tuesday 29 september 2015 global real estate trends and

© Copyright 2015 by K&L Gates LLP. All rights reserved.

Steven Cox, Of Counsel, K&L GatesSabina Kalyan, Global Chief Economist, CBRE Global InvestorsPeter Hobbs, Managing Director, Real Estate Research, MSCIMike Phillips, Editor, EuroProperty MagazineKristina Baurschmidt, Partner, K&L Gates Berlin

Global Real Estate Trends and Opportunities for 2015/2016

Tuesday 29th September 2015

CONFIDENTIAL AND PROPRIETARY

THE EUROPEAN REAL ESTATE OUTLOOK

SEPTEMBER 2015

Presented by:SABINA KALYAN, GLOBAL CHIEF ECONOMIST

CONFIDENTIAL AND PROPRIETARY THE EUROPEAN REAL ESTATE OUTLOOK 2

The Great Fall Of China

Source: Thomson Reuters DataStream.

80

100

120

140

160

180

200

220

240

260

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15

MSCI China & Shanghai Composite Rebased to 100 at Jan 14.

Shanghai Composite MSCI China


Another 20%?


0.145

0.150

0.155

0.160

0.165

0.170

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

CNY/USD Spot Rate.


Abenomics Is Doing A Lot


-80

-60

-40

-20

0

20

40

60

Aug-90 Aug-93 Aug-96 Aug-99 Aug-02 Aug-05 Aug-08 Aug-11 Aug-14

Tankan Survey.

Non-manufacturing Manufacturing


Except What It’s Meant To Do


-6

-5

-4

-3

-2

-1

0

1

2

3

4

Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

Monthly Cash Earnings, % y/y.

Nominal Real


The USA Struggles To Reach Escape Velocity


30

35

40

45

50

55

60

65

Aug-00 Aug-03 Aug-06 Aug-09 Aug-12 Aug-15

ISM Business Activity Surveys.

Manufacturing Non-manufacturing


Monetary Tightening Threatened By Global Pressures


0

1

2

3

4

1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr

Market Implied Path of US Interest Rates, %.

31 Dec 13

30 Jun 15

31 Dec 14

25-Sep-15


Meanwhile The UK Is In Rude Health (But Still Indebted)


-4

-3

-2

-1

0

1

2

3

4

5

6

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Average Earnings, % y/y.

Nominal Real


And Wrestling With The Same Policy Dilemma As The USA


75

80

85

90

95

100

105

110

115

120

95 97 99 01 03 05 07 09 11 13 15

Real Effective Exchange Rate Indices.

GBP USD


By Contrast The Eurozone Is At The Start Of Its Easing Cycle

Source: Gavekal.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Fed QE3 Fed QE2 BoE QE2 BoJ 2013 BoE QE1 BoJ 2014 ECB QE1

Ratio of Central Bank’s Government Bond Purchases To Net Bond Issuance.


The Demand For Credit Is Recovering

Source: European Central Bank.

-5

0

5

10

15

20

04 05 06 07 08 09 10 11 12 13 14 15

Loan Growth, % y/y.

Consumer credit Corporate creditMortgage debt

Source: European Central Bank.

-60

-50

-40

-30

-20

-10

0

10

20

30

07 08 09 10 11 12 13 14 15

Net Change In Demand For Credit.

Large firms Small firms Consumers


And Frankly There Isn’t Much Between The USA & The Eurozone

Sourec: OEF except USA which is Moody’s.

0

1

2

3

4

5

6

7GDP Forecasts, % pa.

2015 2016 2017 2018 2019 2015-2019


So Where Does Europe Stand Relative To Its Global Peers

THE EUROZONE

• EASY MONETARY POLICY

• WEAKENING EXCHANGE RATE

• RECOVERING DEMAND

• AND DESPITE BREXIT & GREXIT, COMPARABLY STABLE POLITICAL & LEGAL BACKDROP

THE UK

• MONETARY POLICY CYCLE EXTENED BY GLOBAL VOLATILITY

• LATE CYCLE BUT DEMAND STILL SURPRISINGLY STRONG

• BACK TO A SAFE HAVEN ONCE THE EU REFERENDUM IS TRAVERSED (?)


The Problem Is That Europe’s Attractions Are Not Unnoticed

Source: CBRE EMEA Research.

0

10

20

30

40

50

60

70

80

90

06 07 08 09 10 11 12 13 14 15

Investment Volumes, EUR bn per quarter.

-100

-80

-60

-40

-20

0

20

40

60

80

'06 '07 '08 '09 '10 '11 '12 '13 '14 15

Investment Volumes, % y/y.


Closed End Funds Are Back And Targeting Europe

Source: Preqin.

