opportunities in european real estate
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Opportunities in European Real Estate. Dr Paul Kennedy, MRICS Head of European Research INVESCO Real Estate. This presentation is for Investment Professionals only and is not for consumer use. C191. Our Autumn 2006 forecasts. 01. GDP growth was expected to improve, but only modestly…. - PowerPoint PPT PresentationTRANSCRIPT
1
Opportunities in Opportunities in European Real Estate European Real Estate
C191
Dr Paul Kennedy, MRICS Head of European Research
INVESCO Real Estate
This presentation is for Investment Professionals only and is not for consumer use.
2
01Our Autumn 2006 forecastsOur Autumn 2006 forecasts
3GDP growth was expected to improve, but only GDP growth was expected to improve, but only modestly…modestly…
Source: Consensus Economics (August 2006)
IRE Prime Forecasting Model - Real GDP Growth (%)
0%
1%
2%
3%
4%
5%
6%EU
- 12
Belg
ium
Germ
any
Spai
n
Fran
ce
Irel
and
Ital
y
Neth
erla
nds
Port
ugal
Finl
and
Denm
ark
Swed
en UK
Pola
nd
Hung
ary
Czec
hRe
publ
ic
Russ
ia
Slov
akia
Real
GDP
Gro
wth
(% p
er a
nnum
)
2006 2007 2008 2009 2010 2011
4When combined with low and stable inflation forecasts When combined with low and stable inflation forecasts this suggested relatively flat 10 year bond yields.this suggested relatively flat 10 year bond yields.
Source: IRE calculations; Bloomberg. March 2007.
IRE Prime Forecasting Model - 10 yr Government Bond Yields
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%19
90
1991
1992
1993
1993
1994
1995
1996
1996
1997
1998
1999
1999
2000
2001
2002
2002
2003
2004
2005
2005
2006
2007
2008
2008
2009
2010
2011
2011
%
Germany Spain France Ireland Italy Netherlands Denmark Sw eden UK
5
Office vacancy was expected to remain under control…Office vacancy was expected to remain under control…
Source: IRE calculations (Fall 2006); DTZ Research
IRE Prime Forecasting Model - Off ice vacancy (%)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%B
erlin
Ham
burg
Mun
ich
Fra
nkfu
rt
Par
is (
IDF
)
Par
is (
CB
D)
Par
is (
LD)
Par
is (
WB
D)
Par
is (
Riv
e G
auch
e)
Lyon Lille
Mar
seille
Rom
e
Mila
n
Am
ster
dam
Rot
terd
am
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Lisb
on
Sto
ckho
lm
Cop
enha
gen
Lond
on (
City
)
Lond
on (
WE
)
Lond
on (
Mid
tow
n)
Lond
on (
Doc
klan
ds)
Birm
ingh
am
Man
ches
ter
Gla
sgow
Edi
nbur
gh
M25
Wes
t
War
saw
Bud
apes
t
Pra
gue
Mos
cow
%
2005 2011
6
……retail data suggested a similar pattern.retail data suggested a similar pattern.
Source: PMA; IRE calculations (Fall 2006)
IRE Prime Forecasting Model - Modern Retail Stock Growth (%)
-2%
0%
2%
4%
6%
8%
10%
12%
14%Pr
ague
Rom
e
Lisb
on
Ber
lin
Dub
lin
War
saw
Bar
celo
na
Mad
rid
Lille
Mun
ich
Bud
apes
t
Lyon
Mila
n
Mar
seill
e
Stoc
khol
m
Pari
s (C
BD
)
Am
ster
dam
Cop
enha
gen
Gla
sgow
Ham
burg
Bir
min
gham
Lond
on (
WE)
Bru
ssel
s
Man
ches
ter
Fran
kfur
t
%
Growth (90-05) Growth (00-05) Growth (05-10)
7We expected robust rental growth from offices in Paris, We expected robust rental growth from offices in Paris, London, Madrid, Barcelona, Stockholm and the M25 London, Madrid, Barcelona, Stockholm and the M25 West…..West…..
Source: IRE calculations (Fall 2006)
IRE Forecasting Model - Prime Office Rental Growth (% pa)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Ber
lin
Ham
burg
Mun
ich
Fran
kfur
t
Pari
s (C
BD
)
Pari
s (L
D)
Pari
s (W
BD
)
Pari
s (R
ive
Gau
che)
Lyon Lille
Mar
seill
e
Rom
e
Mila
n
Am
ster
dam
Rot
terd
am
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Lisb
on
Stoc
khol
m
Cop
enha
gen
Lond
on (
Cit
y)
Lond
on (
WE)
Lond
on (
Mid
tow
n)
Lond
on (
Doc
klan
ds)
Bir
min
gham
Man
ches
ter
Gla
sgow
Edin
burg
h
M25
Wes
t
War
saw
Bud
apes
t
Prag
ue
Mos
cow
St P
eter
sber
g
Bra
tisl
ava
%
Avg. 90-05 Avg. 06-10
8……retail rental growth was expected to be positive, but retail rental growth was expected to be positive, but lower than the recent past (especially in the UK)….lower than the recent past (especially in the UK)….
