Southern Europe Investment Briefing Eri Mitsostergiou - European - - PowerPoint PPT Presentation

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Southern Europe Investment Briefing

Eri Mitsostergiou - European Research Director

September 2016

Agenda

• Southern European (SE)

markets overview

• Economy
• CRE Investment activity
• Sectors
• Players
• Opportunities and risks
• Spain
• Italy
• Greece
• Portugal

Economy – Spain stands out

• Strongest growth in Spain despite political

uncertainty – improving labour market and consumer sentiment

• Weak growth in Italy due to political risk

and fragile banking sector

• Austerity prolongs recession in Greece
• Slow growth and consumption in Portugal

Focus Economics

• 1.0

0.0 1.0 2.0 3.0 4.0 5.0

Greece Italy Finland Portugal Belgium France Austria Netherlands Germany Estonia Slovenia Cyprus Latvia Lithuania Spain Slovakia Luxembourg Malta Ireland

GDP annual variation % 2016

• 1.0

0.0 1.0 2.0 3.0 4.0 5.0

Greece Belgium Finland Italy Austria Netherlands Slovenia France Cyprus Germany Portugal Luxembourg Slovakia Spain Latvia Ireland Estonia Malta Lithuania

Consumption annual % variation 2016

SE CRE investment activity - holds good

• Generally correlated with rest of Europe
• Investors avoided PIGS after the GFC
• But CRE investment in SE picked up fast

since 2013

• In 2015 was almost €18bn up 27% yoy
• In H1 2016 was almost €7bn and expected

to match last year’s level

Savills

• 50,000

100,000 150,000 200,000 250,000

• 5,000

10,000 15,000 20,000 25,000 € million

S Europe investment vs Total

SE H1 SE H2 Total EU15

27% -2% 18% -18%

Spain is the largest market

• Spain is the largest market
• In H1 16 activity was 20%

above the LTA in Spain and 40% in Italy

• However in the European

context, SE still accounts for

• nly 7% of the total activity

Savills

€0.5 €6.8 €2.4 €8.3 S Europe investment by country 2015 Greece Italy Portugal Spain 4% 6% 6% 3% 6% 6% 6% 6% 6% 7% 86% 75% 65% 73% 71% 69% 74% 72% 74% 65% 10% 19% 29% 24% 23% 26% 20% 22% 21% 27% 0% 20% 40% 60% 80% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of S Europe commercial investment

S Europe Core Europe Rest of Europe

Higher allocations in retail driven by Xborder players

• Prime regional shopping

centres and prime high street units in strong demand (40% yoy in IT)

• Logistics is rising (34% yoy

in ES)

• Prime offices in the capitals

always in demand but hard to find

• Xborder investors dominate

the scene directly or through REITs in Spain (Socimi).

• Importance of national

investors in Italy is rising

Savills

49% 47%

Grand Total

Domestic Investment % Cross border Investment % 30% 66%

S Europe

46% 46% 29% 22% 26% 43% 11% 6% 15% 20% 22% 13% 0% 20% 40% 60% 80% 100% EU Italy Spain

Investment by sector 2016

Offices Retail Industrial Other

EU and US players dominate, slowdown from Asia/ME

• EU players account for 80%
• f the activity in Italy, US 4%

and ME 10%

• US money leads the activity

in Spain, drop from ME/Asia

• Demand is there for the right

type of product – lack of supply

Savills

42% 31% 10% 10% 7%

SE investment by investor origin 2015

EU US AsiaPac Middle Eastern Other/Unknown 56% 30% 3% 4% 7%

SE investment by investor origin 2016

EU US AsiaPac Middle Eastern Other/Unknown

Why SE? Economic recovery

• Bail outs, austerity and reforms started paying
• ff, slowdown of recession in 2013 return to positive

growth in 2014

• Significant reduction of country risk reflected in low

bond yields

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• 10
• 8
• 6
• 4
• 2

2 4 6 8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP % annual variation

Greece Italy Portugal Spain 5 10 15 20 25 30 35 40 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

10-year bond yield

Greece Italy Portugal Spain

Why SE? Attractive yield gap

• Core vs periphery yield gap widened

dramatically by 2012 to over 200 bps compared to a 114 LTA. Back to LTA now.

• Positive yield gap with previous peak

yield compression prospects.

