Good opening quarter. DTZ Research PROPERTY TIMES. Europe Industrial Q Contents. Contact

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1 DTZ Research PROPERTY TIMES Good opening quarter Europe Industrial Q1 215 June 215 Contents Contents 1 Economic climate 2 Occupier market 3 Investment market 4 Yields 5 Definitions 6 The European economy is back on track. All the European countries are back on positive territory at few exceptions. If the recession seems now to be history, the recovery is forecasted to be slow. Industrial production remains muted and even Germany, the largest European economy, has not been spared by the slowdown. Demand for logistics space is mainly driven by retailers and industrial companies, especially in the 3 core markets (UK, France and Germany). In this context, around 3.8m sq m of industrial space was leased in the main European markets covered in our study, a volume slightly higher than a year ago (3.6m sq m with Q1 214 figures) (Figure 1). Germany is the most important market with already 1.2m sq m of take-up in Q Worthy of note is also the market activity in the CEE, boosted by a strong performance of the Polish market; More than 8, sq m of logistics space was leased, up by 3 in comparison with Q After several years of downward pressure, rental values remained stable across the board and even increased in some CEE markets. Prime rental values are expected to enter in an upward cycle, with industrial rental values forecasted to increase by an average of 1. per annum over the five coming years. About EUR4.2bn were invested in the industrial sector at the European level, a volume in line with the one recorded in Q As for other sectors, the UK is the main European investment hotspot with EUR1.3bn of inflows. The main transaction of the quarter was closed in Italy with the acquisition of a EUR323m portfolio by CERBERUS CAPITAL MANAGEMENT. As in 214, international and US-based investors showed a strong interest toward the European industrial market. Almost EUR1bn of the inflows came from outside Europe. Contact Frank van der Sluys Head of Research DTZ Zadelhoff +31 () fsluys@dtz.nl Figure 1 Logistics space take-up Main European markets, million sq m Million 18 sq m Germany UK France Benelux CEE PROPERTY TIMES 1

2 Europe Industrial Q1 215 Economic climate Positive GDP growth almost everywhere for the first time since the crisis debuts Worldwide economy is definitely gaining momentum, with a GDP above the mark for the second year in a row in 214. Despite bearish results in Japan, Asia Pacific is leading the way with 4.7% GDP growth in 214 (5.3% in India and 7. in China). The US economy also showed strong recovery signs with GDP growth expected to reach the 3% mark from 215 (Figure 2). Even if the picture is less positive, the European economy is now backing on track after five years of struggle. At the noticeable exception of Italy (-. in 214), all the main European countries registered positive GDP growth in 214 and for the first time since 28. The UK and the CEE countries were the most dynamic with GDP rising by 3.1% and 3.% over the year respectively. These two areas are expected to lead the way in the coming years with an average GDP growth of 3. p.a. for CEE and 2. p.a. for the UK until 218. By contrast, recovery is expected to be subdued in France with a forecasted 1.3% growth per annum over the same period. European industrial production to remain subdued Europe confirms itself as a place of final consumption rather than production. Industrial production was muted in 214 and no rebound is expected in the medium-term (Figure 3). Even Germany, the European leader, posted an unexpected fall in Q Nevertheless, Eurozone April Markit PMI index for manufacturing industry posted a 13-month high giving a glimmer of hope for the continent. Foreign exchanges down Surprisingly, the weak Euro, the low inflation and the improving global economy did not translate into more international trade for Eurozone countries. Euro area is still struggling to gain market shares within international trade. Exports even went down by a record 6.9% in Q4 214 in comparison with the previous quarter (-9. in comparison with Q4 213). This was the third decreasing quarter in a row (Figure 4). This sharp slowdown could be explained by a lower demand coming from oil producer countries weakened by the severe fall in oil prices registered in the second part of 214. Figure 2 Annual GDP growth % % Source: Oxford Economics *China excluded Figure 3 Industrial production growth % % Source: Oxford Economics *China excluded Figure 4 Cross border trade growth % % Source: Oxford Economics *China excluded PROPERTY TIMES 2

3 Europe Industrial Q1 215 Occupier market A build-to-suit market Around 3.8m sq m of industrial space was leased in the main European markets covered in our study. This volume is slightly higher than the one recorded a year ago (3.7m sq m). The European industrial market confirmed its remarkable year 214 with quarterly volumes back to the pre-crisis levels (Figure 5). Germany is the most important market with already 1.2m sq m leased in only three months, down by for from Q1 214 but up by 9% by comparison to the average Q1 figures from 2. Worthy of note is also the performance of the CEE region with more than 8, sq m leased, up by 3 in comparison with Q The Polish market was particularly dynamic with 56, sq m of logistic spaces taken-up. While 3Pls remained shy, retailers and industrial companies have remained the main players of the European industrial market in Q In the UK, NEXT PLC signed over 65,3 sq m of logistics spave, DUNELM over 48,9 sq m in the Prologis Park of Stoke-on-Tren. In France, BUT leased 6, sq m and LIDL 4,8 sq m. With the e-retail burst, all these companies redefined their supply chain and favoured build-to-suit solutions rather than moving into an existing building that won t fully meet their needs. Figure 5 Logistics space take-up Main European markets Million sq m Figure 6 Germany UK France Benelux CEE Industrial rental values growth Birmingham Rotterdam London Antwerp New upward cycle in rental values After a bearish period, industrial rental values are stabilising in the bulk of the European markets. They even increased by 5% in CEE markets such as Bucharest and Budapest. The average European industrial rental value is of 68/ sq m/yr, and 56/ sq m/yr if the UK is excluded. Our forecasts suggest that 215 will be the starting point of a new upward cycle in rental values across Europe. Rents are expected to grow by an average of 1. per annum until 219 in Europe. The UK market, already the most expensive market in Europe with rental values of 23/sq m/yr in London and 9/sq m/yr in Birmingham, is expected to lead the way with rents forecasted to grow at an annual pace of above. After several years of shortage in qualitative supply, both speculative and build-to-suit buildings fuelled the market over the recent period with relative high values. By contrast, rents in the French and German markets are not expected to register significant change in the short term (Figure 6). Although French rental values remain amongst the lowest at the European level, ranging between 41 in the regional markets and 52 in the Greater Paris Region. Brussels Bucharest Budapest Paris Amsterdam Munich Lyon Berlin Warsaw Prague - - %

