European Real Estate Market Outloook€¦ · What Could Go Right… `Beginning of a North American...

European Real Estate pMarket Outloook

PropertyEU's Outlook 2013 series of investment briefingsParis, November 22nd, 2012

Mahdi Mokrane, PhD, MRICSH d f R h & St t E

Focused on the future of real estate

Head of Research & Strategy - Europe

Economic Environment Overview: Barbell ?

US Europe Asia

• Growth has returned and business expansion is anticipated in 2013

• Recovery has so far been jobless

• Initial surge in sentiment post crisis has dissipated

• Europe facing double-dip recession

• China now seeing slower growth

• Japan is on track but affected by weaker exports

M i

Source: AEW

• Pent up consumer demand

• Fiscal uncertainty/ presidential elections

• Major fiscal restrictions and austerity in many countries

• Banking market over-levered

• Australia has had 21 years of growth,but some signs of slowing

• Significant investment capital within sovereign and super funds

Macroeconomic Picture

2 European Real Estate Market Outlook – October 2012

sovereign and super funds

Why I’m positive on the U.S.


U.S. Still Heading Toward a “Fiscal Cliff”

Mandatory 10% cuts on all discretionary spending y y p gbeginning January 2013 ($100 billion)

“Bush Tax Cuts” automatically expire at the end of 2012 unless affirmatively extended ($290 of 2012 unless affirmatively extended ($290 billion)

Payroll tax reduction ($120 billion) and extended $jobless benefits also expire at year end ($40

billion)

AMT inflation adjustment ($100 billion) and AMT inflation adjustment ($100 billion) and adjustment to Medicare reimbursement rate for physicians need to be affirmed by year-end

In total trims 4% 5% from GDP growth in 2013In total, trims 4%-5% from GDP growth in 2013

Next debt ceiling “extension” also needed by year-end to avoid downgrade/default risk


What is the Fed Trying to Do?

Increase the rate of economic growth by “over‐reserving” the lending system and reducing the overall leverage burden of the economy

QE3 is really “QE for as long as it takes”; here and in Europe and Japan

Force capital into “risk” assets by committing to zero yield on “safe” assets for a long time

d d b f fSpur consumption and investment today by raising expectations for future inflation

Reduce real borrowing costs by lowering nominal costs and increasingReduce real borrowing costs by lowering nominal costs and increasing inflation


The Fed Commits to Extended Accommodation

EXPECTED CHANGE IN FED POLICY BY NUMBER OF FOMC MEMBERSRECENTLY UNEARTHED HOME VIDEO OF BEN BERNANKE AS A CHILD

12

11

12

13BEN BERNANKE AS A CHILD

8

9

10

5

6

7

8

3

23

4

5

1 1

0

1

2

2012 2013 2014 2015 2016


Source: Federal Reserve (FOMC press release September 2012)

2012 2013 2014 2015 2016

What Could Go Right…

Beginning of a North American energy paradigm shift

– Re‐sourcing of manufacturing and re‐alignment of the energy supply chain

Housing

– Housing has been net negative to the recovery so far, but it has bottomed

Psychological and Confidence Shifty g

– Division of the election is over. If progress is made on “fiscal cliff”, psychology should improve quickly

Strong Corporate Balance Sheets (Cash)

– Banks and corporations are sitting on a mountain of a cash that could be deployed quickly


Why I’m much less optimisticabout the E.U.


Financial conditions have improved in the Periphery

• Surge in positive sentiment underpinned by the Q1 LTROs quickly dissipated in Q2 Weighted European Peripheral Bond SpreadQ1 LTROs quickly dissipated in Q2

• Some encouraging signs however (Draghi in July, Merkel-Hollande talks, ECB’s OMT scheme, and German Constitutional Court ruling) 7

8

g p p p% spread over German bund

g)

• The Draghi Plan is a pledge to buy unlimited quantities of bonds, enforce reform, and remove private investor concerns over seniority

5

6

• The Draghi Plan

• ushered the Eurozone crisis into a new phase, 2

3

4

p ,

• removed some short-term downside tail risk,

and has boosted short term market 0

1

10 10 10 11 11 11 11 11 11 12 12 12 12 12• and has boosted short-term market expectations. 07

/20

09/20

11/20

01/20

03/20

05/20

07/20

09/20

11/20

01/20

03/20

05/20

07/20

09/20

Source: Datastream, Oxford Economics, AEW Europe


, , p

The Draghi (ECB) OMT plan a positive but...

