Capital flows & top picks in Europe in 2018 Property EU - - PowerPoint PPT Presentation

Capital flows & top picks in Europe in 2018

Property EU breakfast briefing Mat Oakley 5th March 2018

The economic story is looking pretty solid

2 Sources: Thomson Reuters, Focus Economics

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0

%pa

Average annual GDP growth 2018-2022

Factors supporting further strong growth for the EU

3

2000 4000 6000 8000 10000 12000 14000 16000 1-3-1999 1-1-2000 1-11-2000 1-9-2001 1-7-2002 1-5-2003 1-3-2004 1-1-2005 1-11-2005 1-9-2006 1-7-2007 1-5-2008 1-3-2009 1-1-2010 1-11-2010 1-9-2011 1-7-2012 1-5-2013 1-3-2014 1-1-2015 1-11-2015 1-9-2016 1-7-2017

€m

EU exports to China, 3 mth rolling average

Upside:

• Exports to China, new silk road and

strong world trade

• Consumer spending boosted by low oil

prices

• End of excessive austerity
• Loose monetary policy
• Easing of credit conditions

Downside:

• Brexit – negligible impact on anywhere
• ther than the UK
• Interest rates will come up & will affect

weightings to real-estate

• Low wage inflation could hamper

consumer economy

European investment volumes were up by about 10% last year

• 1,0
• 0,5

0,0 0,5 1,0 1,5 2,0 2,5 50.000 100.000 150.000 200.000 250.000 300.000 2012 2013 2014 2015 2016 2017 GDP % pa Millions GDP Commercial investment volumes (€)

Activity driven by significant recovery in UK, NL and strong DE markets, with the UK being the dominant market

• 60%
• 40%
• 20%

0% 20% 40% 60% 80% 100% 120% 140%

Ireland Luxembourg Sweden Norway Italy Portugal Denmark Czech Republic Poland Germany Spain Belgium France Romania Netherlands UK Greece Austria Finland Serbia

Annual change in Investment

Austria 2% Belgium 1% Denmark 2% Finland 4% France 11% Germany 23% Greece 0% Ireland 1% Italy 3% Netherlands 8% Norway 2% Poland 2% Portugal 1% Spain 4% Sweden 4% UK 29% Czech Republic 1% Romania 0%

With cross-border investors rising in importance, both from the USA and APAC

6

0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 5.000 10.000 15.000 20.000 25.000 30.000 35.000 United States China United Kingdom France Germany Switzerland Hong Kong Singapore South Korea Canada Millions

Source of Cross border capital in Europe - 2017

2017 Vol (€) yoy change

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2014 2015 2016 2017 Other Private Prop Co Institution Cross-border

London remains the #1 destination for cross-border investment into Europe, primarily due to its attraction to APAC investors

7 Source: RCA

€ 0 € 2 € 4 € 6 € 8 € 10 € 12 € 14 € 16 € 18 London Madrid Amsterdam Metro Helsinki Frankfurt Berlin Paris Rhine-Ruhr Metro Milan Hamburg

Billions

North America APAC Mid-East Other

+203% +187% +118%

• 41%
• 4%

+197% +2065% +61% +1257% +2%

Factors that I see affecting capital flows into real-estate and favoured destinations going forward

8

• Chinese policy
• Security & stability
• Returns on other asset classes
• Rising base rates/sovereign bond yields
• Falling property yields
• The cycle!
• Structural challenges/changes to property
• Retail, e-tail and distribution – will only one survive?
• Wellness, what workers want, Workspace as a service

(WaaS), AI and demand for office space

My top picks for 2018

9

Offices – expensive in the core, maybe time to look to the fringes

10 Chart source: RCA

• EU28 office-based employment grew by 2.5% in 2017
• Average vacancy rate dropped 50bps in 2017 to 7.3%
• Development activity is picking up, but Grade A CBD

undersupply will remain a theme

• Rents to rise 2.5% to 5% in 2018

But

• Yields are low and likely to go lower in the core
• Development finance still limited
• WaaS just beginning to challenge traditional landlords

in Europe

• Pick: edge of core and future core, TAMI friendly

refurbs, turning secondary into prime

Dusseldorf: Hilden Hamburg: City South Extension Munich: Periphery South-East Oslo: Bryn/Helsfyr Helsinki: CBD Dusseldorf: South Amsterdam: Hoofddorp Frankfurt: Eschborn Prague: Outer City Frankfurt: South

€0,0B €0,5B €1,0B €1,5B

Investors are already pushing into fringe or future core submarkets

2017 Volume Average

Retail – strong consumer story will be challenged by rise in online, but good locations will remain strong

11

• Consumer confidence almost at record levels
• Private consumption growth to stabilise at around

1.5%pa

• Prime high street rents broadly stable
• Mall rental growth polarising between good locations

and the rest

• Shift to online will happen
• Pick: Experience or Convenience, retail

warehousing is the most internet-defensive segment

• 4%

10% 6% 8% 164% 3% 17% 13%

• 14%
• 3%
• 15%

9% 20%

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% Amsterdam Athens Brussels Copenhagen Dublin Helsinki London Madrid Oslo Paris Stockholm Vienna Warsaw

Retail warehousing prime rental growth

yoy 5y growth

Logistics & industrial: The internet play

12

• Prime warehousing rents up 2% last year, and 11%

up on five years ago

• Investment volumes up 60% on 2016

But

• Operator margins are slim and can easily be

challenged by rising staff costs

• Investor competition will intensify
• Autonomous vehicles will redraw distribution maps
• Picks: urban logistics for e-commerce, Benelux,

CEE 2,0% 3,0% 4,0% 5,0% 6,0% 7,0% 8,0% 10 Q2 10 Q4 11 Q2 11 Q4 12 Q2 12 Q4 13 Q2 13 Q4 14 Q2 14 Q4 15 Q2 15 Q4 16 Q2 16 Q4 17 Q2 17 Q4

Industrial and office yield gap will close further (in the UK industrial is now yielding lower than offices)

Offices Shopping Centres Industrial

The rest: lots of interest in “alternatives” and property plays driven by structural change

13 Source: PWC Emerging Trends Europe 2018 (left), RCA (right)

Top 10 sectors for investment dictated more by fashion than liquidity?

• 1. Logistics
• 2. Seniors housing
• 3. PRS
• 4. Self-storage
• 5. Student housing
• 6. Serviced offices
• 7. Mainstream housing
• 8. Healthcare
• 9. Data centres

10.Industrial/warehouse

€0B €20B €40B €60B €80B €100B '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 PRS/Resi Hotel Student Housing Seniors Housing Data Center Other