3475

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13 14 H115

Closed End Fund Dry Powder, EURbn.

Europe North America Asia Rest of World

20% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

06 07 08 09 10 11 12 13 14 H115

Closed End Fund Dry Powder By Region, % Of Total.

Europe North America Asia Rest of World


Desperate Investors Are Using Portfolios To Place Capital Quickly

Source: Real Capital Analytics.

0 1 2 3 4 5 6 7 8

QIAKlepierre

Deut. Ann.BrookfieldStarwoodLone Star

BlackstoneGreystar REP

CPPIBNorthStar

PatriziaCitycon OyjCale Street

CerberusLGIM

Top 15 Portfolio Investors In Europe In H1 2015, EURbn.

Inst/Sov Wealth Debt REIT Private Equity

14%

37%

0

20

40

60

80

100

120

08 09 10 11 12 13 14 15

Portfolio Acquisitions By Capital Source, EURbn & Global as a % of

Total.

Domestic European Global


The Biggest Increase In Activity Has Been In The South


0%

10%

20%

30%

40%

50%

60%Market Share, % of Total.

H1 15 Average

26

-50

0

50

100

150

200Investment Volumes, % H1 2015/H1 2014.

750!


But London Still Dominates Transaction Activity


€0B

€5B

€10B

€15B

€20B

€25B

€30B

€35B

Transactions In Europe In H1 2015.

Paris

Berlin

Frankfurt

Madrid

In H1’15 London accounted for more transaction volume than the next 7 European cities combined.

London Munich

MilanHamburg


Pricing Is Reaching Record Levels


3

4

5

6

7

8

9

10

88 91 94 97 00 03 06 09 12 15

Prime EU-15 Yields, %.Latest=June 2015.

Retail IndustrialOffice Retail trendIndustrial trend Retail trend

75

100

125

150

175

200

225

86 89 92 95 98 01 04 07 10 13

Prime EU-15 Real Rents Rebased to 100 in 1986. Latest=June 2015.

Retail IndustrialOffice Retail trendIndustrial trend Retail trend


Spain In Particular Has Seen Yields Compress At A Rapid Rate


-100

-50

0

50

100

150

200

250

300

06 07 08 09 10 11 12 13 14 15

Prime Office Yield Premium Over West End, bps.

Paris Stockholm Frankfurt Amsterdam Madrid Prague


Prompting Some Investors To Take Profits


-$150B

-$100B

-$50B

$0B

$50B

$100B

$150B

$200B

$250B

2007 2008 2009 2010 2011 2012 2013 2014 YTD'15

Private Equity Fund Transactions In Europe.

Buying Selling Net


Others Are Looking For Higher Yielding Assets


0

50

100

150

200

250

300

350

400

450

Yield Gap Over The Current Cycle.

Maximum Minimum Q2 15


Others Are Using Leverage To Increase IRRs

Source: CBRE Global Investors Treasury Department.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%Prime Yield Spread Over Cost Of Debt, PP.


So Is There Still Embedded Value In This Market?


20

30

40

50

60

70

80

90

100

110

120

06 07 08 09 10 11 12 13 14 15

Real Prime Office Capital Values Per Sq M Rebased To 100 In Q2 2007.

Frankfurt

Amsterdam

London City

Paris

Prague

London West End

Madrid


We Are Still Early Cycle For The Rent Recovery

-5

0

5

10

15

20

High Street Retail Shopping Centre

Real Prime Rent Growth, % cumulative, 2015-2019

Source: CBRE Global Investors.


European Real Estate Investment Themes

DOMINANT RETAIL CENTRES PRIME LOGISTICS FACILITIES IN MAJOR DISTRIBUTION HUBS

CYCLICAL OFFICE RECOVERY NICHE RESIDENTIAL IN UNDER-SUPPLIED MARKETS

Retailers are concentrating their presence in dominant retail locations/formats

PreferredMarkets

Central London & Paris high street retailNW European dominant shopping centres with asset management potentialSouthern Europe for yield compression & rent growth

Shortage of modern facilities and strong demand driven by e-commerce

PreferredMarkets

Major NW European marketsWarsaw and Czech RepBarcelona

Shortage of modern space in city centres combined with strong demand from media and tech companies in emerging locations

PreferredMarkets

London & ManchesterAmsterdam South AxisMadrid & BarcelonaFor higher risk-adjusted return investors - Budapest

Demographic trends combined with shortage of supply for Independent/assisted living facilities and student accommodation

PreferredMarkets

London residentialStudent housing in NWEuropeSenior living in the UKDutch social housing given regulatory change

Preferred Investment

Themes


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tuesday 29 september 2015 global real estate trends and

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