Download - EPRA Insight London · 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

UK REAL ESTATE OUTLOOK

EPRA Insight London

Nick Webb - Exane BNP Paribas [email protected]

For important disclosures, please go to

www.exane.com/compliance

mailto:[email protected]

http://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


Yields fell sharply


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

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c-9

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c-1

0

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Alll

pro

pert

y equiv

ale

nt

yie

ld

Quite boring

Source: IPD

Rents (finally) returned to growth


● In fact – the best year for real rental growth since 2001!

Source: ONS, IPD, Exane BNP Paribas estimates

Capital values rocketed


YO

Y c

ap

ita

l va

lue

gro

wth

Source: IPD

And equities delivered strong outperformance


● The top sector in the UK equity market last year

Source: Datastream

Moving onto 2015…


● We are forecasting another good year for UK commercial

property & equities

Rental growth set to accelerate further


● 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

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3Q

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3Q

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3Q

2005

3Q

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3Q

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3Q

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3Q

2010

3Q

2011

3Q

2012

3Q

2013

Rental growth (LHS) RICS survey rent levels QOQ (RHS)

London offices – big demand / supply imbalance


2.6%

6.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Q1

2004

Q3

2004

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Q3

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2013

Q1

2014

Q3

2014

West End City

(30%)

(20%)

(10%)

0%

10%

20%

30%

-4

-3

-2

-1

0

1

2

3

4

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n 0

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l 05

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n 0

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n 0

8

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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


0

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Q3

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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

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-00

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-11

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-12

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-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


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

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2

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4

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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


● 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


● 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

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Q1

Q2

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Q1

Q2

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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

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600

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Ja

n-1

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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%

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West End / Midtown rental growth, LHS Equivalent yield, RHS

Faster rental growth normally means lower yields


● 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


Equities perform when rates rise

0

2

4

6

8

10

12

14

16

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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


● 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


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

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De

c-00

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c-02

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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

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95

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11

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12

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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


● 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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