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EUROPEAN REGIONAL ECONOMIC GROWTH INDEX

LaSalle> E-REGI index

LaSalle European Regional Economic Growth Index 2018October 2018

Launched in 2000 2018 is the 19th edition of the LaSalle E-REGI IndexShows relative economic performance compared to the European average

Europe-wide coverage32 countries 295 European regions Ranking of 100 cities

Strong relationship with real estateFramework for real estate strategy Proxy for occupier demand

LaSalle Investment Management LaSalle E-REGI Index 2018 3

LaSalle E-REGI Index 2018

Battle of the Giants


1The correlation between the E-REGI scores of the 33 largest office markets in Europe and office take-up in these markets in the following three years has averaged 62% over the last 15 years, showing robust relationship with occupier demand.

LaSalle E-REGI Index 2018: Battle of the GiantsLaSalle’s annual European Regional Economic Growth Index (E-REGI) identifies the European regions and cities with the best economic growth prospects. As such, the index approximates the relative strength of future occupier demand for real estate1 and will prove valuable as the basis of any real estate investment strategy.

Our analysis includes nearly 300 regions across 32 European countries, covering a total population of more than 745 million. This report focuses on Europe’s 100 major city-regions (regions including cities with more than 500,000 inhabitants and all national capitals), which are ranked based on their latest score.

The E-REGI Index attaches a score to each European region based on its medium-term economic growth prospects, its level of wealth and the quality of the business environment, relative to the European average (see technical note on p.28 for more detail on our methodology).

The top of the 2018 index shows relative stability compared to last year. In fact, the top four is entirely unchanged. London retains top spot for the tenth time in the history of the E-REGI Index. London’s outlook remains vulnerable to uncertainty around the UK’s future relationship with the EU, but shows significant resilience compared to the rest of the UK. Paris comes a close second for a second consecutive year, displaying its highest score ever. The French capital leads the LaSalle European Human Capital Index (LEHCI) which drives part of the E-REGI Index score and even increased its score on this metric.

Stockholm remains in 3rd position, boosted by its high level of wealth. Despite the emerging economic crisis in Turkey, the size (it’s the largest city covered by the index with 16.4 million inhabitants) and prospects of Istanbul remain impressive enough to retain the city in fourth position.

London retains

1st positionfor the 10th time in the history of the E-REGI Index

Stockholm remains in

3rd position, boosted by its high level of wealth

Paris comes a

close 2nd for a 2nd consecutive year


The map on the next page shows the dominance of north-western European cities at the top of the index this year. Apart from Istanbul, Madrid is the only city in the top 15 located south of Paris. The recovery remains tangible in the Spanish capital, with strong employment growth improving its E-REGI score this year. The top 15 only shows one new entrant: Helsinki in rank 14, which replaces Lyon which has dropped slightly (from rank 15) to rank 19.

This year, the analysis presented in this report focuses on the cities in Europe’s three largest countries: Germany, France, and the United Kingdom. Not only do London and Paris top the table, three German cities are included in the top 15: Munich in fifth position, Stuttgart in eighth position and Berlin in rank 15. This highlights the difference between the polycentric set-up of Germany compared to the much more centralised countries of the UK and France. The score of the three German cities combined reveals an aggregate score well above either London or Paris individually (see figure on the left). These five cities in Germany, France, and the United Kingdom are of great importance at the top of the index but show an even greater dominance when it comes to the real estate investment market. As the figure also shows, that together they represent 66% of all investment volumes transacted in the top 15 cities over the past 2.5 years.

The analysis presented in the rest of this report shows that Germany, France and the UK go head-to-head in terms of city-strengths. Of the three Giants, Germany comes out top, thanks to the country’s strong business environment score. However, France comes a close second. The country scores more poorly on the business environment metric, but an improving economic outlook, bolstered by a resurgence in job growth, has boosted its cities up the ranking. While London remains the city with the strongest prospects in Europe today, Paris is becoming an ever-closer rival. Brexit uncertainty has started to create job opportunities in Paris, while it has slowed the pace of employment growth in London. Meanwhile, the gap between London and the second-strongest city in the UK (this year: Edinburgh in place 44) has not been larger over the 19-year history of our index. Despite their strong position in terms of Human Capital, the outlook of UK cities is negatively affected until the uncertainty around the future relationship between the UK and the EU is resolved.

