European Real Estate Quarterly Q1 2015

Transcription

1 European Real Estate Quarterly Q1 2015

2 Economy and Capital Markets Perhaps the most important development in Europe since the last Quarterly, has been implementation of QE by the ECB as long expected by this publication. The announced QE program was at the upper end of expectations and began in early March, with purchases of up to EUR60 billion per month until September 2016 (and quite possibly later). The purchases will cover Eurozone government and agency bonds, but also include the existing covered bond and ABS 1 purchase programs. At the time of writing Greek and Cypriot government bonds were not eligible; The QE program will be conducted alongside the European Commission coordinating a public-private infrastructure investment fund that is expected to reach EUR300 billion. This fiscal initiative will complement not only the latest monetary policy efforts of the ECB, but also the ongoing (albeit slow) structural reforms that are occurring in a number of Eurozone countries; The announced round of QE is expected to result in purchases of around EUR 1.1 trillion or slightly over 10% of Eurozone annual GDP. The program is similar in scale and speed to the initial programs from both the Fed and BoE 2. However, the ECB's QE program will need to eventually double in order to match the Fed and BoE programs in size (as a proportion of nominal GDP); The QE program will likely achieve its aims through three primary channels: 1) by lowering the risk-free rate, encouraging investment in higher risk assets, and ultimately via the 'wealth effect'; 2) via increased lending to the real economy as banks find themselves with higher cash levels once/ if they sell their bonds to the ECB; and 3) via depreciation of the Euro as QE increases the money supply; As the program was so widely anticipated (with bond yields compressing considerably in the months leading up to announcement) and bank lending growth suffering due to a lack of borrower demand in recent years, transmission mechanisms 1) and 2) above might not prove as effective as they did for Fed and BoE QE rounds. It's thus expected that 3) above (depreciation of the Euro) proves to be the main way in which the ECB program will have effect, and indeed as Figure 1. illustrates, the Euro has already weakened considerably against the USD in recent months; Aside from an increase in competitiveness, a weaker Euro will also have an important second effect: boosting the cost of imported goods and thus helping to stoke inflation. This is something the ECB will welcome, considering the Eurozone entered outright deflation in December 2014 (and remained in deflation in February 2015) as Figure 2. shows; World trade volume growth has grown little between mid-2014 and early However, for the first time since mid-2014, Eurozone export volumes are now once again increasing, albeit slowly. With export growth slowing more recently in Asia, this will be a headwind for the Eurozone maintaining this positive momentum, even with a weaker Euro helping to underpin exports; Despite some analysts last year forecasting the Eurozone to re-enter recession, this has yet to happen; the economy seems to have stabilised, and the outlook is improving noticeably. A combination of lower energy and commodity prices, ECB QE, and stronger US consumption should support continuing Eurozone recovery; Figure 1. EUR and GBP per USD Source: Macrobond Figure 2. Eurozone core and headline CPI In the UK, it seems that the growth out-performance of 2014 has yet to moderate. Whilst lower oil prices and ECB QE are net-positive for the UK economy, a downside risk of stronger Sterling vs. the Euro is weaker manufacturing production (which remains exchange rate sensitive). This is in contrast to service Source: Macrobond sector output, which continues to grow. With ECB QE expected to predominantly deliver results through a depreciation in the Euro, domestic demand will likely remain the UK's primary growth driver in the short-term; 1 Asset Backed Securities 2 Bank of England

