cash flow return of 4 to 5 percent for core real estate was comparable with that from investing in long term government bonds back in 2007, the spreads of property versus bonds are currently exceeding 200 basis points. In this situation, the pressure on yields for the best properties in the most stable and liquid markets is likely to persist despite, or maybe due to, continued sovereign distress. However, the gap between Core Europe (United Kingdom, Sweden, France, Germany) and the Periphery (Portugal, Italy, Ireland, Greece and Spain) is likely to widen. The premiums for those investments which, in general perception do not qualify as “low risk”, are historically wide and most likely will increase significantly in the short run. In the longer term, assuming that the economic situation begins to normalize and interest rates eventually rise, the capital pressure at the prime end of the market is likely to ease and initiate moderate yield increases in some markets. Simultaneously, the risk premiums for non-prime properties should then gradually reduce, although we do not expect them to return to the pre-crises levels.

Chart 9 – European Office Yields vs. Bond Rates

Sources: RREEF Real Estate Research, Global Insight, PMA. As of January 2011.

Note: Yields are averages of key markets weighted by stock; bond rates are straight averages of 10y government bonds.

f = forecast. There is no guarantee the forecast will materialise.

The yield shape for prime markets is broadly similar across Northern Europe and across the main property types. Nevertheless, there are some important nuances in scale and timing between these markets. Those markets in continental Europe which are fundamentally in best shape, in particular Germany and Sweden, will likely see aggressive pricing levels for another one or two years. London is also set to remain relatively expensive. Other “Core” markets, like Paris or regional UK, could see moderate yield increases as early as 2012 due to the reversion of recent overpricing or due to generally weakening fundamentals. Also, the decompression is likely to begin earlier for logistics and later for prime shopping centres reflecting relative risks associated with these property types. We expect prime yields to move out moderately between end 2011 and end 2016 on average by less than 50 bps, which compares with the expected increase in the 10 year reference bond rate (German Bunds) of roughly 200 bps during the same period.

The development of prime yields in Southern Europe is likely to be entirely different. With the still unresolved sovereign crises in the periphery, international investors are likely to continue to penalise these markets. Compared with the scale of the interest rate

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increases in these countries, this development would lead to significantly negative bond spreads. While real estate pricing may seem relatively aggressive in this case, it needs to be noted that there is still demand for prime real estate coming from local investors, family offices or even wealthy individuals as evidenced by several recent deals in Spain. Ironically, the risk of a well located property with a long lease to a big international tenant may actually be lower than the sovereign risk of the country in which this property is located, calling into question the notion of the ‘risk free rate’ as the basis for asset pricing. This effect should prevent the prime yields in these markets from rising quite as high as debt rates, but outside of the prime segment, the discounts can be significantly higher. Following this increase, yields should remain roughly stable or even compress slowly as economic tensions ease and investor confidence returns.

While our forecasts refer primarily to prime yields across all sectors, the yield profiles outside of the prime sector are likely to show some similarity with that of Southern Europe versus Northern Europe. The focus on core has led to a widening gap between the top slice prime end of the market and the broad average. Insufficient data makes a qualified statement impossible, but the few markets in which submarket level yields are available indicate that the spreads between central and non-central locations have reached the highest levels ever observed. While discounts on values are in many cases justified by higher risks, such as increased vacancy rates and weak occupier fundamentals, it should also be possible to identify markets which are purely sentiment and liquidity driven. Such markets could offer particularly attractive investment opportunities in the medium and longer term although local knowledge will be critical in identifying the winners from the losers.

Chart 10 – Spread Between Central and Non-Central Locations by Submarket

Sources: RREEF Real Estate Research, PMA. As of Autumn 2011.

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Impact of New Regulation

The severity of the recent crises uncovered some of the structural weaknesses of global financial markets. In particular, excessive risk appetite and insufficient risk management seem to be the main reasons for the melt-down back in 2008. While the current new regulations, such as AIFM, Basel III or Solvency II, are not the immediate effect of the crises but the result of many years of pan-European efforts, their relevance has increased rapidly during the last three years and further regulatory initiatives are likely to follow.

The new regulation is almost certain to have significant impact on the real estate markets; however, the effects will be longer term and it may take several years until they fully enfold and their competing impacts become fully evident. They are likely to occur on several different levels:

▪ Changes in the competitive situation on the market ▪ Changing the attractiveness of property investments to various types of

institutions ▪ Changes in the investment environment, particularly the financing conditions

The Alternative Investment Fund Manager Directive (AIFM) introduces, after UCITS, the next level of regulation for the European investment fund industry. On one hand, it formulates relatively rigorous requirements regarding risk and liquidity management, appraisal frequency, reporting etc. On the other hand, it introduces a “European passport” that will allow an asset manager licensed in one country to operate across the whole of the European Union. It is the latter aspect that, in our opinion, will have the most profound effect on the real estate investment markets as it will lead to increased competition, which in turn, can result in more attractive terms for investors and attract additional capital into the asset class.

In contrast, Solvency II, which introduces equity requirements for insurance companies, is likely to have a negative impact on the readiness of this group to allocate capital to real estate. In the current version, the regulation requires that these investments have equity backing of 25 percent. This controversial requirement could push insurance companies out of core real estate, where they are traditionally a major market player, and possibly direct them more strongly into other segments of the market, in which return levels would be more in line with the cost of capital such as real estate lending. There has been recent evidence of this but focused on the very core, prime end of the market at modest loan-to-values.

While the former two initiatives refer more or less directly to real estate, the effects of Basel III are likely to be less direct. While not all details of the framework have yet been finalized, the general expectation is that a more stringent risk control and management system will lead to stricter lending standards, which in turn would negatively impact banks’ ability to finance real estate, especially in the higher risk spectrum. In fact, 70 percent of respondents in a recent survey by DTZ expect a negative overall impact of Basel III in this area. Given that banks provide roughly three quarters of financing for property investments in Europe, this could create a significant bottleneck and reduced liquidity. On the other hand, alternative sources of capital are likely to arise to fill this gap providing an alternative lending sector more familiar in the U.S market, with an increasing amount of debt provided by non-bank lenders such as insurance companies, debt funds and pension funds.


This short overview demonstrates how new regulatory initiatives could change the face of the industry over the coming years. Along with Solvency II or Basel III a number of other ideas of how to improve the functioning of financial markets have been discussed as a result of the global financial crises. Although they have been recently overshadowed by the sovereign debt crisis, the last word has not yet been said and the topic will remain relevant in the near and further future.