The next three sections address the strengths and weaknesses for the cities in each of the three Giants separately. A number of city-level strategies are also presented to show how the themes put forward by the results from the E-REGI Index can be translated to outperforming investment opportunities. At the end of this report we return to the broader picture described by this year’s results, summarising trends seen in the other cities covered by the index.

1. London

2. Paris

3. Stockholm

4. Istanbul

5. Munich

6. Dublin

7. Luxembourg

8. Stuttgart

9. Oslo

10. Copenhagen-Malmö

11. Zürich

12. Madrid

13. Brussels

14. Helsinki

15. Berlin

5 cities responsible for the lion’s share of real estate investment activity

Source: LaSalle (08/18)


E-REGI 2018 Scores

1. London

13. Brussels

7. Luxembourg

2. Paris

12. Madrid

11. Zürich

8. Stuttgart

5. Munich

15. Berlin

10. Copenhagen-Malmö

14. Helsinki

4. Istanbul

3. Stockholm9. Oslo

6.Dublin

Very Strong 1.19 - 2.37

Strong 1.08 - 1.19

Good Medium 0.97 - 1.07

Poor Medium 0.87 - 0.97

Weak 0.80 - 0.87

Very Weak 0.28 - 0.80

No data

Coverage Cities

Top 15 Cities

LaSalle E-REGI Index

UK


UK: Principal strengths come from Human Capital Scores, while Brexit casts a shadowAt the start of the autumn 2018, the future relationship between the UK and the EU remains undetermined despite the rapidly approaching Brexit date in March 2019. Unsurprisingly this uncertainty has affected the UK cities in the 2018 E-REGI results: GDP and employment growth forecasts have been scaled back and the business environment score has fallen below the European average for the first time. London (1/-) was able to maintain its top position in the overall ranking thanks to its large size and strong Human Capital score, emphasising the lasting importance of the UK’s capital.

The business environment score is determined on a national level, primarily using Oxford Economics’ data driven risk assessment on Sovereign Risk, Trade Credit Risk and Political Stability. At present, the UK sits in the bottom quartile on the indicator of Political Stability: reflecting the risk that the Brexit negotiations may result in a general election as well as the already weakened position of the Conservative party in the UK government. The implications of the decoupling process between the UK and EU on Trade Credit Risk are currently only moderately reflected in the data, but could oscillate quickly. More positively, risks around Sovereign Default remain very limited as the UK benefits from setting its own monetary policy.

In the period ahead, we expect uncertainty to remain elevated and the news flow to vacillate as key events transpire. However, the bigger picture is that the prospect of a second referendum should help maintain discipline amongst Eurosceptic MPs adding pressure on them to push through a deal, rather than face the prospect of a much more disruptive no-deal scenario or a general election.

The deterioration in national-level GDP growth expectations has been reflected in weaker GDP scores in the majority of UK cities. Leeds (76/-10) and Liverpool (78/-2) saw the most notable decrease in GDP rankings, tumbling by 23 and 12 positions respectively compared to last year. Last year, Bristol (49/-20) and Manchester (48/-5) were the strongest cities in the UK after London, but as both cities saw significant declines in their GDP scores, they have now been overtaken by Edinburgh which is the second strongest UK city in the 2018 index, taking up place 44 in the overall ranking. Bristol saw the most notable fall in the overall E-REGI ranking of all UK cities due to lower historic and forecast GDP growth rates.

London retains its

top positionin the overall ranking thanks to its large size and strong Human Capital score

Despite record low unemployment rates and slowing immigration, seven of the thirteen UK cities saw their

Last year, Bristol and Manchester were the strongest cities in the UK after London but have now been overtaken by

Birmingham looks to benefit from an

Edinburgh

enhanced transport network and relocation of some major financial service employers

employment rankings improve


LaSalle Investment Management | LaSalle Research Seminar 2018 4

UK cities benefit from strong Human Capital scores

Axis crosses at score of 1 as this is the European average.