Source: IRE calculations (Fall 2006); DTZ Research; CWHB
IRE Prime Forecasting Model - Retail Rental Growth (% pa)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%Ber
lin
Ham
burg
Mun
ich
Fran
kfur
t
Paris
Lyon Lille
Mar
seill
e
Rom
e
Mila
n
Am
ster
dam
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Stoc
khol
m
Cop
enha
gen
Lond
on
Birm
ingh
am
Man
ches
ter
War
saw
Bud
apes
t
Prag
ue
Mos
cow
St P
eter
sbur
g
Bra
tisl
ava
%
Avg. 90-05 (SSU) Avg. 06-10 (SSU)
9...industrial / logistics rents were expected to keep ...industrial / logistics rents were expected to keep pace with inflation.pace with inflation.
Source: IRE calculations (Fall 2006); DTZ Research
IRE Prime Forecasting Model - Industrial Rental Growth (% pa)
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%Ber
lin
Ham
burg
Mun
ich
Fran
kfur
t
Paris
(IDF)
Lyon Lille
Mar
seill
e
Rom
e
Mila
n
Am
ster
dam
Rot
terd
am
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Stoc
khol
m
Gtr
Lon
don
Birm
ingh
am
Man
ches
ter
Gla
sgow
Edin
burg
h
War
saw
Bud
apes
t
Prag
ue
Mos
cow
St P
eter
sber
g
Bra
tisl
ava
%
Avg. 90-05 Avg. 06-10
10We expected capitalisation rates to remain broadly We expected capitalisation rates to remain broadly stable….stable….
IRE Prime Forecasting Model - Expected Yield Shift (%)
0%
2%
4%
6%
8%
10%
12%
14%
0% 2% 4% 6% 8% 10% 12% 14%
Prime Yield (Q2 2006)
Prim
e Yi
eld
(Q2
2011
)
Offices Retail SSU Industrial
Source: DTZ Research; IRE (Fall 2006)
11...as a result, of the 143 markets covered by our ...as a result, of the 143 markets covered by our forecasts, over 50% were expected to “out-perform” forecasts, over 50% were expected to “out-perform” for total return investors…for total return investors…
IRE Prime Forecasting Model - Expected and Required Total Returns (all sectors)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0% 4% 8% 13% 17%
Expected Return (Q2 2006-Q2 2010)
Req
uire
d R
etur
n (Q
2 20
06-Q
2 20
10)
Offices Retail SSU Retail ShC Retail Parks Industrial
Attractive
Unattractive
Source: IRE calculations (Fall 2006)
12Office opportunities were particularly clear, with Office opportunities were particularly clear, with Paris, regional France, London and Spain leading.Paris, regional France, London and Spain leading.
Source: IRE calculations (Fall 2006)
IRE Prime Forecasting Model - Prime office total returns Q2 2006 - Q2 2010
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Ber
lin
Ham
burg
Mun
ich
Fran
kfur
t
Pari
s (C
BD
)
Pari
s (L
D)
Pari
s (W
BD
)
Pari
s (R
ive
Gau
che)
Lyon Lille
Mar
seill
e
Rom
e
Mila
n
Am
ster
dam
Rot
terd
am
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Lisb
on
Stoc
khol
m
Cop
enha
gen
Lond
on (
Cit
y)
Lond
on (
WE)
Lond
on (
Mid
tow
n)
Lond
on (
Doc
klan
ds)
Bir
min
gham
Man
ches
ter
Gla
sgow
Edin
burg
h
M25
Wes
t
War
saw
Bud
apes
t
Prag
ue
Mos
cow
St P
eter
sber
g
Bra
tisl
ava
%
Ungeared IRR (Q2 2006 - Q2 2010) Required return (now)
13
02Key changes over the last 6 monthsKey changes over the last 6 months
14Our GDP growth forecasts have improved…Our GDP growth forecasts have improved…
Figure 1 - Average GDP Growth (2007-2011)
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
EU - 1
2
Bel
gium
Ger
man
y
Spai
n
Fran
ce
Irel
and
Ital
y
Net
herlan
ds
Port
ugal
Finl
and
Den
mar
k
Swed
en UK
Pola
nd
Hun
gary
Cze
ch R
epub
lic
%
Spring 2007 Autumn 2006
Source: INVESCO Real Estate; Experian Business Strategies (June 2006 and December 2006)
15...particularly for Germany....particularly for Germany.
Source: INVESCO Real Estate; Experian Business Strategies (June 2006 and December 2006)
Figure 2 - German GDP (Autumn 2006 vs Spring 2007)
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
2.6%
2.8%
2006 2007 2008 2009 2010 2011 2012
% R
eal G
DP
Gro
wth
Autumn 2006 Spring 2007
16Office take-up and rental values have recovered faster Office take-up and rental values have recovered faster than we expected…than we expected…
Source: INVESCO Real Estate; DTZ Research (February 2007)
Figure 3 - Selected Prime Office Nominal Rental Values (1998=100)
50
70
90
110
130
150
170
190
210
230
1998
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
1998
=10
0
Frankfurt Paris (LD) Dublin MadridLondon (City) London (WE) Glasgow Warsaw
17……as expected yields have continued to fall, reflecting as expected yields have continued to fall, reflecting improving rental growth prospects and weight of improving rental growth prospects and weight of money. money.