Office Market Highlights With the prospects for short-term economic growth waning in Europe in the latter half of 2011, economists have scaled back forecasts accordingly. As the outlook for employment growth worsened, Europe’s office markets lost momentum, especially in some of the more fragile peripheral markets which were already struggling to gain traction. As a result, the net absorption of office space, which has lagged below its historical average since 2008, we believe will continue to underperform through to the mid-decade. On the upside, supply has responded with net additions to stock falling well below historical averages in most markets, a pattern also set to continue in the foreseeable future. This should keep the vacancy rate relatively stable across Europe as a whole.

Chart 11 – Average European Office Net Additions and Vacancy Rate

Sources: RREEF Real Estate Research, PMA. As of December 2011.

Note: Weighted average of the key markets.


Occupier Outlook The deteriorating economic outlook for Europe in the latter half of 2011 resulted in adjustments to RREEF Real Estate’s previous forecast. What had been a relatively stable five-year outlook for office rent growth has shifted to an outlook with more shape. European office rents as a whole are set to see little growth over the near-term, before staging a moderate recovery around the middle of the decade. Cyclical timing will certainly vary across regions, with Core Europe and the Central and Eastern Europe region trending ahead of the periphery markets in their respective recoveries. Downside risks to this forecast are also notable. Further worsening of the Eurozone crisis could exacerbate the depth of this office cycle.

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Chart 12 – European Office Prime Rent Growth 2004-2016f

Sources: RREEF Real Estate Research (forecast), PMA (history). As of December 2011.

Note: Averages of key markets in each region weighted by stock.


London is clearly the outperformer among the UK’s markets, and of all London submarkets, the West End’s near-term prospects are strongest. The West End benefits from constrained supply, especially in its prime districts like Mayfair/St James’s. Tight availability led to solid rent growth in the West End in 2011. While rent growth prospects for 2012 are more limited, the West End’s office outlook is still the United Kingdom’s strongest. The supply pipeline in the City is also constrained but the nuances of demand here lead to a more volatile submarket. Unlike the West End’s more varied occupier base, the City’s churning mix of banking, finance, and insurance tenants gravitates toward quality spaces while generating only marginal net absorption. The City is more exposed to changes in global financial markets, and worsening conditions in the Eurozone in 2012 could negatively ripple through the tenant base and weaken the submarket’s rents. Outside London, the near-term prospects for rent growth in the United Kingdom’s regional markets are negligible. Manchester, Birmingham, and Glasgow continue to struggle with overhangs of fairly recent speculative office supply.

In France, prospects for near-term office absorption in Paris could force rents down in the near term, especially in La Défense where oversupply from speculative construction will destabilize fundamentals. By contrast, the supply-constrained Paris CBD should enjoy a stronger and faster recovery in the outer years of the forecast, with rents averaging near 4 percent growth compared to less than 2 percent in La Défense. This pattern is likely to repeat in the regional French markets – Lille, Lyon and Marseille – But their typical low volatility will prevent rent drops of more than 1 or 2 percent in the near term. Expected average five year growth rates range from 1 percent for Lille to 1.9 percent for Lyon.

In the short-term, Core Europe’s strongest major office market continues to be Stockholm, which lies outside the Eurozone and has been buffered to some degree from the immediate turmoil. With its development pipeline under control, recent occupier demand has been channelled toward central locations, keeping the CBD’s vacancy rate much lower than the fringe. Office fundamentals benefit from Sweden’s relative economic resilience and sound fiscal management, but the downside risk of financial contagion spreading out from the Eurozone cannot be dismissed.

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In Germany, a weaker economy in 2012 is expected to dampen office market fundamentals, with prospects varying across cities. Nevertheless, over the next two years both Berlin and Munich are expected to see rents rise modestly amid solid net absorption and limited supply pipelines. The longer term prospects for these markets are above average by German standards, with rents expected to average 2.5 to 3 percent annual growth after 2013. Occupier demand in Hamburg has also been trending upward but net additions to supply – Led especially by the HafenCity redevelopment – Will hold rents flat in the near term, with moderate growth averaging around 2 percent per annum following after 2013. In Frankfurt, a high vacancy rate, moderate but steady supply, and turbulence in European financial markets will keep office fundamentals destabilized in the near term, with rent growth resuming in the outer years of the forecast.

The impact of the global financial crisis in 2008 had a major impact on the office markets of Spain and Ireland. From the depths of the downturn, these markets were expected to eventually rally and present strong recoveries for opportunistic investors. This outlook still generally holds true for Dublin and the Spanish markets, though fiscal uncertainty in the Eurozone in 2010 and 2011 has pushed back the timing of forecasts well beyond those initial expectations. With another recession looming over Europe in 2012, headline rents will fall further in both Madrid and Barcelona in the near term. Of these two Spanish markets, Barcelona struggles more to contain its supply pipeline and this will delay its recovery cycle behind Madrid. Milan, Rome, and Lisbon will be among the last of Europe’s peripheral office markets to recover. Though demand conditions are sluggish in both major Italian markets, supply remains constrained with a dearth of new office development. Lisbon will also grapple with stagnant net absorption amid weak economic conditions in 2012 even as its stock expands with speculative office space still dripping out of the supply pipeline.

Office markets across Central and Eastern Europe will move in unsynchronised directions in 2012. Warsaw enters 2012 following the stellar outperformance of its office fundamentals in 2011. Strong economic conditions in Poland, a constrained supply pipeline, limited options for prime product, and a declining vacancy rate all contributed to a surge in office rents in Warsaw in 2011. Warsaw will continue this momentum in the near term, though the office market’s reliance on international occupiers may be hindered by the changing wider economic conditions within the Eurozone. While Warsaw boomed, rents in Prague held steady over the past couple of years and are unlikely to move much in the near term. Prague remains a relatively stable market with modest take-up and marginal additions to supply. Meanwhile, Budapest’s office fundamentals have struggled to achieve similar balance. New construction is hardly a problem; rather, the Budapest office market still struggles with net absorption even when economic conditions are favourable. While the major CEE office markets face varying prospects in the near term, their fundamentals should begin converging in the outer years of the forecast. Rents in all three markets – Warsaw, Prague, and Budapest – Are expected to average 2.5 to 3 percent per annum by the 2014/2016 period, putting them in a somewhat closer alignment than they are likely to experience in 2012.


Chart 13 – Office Prime Rent Growth 2012-13 vs. 2014-16f

Sources: RREEF Real Estate Research (forecast). As of December 2011.

Note: Average rent growth p.a. over indicated period.


