MARKET UPDATE September 2014

Illustratio

n: H

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ing Larsen

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GDP: Mainland Norway vs. Eurozone

Economic figures (as per COB Sept. 9th 2014) Economic figures Norway (growth in %)

Statistics Norway (SEP-14) 2013 2014E 2015E

Privat spending 2.1 2.1 2.9

Public spending 1.8 2.3 2.3

Gross investments in capital goods 8.4 -0.4 1.0

- in mainland-Norway 4.4 0.8 3.2

- in oil 17.1 -1.3 -7.5

Exports -3.3 1.6 1.3

- oil & gas -7.7 0.1 0.8

- traditional goods 0.4 2.6 1.1

Imports 2.9 1.8 3.3

GDP 0.6 1.9 1.7

GDP mainland-Norway 2.0 2.2 2.1

Household real income 3.1 3.0 3.3

Operating balance (Bn. NOK) 333.6 321.0 318.0

LATEST FIGURES 12 MTHS. AGO

Key policy rate 1.50 % 1.50 %

3m Nibor 1.71 % 1.73 %

10 yr gvt. bond yield 2.43 % 3.13 %

10 yr swap rate 2.66 % 3.52 %

CPI 2.10 % 3.20 %

CPI - ATE 2.20 % 2.50 %

Unemployment rate 3.30 % 3.40 %

NOK/USD 0.16 0.17

NOK/EUR 0.12 0.13

NOK/GBP 0.10 0.11

NOK/SEK 112.00 110.50

Oslo Stock Exchange BX 613.71 503.40

House price index (12 mth. ∆) 1.40 % 5.74 %

Source: Statistics Norway

Source: IMF/Statistics Norway

Source: Statistics Norway (AKU)

Labour market Inflation last 5 years

Domestic vs. foreign currency last 5 years

Macro Norway • The key policy rate has been stable at 1.50 %

since March 2012, and is expected to remain unchanged throughout 2015.

• The Norwegian Krone (NOK) is on its strongest since June partly due to an unexpected increase in the retail sales during the summer.

• The weak NOK in 2013 has contributed to an increased CPI-JAE, which has fluctuated around the inflation target for the monetary policy (2.5 %) so far this year.

• Improved competitiveness due to the weakening of the NOK through 2013 and improved international growth is expected to increase GDP-growth, through increased exports.

• The unemployment rate has been low and stable so far this year. Statistics Norway expects a slight increase in the unemployment rate in 2015 to 3.7 %

• Oil investments are expected to decrease in

2015 from an all time high level in 2014. This will be the first drop since 2010. The decrease is mainly due to significantly lower estimates of field development and fields on stream.

Global • The European Central Bank (ECB) recently cut

the key policy rate from 0.15 % to 0.05 % to keep the low inflation from derailing the Eurozone's weak economy.

• German economy is shrinking for the first time since Q1 2013. GDP fell 0.2 % from Q1 2014 to Q2 2014.

• The unemployment rate in France has

increased nine months in a row, to an all time high (10.1 % in the first quarter). This reflects the zero growth in France and the Euro-zone.

• Italy's four largest banks will apply for crisis loans totaling 27 billion EUR (220 billion NOK) from the ECB, according to Bloomberg News.

• United States’ GDP increased by 4.2 % from Q2 2013 to Q2 2014. A number of macroeconomic numbers last month indicate that the US economy is starting to recover.

• Russian economy is about to decrease, partly due to US’ and EU’s sanctions against Russia because of their involvement in the Ukraine and the annexation of The Crimean Peninsula.

Number formatting: SI style (English version)

Sundtkvartalet – New building (29 300 m²) Malling & Co Næringsmegling is responsible for the letting of this projected office and retail building in central Oslo.

2450

2500

2550

2600

2650

2700

2750

3,0 %

3,2 %

3,4 %

3,6 %

3,8 %

4,0 %

Unemployment rate (L.axis)Labour force (in 1 000 people) (R.axis)Employed work force (R.axis)

Source: Kommunalbanken

-6,00%

-4,00%

-2,00%

0,00%

2,00%

4,00%

6,00%

Mainland-Norway Eurozone

0,09

0,10

0,11

0,12

0,13

0,14

0,15

0,16

0,17

0,18

0,19

NOK/GBP NOK/EUR NOK/USD

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

3,00%

3,50%

CPI CPI-ATE

Commercial Real Estate Office letting market • Advertised office space in Greater-Oslo as of

August 15th is approx. 11 % of the total building mass. This rate includes potential new office projects (approx. 3 %).

• The vacancy rate (available within 12 months)

is approx. 8 %. Average vacancy rate has been almost 8 % in 2014, the same as the average vacancy rate in 2013.

