BRITISH GRI 2011 INVESTORS AND DEVELOPERS IN UK REAL ESTATE

BRITISHGRI2011

INVESTORS AND DEVELOPERS IN UK REAL ESTATE

Deutsche Bank

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

George Buckley, Chief UK [email protected] +44 20 7545 1372

UK Economics:A bumpy ride

British GRI Conference, 11 May 2011

mailto:[email protected]

George Buckley ([email protected], +44 20 7545 1372), Economics Research, Global Markets. May 2011Deutsche Bank

3

The UK recovery has been disappointing, compared to both the past and other G7 countries; history has proved that rebounds often happen, but that recoveries are volatile (as Q4 2010/Q1 2011 illustrate)

Sources: Haver Analytics, ONS, Bank of England, Deutsche Bank

A volatile and disappointing recovery

0

1

2

3

4

5

6

1832

1837

1842

1847

1850

1867

1879

1885

1893

1900

1903

1908

1921

1926

1931

1947

1975

1981

1991

Average growth (% yoy) in GDP in the twoyears following the last annual fall

LR avg

88

90

92

94

96

98

100

102

2006 2007 2008 2009 2010 2011

CAN FRAGER ITAJ AP UKUS

GDP levels, peak = 100



4

Sources: OECD, Reinhart & Rogoff (2010), ONS, IDS, Deutsche Bank

The downside risks to our growth forecasts

High debt & weak household incomes pose key downside risks to the outlook

-25

0

25

50

75

100

125

150

175

IT GE FR J P US CA UK

Levels

pp change since 97

Household liabiliies, % nominal disposableincome (2008 figures)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Below 30% 30-60% 60-90% 90% & above

Mean

Median

Real GDP growth (% yoy), advancedeconomies 1790-2009, by govt debtbrackets (% of GDP) - Reinhart & Rogoff

1

2

3

4

-3

-2

-1

0

1

2

3

4

5

6

2004 2006 2008 2010

RPI headline, % yoy (lhs)

IDS pay settlements, % yoy (rhs)



5

Sources: Bank of England, ONS, Haver Analytics, JP Morgan, Deutsche Bank

The key upside risks to our growth forecasts

-4

-3

-2

-1

0

1

2

3

4

5

6

70

75

80

85

90

95

100

105

1999 2001 2003 2005 2007 2009 2011

Sterling trade weighted (lhs)

Real trade weighted (lhs)

Official interest rates % (rhs)

Real official interest rates % (rhs)

-6

-4

-2

0

2

4

6

8

-8

-6

-4

-2

0

2

4

6

1988 1991 1994 1997 2000 2003 2006 2009

Credit impulse (net lending/GDP, yoy change (lhs)

Real GDP, % yoy (rhs)

Both series 2qma

Forecast based on unchanged net lendingand 1% qoq nominal GDP growth

The stimulus – rates, QE and sterling – has been huge, and the drag on GDP growth from credit should dissipate going forward

Year 1Income £100Pay down debt £40Left to spend £60

Year 2 £100 £20 £80 Spending up a third, but

we are still “de-leveraging”



6

Sources: Haver Analytics, ONS, Consensus Economics, Deutsche Bank

Inflation surprises

Just over a year ago the BoE had been expecting that inflation would fall below 1% in the first quarter of 2011. Commodity prices, the impact of lower sterling and tax rises have proved them wrong

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011

2010

2011

Evolution of Consensus Forecastsfor UK CPI inflation, %

-1

0

1

2

3

4

UK CAN EUR US SWI J PN

Latest core inflationreading, % yoy



7

Sources: ONS, Haver Analytics, Bloomberg, Deutsche Bank

Explaining sticky inflation: price level effects

There have been a number of external, exogenous, one-off price level effects that have pushed inflation higher: in particular, sterling, commodity prices & taxes

-4

-2

0

2

4

6

8

10

-40

-30

-20

-10

0

10

20

30

40

50

2001 2003 2005 2007 2009 2011

£ commodity prices (lhs)Headline input prices (lhs)Headline output prices (rhs)CPI (rhs)

% yoy rates

0

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009 2010 2011

CPI ex indirect taxes

CPI headline

Rates of inflation, % yoy

-4

-2

0

2

4

6

8

1997 1999 2001 2003 2005 2007 2009 2011

Core goodsServicesOverall CPI

CPI inflation, % yoy



8

There is a lot of variation between estimates of the output gap. Even if we were certain of the size of the output gap, it may impart less downward pressure on inflation than in the past

Sources: IMF, OECD, CBI, ONS, Haver Analytics, Deutsche Bank

What role is the output gap playing?

