Post on 18-Jun-2020
UK REAL ESTATE OUTLOOK
EPRA Insight London
Nick Webb - Exane BNP Paribas realestate@exanebnpparibas.com
For important disclosures, please go to
www.exane.com/compliance
We like UK Real Estate
● Rental recovery set to accelerate
● Downward pressure on yields
● Strong NAV growth for listed stocks
● Don’t worry about interest rates
Exane BNP Paribas | REAL ESTATE 2
But first – the 2014 story
2014
Exane BNP Paribas | REAL ESTATE 3
Yields fell sharply
Exane BNP Paribas | REAL ESTATE 4
4%
5%
6%
7%
8%
9%
10%
11%
De
c-8
6
De
c-8
8
De
c-9
0
De
c-9
2
De
c-9
4
De
c-9
6
De
c-9
8
De
c-0
0
De
c-0
2
De
c-0
4
De
c-0
6
De
c-0
8
De
c-1
0
De
c-1
2
Alll
pro
pert
y equiv
ale
nt
yie
ld
Quite boring
Source: IPD
Rents (finally) returned to growth
Exane BNP Paribas | REAL ESTATE 5
● In fact – the best year for real rental growth since 2001!
Source: ONS, IPD, Exane BNP Paribas estimates
Capital values rocketed
Exane BNP Paribas | REAL ESTATE 6
YO
Y c
ap
ita
l va
lue
gro
wth
Source: IPD
And equities delivered strong outperformance
Exane BNP Paribas | REAL ESTATE 7
● The top sector in the UK equity market last year
Source: Datastream
Moving onto 2015…
Exane BNP Paribas | REAL ESTATE 8
● We are forecasting another good year for UK commercial
property & equities
Rental growth set to accelerate further
Exane BNP Paribas | REAL ESTATE 9
● Landlords have pricing power: thanks to accelerating demand and limited supply
● Key leading indicators very bullish: the RICS survey points to rental growth of over 5% in 2015
Source: IPD, RICS, ONS, Exane BNP Paribas estimates
-90
-70
-50
-30
-10
10
30
50
(10%)
(8%)
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
3Q
1998
3Q
1999
3Q
2000
3Q
2001
3Q
2002
3Q
2003
3Q
2004
3Q
2005
3Q
2006
3Q
2007
3Q
2008
3Q
2009
3Q
2010
3Q
2011
3Q
2012
3Q
2013
Rental growth (LHS) RICS survey rent levels QOQ (RHS)
London offices – big demand / supply imbalance
Exane BNP Paribas | REAL ESTATE 10
2.6%
6.2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Q1
2004
Q3
2004
Q1
2005
Q3
2005
Q1
2006
Q3
2006
Q1
2007
Q3
2007
Q1
2008
Q3
2008
Q1
2009
Q3
2009
Q1
2010
Q3
2010
Q1
2011
Q3
2011
Q1
2012
Q3
2012
Q1
2013
Q3
2013
Q1
2014
Q3
2014
West End City
(30%)
(20%)
(10%)
0%
10%
20%
30%
-4
-3
-2
-1
0
1
2
3
4
Ja
n 0
5
Ju
l 05
Ja
n 0
6
Ju
l 06
Ja
n 0
7
Ju
l 07
Ja
n 0
8
Ju
l 08
Ja
n 0
9
Ju
l 09
Ja
n 1
0
Ju
l 10
Ja
n 1
1
Ju
l 11
Ja
n 1
2
Ju
l 12
Ja
n 1
3
Ju
l 13
Ja
n 1
4
Ju
l 14
BofE Agents: Business Services employment intentions (LHS)
WE/Midtown yoy rental growth, 6-month lag (RHS)
Source: ONS, IPD, BoE, JLL, RICS. Exane BNP Paribas estimates
Vacancy already very low More business services jobs
● Supply is tight: with vacancy rates close to cyclical lows
● Job creation driving demand: rising business services employment points to significant space needs
Retail – better than you might think
Exane BNP Paribas | REAL ESTATE 11
0
200
400
600
800
1000
1200
1400
1600
Q3
1972
Q3
1974
Q3
1976
Q3
1978
Q3
1980
Q3
1982
Q3
1984
Q3
1986
Q3
1988
Q3
1990
Q3
1992
Q3
1994
Q3
1996
Q3
1998
Q3
2000
Q3
2002
Q3
2004
Q3
2006
Q3
2008
Q3
2010
Q3
2012
Q3
2014
Retail rents Retail sales (internet-adjusted)
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
-50
-40
-30
-20
-10
0
10
20
Feb
-91
Feb
-92
Feb
-93
Feb
-94
Feb
-95
Feb
-96
Feb
-97
Feb
-98
Feb
-99
Feb
-00
Feb
-01
Feb
-02
Feb
-03
Feb
-04
Feb
-05
Feb
-06
Feb
-07
Feb
-08
Feb
-09
Feb
-10
Feb
-11
Feb
-12
Feb
-13
Feb
-14
GfK Consumer confidence index (LHS) Annualised 6-mth rolling rental growth (6-mth lag, RHS)
Source: CBRE, IPD, ONS, GfK, BIS, CBI, Exane BNP Paribas estimates
Consumer confidence is high Rents have fallen versus sales
● Consumers are spending again and prime shopping centres are finally reporting good sales growth
● The internet remains the big threat, but rents are much more affordable relative to physical sales
Industrial – a structural winner
Exane BNP Paribas | REAL ESTATE 12
Industrial employment is growing Space availability is shrinking
Source: ONS, IPD, JLL, Exane BNP Paribas estimates
● A growth story at last
● Rents already growing at twice the peak rate of the last cycle
60
70
80
90
100
110
120
130
140
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