• The old ECB bond purchasing “Securities Market Programme” (SMP) has been terminated and replaced with “Outright Monetary Transactions” (OMT)

• This involves:

– Unlimited Crisis Country (CC) bond buying in the secondary markets

– For those CC that formally request EFSF/ ESM aid and accept the attached conditionality

Bond purchases to be fully sterilised and only focus on the short end of the yield curve– Bond purchases to be fully sterilised and only focus on the short end of the yield curve

– Seniority will not be affected for private investors by the bond purchases

– No OMT for Greece, Portugal, Ireland until they can access bond markets on their own

• The Draghi OMT plan was approved by the ECB in the first week of September, despite opposition from the Bundesbank

• Considering the German opposition to the plan and veto power over the use of the EFSF, and the above restrictions, the plan appears to be a watered down version of the outgoing SMP

• The plan’s strict conditionality means that participating countries will need to agree to further structural reforms and austerity


... no game changer

• Positive but incomplete:

– The exclusion of the three smaller CCs leaves them in a distinctly weaker position and effectively puts a ‘firewall’ of sorts around the two larger CCs of Italy and Spainp g y p

– If anything, the smaller CCs need the aid more, as they are more desperate to get their funding costs down, which is one factor necessary for their recovery. Their exclusion makes recovery more difficult for them and leaves them now more likely to exit the Eurozone

– Whilst the conditionality of reform and austerity is necessary for recovery, there is a risk these will be implemented too quickly and/or deeply and have a negative effect

– The plan on its own does not solve the chronic lack of competiveness and growth in the CC

• As such, our house view remains unchanged:

– Germany alone or jointly with the other northern European countries leaving the Eurozone; or even GB leaving the EU (over regulation, EU budget..)g ( g , g )

– or a number of the CC either defaulting and/or leaving the Eurozone is likely unless real conclusive measures are enacted.

• Ergo the OMT is not a game changer• Ergo, the OMT is not a game changer

• More important: without a meaningful banking union, the vicious interdependence between weak banks and weak governments cannot be broken.


But outlook remains challenging with domestic demand a drag on growthdemand a drag on growth

All d l d t G h t i • All roads lead to Germany: what in exchange for the price of rescuing/fixing the Eurozone?

• Italian (April) and especially German 3%

4%

Eurozone: GDP and Domestic Demand

• Italian (April) and especially German (Sept.) elections in 2013 are highly likely to drive the nature and timing of the Eurozone crisis in the short-term

0%

1%

2%

• In the meanwhile Europe will continue to fiscally consolidate and flirt with double-dip recession.

‐3%

‐2%

‐1%

• Eurozone PMI manufacturing and services indices indicate contraction

• The Eurozone economy is likely to continue to contract from slowing global demand

‐5%

‐4%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

GDP Internal consumption

to contract from slowing global demand, fiscal austerity, and a declining supply of credit

Source: Datastream, Oxford Economics, AEW Europe


, , p

Long term prospects likely to be below trend for EU

Main implications of the above scenario :

3,0

GDP Growth % point difference from historical average

• Germany and other northern Eurozone countries allow heightened inflation in the medium-long term

• EU real GDP contracts for the best part of 2012-2013

1,0

2,0 • The Bundesbank allows the ECB to lower its base rate

• Unemployment peaks in 2014-2015

1 0

‐

• EU economies rebound in 2016-2017 and only mean-revert towards historical GDP growth in 2019-2020

‐2,0

‐1,0 EUROZONE

US

BRICS

Real GDP Growth Europe (EU) UK2013 0.15% 1.0%2014 1.0% 1.4%

‐3,0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2015 1.5% 2.0%2016-20 (average) 1.9% 2.5%

13 European Real Estate Market Outlook – October 2012 Source: Oxford Economics, AEW Europe

But some countries will fare much better than others

AEW Europe’s attractiveness scoring for RE in EuropeCombining the Economy, Structural RE score and Forecasts (out of a maximum score of 100)

70,0

80,0

Forecasted Real Estate Performance

Structural CRE Strength

50,0

60,0 Macroeconomic strength

30,0

40,0

10,0

20,0

0,0

UK

Ger

man

y

Fran

ce

Pola

nd NL

Swed

en

Swit

zerl

…

Finl

and

Nor

way

Lux.