3 Looking ahead, the arrival of ECB QE is certainly a net-positive development, but it is unclear whether it can catalyse a sea change in Eurozone fortunes. Many elements of the region's economies require further delevering, fiscal adjustment, internal devaluation, and structural reform. As the last five years have demonstrated, these are often politically-charged issues that don't easily garner voter support or that if voted in, entail hardships that voters in some countries find they are ultimately unwilling to tolerate. As ever, we will be carefully monitoring developments and flow-on effects to real estate. Investment Market 2014 European investment activity at highest level since the GFC 3 Strong investor sentiment coupled with increasing cross-border capital flows continue to drive the recovery of the investment markets, with 2014 full-year investment volumes across the region rising by 32% y-o-y to reach EUR218 billion. A total of EUR77.6 billion was transacted during Q4, an increase of 49% q-o-q and 27% y-o-y; All parts of Europe performed well in 2014, except eastern Europe where recent political events in Russia and Ukraine have had a significant negative impact on investment volumes investment volumes in the core markets of western Europe continued to gain pace (+12% y-o-y), while investment volumes surged by 56% y-o-y in peripheral markets. Positive investor confidence extended to the Netherlands, Italy and Portugal during Q4 2014, while Ireland and Spain continued to draw increasingly high levels of investor interest; In the UK regions, stronger economic activity combined with the higher yields on offer (relative to central London) have spurred investors to increase investment outside the capital. This increase in regional investment activity has not been solely due to yield-reaching domestic investors, as cross-border investment into the UK regional markets increased by 43% during Although central London offices continued to be the largest segment of overall UK investment volumes, there was growing investor demand in other sectors, with 2014 investment volumes for the UK-wide industrial sector increasing by nearly 60% y-o-y; France saw 2014 investment volumes increase by 31% y-o-y, with the majority of investment activity focusing on the greater Paris region. The Paris office market in particular made a big contribution to French investment volumes during the year, mainly due to strong foreign investor demand and the higher yields that Paris offers over the central London office; As Figure 3. shows, The All Property prime yield continued to edge down during 2014, predominantly due to a surge in investment activity across Europe. The Crisis Countries 4 saw the pace of yield compression accelerate across all sectors, led by Dublin retail and industrial (-150bps y-o-y), Lisbon offices and industrial (- 125bps y-o-y), and Madrid offices (-100bps y-o-y); Outlook With global capital pursuing real estate investment at near pre-gfc levels, investment activity in the wider European market is expected to remain strong, despite the clear difference in fortunes between many European investment and occupier markets; The recently launched ECB QE program has already started to positively impact the investment market via yield compression. With European government bond yields having compressed even more over the last quarter, the relative value merits of real estate remains firmly in place which will no doubt attract even further capital; As Figure 4. shows, prime yields for all three sectors of core markets of western Europe are at or near their historical lows, driving prime capital values in these markets to (or above pre- Figure 3. European commercial property investment volumes and EU all property prime yields EUR billions Source: CBRE Figure 4. Selected European markets prime net initial yields (current, historical average and range) % Source: PMA European investment volume (four quarter rolling) EU all property prime yield Office average Min Max Current Retail average Logistics average % Global Financial Crisis 4 Greece, Italy, Spain, Portugal and Ireland

