The Logistics Market in Italy H1 2012

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1 The Logistics Market in Italy H emerging as the most difficult year for the Italian economy since the beginning of the crisis, with a severe contraction of both consumption and industrial production Healthy take-up activity and slowdown in development contributing to a reduction in vacancy rates across prime locations. H has seen a take-up of just over 460,000 m² of warehousing space, up 12% on H Substantial slowdown in completions, with a total of approximately 102,000 m² new warehousing space delivered. Further delays are expected for the rest of the year due to limited credit available to developers Very limited supply of Grade A investment opportunities and weak demand by investors leading to just 40 million totally invested over H1 2012

2 2 On Point Macroeconomic overview Q Change Y-o-Y GDP -2.1% -290 bps Consumer prices 3.3% +70 bps Household consumption -2.5% -350 bps Unemployment 10.8% 33% Industrial production (Index) % PMI 44.3 (July) -12% Export Q has seen a continued contraction in the global economy, with GDP in the Eurozone declining by 0.5% on Q Distressed financial markets have resulted in increased volatility in the stock and bond markets in the Euro area, with Southern European countries particularly affected 1. Italy is one of the worst performing economies in the Eurozone, with an estimated decline in GDP by 2.1% and inflation at 3.3% in Q (against a Eurozone average of 2.7%). An increase in unemployment and youth unemployment (and low participation rate) reaching new highs also point to a worsening outlook for the industrial sector. Indeed, among the Consensus panellists the impact of acute fiscal corrections and weak private consumption are among the three key unfavourable factors affecting their macroeconomic forecasts for 2012 and 2013, alongside financial markets turbulence. EMEA, Purchasing Managers Indices, August 2012 Eurozone UK Germany France Spain Italy Aug '10 Sep '10 Oct '10 Nov '10 Dec '10 Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug '11 Sep '11 Oct '11 Nov '11 Dec '11 Jan '12 Feb '12 Mar '12 Apr '12 May '12 Jun '12 Jul '12 Source: Jones Lang LaSalle on Markit, JP Morgan data, August 2012 On the retail side, however, the overall decline in retail sales recorded by ISTAT (-2% Month on Month in June 2012) is possibly lower that could have been expected, reflecting the relative wealth that the average Italian household can still rely on; a map of disposable income at province level for EU 27 countries helps illustrating the point. Export also offers some relief, with a 1.4% growth Month on Month in May 2012 thanks to a 5.5% increase in export towards non Eurozone countries. EU 27, Disposable income per capita at NUTS 3 level, 2011 The decline in industrial production is reflected in the Purchasing Managers Indices, on a declining trend since March Source: Jones Lang LaSalle on Oxford Economics data, Sources for the section: Consensus Forecasts, July and August 2012; ISTAT, data as at June 2012, 2005=100; Industrial production: ISTAT data at Q2 2012; Banca d Italia, Bollettino economico, July 2012, Markit, JP Morgan data, August 2012.

3 On Point 3 Distribution warehousing market Key facts Italy H H Logistics stock (000s m 2 ) 12,570 12,940 Take-up 414, ,000 Overall vacancy rate 6.4% 5.8% Completion 164, ,800 Stock and completions With a stock that is now just under 13 mln m 2, Italy is among the largest European distribution warehousing despite its predominantly local reach 2. The pipeline is however quite generous. With a number of schemes delayed from 2011, under construction floorspace expected by the end of 2013 totalled over 517,000 m² and was up 59% on Q EMEA, Under Construction, Q compared to Q In the first semester of 2012 the economic crisis has started taking its toll on the development sector. As a result, the warehousing sector has seen a substantial slowdown in completions, with a total of 101,800 m² new warehousing space delivered, only 18,000 m² of which were concentrated in a single speculative scheme in the Lombardia region. Such a slowdown is happening in most of European countries, all of which are experiencing construction levels below their five-years annual completion average (France is the only exception). EMEA, Under construction and 5-years annual completions average, H sq m 2,000 1,800 1,600 1,400 1,200 1, Belgium Spain Netherlands under construction UK France Italy Germany Hungary Czech Republic Poland Italy 5-year annual completions average Russia However, more delays are now emerging: with limited credit available to developers, and limited exit options due to the stall currently characterising the investment market, projects are being put on hold unless they are built to suit or built to own. under construction 5-year annual completions average 2 Jones Lang LaSalle tracks modern distribution warehousing defined as properties that were completed after 1995 and are above 5,000 m 2 in size.