Aust

ria

Ital

y

Belg

ium

Dan

ema…

Esto

nia

Irel

and

Czec

h …

Spai

n

Slov

akia

Slov

enia

Port

ugal

Hun

gary

Gre

ece

14 European Real Estate Market Outlook – October 2012 Sources: AEW Europe

G S B D S S P H

AEW’s attractiveness scoring for RE in Europe : differentiation in the periphery and France in the middlep p yScore out of a maximum of 100

Total Score > 70

60 < Total Score <= 70






Sources: AEW Europe

What Could Go Right…

US and Asia growth and internal demand h l ll b k EU f ihelp pull back EU from recession

Most importantly the Eurozone has ammunition to deal with the crisis:

ECB even more interventionist

More bailouts

Full bailout for SpainFull bailout for Spain

Renegotiation for Greece

‘mini’ bailout for Italy?

New bailout for Portugal?

Move towards fiscal & banking union

M j t t l f iftlMajor structural reforms swiftly implemented in France


CRE: Why debt finance willplay centre stage


Why does it matter ?

The Effect of Debt Availability on the UK CRE Market

UK net lending to property companies (RHS, GBP billions) IPD UK capital value index (LHS, base=100)

35

40

250

300

20

25

30

200

10

15

20

150

0

5

50

100

‐10

‐5

0

981

982

983

984

985

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

009

010

011


1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2

Source: IPD, BoE

Senior mortgage real estate debt seen as the new super corecore

Typical lending terms for core property (sept. 2012)Based on a five year loan from a single lender. Margin over the Euribor/ Libor swap rate

Germany UK France Recent market Trend

Max LTV 67% 65% 65% ↔

Max Loan Size (€) 150+ 65 50-60 ↑( )

Minimum Margin 190 275 250 ↔

Funding Gap estimated to be more than €300bn according to our calculations.Senior mortgage real estate debt:

• Is directly backed by an underlying real asset (resisted during the 2009-type downturn)y y y g ( g yp )

• Has become even more attractive recently with higher margins now that banks have

somewhat retreated

• Increases a portfolio’s diversification as it sits between real estate and fixed income

European banks sell €7.5bn of property loans from Jan. to Sept. 2012 (CBRE)

19 European Real Estate Market Outlook – October 2012Source: AEW Europe

Core will stay King until the German election next yearGerman election next year


2012 Investment Volumes Lag those of 2011 for the MomentMoment

UK: Month on month cumulative investment volumesFrance: Month on month cumulative investment volumes

12 00014 00016 00018 00020 000

2012 2011 2010 2009

20 000

25 000

30 000

35 0002012 2011 2010 2009

2 0004 0006 0008 000

10 00012 000

5 000

10 000

15 000

20 000

• Volumes are slightly behind in the UK Germany: Month on month cumulative investment volumes

0J F M A M J J A S O N D

0J F M A M J J A S O N D

2012 2011 2010 2009g yand to a larger extent in France but the slowdown is more marked in Germany 15 000

20 000

25 0002012 2011 2010 2009

• Recall that Q4 2011 investment volumes in France were somewhat “stimulated” by the in termination of 0

5 000

10 000


the so called SIIC 3 tax break regime Sources: RCA, AEW Europe

J F M A M J J A S O N D

Periphery is way behind and has become an opportunistic play even for Core assetsopportunistic play even for Core assets

Italy: Month on month cumulative investment volumes Spain: Month on month cumulative investment volumes

3 500

4 000

4 5002012 2011 2010 2009

3 000

3 500

4 0002012 2011 2010 2009

1 500

2 000

2 500

3 000

3 500

1 500

2 000

2 500

3 000

0

500

1 000

J F M A M J J A S O N D0

500

1 000

J F M A M J J A S O N D

• Very low volumes despite a relatively good start of the year

• With Spain moving centre stage in the Eurozone crisis, investment

• Eurozone fears and risk aversion are quite high on investors’ agendas

volumes have tumbled

• Only opportunistic investors and a handful of local players are still


handful of local players are still activeSources: RCA, AEW Europe

Why debt finance will play centre stageCore will stay King until the German election next yeary g y

Commercial real estate Investment volumes in Europe (€bn) Yield divergence in Europe (%)