5.7

2.0 2.0

1.7 1.61.5 1.5 1.4 1.4

1.3 1.2 1.2 1.2

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Bristo

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Birming

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Liver

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Nottin

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Cardif

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Newca

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All UK cities have above average Human Capital scores

UK: Human Capital Scores (2018)



In contrast, a stronger-than-expected year for service sector employment in 2017 across the UK has helped employment scores. Despite record low unemployment rates and slowing immigration, seven of the thirteen UK cities in the index saw their employment rankings improve relative to 2017. Birmingham (45/+4) shows the most notable improvement, as the city looks to benefit from an enhanced transport network on the back of a new high-speed rail link to London (HS2), as well as the moves of some major financial service employers.

Most notably, HSBC has transplanted much of its back-office operations to Birmingham. The Nottingham/Derby (61/+9) metro area also saw its overall ranking boosted by healthy forecast growth in administrative and support jobs and professional & technical and scientific positions. The same observation is true about Glasgow (69/+4). Cardiff (65/+7) saw a strong improvement in its overall E-REGI position, largely thanks to an improved employment score which came broadly in line with the European average. Similarly, Edinburgh’s (44/+4) increase in the overall ranking was helped by a healthy improvement in employment prospects, with important job gains expected in the administrative and support sector as well as among professional, scientific and technical activities. By contrast, partially reflecting comparatively poorer transport infrastructure, Leeds is expected to see a significant contraction in public and financial sector employment over the next five years, causing the city to fall 22 places in the employment ranking.

One of the UK’s principal strengths is its exposure to factors that are tied to long-term drivers of productivity as measured through our Human Capital scores. In fact, all UK cities score above the European average in terms of human capital, and the lowest ranking UK city on this metric (Belfast (83/+3) sits towards the middle of the pack, in 57th place on the Human Capital ranking. After London, Edinburgh achieves the second highest Human Capital score, reflecting the city’s close ties to higher education institutions. Bristol also continues to enjoy a Human Capital score that is double the European average. Sheffield (87/-2) and Newcastle (84/-) were the most notable improvers in terms of Human Capital rankings in the UK, rising eight and five positions respectively. These two cities enjoy strong agglomeration effects through high density and have a high representation of tertiary education graduates within their working-age population. Nevertheless, a stronger Human Capital score was not enough to significantly alter their standing in the overall E-REGI ranking compared to last year.

The vast majority of the UK cities have wealth scores close to the European average. There are four notable exceptions with wealth scores well-above the European average: London, Bristol and Edinburgh which display wealth scores 62%, 22% and 13% above

the European average respectively. Going forward, these cities are also expected to become wealthier with higher projected GDP growth than population growth. That fits well with the view that strong Human Capital also translates into healthy economic growth prospects over the medium-term. Conversely, Sheffield’s wealth score, the lowest in the UK, is 16% lower than the European average, implying that expected economic growth looks set to be outpaced by population growth in the area.

City2018 E-REGI Score

2018 E-REGI Rank

Edinburgh 1.2 44 66 69 15 37

Birmingham 1.2 45 43 35 31 60

Manchester 1.1 48 52 57 29 45

Bristol 1.1 49 77 79 16 33

Nottingham -Derby 1.1 61 62 50 41 62

Cardiff 1.0 65 80 61 44 50

Glasgow 1.0 69 82 76 36 54

Leeds 1.0 76 84 80 55 59

Liverpool 0.9 78 92 87 37 67

Belfast 0.9 83 86 82 57 68

Newcastle 0.9 84 89 86 52 66

Sheffield 0.9 87 94 84 56 74

Based on component scores

GDP Rank

Employment Rank

Human Capital Rank

Wealth Rank

UK City Scores and Sub-Score Ranks



South East London: Low-rise retail clusters provide options for transformation London’s population continues to increase despite Brexit uncertainties and demand for affordable and mid-price housing remains strong. The map shows housing density of 200m by 200m squares together with nearly 200 retail warehouse location across Greater London. A number of retail warehouses in South East London are located in otherwise very dense part of the city. As a lower-density, lower-value use compared to urban residential, these retail warehouses make interesting investment opportunities as they provide an income stream at point of entry and a development opportunity later in the investment period.