4 4 On Point Take-up activity and rental values Take-up Coupled with a healthy take-up activity the slowdown in development activity has affected vacancy rates across prime locations. H has seen a take up of just over 460,000 m² of distribution warehousing, representing an increase by 12% on H Italy, Logistics take-up, m², 2007 H ,000, , , , ,000 - Italy was one of the most dynamic markets across the JLL EMEA panel, and well above its 10 year take-up average. EMEA, Distribution Warehousing Take-up >5,000 m² (UK: >10,000 m²), 000s m², H Germany France Netherlands Russia Spain Italy UK Poland Belgium Hungary Czech Republic 657, , , , , , Yearly take-up Q1 Q2 Italy H1 Take-up H H year HY average Italy H Italy H ,000 1,500 2,000 2,500 Retail and 3PL operators were the most active in the semester. Out of the total 465,000 m² take-up, the 3PL sector totalled 40% with 184,500 m², the retail sector followed with 35% or 160,500 m², and the manufacturing sector, with courier and transport operators made up the remainder (100,200 m 2 and 19,500 m² respectively). Retailers saw a significant rise in activity compared to H1 2011, with a 161,000 m 2 take-up in H against 41,000 m 2 in H Italy, Distribution warehousing take-up by occupier type, m², H H % 90% 80% 70% 60% 50% 40% 30% 20% 0% 35% 53% 35% 22% 40% Other Retail Manufacturing 3PL Looking at deals in each sector, 3PL deals saw some large deals, with three deals only totalling 118,000 m 2. Among retail operators, four transactions accounted for almost 60% of the total 160,500 m² retail take-up, and the largest deals involved large discount chains. This is significant in the current macroeconomic context, as it reflects a possible change in consumers behaviour towards more affordable shopping options. The consumers good market, both luxury and fast moving, was also relevant among manufacturing and 3PL occupiers. In the manufacturing sector for instance fashion and beauty totalled just over 40% of the sector 100,200 m 2 take-up. The food sector accounted for another 45,000 m 2 of manufacturing takeup. This is consistent with industrial production data for Q2 2012, which saw intermediate goods suffer substantially compared to fast moving consumer goods. The most sought after locations in Q2 were the Lombardia region, mostly the province of Milan (26% of take-up) and Pavia (12%), as well as the Emilia Romagna region with Piacenza (14%) and Bologna (11%), where retailers operations were already located. Over 80% of the take-up involved Grade A properties, and the remainder saw a mix of local and international 3PL operators, couriers and modern distribution retailers seeking proximity to their end markets (possibly also to counter increasing fuel prices).

5 On Point 5 Vacancy The overall Italy vacancy rate has declined by 104 bps on H1 2011, to approximately 6%. In the Lombardia and Emilia Romagna regions, where the prime distribution warehousing locations are concentrated, vacancy is effectively at frictional level despite some releases. This is the result of a dynamic letting market in which constraints to credit for developers have limited not only speculative development but also built to suit activity. Tenants have thus turned to either built to own, when they had enough equity, or to existing properties. Owner occupation and lettings have increased in absolute numbers, and have grown from contributing almost 30% each to total take-up volumes in H to the current 44% of owner occupation and 40% of lettings. Italy, Distribution warehousing take-up by contract type, m², H H % 90% 80% 70% 60% 50% 40% 30% 20% 0% 176, , ,735 74, , , Pre-Let Owner occupied Let Despite the constrained competition, however, tenants have been able to negotiate more favourable terms, with more generous incentives compared to a year ago. Such tenant friendly environment is spread throughout Europe, with incentives contributing on average to in Amsterdam and London and to 8% in Munich, Warsaw and Budapest, against an average figure of 5% in Milan. In terms of rent-free periods incentives are at about six to eight months on typical 6+6 years leases (9+6 is standard for built to suit). EMEA, Prime rent and incentives as % of prime rent, / m²/ pa and %, Q London 2% Moscow Amsterdam 8% 8% Munich Warsaw Net Effective Rent 15% Madrid 8% Budapest 5% Milan Prime Rent 6% Brussels 6% Prague 45% Paris Source: Jones Lang LaSalle Reseach, 2012 Incidentally, 63% of all owner occupied floorspace (203,000 m²) was taken up by retail operators, 30% by 3PL and the remainder by a manufacturing company, all of whom may have had equity or preexisting credit lines to tap into. into. Rental levels The high levels of letting activity and constrained competition in Grade A properties in prime location has also helped sustain face rents which are stable on H across both prime and secondary locations. Prime Rent Q Change YoY Milan 52 = Rome 54 =