4 GFC highs). The precipitation of known-unknown and/ or unknown-unknown risks notwithstanding, markets such as Milan (offices, retail and logistics), Dublin (retail and logistics), and Madrid (offices) offer high expected returns; The outsized prime-secondary yield gap in most European markets remains largely in place and an ever-larger number of investors are expected to take advantage of this in their reach for yield in an increasingly yield-constrained environment; Logistics developments in central Europe are becoming increasingly attractive, due to a combination of strengthening occupier demand, limited supply of modern stock, and an improving economic outlook. Office Market As Figure 5. shows, the final quarter of 2014 saw office occupier demand recover, with overall take-up across the major markets of Europe improving 40% q-o-q and 21% y-o-y. Among individual markets, take-up rose most notably in Dublin (193% q-o-q) and central Europe (92% q-o-q), due to a number of large letting deals; Q4 saw quarterly letting activity in central Paris rebound off the low level from Q3, with Q4 take-up rising by 55% q-o-q. This increase was partially driven by strong occupier demand in La Defense and the Western Business District. Annual take-up in central Paris reached 1.12m sq m during 2014, which is an increase of 14% y- o-y and broadly in-line with the 10 year average; Figure 5. Selected European markets quarterly office take-up 000s sq m 2,500 2,000 1,500 1,000 Letting activity in the German top seven markets rose by 3% y-o-y in 2014, with aggregate take-up reaching 2.9m sq m. On a city level, take-up rose most in Berlin (27% y-oy), followed by Stuttgart (25% y-o-y), and Source: PMA Hamburg (19% y-o-y). In contrast, Dusseldorf and Frankfurt recorded the biggest declines in occupier demand, with take-up falling by 30% and 20% y-o-y respectively; 500 The overall supply market is characterised by a general lack of quality stock, partly due to low levels of development completions over the last two years. Vacancy rates continued to remain high in central Europe and the Netherlands, while supply fell modestly in all major German cities. Vacancy rates in Dublin (-380bps y-o-y) and central London (-210bps y-o-y) decreased sharply during 2014, with central London availability falling to its lowest level since 2001; Across Europe, Dublin and central London continued to experience the strongest rental growth during Lack of supply was a major driver of this strong rental growth. In Spain, prime rental values have reached a trough and positive rental value growth is being seen in the Madrid office market, albeit at a slow rate; Q4 European office investment volumes reached EUR34.7 billion, representing an increase of 47% q-o-q and 18% y-o-y. This surge in investment activity boosted overall transaction levels to the highest level since the GFC, with 2014 investment volumes reaching EUR95 billion, up 23% y-o-y. Spain, Ireland and the Netherlands experienced the biggest increase in investment activity, with investment volumes rising by 204%, 110% and 88% y-o-y respectively; Most European office markets experienced further yield improvements during 2014, with prime yields declining sharply in Dublin (-125bps y-o-y), Lisbon (-93bps y-o-y), Madrid (-92bps y-o-y) and Manchester (-75bps y-o-y). The core markets in western Europe continued to see modest yield compression during 2014, with prime net initial yields in central London and the top German markets now at or lower than their pre-gfc lows; 0 Central London German top 7 Dublin Central Paris CE3 Madrid Outlook Looking ahead, occupiers preference for prime grade A office space is expected to remain strong during This, combined with a strengthening in occupier demand across the wider European market is likely to see increased competition for the best buildings in those markets with under-supply; Development activity is expected to remain modest in most European markets, which will further support rental growth prospects. Dublin, Madrid and central London are expected to experience the strongest rental uplifts over the next six quarters, with this growth being driven to a large degree by low levels of new supply; The majority of European office centres are forecast to see further yield compression during 2015, led by the major UK regional centres and central Europe. With economic growth in the UK and central Europe forecast to outperform many other European countries, high levels of investor interest is likely to persist in those markets.

5 Logistics Market Strong rebound in the United Kingdom and Germany Occupier Activity Logistics take-up totalled 5.6m sq m in the German market in This is the second highest volume ever achieved (from lettings and owner-occupiers) after that of This represents an increase of 11% y-o-y and more than 20% above the five year average. Assuming that the economic developments remain positive and that demand remains strong, annual take-up could again reach 5m sq m 2015; Prime rents for warehouse space in the 5,000 sq m size category have remained stable over the course of 2014, except for a slight rise in Munich. The highest German logistics rents are still paid in Munich, followed by Frankfurt, Hamburg, and Düsseldorf, while Berlin remains the most affordable location. Rental values are expected to remain mostly stable in 2015; In the UK during 2014, 1.87m sq m was let or acquired for occupation, of which about 1.13m sq m was signed in H2. Y-o-y, take-up increased by 6%. During the year availability decreased by 43% from 2m sq m to 1.13m sq m, as the remaining modern vacant space that had been completed in 2009 has been let; New speculative development activity is beginning to emerge in the UK, but units are being rapidly taken up as demand continues to remain strong. The lack of quality supply should now induce rental growth, with the London and south east regions leading this trend; French take-up reached 2.37m sq m in 2014, representing a 13% decrease y-o-y. Occupier activity was mainly supported by built-to-suit schemes in the Paris and the Lyon regions. Most large transactions (>50,000 sq m) were located in these two markets; In France, take-up in cross-docking facilities for parcel and urban deliveries increased strongly in Retailers were the most active occupiers, while industrial operators have tended to postpone take-up intentions. Immediate supply remained stable during 2014 at around 3.4m sq m. While existing supply is decreasing in terms of quality, semi-speculative projects are relatively numerous and could meet the needs of future built-to-suit projects. Face rental values remain stable but incentives vary depending on a number of factors, including quality and location; Investment Germany s logistics investment market reached a new record in 2014, with transaction volumes reaching almost EUR3.6 billion (an increase of 57% y-o-y and exceeds the 2006 and 2007 figures of ceur 2.5 billion each); In Germany, international investors were particularly active during Their contribution to investment volumes represented slightly more than EUR2.2 billion, generating a market share of 62% of the sector s volumes. The share of portfolio transactions almost doubled y-o-y to EUR1.8 billion and almost half the sector s total transaction volume was generated by portfolio transactions; Notwithstanding any external shocks, German transaction volumes could again exceed EUR3 billion in The scarcity of class A stock could cause prime net initial yields to compress further in some locations; New records were set in the UK logistics investment market in 2014, with volumes reaching EUR3.84 billion, an increase of 64% y-o-y. As a result of the ongoing increase in investor appetite for logistics assets, prime net initial yields have continued to compress, with evidence of assets trading at 5.0%; 2014 French logistics investment volumes totalled EUR1 billion. The upswing in occupier activity in the established markets of Paris and Lyon appears to have boosted investor sentiment and investment volumes have increased accordingly. Two large portfolio deals represented half of this volume. Investors have been focussing on new buildings, including recently delivered built-tosuit-warehouses. Prime net initial yields compressed further from 7% at end-2013 to 6.75% at end-2014; Outlook Figure prime European logistics yield evolution % Source: PMA, AEW Europe Min 2014 Max With supply of modern space falling across the main European logistics markets, rental growth is expected in prime locations as demand continues to be robust, being particularly supported by the online retailing growth; As strong investor demand for prime assets has compressed yields, investors are expected to increasingly consider Core+ alternatives, including speculative developments in the UK or shorter unexpired lease length investments in Germany.