Source: INVESCO Real Estate; DTZ Research (February 2007)
Figure 4 - Prime Office Yields
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
% Y
ield
(M
arke
t Defi
nition
)
Paris (CBD) Lyon Amsterdam Dublin MadridStockholm Copenhagen London (City) London (WE) Birmingham Warsaw Budapest Prague
18Strong rental growth forecasts mean that investors Strong rental growth forecasts mean that investors could force prime office yields lower, while still could force prime office yields lower, while still achieving “appropriate” total returns.achieving “appropriate” total returns.
Source: INVESCO Real Estate (Spring 2007); DTZ Research (February 2007)
Figure 5 - Current and "correct" prime office yields (%)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Ber
lin
Ham
burg
Mun
ich
Fran
kfur
t
Pari
s (C
BD
)
Pari
s (L
D)
Pari
s (W
BD
)
Pari
s (R
ive
Gau
che)
Lyon Lille
Mar
seill
e
Rom
e
Mila
n
Am
ster
dam
Rot
terd
am
Bru
ssel
s
Dub
lin
Mad
rid
Bar
celo
na
Lisb
on
Stoc
khol
m
Cop
enha
gen
Lond
on (
Cit
y)
Lond
on (
WE)
Lond
on (
Mid
tow
n)
Lond
on (
Doc
klan
ds)
Bir
min
gham
Man
ches
ter
Gla
sgow
Edin
burg
h
M25
Wes
t
War
saw
Bud
apes
t
Prag
ue
% Y
ield
(M
arke
t D
efini
tion
)
Current market yield 'Correct' yield
19Other sectors Other sectors
Retail
Rental growth has been in line with expectations.
Improving employment growth prospects should provide support despite indebted consumers (particularly in the UK) and tight margins.
Supply growth may be becoming more important.
Yield pressure appears to be easing.
Logistics
Rental growth has been lower than our forecasts.
Margin pressure combined with investment led development.
Demand for income has driven yields to unsustainable levels in some markets.
20Is there Is there stillstill time for one last dance? time for one last dance?
Yes…
GDP growth appears to be strengthening.
Inflationary pressures are likely to remain low.
Long-term interest rates should remain under 4.25% in the Eurozone and 5.25% in the UK.
Supply appears to be under control.
Rental growth is likely to accelerate, particularly in the office sector.
Yields can fall further in some markets without damaging return prospects.
But….
Economic conditions could deteriorate (US, global equity markets etc.)
Some markets present clear challenges (e.g., parts of central Europe)
Supply might exceed our projections (e.g., in the City of London)
21
03French acquisitionsFrench acquisitions
22Retail – Le Printemps Retail – Le Printemps
Le Printemps – Paris 9Purchased in Q1 2007 for a US pension fund advisory mandate
Prime retail building located in the heart of Paris CBD13,300sqm department storeRisk profile = PrimePurchase price = €184,600,000Net initial yield: 4.00% Expected Unlevered Global Return: 5.46%
For illustrative purposes only
23
Le Directoire - St Cloud (92)Purchased in Q1 2007 for a listed company
Office - Le DirectoireOffice - Le Directoire
Office building located in the WBD12,549 sqm multi-let 100% letRisk profile = CorePurchase price: €47,400,000Net initial yield: 5.40% Expected Unlevered Global Return: 8.35%
For illustrative purposes only
24
Le Diapason – Paris 19Purchased in Q1 2007 for a listed company
OfficeOffice - - Le DiapasonLe Diapason
Office building located in the 19th district of Paris6,548 sqm multi-let 100% letRisk profile = CorePurchase price = €23,600,000Net initial yield: 6.54% Expected Unlevered Global Return: 9.49%
For illustrative purposes only
25
Le Verdun – Gentilly (94)Purchased in Q1 2007 for a listed company
Office - Le VerdunOffice - Le Verdun
Office building located in the peripheric market2,524 sqm multi-let 100% letRisk profile = CorePurchase price = €14,000,000Net initial Yield: 4.71% Expected Unlevered Global Return: 7.66%
For illustrative purposes only
26 Important informationImportant information
INVESCO Real Estate invests in property and land. This can be difficult to sell, so you may not be able to sell your investment when you want to. The value of the property is generally a matter of a valuer’s opinion. The value of investments and the income from them can fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Past performance is not a guide to future. INVESCO Real Estate has expressed its own views and opinions in this presentation and these may change. The information in this document is selective and does not constitute an offer or an invitation to subscribe for, or purchase, any securities. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns.
This presentation is issued by INVESCO Real Estate for Investment Professionals only and should not be issued to, or relied upon by, other parties. No representation, express or implied, is made as to the fairness, accuracy or completeness of the information contained in this presentation and no reliance should be placed upon it. For your protection, telephone calls may be recorded.
Contact London:
INVESCO Real Estate
10 Mount Row
London W1K 3SD
United Kingdom
Phone: +44 20 75 43 35 00
www.invescorealestate.co.uk
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