LegendHousing density

High

Low

Retail warehousing

South East London: Low-rise retail clusters provide options for transformation

London’s population continues to increase despite Brexit uncertainties and demand for affordable and mid-price housing remains strong. The map shows housing density of 200m by 200m squares together with nearly 200 retail warehouse locations across Greater London. A number of retail warehouses in South East London are located in otherwise very dense part of the city. As a lower-density, lower-value use compared to urban residential, these retail warehouses make interesting investment opportunities as they provide an income stream at point of entry and a development opportunity later in the investment period.


France

Over the last three years Toulouse has experienced

stronger GDP growththan any other city in France

In terms of Human Capital, Paris ranks

1st for the quality of its universitiesand patent production, 2nd in terms of venture capital and 3rd for population density

growth forecasts for all French cities have been upgraded

Service sector employment

are forecast in Paris by 2022, the second-highest after London

40,000 additional IT jobs


France: Strong improvement in Employment Scores, with labour market reforms providing further upsideDuring 2017, Emmanuel Macron’s first year in power as the French President, France recorded the strongest economic growth since 2007. Growth in the first half of 2018 has been more modest and recent strikes and protests opposing the President’s planned reform agenda have certainly contributed to the slowdown. Nevertheless, this year’s results re-emphasise the strength of Paris (2/-) in a European context, as the city displays its highest E-REGI score in the 19-year history of the index. The French capital leads the LaSalle European Human Capital Index (LEHCI).

France’s Business Environment score is marginally higher than the European average but has weakened compared to last year, holding back all French cities in their progression in the 2018 E-REGI index. Despite France’s public finances improving recently, Oxford Economics sees the Sovereign Credit risk in France as the highest of the three giants, mainly due to France’s higher budget deficit (as a % of GDP) which could prove problematic in an environment of rising interest rates. France also underperforms relative to the European average on Political Stability. Macron may still be firmly in the driver’s seat for another four years, but he faces an upward struggle trying to implement much needed reforms to the labour market and welfare system. However, the expectation is that the President will succeed in the implementation of the Government’s structural reforms and these present significant upside risks to the medium-term growth outlook.

The five-year outlook for French economic growth has strengthened over the last year, which has been reflected in stronger GDP scores in the majority (8 out of 10) of French cities in the E-REGI index. Over the last three years Toulouse (32/-4) has experienced stronger GDP growth than any other city in France. This has been supported by strong population growth, second only to Bordeaux (51/-4), with people predominantly coming from other regions in France, in particular from the Paris region. Marseille-Nice (43/-2) benefits from a stronger GDP outlook compared to last year. Lille (70/-5) is also a notable improver in terms of GDP score.


All French cities have improved their employment score

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Strasb

ourg

Marseil

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Toulou

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Nantes

Bordea

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Basel-

Mulhou

se Lille

France: Change in Employment Scores (2018)


The unemployment rate in France peaked in 2015 and the labour market has been recovering since as the economic recovery has taken hold. The recovery in the French labour market is benefiting all French cities in this year’s E-REGI results through higher Employment scores. Robust service-sector employment of 3.5% over the last three years (equivalent to around 670,000 jobs) is partially attributable to a cyclical recovery, but also the result of government measures under former President Hollande, which included fiscal incentives for companies to hire low-to-medium-paid employees. President Macron’s reforms aim to lower unemployment further and ease labour regulations to create a more attractive and flexible French labour market. As such, service sector employment growth forecasts for all French cities have been upgraded compared to last year.