4 Europe Industrial Q1 215 Investment market Good start to the year The European industrial investment market posted a dynamic start to the year with a EUR4.2bn investment volume in Q1 215, a figure similar to the one registered in Q This performance is remarkable given the fact that 214 was a decade record year for the European industrial market with EUR21.7bn of investment. Nevertheless, the industrial sector remained a specialist playground attracting only of the total European investment inflows in Q1 215 (Figure 9). As for the other sectors, the UK is the main investment hotspot with an average market share of 41% over the past decade. This market share shrank sharply in Q1 215 with EUR1.3bn invested in Q1 215, i.e. 3% of the amounts invested at the European level. Thus, the UK largely kept its leading position. By contrast, investment activity was subdued in Germany and France - the two other main European markets - with EUR657m and EUR118m invested respectively. It represents half of the Q1 214 volume for Germany and even less than the quarter in France. Southern Europe continued to enjoy growing market activity with EUR617m already invested in industrial assets in Q This is a sharp rebound for a zone having recorded an annual investment volume of EUR357m on average over the past five years. This tremendous performance is mainly explained by a large deal in Italy. The UNICREDIT bank sold a EUR323m portfolio of foreclosed industrial assets to CERBERUS CAPITAL MANAGEMENT, a US based private equity firm. Big players back on the industrial market International investors were almost absent of the European industrial market during the crisis peak with only EUR568m invested in 29. Since then, they have increased year after year their exposure to the European market. In 214, their assets acquisitions reached a record level of EUR5.8bn. Year 215 started on the same pattern with already almost EUR1bn of inflows coming from outside Europe. Nevertheless, the industrial market remains a specialist playground. Domestic investors keep the lion s share with an average market share of around two thirds of the total investment volume. This trend was confirmed in Q1 215 with EUR2.6bn closed by investors on their domestic market (Figure 11). Figure 9 European industrial investment market, m Figure European industrial investment market, m Figure 11 European industrial investment market, m Industrial investment Industrial market share United Kingdom Germany Nordics CEE France Benelux Southern Europe Rest of Europe Domestic European Non-European 1 % %

5 Europe Industrial Q1 215 Yields Few room of vehicle for further yield compressions Given the strong appetite shown by investors, both domestic and foreign, and the lack of opportunities available on the market, prices are under an upward pressure. Prime yields went down by an average of 15 bps over the course of Q Nevertheless, yields are stabilising in many core markets in France, Germany and Belgium. By contrast, yield compression is still ongoing in the Peripheral markets such as Barcelona (7.75% down by 25bps in Q1 215) or Prague (7.%, -5 bps over the quarter). Room for further yield compression is narrowing but still does exist in some European markets. The bulk of markets are still above their historical through, even in London Heathrow at 5.% at the end of Q1 215 versus 4.% reached in mid- 27 (Figure 12). Going forward, our forecasts suggest that the current cycle is coming to its end with yields expecting to stabilise in the core European markets. Peripheral ones, in Southern Europe and CEE in particular, are expected to lag by few quarters and to stabilise only in 217. Figure 12 European prime industrial yields (Q1 215 = dot, Q1 25 to Q4 214 = line)

6 Definitions Operating licences Licences required to operate a warehouse building. There are around a hundred different kinds, the most frequent being numbered as follows: 15 (Covered warehouses), 153 (Wood and/or paper stocks), 2662 (Honeycombed Plastics storage), 2663 (Storage of manufactured plastics, tires), 1412 (Container storage of flammable gases or aerosols), and 1432 (Container storage of inflammable liquids). Classification Warehouses are classified according to their technical characteristics (hardness at ground level, unimpeded height, etc.), their accessibility (distance from the motorway, not being shut into an urban area), and their capacity for growth (adaptation to present and future ICPE standards and to the constraints of insurers). Turn-key transaction A building whose construction begins after a definite commitment from an occupier/tenant, even if a developer's project existed previously without construction having begun. These operations are included in take-up only when the preconditions (such as permits and financing) have been fulfilled. Owner-occupier project A building whose occupier is the owner Take-up The total deals, whether rentals or sales, carried out by users, including pre-let, turnkey rentals, and owner-occupier projects. Warehouse A building for stocking, distribution, or light assembly. Such premises are ranked in different categories: Class A for a highly functional or "new generation" warehouse, Class B for a building up to the standards of a modern warehouse, and Class C which includes all other warehouse buildings. Classification is done according to a number of criteria, such as the building's construction date, ceiling height, manoeuvring area, hardness of the floor, etc. Old or second-hand building A building that has already been occupied by a user. Also called "second-hand" buildings in contrast with "first-hand" or new buildings. Speculative building A building whose construction is begun without previous sale or letting to one or several users. Non-speculative building A building for which all the steps preliminary to launching the project have been taken (purchase of the land, preparatory studies, obtaining of the building permit, etc.), while actual construction will only begin once a user has committed to all or part of the project. New building A building that has never been used. Also called "first-hand" in contrast with "second-hand" buildings.

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