Dec 8
6
Dec 8
8
Dec 9
0
Dec 9
2
Dec 9
4
Dec 9
6
Dec 9
8
Dec 0
0
Dec 0
2
Dec 0
4
Dec 0
6
Dec 0
8
Dec 1
0
Dec 1
2
Industrial employment ('000s, LHS) Real industrial rents (indexed, RHS)
13.5 10
8.3 6.1 6
17.2
16.3
13.8
9.8 9.6
0
5
10
15
20
25
30
35
2010 2011 2012 2013 H1 2014
Sq ft m
illio
ns
New Secondhand
-14%
-16%
-28% -2%
Our rental growth forecasts
Exane BNP Paribas | REAL ESTATE 13
● We forecast positive rental growth for all three major commercial property subsectors in 2015
● The strongest growth still likely to be in the London office market where the demand/supply imbalance is most extreme
Our market rental growth forecasts
Source: Exane BNP Paribas estimates
2015e 2016e
West End offices 15% 10%
City offices 13% 10% Shopping centres 3% 3% Retail warehouses 2% 2% Industrial 4% 4%
A healthy investment market
Exane BNP Paribas | REAL ESTATE 14
● High demand from commercial property industry for bank debt
● Sustained strong inflows into property funds
CRE driving demand for bank lending Fund inflows = capital growth
-20%
-15%
-10%
-5%
0%
5%
10%
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2007 2008 2009 2010 2011 2012 2013 2014
CRE contribution to demand for lending (LHS) QOQ CRE capital growth (RHS)
Source: BoE, IPD, IMA, Exane BNP Paribas estimates
-20%
-15%
-10%
-5%
0%
5%
10%
-300
-200
-100
0
100
200
300
400
500
600
Ja
n-0
7
Ju
l-07
Ja
n-0
8
Ju
l-08
Ja
n-0
9
Ju
l-09
Ja
n-1
0
Ju
l-10
Ja
n-1
1
Ju
l-11
Ja
n-1
2
Ju
l-12
Ja
n-1
3
Ju
l-13
Ja
n-1
4
Ju
l-14
GBPm net retail inflows (LHS) QOQ change in capital values (RHS)
0%
2%
4%
6%
8%
10%
12%(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
De
c-8
7
De
c-8
9
De
c-9
1
De
c-9
3
De
c-9
5
De
c-9
7
De
c-9
9
De
c-0
1
De
c-0
3
De
c-0
5
De
c-0
7
De
c-0
9
De
c-1
1
De
c-1
3
West End / Midtown rental growth, LHS Equivalent yield, RHS
Faster rental growth normally means lower yields
Exane BNP Paribas | REAL ESTATE 15
● Rate of rental growth the key driver of yield movements
● Expect peak multiples for (near) peak rents… and vice-versa
Source: IPD, Exane BNP Paribas estimates
We’re not worried about rising interest rates
Exane BNP Paribas | REAL ESTATE 16
Equities perform when rates rise
0
2
4
6
8
10
12
14
16
Ja
n-8
7
Ja
n-8
8
Ja
n-8
9
Ja
n-9
0
Ja
n-9
1
Ja
n-9
2
Ja
n-9
3
Ja
n-9
4
Ja
n-9
5
Ja
n-9
6
Ja
n-9
7
Ja
n-9
8
Ja
n-9
9
Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
Ja
n-0
9
Ja
n-1
0
Ja
n-1
1
Ja
n-1
2
Ja
n-1
3
Ja
n-1
4
Tightening Bank of England base rate (LHS) All Property equivalent yield
Source: BoE, IPD, Bloomberg, Datastream, Exane BNP Paribas estimates
Yields fall in rate rising cycles
● Don’t worry about the beginning of a rate-rising cycle – yields only tend to move out at the end
Our yield forecasts
Exane BNP Paribas | REAL ESTATE 17
● Investment yields fell sharply in 2014 but we still see scope for further declines this year
● The key risk is a demand shock which would slow rental growth
● 2016 could be the end of the road
Our yield shift forecasts
Source: Exane BNP Paribas estimates
2015e 2016e
West End offices -20 +30 City offices -20 +30 Shopping centres -15 0 Retail warehouses -20 0 Industrial -30 -10
An unchanged multiple would mean high returns
Exane BNP Paribas | REAL ESTATE 18
UK RE sector trading at a small spot premium Land Securities: share price versus spot NAV/share
(50%)
(40%)
(30%)
(20%)
(10%)
0%
10%
20%
30%
De
c-90
De
c-92
De
c-94
De
c-96
De
c-98
De
c-00
De
c-02
De
c-04
De
c-06
De
c-08
De
c-10
De
c-12
Source: Companies, Datastream, Exane BNP Paribas estimates
0
500
1,000
1,500
2,000
2,500
Mar-
91
Mar-
92
Mar-
93
Mar-
94
Mar-
95
Mar-
96
Mar-
97
Mar-
98
Mar-
99
Mar-
00
Mar-
01
Mar-
02
Mar-
03
Mar-
04
Mar-
05
Mar-
06
Mar-
07
Mar-
08
Mar-
09
Mar-
10
Mar-
11
Mar-
12
Mar-
13
Mar-
14
Share Price NAV
● We expect 2015 share price returns in-line with our 16% average NAV growth forecast
● UK REIT share prices track NAV closely – but watch out for the end of the cycle
Conclusion
Exane BNP Paribas | REAL ESTATE 19
● 2015 looks like being another good year
● But risks are rising as we get closer to the end of the cycle
● When the end does come, expect a hard landing
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