Investment Market Outlook European Office investment activity held up well in 2011, despite falling business confidence and the ongoing economic uncertainties across the continent. Nevertheless, the debt crisis, coupled with weakening economic outlook for the region cooled the office investment market during the second half of 2011.

According to RCA data, total transaction volumes in 2011 reached €54 billion, recording a 16 percent increase over 2010. The core markets, in particular UK, France, Germany and Sweden, remained the most liquid, accounting for around 65 percent of the total investment. Cross border investors, particularly North American and Asian, accounted for more than half of the total transactions while Germany, UK and Nordics were the most active continental buyers.

In terms of investor type, over recent years, insurance companies and private investors have become more active in the European Office market. Since 2007, their share of the total volume of investment has doubled and now accounts for approximately one third of transactions.

Investors have found real estate investment, compared with other fixed income asset classes, more robust, offering higher yields. Foreign capital, in particular from sovereign wealth funds and a broader set of Asian investors, is anticipated to grow but be mainly concentrated in core locations such as Paris and London.

Prime yields in most of the Core European office markets are currently below their historical averages, as investors showed continued interest in high quality assets with secure income. On the other hand, non-prime assets have seen falls in values as little capital has been targeting this part of the market. The supply-demand mismatch, in addition to weak leasing conditions and less funding availability for these assets, is supporting a historically high yield spreads over prime assets and looks to provide attractive risk adjusted returns over the medium term.

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RREEF believes that over the medium term, prime office yields will begin to expand moderately in most markets as interest rates rise, however inflation risks have probably diminished and the impact of austerity will create excess capacity. As such, the risk of significantly higher reversionary rates seems to be lower than it was a year ago when fears of inflation were high. Yields are expected to flatten during the back end of forecasting period, although the timings vary. In the core markets such as Germany, the UK, and the Nordics, yields will drift out in later years as compared to the CEE countries. However, further compression could happen in peripheral markets as economic and financial market conditions stabilise.

Chart 14 – European Office Prime Yields 2011-2016f



Megatrends Cyclical dynamics aside, a number of significant structural changes are underway that will have an impact on European office markets. Austerity cuts to public budgets carry immediate implications – Particularly on the use of office by white collar civil service workers, with certain markets, where previous growth was driven by government policies of decentralization and relocation to less expensive locations, more severely affected. A reduction in occupied space could mean privatised public office buildings, thus raising the leasable stock as well as vacancy rates.

Other structural dynamics will unfold more slowly and will be felt with less urgency. Occupiers will continue to expect “smart features” to become standard features, especially in newer buildings. Examples include security systems, subfloor wiring and cabling, and energy efficiency. Also, demographic changes continue to shape occupier trends in subtle ways. The office-using workforce is poised for transition in terms of age as well as gender. Younger, well-educated workers will be needed in the years ahead to replace a wave of older retiring office workers. More than ever before, a new generation of well-educated women will step into executive and managerial roles as an older generation of (primarily male) management steps aside. With younger and more gender-balanced leadership among office occupiers, owners can anticipate new tenant priorities: a change in functional layouts, better lighting and security, and subtle changes in amenities, including ground-level retail that better reflect the age and gender composition of tenants. These longer term megatrends support the case for investing in core, prime buildings which already have in place the highest environmental and build specifications, reducing the cost of a future retrofit when compared to more secondary assets.

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Retail Market Highlights Retailing conditions in Europe were difficult throughout 2011, as high unemployment, rising prices, government austerity programs and the uncertainties of the sovereign debt crisis weighed upon consumer confidence. The pace of retail sales growth decelerated through much of the year, with even previously buoyant markets such as Poland and Sweden experiencing a marked slowdown.

The worsening retail climate continued through to the end of the year leading to an annual decline in sales of 0.1 percent across the EU. Although few markets have been immune to the recent fall in consumer sentiment, the EU sales figures mask significant differences across the continent. Greece, Spain and Portugal were the clear underperformers – Being at the epicenter of the Eurozone crisis and facing a long period of severe austerity, Greek consumers registered an almost double-digit annual decline in retail sales. The best performing retail sales figures tended to be found outside of the Eurozone, in the Nordics and parts of Eastern Europe, such as the Baltic States. Within the Eurozone, France saw the greatest increase in retail sales during 2011, as rising real wages and rapid house price growth supported spending.

Occupier Outlook In correlation with the wider economy, the retailing environment is set to remain difficult over the next two years, as a return to recession and intensified austerity programs keep unemployment high, strain household budgets and encourage consumer deleveraging. In this period, lower inflation will provide some relief. Over the full five year forecasting horizon, the retailing picture improves as austerity programs are drawn to an end and economic recovery supports net employment growth. However, with consumers remaining cautious, credit in short supply and rising interest rates increasing mortgage repayment costs, the sales recovery is expected to be gradual.

Chart 15 – European Shopping Centre Prime Rental Growth 2007-2016f




In addition to this weak market environment, the growth of online and multichannel retailing will continue apace, diverting spending and making for an increasingly diverse and complex shopper journey. With supermarkets also set to grow their number of stores, the value of spend growth in traditional high street and shopping centre locations

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will be even less than the moderate levels indicated by the headline figures. In this environment, retailers will remain cautious, with further rationalization of underperforming stores. The best locations and shopping centers will continue to benefit from domestic and cross border retailers keen to capitalize on the counter-cyclical opportunity to expand into high quality space at a low cost.

The supply pipeline shrank rapidly during the downturn, as many schemes were delayed or cancelled altogether. Given the uncertain economic environment and a lack of development finance, the outlook for development activity remains subdued, with annual European completions expected to be around 20 percent below average over the next five years. At a country level, Poland and Finland are expected to buck the trend, with annual completions averaging 6 percent and 7 percent of stock respectively.

In aggregate across the 16 countries we forecast, prime shopping centre rental growth is forecast to remain modest over the next two years, averaging annual growth of 0.9 percent, before picking up to 2.7 percent in the final three years of the forecast period. As shown below, the outlook varies significantly by country. The fastest growth, particularly over the next two years will generally be found outside of the Eurozone, with Poland and Sweden the top performers.

Beset by a myriad of problems such as rising unemployment and severe austerity packages, the Eurozone periphery is expected to experience further falls in prime shopping centre rental values during 2012. But given the now low base rents in markets such as Spain and Ireland, we anticipate that once economic conditions stabilize and start to improve during the middle of the decade, these markets should experience a period of accelerating rental recovery.