05

101520253035404550556065

1960 1970 1980 1990 2000 2010

UK

US

Openness (X+M as % of GDP)30

40

50

60

70

80

90-7-6-5-4-3-2-1012345

1980 1985 1990 1995 2000 2005 2010

OECD output gap, % (lhs)IMF output gap, % (lhs)CBI % firms below capacity, % (rhs)

Invertedaxis



9

BoE Governor Mervyn King has argued that price level effects should be accommodated, but that second round effects – higher inflation expectations and wage pressures – should not

Sources: Factiva, Consensus Economics, ONS, Deutsche Bank

Inflation expectations: questions about credibility

1.75

2.00

2.25

2.50

2.75

2005 2006 2007 2008 2009 2010 2011

UK

Euro

Consensus Forecasts, projections for inflation 6-10 years ahead, % yoy(as at October each year)

0

1

2

3

4

5

6

7

0

50

100

150

200

250

300

350

2008 2009 2010 2011

Factiva search hits for 'BoE' & 'credibility' & 'inflation' (lhs)

CPI inflation % yoy (rhs)



10

Sources: Halifax, Nationwide, ONS, S&P Case-Shiller, BEA, DCLG, Deutsche Bank

Nominal house price fall forecast for 2011

Whether it’s compared to past history or other countries, the downward correction to house prices does not look to have run its course yet

60

65

70

75

80

85

90

95

100

105

-12 0 12 24 36 48 60 72

Late 1980s/early 1990s adjustment

Current adjustment

Months after/before peak

Real house prices (peak=100)

50

100

150

200

250

1987 1990 1993 1996 1999 2002 2005 2008

US (S&P Case Shiller)

UK (Halifax)

Real house price indices, 1987=100

31%

0

20

40

60

80

100

120

1970 1975 1980 1985 1990 1995 2000 2005 2010

Real UK house prices2005 Q1 = 100

+73%

-34%

+30%

-14%

+100%

-31%

+164%

-16%



11

Sources: CML, DCLG, ONS, Deutsche Bank

Average affordability is not an encouraging sign

10

20

30

40

50

19691973197719811985198919931997200120052009

Mortgage repayments/disposable income ratio, %

Long-runaverage



12

Latest plans are for the coalition government to cut the structural deficit from 8.9% to 0.5% of GDP over the parliament - a significant acceleration relative to the previous government’s deficit reduction programme

Sources: OECD, HM Treasury, OBR, ONS, Bloomberg, Deutsche Bank

Coalition plans to reduce the deficit

-2

0

2

4

6

8

10

12

71-7

2

75-7

6

79-8

0

83-8

4

87-8

8

91-9

2

95-9

6

99-0

0

03-0

4

07-0

8

11-1

2

15-1

6

Deficit outturns and OBR forecastsBars are structural, line is total, % of GDP

Fcast

30

35

40

45

50

55

60

FRA

BE

L

AU

S

ITA

UK

EU

R

GR

E

PO

R

GE

R

SP

A

CA

N US

JPN

AU

SL

Total governmentoutlays, % of GDP

-1

0

1

2

3

4

5

6

7

8

2008 2009 2010 2011

UKSpainIrelandItalyPortugal

Spreads to bunds(10Y govvies, %)



13

Real government spending is expected to fall by 1.3% per year on average from 2011-15. The direct effect of this will be to knock 0.8pp off the annual rate of GDP growth. Nominal spending, however, does not fall in any year of the forecast horizon

Sources: OECD, HM Treasury, OBR, ONS, Deutsche Bank

The outlook for government spending

Average growth1982-1983 = 3.0%

Average growth1994-1999 = 3.5%

-10

-8

-6

-4

-2

0

2

4

6

8

1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Cyclically adjusted primary balance, % GDPGDP % yoy

600

625

650

675

700

725

750

775

08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16

Total managed expenditure, £bn

Grey lines are previous forecasts in 2009 & 2010; dark blue line Mar 2011

-3

-2

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012 2014

OBR forecasts(average 2011-15 = -1.3%)

Real government spending, % yoy(average 2000-10 = +2.2%)



14

• Recovery has been muted• Euro area/commodities/N Africa/Japan risks

Why waiting might be better

• The recovery continues

• Headline and core inflation shockingly high

• Inflation expectations have risen

Justifying an early move

Sources: Bank of England, Markit, Bloomberg, ICAP, Deutsche Bank

• Policy is at “emergency” setting

DB: Rates to rise in August, but risks of further delay

• Risks of fiscal-induced double-dip

• Inflation could fall more quickly

-1.75

-1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

35

40

45

50

55

60

1998 2000 2002 2004 2006 2008 2010

Whole economy PMI (lhs)

Rate changes, % (rhs)

Avg cut level

Avg hike level

0.250

0.375

0.500

0.625

0.750

0.875

1.000

1.125

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

SONIA rates at BoE meeting dates, % (grey shaded bars show when rate hikes are fullypriced)



15

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BRITISHGRI2011

INVESTORS AND DEVELOPERS IN UK REAL ESTATE

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BRITISH GRI 2011 INVESTORS AND DEVELOPERS IN UK REAL ESTATE