6 6 On Point Warehousing investment market The warehousing sector is being severely affected by the on-going uncertainty on Italy s economic fundamentals. Very limited supply of Grade A buildings in prime locations and weak demand by investors has resulted in just four deals over H totalling approximately 40 million, all of which were sold to owner occupiers. This may seem at odds with the evidence of constrained credit to nonfinancial firms. However, all the deals involved cash-rich firms who are likely to have chosen to secure their equity in their own buildings and to have considered renting the least convenient option at the moment. Industrial production has slowed down substantially on Q1, and year-end 2012 forecasts put Italy 4% below the Eurozone, negatively affecting demand for logistics assets. Italy, Warehousing investment volumes, 2003 H Average H requirements, owner occupiers appear to be the only investors actively pursuing opportunities. Prime net yields reflect the market conditions, having increased by between 10 and 15 basis points across all monitored locations. Italy, Prime net yields by submarket, 2007 H Milan Rome Investors are being cautious about Italy in general, but are also put off by the limited supply of Grade A investment properties and by sellers price expectations. As a result, assets whose location, building quality, lease length and tenant rating match investors requirements are not actively pursued. Increasingly Italy compares unfavourably with other non-core European countries in which prices are more aggressive, other things being equal. As a result, whilst warehousing remains an asset class that investors look at to diversify their portfolios, they do not necessarily consider Italian warehousing as the best product to do so. With institutional investors becoming even more cautious and exclusively focused on core investment opportunities (location, building quality, lease length and tenant rating), and country risk hampering activity even when opportunities match demand

7 On Point 7 Outlook Demand fundamentals The outlook for macroeconomic indicators remains weak. The Italian GDP is only expected to start growing again in Q but real GDP is still expected to experience negative growth in Consumption is expected to suffer from relatively high (albeit declining) inflation levels sustained by increases in indirect taxation. The Bank of Italy expects that real income may continue to decline throughout 2013 and the restrictive fiscal policy (considered too restrictive by 67% of the Consensus panel) may further constrain a recovery in consumption. Investment market Investors confidence has decreased on Q1, and the outlook for the remainder of 2012 is not reassuring. H1 has seen activity only by end users, a sign of the depressing impact of the on-going credit crunch and of the harsh economic crisis. Over the next months the macroeconomic environment is expected to continue constraining investment activity, with investment volumes lower than in 2011 and a potential further repricing, although some assets may struggle to raise interest even at higher yields e 2013e GDP* Industrial production* Household consumption* Inflation rate* Unemployment rate Source: Consensus Forecasts (August 2012), avg annual figure, e=consensus estimate, *= % change year on year. Occupiers market The constrained supply and lively demand are expected to continue putting pressure on existing stock with expectations of declining vacancy in prime location, also in light of the on-going difficulty in financing built to suit deals. As is happening in other sectors the market is seeing an increasingly segmented demand, very strong for prime properties in primary locations and strong for those in secondary locations, as well as secondary properties in prime locations. On a positive note, some interest is recorded towards Grade A properties with long leases and tenants with a strong covenants within established logistics park. The forthcoming months will be crucial in understanding future yield movements: should any prime deal go through in H then the outlook on yields by year end may remain stable. In the absence of transactions, however, the negative sentiment may lead to an increase in both prime and secondary net yields. H Outlook H Outlook Investment volumes Stable Stable Prime net yields Stable Stable This is expected to sustain rents, and incentives are consequently likely to remain stable in prime locations but possibly increase in secondary ones. H Outlook 3 H Outlook Take-up (000's sq m) Stable Stable Vacancy Rate (%) Decreasing Decreasing Completions (`000 sq m) Stable Decreasing Under Construction (`000 sq m ) Stable Decreasing Prime Rent ( /sq m/ pa) Stable Stable 3 Outlook compared to H1 2012

8 Jones Lang LaSalle Research Elena Di Biase Research Milan + 39 (0) Elena.DiBiase@eu.jll.com Roberto Piterà Logistics & Industrial Agency Milan + 39 (0) Roberto.Pitera@eu.jll.com Gianluca Sinisi Logistics & Industrial Capital Markets Milan + 39 (0) Gianluca.Sinisi@eu.jll.com OnPoint reports from Jones Lang LaSalle include quarterly and annual highlights of real estate activity, performance and specialised surveys and forecasts that uncover emerging trends. COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them. Printing information: paper, inks, printing process, recycle directive.