Savills

50 100 150 200 250 300 06 Q2 06 Q4 07 Q2 07 Q4 08 Q2 08 Q4 09 Q2 09 Q4 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

Periphery vs Core yields

Core vs Periphery SC yield gap Core vs Periphery CBD office yield gap 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 01 Q1 01 Q4 02 Q3 03 Q2 04 Q1 04 Q4 05 Q3 06 Q2 07 Q1 07 Q4 08 Q3 09 Q2 10 Q1 10 Q4 11 Q3 12 Q2 13 Q1 13 Q4 14 Q3 15 Q2 16 Q1

Prime CBD office yields

Athens Barcelona Lisbon Madrid Milan

• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 20.0 25.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

IPD/MSCI Total return

Italy Spain Germany France

Why SE? Attractive returns

• S European prime yields still more

attractive compared to core

• Despite the rapid yield compression

yield differential of prime assets with risk-free rate (10y bonds) remains attractive

• Yield gap with previous peak mostly
• closed. Yields to stabilise this year.

Savills

Risks – Slow economic recovery

• Weak economic growth
• High youth unemployment
• Ageing population

KPMG

• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GDP % annual variation

Greece Italy Portugal Spain 0.0 5.0 10.0 15.0 20.0 25.0 30.0

Malta Austria Germany Estonia Netherlands Luxembourg Ireland Belgium Lithuania Slovenia Finland Latvia France Slovakia Italy Portugal Cyprus Spain Greece

Unemployment % active population 2016

Risks – The burden of NPLs on banks

• Spain the only country where NPL ratio is

down, first to create bad bank – SAREB

• New institutional framework in Greece

attracts demand from international loan management industry

• In Italy Atlante 2 private equity fund set up

to buy exclusively NPL’s. The recovery of the real estate market will boost NPL volumes in Italy.

• Three of Italy’s largest

banks, UniCredit, Intesa Sanpaolo, and MPS, have established internal bad loan divisions to house non-core assets and have set out deleveraging strategies, which include NPL sales

KPMG

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% Greece Italy Portugal Spain

NPL ratios

2013 2015

Risks – Politics

Savills

Outlook / Opportunities - Retail

• Consumer spending growth –

highest in ES, positive in PT and IT, slow in GR

• Retail parks – evolution of the

concept – redevelopment

• pportunities, rental growth

prospects

• Shopping centres - Undersupplied

regions – new/re developments ES, IT, PT, GR

• High streets – secondary cities –

strong tourist destinations in IT, ES (Venice, Florence, Bologna, Turin), 8 0% yoy rise

• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Greece Italy Portugal Spain Average Europe

Consumption annual variation

2016 2017 2018

Outlook / Opportunities - Offices

• Improving fundamentals – rising take

up, low supply, falling vacancies

• 30% yoy rise in Madrid
• Good rental growth potential (Madrid

and Barcelona top performers)

• 4% yoy rental growth in Madrid
• 30-40% below peak
• Refurbishments in CBD
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Warsaw Moscow Oslo Zurich Athens Prague Helsinki Brussels Rome Vienna Copenhagen Luxembourg Lyon Amsterdam Budapest Lisbon Milan Paris Frankfurt Hamburg London Munich Berlin Stockholm Dublin Barcelona Madrid average pa Axis Title

Prime office rental growth 2016-2018

Outlook / Opportunities - Other

• Tourism
• Hotels and second homes in

tourist destinations (ES, GR)

• Logistics
• Ecommerce creates new
• pportunities in the sector
• In H1 16 34% rise yoy in Spain

(€450m), 80% in Italy (€200m)

• Privatisation of public assets

European Travel Commission

1 2 3 4 5 6 7 8 2014 2015 2016 2017 2018

Tourist numbers growth

Europe Northern Europe Southern Med Europe Western Europe

Conclusions

• Economic recovery in SE steady but slow. Spain outperforms
• More reforms needed to drive economic growth and reduce public debt. Politics pivotal to

economic recovery

• Measures to speed up the deleveraging of the banking sector, improving investor

sentiment

• CRE investment is strong driven by Xborder investors and retail
• Most of yield compression is done, spread with bonds remains attractive
• Opportunities through asset management and rental growth
• offices and retail parks,
• refurbishments/redevelopment of offices and shopping centres,
• ecommerce/logistics synergies,
• high street in tourist destinations,
• tourism facilities

Thank you!