In both the UK and France, job cuts and austerity will weigh upon growth over the next two years, but with strong consumer cultures, improving economic health and little new prime supply, high quality space in the best locations will be at a premium by the middle of the decade, supporting a more robust recovery. The strengthening labor market in Germany is not expected to be enough to overcome a lack of inherent consumerism. International retailers are expanding into the market and their emphasis on prime destinations should supporting rents in these locations. As such, total prime rental growth over five years should be similar to that of the UK and France.


Chart 16 – Shopping Centre Prime Rent Growth 2012-13 vs. 2014-16f




Investment Market Outlook The Eurozone crisis has reignited widespread risk aversion throughout the European investment market, and despite below historic average yields, retail investors have maintained their focus upon prime, income-secure assets, located within the better performing economies. In response, Core European and CEE shopping centre yields are forecast to have tightened by around 25 basis points in 2011, with Germany and France approaching pre-recession lows. In the periphery, rising bond yields and a worsening rental growth outlook halted the inward yield movement recorded across Spain and Italy in 2010, leading to stabilization across all except Portugal, which registered a 25 basis point rise.

The yield gap between the Eurozone periphery and the other European markets is set to remain elevated as recession and the debt crisis continues to push investors towards safety. However, over the medium term we expect that this gap will start to diminish as financial and economic stability allow for a period of policy normalization and greater levels of risk appetite. We expect that this narrowing of the spreads will create buying opportunities for core investors in these peripheral markets. For non-core investors, opportunity may already exist.

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Chart 17 – European Retail Prime Yields 2011-2016f

Sources: RREEF Real Estate Research (forecast data). As of December 2011.


Megatrends Multichannel retailing

Following the advent of internet shopping, the consumer journey has become increasingly diverse and complicated over the past decade. This trend is set to continue and will alter the way in which successful retailers and landlords operate. The shopper journey will not be categorised as actual or virtual, but as a multistage combination of the two. Retailers will increasingly be required to have a presence across multiple online platforms, while also taking real estate space in order to allow for goods to be experienced, exchanged and to build brand in what will be an increasingly noisy virtual environment. Landlords will have to respond to these changes – Collection storage lockers and click and collect parking will become increasing common. Furthermore, the proportion of retail space, especially in shopping centers, let to restaurants and leisure will increase as landlords look to boost footfall by making shopping a pastime and a social event.

Not all retailers and shopping locations will be able to successfully implement a multichannel strategy – Smaller secondary locations may find the costs prohibitive. As such, multichannel retailing is likely to lead to the continued polarization between retail locations. In addition, with the benefits of offline multichannel retailing not necessarily being captured by sales through the till, some current turnover rent models will not be viable.

Demographic change

The proportion of people in the European Union over 65 years old is set to rise from around 25 percent in 2010 to 38 percent in 2030, and continue to rise to almost 50 percent by the middle of the century. Unlike previous generations, this group of older aged people will be more active and better informed (silver surfers).

Retailers and landlords will have to respond to this challenge in store design and product lines. Successful landlords will accommodate the needs of the older generation, providing improved accessibility and broader walkways, secure and preferential parking

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for less mobile and enlarged restaurant and leisure facilities. These demands are likely to favour covered shopping centres, rather than high streets or retail warehouses.

Improved accessibility within stores may lead to less efficient retailing and lower sales densities, which in turn could weigh upon rental levels. Nevertheless, unlike previous older generations, many retirees in the next 30 years will be both money rich as well as time rich – Having benefitted from rising property prices, economic growth and generous pensions. By providing both the facilities and an attractive retail offering, successful landlords will be able to increase dwell times and capture a greater proportion of this age group’s total spend.


Logistics Market Highlights After several years of weak rent growth, logistics markets showed signs of life in early 2011. Occupiers discovered and capitalised on the market’s relative affordability. PMA reported increased take-up across key European logistics markets in the first half of the year. With limited availability of modern logistics product in Europe – Especially outside the major markets of London, Paris, and Madrid – 3rd party logistic (3PL) tenants were quick to snap up the market’s perceived deals, especially where ample incentives were offered. The stir of modest activity in the market has drawn a few speculative projects, but most construction remains build-to-suit. Despite the positive signs in early 2011, prime logistics rents remain well below the previous cyclical peak, thus leaving room for further recovery in the years ahead. Of all major property types, logistics rents tend to be one of Europe’s most stable performers. Historically, annual rent growth in the logistics market has been less volatile than the office market. This has been true across all major regions, including the United Kingdom, Core Europe, periphery, and Central and Eastern Europe.

Occupier Outlook With Europe’s economic momentum stalling in the latter half of 2011, further risks to the logistics market lie ahead. Two of the market’s underlying drivers, consumer spending and industrial production, are vulnerable in a recession. Global trade forecasts have also been scaled back, possibly impacting logistics demand in Europe’s hub markets for air cargo and container distribution in 2012. Yet this weakening outlook occurs not at a cyclical peak in the logistics cycle but amid a fragile recovery. Rents, as well as most general indicators of freight movement, fall well below the market’s previous peak, especially in the periphery markets. Even under the recessionary scenario for 2012, Europe’s overall logistics market has less room for further decline than it did during the global crisis of 2008. The outlook then is for relatively stable rent performance in the near term, with some notable differentiation across regional markets.

Chart 18 – European Logistics Prime Rental Growth 2004-2016f




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In the current climate, the UK logistics market is likely to experience little momentum in the near term. In London and across regional markets, rents are forecast to stay relatively flat, growing at well below a one percent per annum pace over the next two years. As demand slowly returns, rents should rise modestly at 1 to 2 percent per annum, with recovery in the Scottish markets lagging behind London and the regional English markets.

Rent performance in Core European markets showed more divergence in 2011 than the United Kingdom experienced. Stockholm, Paris, and most of the German markets (especially Berlin) enjoyed moderate rent growth in 2011 even as the Benelux and French regional markets were still straddling on the cusp of recovery. With mild recession widely expected in the Eurozone in 2012, none of these Core European markets are likely to see rents break above an average growth rate of 1 percent per annum over the next two years. At best, these markets will eke out thin marginal gains in the near term. As the economy recovers and consumers begin to spend, freight will once again move in greater volumes across the continent. France and Belgium – The unavoidable crossroads for Iberia, the United Kingdom, and the rest of continental Europe – Are well positioned to capture the gains of a significant uptick in logistics demand. In the outer years of the forecast, Paris, Brussels, and the French regional markets are all expected to accrue rental gains above 2 percent per annum on average.