6 Retail Market As Figure 7. shows, European retail sales volumes rose by 0.9% in 2014, as the Eurozone recovery, private sector delevering, and past ECB stimuli started to have an effect on household spending patterns; However, the EU average masks differences at individual country level, with some markets such as Italy and the Netherlands still facing challenging conditions. Further retail sales volume growth is expected during the remainder of 2015 for the EU as a whole; Shopping centre development activity remained subdued during 2014, with completions reaching less than 1,000,000 sq m, a large decline from the 2,021,000 sq m recorded in 2013; Outside France and Germany, new shopping centre starts were largely in the Crisis Countries due to further economic recovery across many of these countries, high rates of unemployment slowly declining, and increasing tenant demand from international retailers for well-located, quality space; Figure European retail sales volumes (y-o-y % change) Ireland UK Poland Sweden Czech Republic Hungary Spain Germany EU Finland Portugal France Italy Netherlands Greece European retailers have continued to seek out new locations, in both markets they already have a Source: PMA presence and in markets they do not yet have a presence. Notably, prospective tenants continue to have highly selective requirements. Steady demand for major high street retail pitches has meant most cities posted prime rental growth in 2014, with Lisbon, London and Warsaw particularly outperforming; In France, the retail occupier markets remains polarised, with Core locations enjoying strong tenant demand and non-core locations considerably weaker; While French shopping centre completions remained buoyant in 2014, activity was largely focused on redeveloping and refurbishing existing schemes; In Spain, the occupier market continues to benefit from the economic recovery, particularly over the last 18 months. The shortage of prime space in Madrid and Barcelona has led retailers to turn to edge of prime locations; Global investor demand remains buoyant Rolling four quarter investment volumes saw retail investment activity across Europe decrease by 3.1% q- o-q during Q4, as Figure 8. illustrates. However, on a y-o-y basis, there was an increase of 10.2%, with volumes reaching EUR47.9 billion; European shopping centre investment volumes reached EUR20 billion in 2014, for the first time since 2007 and almost all major markets saw above average transaction volumes; The combination of strong investor demand and a lack of quality assets for sale has induced further prime net initial yield compression, to 2.8% in London, 3.3% in Munich and 3.4% in Paris; In Germany, investor demand remains well ahead of supply in the top seven cities, leading investors to express growing interest in second tier cities. As a result the yield gap between prime and secondary locations has started to narrow. Figure 8. European retail investment volume EUR billions Four quarter rolling Quarterly Source: PMA