• 14 premises larger than 10 000 m² and 28

premises above 5 000 m² are advertised as of August 15th.

• An unusual low volume of office area was signed in Q2 2014. The low expiry volume in 2015 to 2017 is believed to be the main reason for this (see topic of the month).

• Riksrevisjonen is moving from Pilestredet to Olav Thon Gruppen’s new building in Storgata 14-18 and Stenersgata 2-4 in 2016 (13 000 m²).

• The average office rental prices in Oslo have increased by approx. 25 % the last 5 years according to Arealstatistikk.

• Average contract length in Oslo has increased over the last 5 years by approx. 1.5 years.

• We expect the rental prices to flatten out in the short term due to the high supply of office space and the already high rental price levels.

Transaction market

• So far in 2014, we have registered NOK 26 billion in transaction volume, divided into 109 transactions.

• The transaction activity started somewhat slow in 2014, but has increased throughout recent months. We expect the activity to boost further throughout the year.

• A healthy letting market supported by a strong economy, available funding and less risk averse investors are key drivers for this.

• International investors have been expected to increase their exposure towards Norwegian commercial real estate. So far in 2014 their stake of the investment volume is 18 %.

• Prime yield has remained stable throughout the year at approximately 5.00 %. We have also seen a contraction for secondary assets lately. Easier access to credit, lower interest rates, increasing risk willingness, increased participation from international investors and a lot of capital heading into commercial property are main drivers for this.

Source: Malling & Co

Eiendomshuset Malling & Co Dronning Mauds gate 10. Postboks 1883 Vika. NO-0124 Oslo T: 24 02 80 00 – F: 24 02 80 01 – E: post@malling.no – www.malling.no

*Source: Malling & Co **Source: Kommunalbanken ***Source: Arealstatistikk Q2 2014

The signed volume of office space (m²) in the second quarter was the lowest signed volume since Q3 2009. Only 110 000 m² was signed, while the average since 2008 is 165 000 m² per quarter. The second quarter is often the one with the highest signed volume of the year, but in 2014 the amount of signed square meters fell with over 50 percent from Q2 2013, and was lower than the 1st quarter.

This seems dramatic, but the explanation might be simple: The expiration of contracts is low in the three upcoming years. And since most of the tenants sign their contracts approx. one year before moving, a drop in the amount of office space signed in 2014 was expected. The correlation between the amount of contracts expiring one year and the contracts signed the year before is very high, especially in the last three years. We have seen a changing trend where large tenants seek new office space only 1-2 years before contract expiry, instead of 3-4 years which was usual a couple of years ago.

Key facts real estate 2014 Q2 Advertised office volume in Oslo (m²)

Yield development last 5 years Prime rents in Oslo (NOK/m²/yr)

Topic of the Month: Low absorption of office space in Q2 2014 due to low expiration in 2015-2017

Prime yield* 5.00 %

Normal yield* 6.50 %

5 yr swap rate (per COB Sept. 9th)** 2.12 %

Average of 15 % highest rents in Oslo*** 3 100 NOK/m²/yr.

Office contracts signed*** (Oslo) 109 750 m²

Largest office contract*** (Oslo) 11 980 m²

Avg. contract length*** (Oslo) 5.0 yrs.

OFFICE CLUSTER RENT Δ 12 MTHS.

CBD (Vika/Aker Brygge/Tjuvholmen) 4 800 7 %

Skøyen 3 300 10 %

Central Oslo 3 500 9 %

Bjørvika 3 500 -

Lysaker 2 350 -

Fornebu 2 150 2 %

Nydalen/Sandaker 2 300 5 %

Økern/Løren/Risløkka 2 100 11 %

Bryn/Helsfyr 2 100 8 %

Source: FINN.no/Malling Co

Source: Malling & Co / Nordea

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

900 000

1 000 000

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q1

20

12

Q3

20

12

Q4

20

12

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

13

Q1

20

14

Q2

20

14

Q3

20

14*

> 5 000 m² < 5 000 m²

*Jul.-Aug. 2014

2,50%

3,00%

3,50%

4,00%

4,50%

5,00%

5,50%

6,00%

6,50%

7,00%

7,50%

10 yr swap Prime propertyNormal property

m² office space in Oslo

- 50 000

100 000 150 000 200 000 250 000

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

12

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

13

Q1

20

14

Q2

20

14

Source: Arealstatistikk

m² office space in Oslo

-

250 000

500 000

750 000

1 000 000

2009 2010 2011 2012 2013 2014 2015 2016 2017

Contract expiry Contract signed the year before Known expiry volume Source: Arealstatistikk