The German and Dutch markets should follow a little further behind, with moderate growth of 0.5 to 1 percent per annum during this same period. The Scandinavian markets, especially Stockholm which enjoyed a relatively strong recovery in 2010 and 2011, are likely to see flatter rent performance in the outer years.

Europe’s peripheral logistics markets in Spain, Italy, and Portugal showed signs of stabilising in 2011, following sharp rent declines in the previous two years. As Europe moves into recession in 2012, rents in these markets will fall further under renewed downward pressure. The Italian markets in particular are vulnerable to a downturn and could perhaps slide 1 to 2 percent per annum in the near term. In the outer years of the forecast, Spain is best positioned for an earlier recovery, with rents returning to a 1 to 2 percent per annum growth rate. Even in the outer years of the forecast, logistics fundamentals in Lisbon, Milan, and Rome will remain soft in the wake of recession and austerity programs.

Riding on solid rent increases in 2011, Warsaw is one of Europe’s best positioned markets for a soft landing. Fundamentals remain in good shape, and rents could still climb in the near term, albeit at a much slower pace than in 2011. Fundamentals in Prague and Budapest will be softer in the near term. Improving economic conditions in the outer years of the forecast should position all three markets for longer term growth of 1.5 to 2.5 percent per annum after 2013.


Chart 19 – Logistics Prime Rent Growth 2012-13 vs. 2014-16f




Investment Market Outlook Logistics typically account for nearly 10 percent of the European real estate investment market. This share has remained roughly stable over the past years. A general recovery in investment activity resulted in a revival in this sector. While the United Kingdom continued to be the most active market in 2011 (30v of total European logistics investment) and the geographic focus was clearly on the Core Europe, interest in Central and Eastern Europe, in particular Poland, has increased significantly. Like other sectors, investors avoided the periphery where investment volumes dropped by over 50 percent.

Investors are seeking new, well located properties with long leases, which are becoming rare after several years of nearly empty supply pipelines. This has led to tightening yields in the most popular markets. In key German locations and in Warsaw, logistic yields moved in by 40 basis points over the past 12 months. In other locations in Core Europe, the change was less dramatic, while Southern Europe saw prime logistic yields move in the opposite direction.

We expect that the end of 2011 marked a turning point for the logistics investment market. Unlike prime office or retail, even a high quality industrial property is not perceived as a “safe haven” in times of recession, so that moderate yield increases in Core Europe seem rather likely in 2012. In the periphery, the outward movement could be even higher.

As economic conditions improve over the next 2-3 years we expect that the yield spread between Core Europe and the periphery to start to narrow, attracting core investment back to the best locations and assets in these markets.

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Megatrends One of the most anticipated trends shaping Europe’s logistics market – The rise of internet retailing – May experience a temporary respite in 2012. With much of Europe facing a likely recession this year, consumers are in a cautious mood. Spending in the months ahead will likely steer toward staples, whereas most internet retailing focuses on discretionary spending. As Europe’s economy recovers, logistics facilities will benefit as consumers channel more of their pent-up discretionary spending toward internet retailers. In the interim, even a small lull in internet sales growth could further squeeze the operating margins of European 3PLs, creating a possible context for yet further consolidation.

Over the longer term, an integrated modernised transport network is reshaping Europe’s distribution channels. The European Union’s Trans-European Transport Network (TEN-T) programme committed €8 billion over the 2007 through 2013 period for the development of 30 priority multi-modal corridors connecting European Union member countries. The Central and Eastern Europe region benefits significantly from this ongoing integration and modernisation effort. For 3PLs – Which already account for more than 40 percent of take-up of modern logistics facilities – These transport networks contribute to a new hierarchy for distribution. Yet the primary nodes of these distribution corridors – Airports and ports – Are being challenged to raise their operating standards. One issue is scale. Only a handful of container ports will be navigable enough to support the new generation of post-Panamax ships. Meanwhile, few airports have the physical capacity to support large new aircraft like the A380. Even when the retrofitting of existing facilities is technically possible, it may be unrealistic: Dredging waterways, for example, can sometimes have serious environmental implications, and airports often lie in heavily urbanised areas where proposed expansions (e.g., Heathrow) or extended hours of operation (e.g., Frankfurt) can spur vehement political opposition. These are megatrends that will frame the supply and demand context for the logistics market in 2012 and beyond.

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Alternative Sectors Investors have been showing increased interest in ‘alternative’ property sectors over recent years. One distinctive feature of these assets is that they are less sensitive to cyclical movements compared to core sectors as different underlying occupier demand fundamentals leads to a weak correlation with traditional real estate sectors. Performance in many of the Alternative sectors depends on the quality of their operators, and investment in such assets needs careful, specialist due diligence of both the real estate and the operating business.

Market opportunities across countries are different for each sector and a specific risk-return profile for each location must be adopted in the decision making process. Alternative sectors offer higher returns than traditional properties which are derived from the transparency-liquidity premium or their specific business related risks. This market is emerging and as it matures will become more transparent eroding risk premia.

Multifamily Residential: Total European residential transactions in 2011, according to RCA, were €8.5 billion in 2011, 7 percent down from 2010 levels. The market has shown an uneven recovery pattern. According to Deutsche Bank research, European countries can be categorised into three groups in terms of their housing market reaction to the recent economic downturn. Group one, with more stable markets, include countries such as Austria, Belgium, Sweden, Germany and Switzerland, which saw little or no impact on house prices. In the second group, house prices temporarily fell before returning to growth in recent years, e.g., France, the United Kingdom and the Netherlands. Finally, Spain, Greece and Ireland are in the third and the most volatile group which were hit hard and the prices are still falling. Nevertheless, the downside risks are still not ruled out in the first and second while the Eurozone crisis is still unresolved.

Supply and demand prospects are also different across countries. However, on the demand side, credit markets have tightened following the European Commission announcement in 2011 to introduce rules to promote more responsible mortgage lending. In terms of supply, the outlook for construction does vary. Furthermore countries also exhibit different propensities for home ownership clearly making some markets more attractive as investment destinations. In Germany, Poland and Nordics construction levels are expected to rise over the next two years. France, the United Kingdom, Belgium and the Czech Republic are set to show slight decline, while construction activity in Italy, Spain, Ireland and Denmark is estimated to fall sharply.

Hence, price expectations are not the same across Europe. PMA forecast shows that house prices in France and Germany will continue to rise over the next five years with average rate of 3.3 percent and 2.0 percent per annum respectively. The Netherlands, United Kingdom, Italy, Ireland and Spain are not expected to see price growth until 2013 or 2014.