7 Residential Markets As Figure 9. shows, investment volumes across Europe for apartment/multi-family housing in 2014 fell by 16% y-o-y. However, this decrease masks the trend of an increasing institutional investor interest in the sector, given the supply-demand imbalance in a number of European cities; United Kingdom The housing market ended 2014 on a weak note, with little sign of the excess demand that characterised the start of The tightening in mortgage regulation, designed to encourage responsible lending, reduce the risk of a credit fuelled boom, and ultimately stabilise the market, has put downward pressure on demand; Price pressures also alleviated throughout H due to widespread affordability issues and speculation about an imminent BoE rate rise; The positive outlook for the economy, combined with the Q implementation of decreases in Stamp Duty Land Tax for properties sold for less than GBP937,500, are likely to give support to demand during Furthermore, in early Q1, mortgage interest rates declined as the prospect of more imminent base rate rises receded, which is likely to also support pricing; France Figure 9. European apartment sales volume EUR millions 30,000 25,000 20,000 15,000 10,000 5,000 Source: RCA Annual investment volumes were maintained during H1 2014, after increasing in However, the 12 month rolling volume average fell slightly in September, to 725,000 houses sold. Despite this fall, on a y-o-y basis, the annual number of transactions for September rose by 5.4%; House prices for all existing dwellings in France fell by 0.6% q-o-q during Q Within this, prices for existing apartments continued to fall by 0.9% q-o-q, after a Q2 fall of 0.2% q-o-q, whereas prices for existing houses remained largely stable with a Q3 fall of 0.3% q-o-q after no price change in Q2. In Ile de France, prices have fallen continuously since the end of 2011, by around 5% between Q and Q3 2014; Since September 2013, the number of new builds started over a 12 month rolling period continued to fall, and reached 1998 levels for the first time in November 2014 with fewer than 300,000 new starts. The shortage of new build projects will affect the housing supply and is expected to help reduce downward pressures on prices; 0 Rolling 12 months volume Quarterly volume Germany Due to fewer portfolios being brought to market during 2014 than in 2013, investment volumes decreased by 22% y-o-y, only reaching EUR12.1 billion. Germany remained Europe s largest residential investment market, accounting for 51% of investment volumes due to relatively low prices vs. the European average as Figure 10. shows; During Q average prices per unit in Germany increased by 37% y-o-y but decreased by q-o-q. The recent fall in prices can be considerably attributed to investors shifting their attention to secondary cities, due to scarce supply in the top seven cities, and lower prices and favorable demographic trends to be found in secondary cities. Figure 10. Average apartment price EUR per unit 200, , , , , ,000 80,000 60,000 Germany 40,000 Europe Source: RCA

8 An affiliate of Natixis Global Asset Management AEW Europe is a leading European real estate investment manager with 9 offices throughout Europe. AEW Europe is focused on the creation, execution and management of discretionary commingled investment vehicles, separate account strategies and real estate securities funds to both institutional investors and private clients. The group has over 270 employees who are responsible for over 18 billion of assets under management. The integration of AEW Europe with the resources and capabilities of North American-based AEW Capital Management creates a truly global real estate investment management platform with aggregate gross assets under management of more than 37 billion. Research & Strategy Contacts AEW Europe 8-12 rue des Pirogues de Bercy Paris, France AEW Europe 33 Jermyn Street London SW1Y 6DN, UK AEW Europe Carl-Theodor-Straße Düsseldorf, Germany Sam Martin MSc MRICS Head of Research & Strategy Tel. +44 (0) sam.martin@aeweurope.com Ken Baccam MSc Director Tel. +33 (0) ken.baccam@aeweurope.com Shan Shan Qi MSc Associate Tel. +44 (0) shanshan.qi@aeweurope.com Virginie Wallut MBA Associate Director Tel. +33 (0) virginie.wallut@aeweurope.com Abraham Mboyo Mbango MSc Analyst Tel. +33 (0) abraham.mboyombango@aeweurope.com Investor Relations Contact Schalk Visser CFA Head of Investor Relations Tel. +44 (0) schalk.visser@aeweurope.com 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 be suitable 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 expressed herein 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 reasonable efforts 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, 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 permission of AEW Europe.