50 0

60,0

70,0

7 5%

8,5%

30,0

40,0

50,0

Italy

Spain

Germany

6,5%

7,5%

10,0

20,0

, Germany

France

UK4,5%

5,5%

0,0

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

3,5%'08 '09 '10 '11 '12

UK Regional France RegionalLondon Prime Paris PrimePeripherals

* 4 quarter rolling average (Office and Retail Yields)

• Risk aversion is still at all time highs: polarization visible between property types, locations and income profiles

Of t i t t i iti b 15% i th fi t h lf f 2012

23 European Real Estate Market Outlook – October 2012 Sources: RCA, PMA, AEW Europe

• Of note: overseas investors grew property acquisitions by 15% in the first half of 2012

Main takeaways

What kind of deals should you be i i hi i ?executing in this environment?


Real estate investment markets: overview

• Market characterized by strong risk aversion, but not a “wait and see” attitude• Majority of European property markets are posting stable net initial yields

• Absent a euro breakup, European real estate presents relatively good value:– with an average 6% NOI yieldwith an average 6% NOI yield

– CRE yields at 5% to 6% for Core offer a historically attractive yield spread when compared to very senior corporate bonds yielding 2.4% and 0.8% for a blend of UK, French, and German five-year government bondsy g

• Cross-border capital (incl. from other regions) is increasing and expected to continue to favor the London, Paris, Nordic, and Polish markets

• Main risk (and opportunity) is the estimated €200-400bn 2012-2014 funding gap• Opportunistic approach to European CRE should be backed by “don’t bet on

growth and convert assets to core” philosophy.


We know all about Core but is there room for other strategies?strategies?

Core Value Added Opportunistic Core Europe

Value Added Europe

Opportunistic Europe

ff CBD / Edge of CBD mainly Leasing Risk (Germany)Office CBD / Edge of CBD mainly

targeting London and Paris ? Liquidating FundsStressed capital stacks

RetailCity centre urban regeneration

?Temporary shift of focus to too

narrow a definition of Core RetailSale and leasebacks

? narrow a definition of Core (Secondary UK)

Residential Student accommodation ?Developer backing London &

South EastSolid demand in Germany

LogisticsLong-leased new build in the European logistics ‘banana

shaped’ market? Portfolio sales with heavy

discountsshaped market

Other Other Lodging alternatives and senior housing/clinics ?

Debt workoutsOperating Platforms in

specialized market segments(Self Storage)


(Self Storage)

Panel Discussion


Contact

Research & Strategy Investor Relations

Mahdi Mokrane, PhD, MRICSHead of Research & Strategy - Europe

8 12 d Pi d B

Schalk Visser, CFAManaging Director, Head of Investor Relations

33 J St t8-12 rue des Pirogues de Bercy 75012 ParisFrance

[email protected]+33 (0)1 7840 9260

33 Jermyn StreetSW1Y 6DN LondonUnited Kingdom

[email protected]+44 (0)20 7016 4845


This publication is intended to provide information to assist investors in making their own investment decisions, not to provide investment advice to any specific investor. Investments discussed and recommendations herein may not besuitable for all investors: readers must exercise their own independent judgment as to the suitability of such investments and recommendations in light of their own investment objectives, experience, taxation status and financial position.This publication is derived from selected sources we believe to be reliable, but no representation or warranty is made regarding the accuracy of completeness of, or otherwise with respect to, the information presented herein. Opinions expressedherein reflect the current judgment of the author : they do not necessarily reflect the opinions of AEW Europe or any subsidiary or affiliate of the AEW Europe’s Group and may change without notice. While AEW Europe uses reasonableefforts to include accurate and up-to-date information in this publication, errors or omissions sometimes occur. AEW Europe expressly disclaims any liability, whether in contract, tort, strict liability or otherwise, for any direct, indirect,i id t l ti l p iti p i l d i i t f i t d ith th f thi p bli ti Thi p t t b pi d t itt d di t ib t d t th p t ith t th p itt p i i

Focused on the future of real estate

incidental, consequential, punitive or special damages arising out of or in any way connected with the use of this publication. This report may not be copied, transmitted or distributed to any other party without the express written permissionof AEW Europe.

European Real Estate Market Outloook€¦ · What Could Go Right… `Beginning of a North American...

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