Overall, tighter mortgage regulations, deteriorating affordability in markets like France, low supply activity and increase in urbanization are likely to increase pressure on rents. As a result, similar to more traditional investment sectors, a slowdown in capital value growth in most of the countries is expected to leave residential investors more reliant on the income returns over the next five years.

Investment opportunities are expected to be heavily influenced by local supply demand dynamics. In the early part of the forecast period core investors are likely to remain focused upon central locations within the major core cities such as London and Paris


where supply is most constrained. Parts of Spain and Ireland, having experienced a construction boom and a deep downturn, are likely to remain unattractive to most core investors throughout the period.

Hospitality: The hotel market, compared to healthcare and student housing, has a higher sensitivity to the state of the global economy and is more likely to follow the main real estate sector trends. Hotel investment activity in Europe has substantially increased over the past two years, following a dearth of activity in 2009. In 2011, European hotel transactions were €7.7 billion, slightly less than €8.2 billion in 2010, according to RCA. France and the United Kingdom have been the most active markets, accounting for more than half of the total investments in Europe. Much activity being driven by distressed situation forcing asset sales.

Budget hotels have been of most interest to institutional investors, as they seem to perform better in a downturn than luxury hotels, which are more dependent on the conference trade, and therefore could suffer more in the recession period. Key cities are expected to continue to outperform provincial markets because while most provincial hotels are driven largely by domestic, business related demand, metro cities like London are driven more by overseas visitors.

Among major European cities, London hotels are estimated to perform relatively well in the near term, and see increase in the number of domestic and overseas visitors resulting from the 2012 Olympics. Hotels in Stockholm are expected to see highest revenue per average room (RevPaR) and occupancy growth in 2012 on the back of Swedish strong economic growth.

The impact of austerity measures on corporate, consumer and government spending on the travel industry remains a concern. With expected subdued business activity in Europe and squeezed discretionary spending, the hotel market in general is not seen to perform well over the next 2 to 3 years. This trend could reverse as the momentum returns to the Europe’s economy.

In this environment core investment opportunities are likely to found in the city centres of Core Europe that continue to attract business travellers and short break holiday makers. Mass market holiday destinations may also provide opportunities, as families move down the value spectrum – Favouring Spain and Portugal over Italy.

Chart 21 – Inbound Visitor Growth (YoY %)

Source: European Travel Commission. As of Q3 2011. f = forecast. There is no guarantee the forecast shown will materialise.

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European Care Housing: Nursing and Care Housing sector is driven by demand for healthcare services which in turn is underpinned by demographic trends. Almost all European societies are ageing and will need more care homes and private clinics in the future. However, timing of the market demand varies across the continent as some societies are ageing faster than the others. The United Nations estimated in 2010 that the share of Europeans in the age group of 70 and above is expected to rise from 15 percent in 2011 to 20 percent in 2030 and close to 30 percent in 2050. Breakdown of the forecast shows that the speed of aging in Southern and Western Europe, particularly Spain and Germany, is much faster than that in the Northern and Eastern European countries.

Chart 22 – Europe Population Aging Prospects

Source: United Nations. As of June 2011.

Structure and management operations of care housing, together with regulatory and cultural differences are diverse across Europe. In Western Europe and the Nordics, government revenue has historically supported the social care system while public healthcare system in Central and Eastern Europe are not very strong. In France, the sector is strictly controlled by the government while German authorities have allowed private sector to grow. In Southern Europe, families tend to care for their parents at home.

Financing and delivery of social care services have been increasingly transferred from the public sector to the private sector over recent years. In 2011, circa €270 million of senior and care homes have been transacted across Europe. Belgium, Sweden and France accounted for more than 70 percent of these transactions. The average yield was 6.4 percent which ranged from 6 percent for Belgium care homes to 6.8 percent in Sweden. Public policies, legal issues, and availability of finance will determine the growth of private sector in the coming years. As a result of governments austerity measures the healthcare market could see more sale and leasebacks to authorities and an increase in private sector involvement. Health care leases in most of the Europe are index-linked and long term reducing the income risk for investors. However, risks to this sector come from planning, licensing, resourcing, and surgical specialist support.

Student Housing: Student housing is a more established investment market relative to the healthcare sector and has been known as a niche investment market for many years. According to RCA, total student accommodation transactions in Europe were around €1.4 billion in 2011, up from €760 million in 2010. Close to 90 percent of the recorded deals were in the United Kingdom and Sweden.

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Eurostat data shows that the number of students in Europe has increased by around 50 percent over the past 10 years. However, King Sturge estimated in 2010 that universities across Europe are able to provide accommodation for only 16 percent of the student population. Supply shortage, and the rise in the number of domestic and particularly in overseas students, who would usually pay a premium for high quality and well located accommodation, urge quality student accommodation.

Recent university funding cuts are likely to further restrict the supply of university owned student housing. At the same time, despite the rise in university fees and economic downturn, demand for student accommodation is expected to stay strong particularly in the top university cities. In Germany, Savills research show that only 181,000 places in publicly funded accommodation is available to students, which leaves more than 2 million students on the open residential market. This supply-demand inequality will provide development and investment opportunities for the private sector as the student housing offers high income yield and capital values growth prospects.

As with the care housing, it is critical to recognise the nuances of the market in each country before making investment decisions. For example, in Belgium there is very little subsidised accommodation for students of university colleges, and in Denmark it is much more difficult to get affordable housing and in Norway provisions vary across different institutions.


Investment Opportunities by Sector and Risk In the current economic environment real estate fundamentals are set to remain weak over the following 12 to 24 months and also our medium term rent growth outlook is weaker than what has been seen in the past recoveries. This creates obvious risks to strategies building on significant upswing in the broader letting market. While limited construction activity can lead to tighter availability in some markets, properties of poorer quality or located in less attractive spots will struggle to retain their tenants. At the same time, risk aversion has become one of the main drivers behind investment decisions. As uncertainty persists, investors are ready to pay high premiums for “best in the market” type of properties.

In this situation, we see risks at both ends of the market. Pricing of prime properties in key European markets is increasingly aggressive driven not by the strong fundamental outlook but mainly by risk aversion. For these properties, the already low level of cash flow returns can be further eroded by the gradual yield decompression in the medium term. On the other hand, secondary schemes in fringe markets, although attractively priced, involve very real risk of long term vacancy. In our view, the currently most attractive opportunities lie between these two extremes: in established markets and submarkets which are sufficiently attractive to tenants but not perceived as typical prime and hence not suffering from overpricing.

Opportunities by sector Offices: The above described contrasts are particularly valid for the office markets. In the near future core investment activity will principally focus upon fully let buildings within the CBD of global cities. This can prove to be a viable strategy in some cases as an outlook for very little new supply is creating a particularly positive rental story when occupier demand improves. We expect this to be the case of Central London. However, prime office yields are now below historic average and are expected to move out in the medium term. This means that not all of the expected rent growth can be translated into value growth as will likely be the case in Central Paris. While London, Stockholm and Berlin are still expected to be among the outperformers, other office markets in the top performance quartile of our forecast are those that usually receive slightly less attention from international investors like Warsaw, Dublin, or regional French markets (Lyon, Marseille).

While most investors focus on CBDs, interesting investment opportunities can arise just outside of the prime locations. They tend to receive less attention from investors and trade at less aggressive yields while the risk profile still remains acceptable. However, such strategy will require a high degree of local knowledge in order to take advantage of specific cases of market mispricing. Good knowledge of tenant expectations in individual submarkets is crucial as significant differences can be expected even within one market.

Retail: Prime shopping centres are expected to outperform the other two sectors according to our five year forecast driven mainly by a more stable yield outlook combined with moderate rent growth. Generally, we expect this property type to deliver positive value growth across the continent, but established Western European locations like France, Netherlands or Denmark will find themselves in the lower quartile. The outperformers are to be found in more dynamic Central and Eastern Europe economies, in particular Poland and Czech Republic, or in some of the countries hit worst by the downturn and expecting strong recovery, in particular Spain and Ireland. However,


caution is required when acting elsewhere in Southern Europe as we do not expect the consumers in Italy and Portugal to return quite as strongly as in Spain.

Strained household budgets and the continued shift towards multichannel retailing favour large dominant schemes that are located next to large population centres and occupied by secure multiples – Rather than local independent stores. However, as pricing becomes aggressive for these schemes, opportunities can also arise outside of the typical core destinations. A detailed knowledge of individual retail catchments will be required to identify these core opportunities. In locations where a gap between the retail offer and potential catchment demand exists, targeted asset management could provide opportunities.

Logistics: Logistics remains behind office and retail in terms of market size and investment volumes, but it offers somewhat different characteristics of returns than the other two. While historical growth rates for logistic properties have been relatively low, they have been compensated by higher cash flow returns. Stronger income component can prove attractive in times of uncertainty, and well located logistic schemes can be seen as a defensive play.

In the near term, key logistic hubs in Northern European countries, such as Paris, Hamburg or Stockholm, are expected to outperform. Established trading links and access to growth export markets such as China will play a major role. In the medium term, however, the rebalancing of the weaker Eurozone should encourage medium term export growth. The Iberian countries in particular, with their close links to emerging Latin America, may provide medium term logistics opportunities. Industrial units that can provide the facilities for fast growing high tech manufacturing and online distribution are likely to prove particularly attractive.

Debt: In the weakening economic environment certain real estate assets are expected to come under particular strain as debt covenants are breached and refinancing remains in short supply. With debt capital less plentiful, some landlords will turn to equity investors to recapitalize their balance sheets. In the light of these developments real estate debt is becoming an increasingly interesting option for investors seeking real estate exposure. While banks still remain the most important source of financing in Europe, more stringent lending standards and new regulation will likely create a gap which can be filled by other private lenders. This type of real estate investing can provide major opportunities for both defensive and more risk-prone investors.

Opportunities by investment style Through capital targeting safety, core yields have moved lower, reducing the expected rate of income return. Despite this, core investments are expected to remain in high demand throughout the early years of the forecast period, offering resilience in the face of economic uncertainty. As compensation for this reduction in risk, core investments are expected to record lower than average total returns over the next five years.

The present risk on less prime property is significantly elevated, and is likely to be beyond the threshold of many investors. Investor appetite for non-core locations or lower quality asset is expected to remain limited for at least the next 2 to 3 years. Investment strategies targeting the very best space within the Eurozone periphery, where investment yields have been pushed up by a poor national picture, may provide non-core opportunities with potentially higher income returns and a medium term recovery play.


Value-added strategies tend to rely upon economic and fundamental growth to achieve target total returns. A recent research initiative by RREEF Real Estate Research concluded that over a short, medium and long term basis value add strategies have failed to deliver attractive risk adjusted returns. Given an outlook for a sluggish recovery in economic activity across much of Europe, opportunities for value-add will likely be formed not at a national level, but sub-regionally in response to infrastructure initiatives or accelerating growth in certain industrial sectors.

For those investors looking to move up the risk curve, we believe that this point in the cycle may prove a favourable time to make opportunistic investments. In the markets which are seeing the greatest distress, certain assets are showing an initial yield that is well above historic average levels and, according to RREEF Real Estate research, this has typically led to well above average rates of return over the following years. As banks and governments are looking to de-lever their balance sheets, opportunities to acquire non-performing loans and distressed property are likely to emerge in the near future. In these cases, investors typically buy assets at significant discounts to face value and total returns are more likely driven by increases in capital value as a result of rising liquidity. Increased deal flow and opportunity is expected to emanate from bank balance sheets as they seek to comply with new regulation and either retreat from real estate lending altogether or withdraw back to their domestic markets.


Sustainability In addition to the traditional market, financial and risk factors that must be considered in capital allocations, investors increasingly must take into account the sustainability of the assets they acquire and how they are managed. This is particularly true for real property markets, where a diverse but convergent set of economic, market, and regulatory forces are combining to move the industry to adopt greener practices. Indeed, the move to sustainability in many leading markets around the world has been redefining standards of institutional-quality buildings and the responsibilities of fiduciaries. In the coming years, questions about any “green premiums” will increasingly shift to a proliferation of “brown discounts.”

A 2011 study by Johnson Controls (JCI)1

Sustainability has also been propelled by both rising government mandate and evolving local market standards. Even when not required by law, tenants are increasingly demanding greener facilities: To attract employees, impress customers and to satisfy shareholders.

of 4,000 global executives and building owners responsible for energy management and investment decisions found that 70 percent of respondents viewed energy management as very or extremely important, up 10 percentage points over the prior year. With building owners and tenants facing higher energy costs in recent years – And the risks of still more increases in the future – The greatest motivation toward sustainability across all regions in the JCI study was the cost savings that green technologies and practices deliver to building owners and tenants alike. Financial incentives to improve building performance further strengthen the economics of investments in building performance, and were the second most often cited factor in the JCI study.

Little known only a decade ago, there are now some 8,700 LEED-certified buildings globally, covering more than 1.6 billion gross square feet of building area, plus another 1,100 buildings certified under the BREEAM standard. 2

This confluence of market forces is leading to increasing evidence of the value that sustainability adds to buildings, properties and portfolios. A 2011 study

According to the US Green Building Council, one million square feet of building area world-wide is now registered for potential certification every day. A multitude of other certification systems have also been adopted across the globe in addition, to numerous Energy assessment protocols, both voluntary and mandatory.

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Governmental resolve is strengthening to address global warming through increasingly strict mandates and requirements in the real estate industry. In the United Kingdom, the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme (EES) requires

of nearly 1,200 UK commercial real estate leases found an average rental rate premium of 21 percent for BREEAM-certified buildings, and a 26 percent premium in sales price across more than 2,000 UK transactions from 2000 to 2009. The authors identify these premiums while cognizant that they include overall measures of quality relative to non-certified buildings; however, absent other standard measures of quality, the market is looking to certification systems such as BREEAM, and clearly rewarding them. While the precise magnitude of these premiums may be debated, the direction is clear and incontrovertible – And consistent with virtually all known reputable studies conducted throughout the world.

1Johnson Controls, International Facility Management Association and the Urban Land Institute (2011): “2011 Energy Efficiency Indicator: Global Results.” 2 LEED stands for Leadership in Energy and Environmental Design, an assessment system developed by the US Green Building Council. BREEAM is the BRE Environmental Assessment Method established in the UK by the Building Research Establishment (BRE). 3 Chegut, Eichholtz and Kok (2011): “Supply, Demand, and the Value of Green Buildings.”


building owner’s to purchase emissions allowances, introducing a strong incentive to improve building efficiency, and publicly ranks companies for their carbon performance. Across the European Union, the EU Performance of Buildings Directive (EPBD) required all member states to develop energy efficiency rating schemes, which are now commonly known as Energy Performance Certificates (EPCs). Requirements for provision of EPCs can vary by country, but generally, they are being required upon the sale, leasing or financing of mid to high-rise commercial buildings. Germany, France, the United Kingdom, and most other member states have led the way, making the disclosure of energy performance a standard component of any significant real estate transaction in these and other key European markets.

Accordingly, sustainability considerations are becoming an increasingly important and integral component of the investment decisions. Of course, market standards and government regulations vary widely by geography and product type. Thus, prudence requires that investors understand the nuances of local environmental standards and regulations as well as the traditional market and financial factors that underpin investment decisions. Responsible fiduciary practices now demand that investment managers possess and apply such knowledge to identify and manage to the risks and opportunities that sustainability presents in the same manner that they do more traditional ones.


Appendix: Important Notes © 2012. All rights reserved. RREEF Real Estate, part of RREEF Alternatives, the alternative investments business of Deutsche Asset Management, the asset management division of Deutsche Bank AG offers a range of real estate investment strategies, including: core and value-added and opportunistic real estate, real estate debt, and real estate and infrastructure securities.

In the United States RREEF Real Estate relates to the asset management activities of RREEF America L.L.C., and Deutsche Investment Management Americas Inc.; in Germany: RREEF Investment GmbH, RREEF Management GmbH and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN 63 116 232 154) an Australian financial services license holder; in Japan: Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for RREEF Real Estate’s direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for RREEF Real Estate’s real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK) Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management (Global) Limited; in addition to other regional entities in the Deutsche Bank Group.

Key RREEF Real Estate research personnel are voting members of various RREEF Real Estate investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF Real Estate and its affiliates.

This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.

The views expressed in this document constitute Deutsche Bank AG or its affiliates’ judgment at the time of issue and are subject to change. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer.

An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors who can bear substantial investment losses. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results.

The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance.

Issued and approved in the United Kingdom by Deutsche Alternative Asset Management (UK) Limited of One Appold Street, London, EC2A 2UU. Authorised and regulated by the Financial Services Authority. This document is a “non-retail communication” within the meaning of the FSA’s Rules and is directed only at persons satisfying the FSA’s client categorisation criteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client.

When making an investment decision, potential investors should rely solely on the final documentation relating to the investment or service and not the information contained herein. The investments or services mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with us you do so in reliance on your own judgment.

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I-026518-1.0 1

Global Research Team

Global

Mark Roberts Global Head of Research [email protected]

Kurt W Roeloffs Global Chief Investment Officer [email protected]

Americas

Alan Billingsley Head of Research, Americas [email protected] Marc Feliciano Chief Investment Officer, Americas [email protected] Ross Adams Industrial Specialist [email protected] Bill Hersler Office Specialist [email protected] Ana Leon Property Market Research [email protected]

Andrew J. Nelson Retail Specialist [email protected] Alex Symes Economic & Quantitative Analysis [email protected] Brooks Wells Apartment Specialist [email protected] Stella Xu Property Market Research [email protected]

Europe

Simon Durkin Head of Research, Europe [email protected] Gianluca Muzzi Chief Investment Officer, Europe [email protected] Jaroslaw Morawski Property Market Research [email protected] Nazanin Nobahar Property Market Research [email protected]

Arezou Said Property Market Research [email protected] Maren Vaeth Property Market Research [email protected] Simon Wallace Property Market Research [email protected]

Asia Pacific

Koichiro Obu Head of Research, Japan/Korea [email protected] Leslie Chua Head of Research, Asia Pacific ex-Japan/Korea [email protected]

Paul Keogh Chief Investment Officer, Asia Pacific [email protected] Edward Huong Property Market Research [email protected] Orie Endo Property Market Research [email protected]

Asia-Pacific

February 2012

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Office Locations:

Frankfurt Mainzer Landstraße 178-190 60327 Frankfurt am Main Germany Tel: +49 69 71704 0 Hong Kong Floor 58 International Commerce Center 1 Austin Road West, Kowloon Hong Kong Tel: +852 2203 8888 London 1 Appold Street London EC2A 2UU United Kingdom Tel: +44 20 754 58000 New York 345 Park Avenue 25th Floor New York NY10017-1270 United States Tel:+1 212 454 6260 Paris Floor 4 3 Avenue de Friedland Paris France Tel: +33 1 44 95 63 80 San Francisco 101 California Street 26th Floor San Francisco CA 94111 United States Tel:+1 415 781 3300 Singapore One Raffles Quay #15-00 South Tower Singapore 048583 Tel: +65 6423 8385 Tokyo Floor 17 Sanno Park Tower 2-11-1 Nagata-cho Chiyoda-Ku Tokyo Japan Tel:+81 3 5156 6000

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