Of the French cities, Paris sees the strongest improvement in its Employment score. All categories of service sector employment in Paris are forecast to expand over the next five years, but particularly employment in the professional & administrative and IT sectors. By 2022, Oxford Economics forecasts an additional 40,000 IT jobs in Paris, the second-highest growth in Europe after London. SoPi (South of Pigalle) in the 9th arrondissement has seen the greatest concentration of internet start-ups in recent years and has developed into a vibrant area to work, live and play. The Employment scores of Nantes (50/-5) and Rouen-Le Havre (75/-1) also improved strongly due to a better growth outlook than previously, although their overall scores were held back by other components.


2018 E-REGI Rank

Paris 2.3 2 10 7 1 6

Lyon 1.4 19 35 11 12 39

Toulouse 1.2 32 55 21 19 48

Basel- Mulhouse 1.2 36 87 68 13 18

Marseilles -Nice 1.2 43 44 28 43 46

Nantes 1.1 50 53 19 73 51

Bordeaux 1.1 51 51 22 67 56

Lille 1.0 70 76 42 77 64

Strasbourg 1.0 74 96 64 64 41

Rouen-Le Havre 1.0 75 83 62 83 58


GDP Rank

Employment Rank

Human Capital Rank

Wealth Rank

France City Scores and Sub-Score Ranks


The five-year outlook for French economic growth has strengthened over the last year

Paris

Lyon and Strasbourg

Basel-Mulhouse

82% above the European average and 6th highest by rank

more than 10% wealthier compared to the European average

49% above the European average

Paris made further progress in terms of its Human Capital score, which is leading in Europe. Within the Human Capital score, Paris ranks first for the quality of its universities and patent production, second in terms of venture capital and third for population density. The establishment of hubs such as Station F in the French capital, the largest start-up incubator in the world located in the 13th arrondissement of Paris, creates an ecosystem that will drive technological innovation. Further ahead, the Grand Paris project which involves €26 billion of investment to develop the public transport infrastructure of Paris, will provide a framework to link the region’s main economic centres and support long-term growth. Earlier this year, the French government also approved five new high-speed TGV train lines to improve connectivity between France’s regions by 2023. Lyon (19/-4) also has a strong Human Capital score in a European context, scoring strongly on its quantity and quality of universities and patent production. In Basel-Mulhouse (36/-3) the chemical and pharmaceutical industry drives R&D investment and patent production, while Toulouse’s strong performance in terms of R&D investment is linked to the presence of the Airbus group.

At a national level, GDP is growing faster than population meaning that wealth is generally increasing. However, as GDP per capita increased less than the European average, the Wealth scores for the French cities are marginally lower than last year. Within France, Paris stands out in terms of wealth, and also fares strongly on a European basis (82% above the European average and 6th highest by rank). The Paris region accounts for 18% of the French population but generates one third of national wealth. Basel-Mulhouse also displays relatively high wealth (49% above the European average), while Lyon and Strasbourg (74/-14) are more than 10% wealthier compared to the European average. The remaining six French cities in the index display wealth around the European average, with the exception of Lille, which sits 5% below the European average.



LegendParis TMT Letting Transactions

IT/Software

Media

Internet Service

Hardware & Equipment

Telecommunications

SoPi (South of Pigalle): Paris Edge of CBD location preferred by start-upsParis has a strong presence of IT companies, both of the traditional kind as well as tech start-ups such as Blablacar (car sharing) and Criteo (personalized online advertising). The map shows TMT leasing transactions categorised by type of business. The red dots of IT/Software companies are most numerous and can be found throughout Paris and surrounding areas. The green dots, displaying internet service companies, are less plentiful and concentrated in the 9th and 2nd arrondissements. The area of the 9th, now dubbed “SoPi” is a typical edge of CBD location in strong demand by smaller office tenants due to its central location, mix of historical buildings and amenities. Investment in this area suits core investors looking for upside through rental growth.

SoPi (South of Pigalle): Paris Edge of CBD location preferred by start-ups

Paris has a strong presence of IT companies, both of the traditional kind as well as tech start-ups such as Blablacar (car sharing) and Criteo (personalized online advertising). The map shows TMT leasing transactions categorised by type of business. The red dots of IT/Software companies are most numerous and can be found throughout Paris and surrounding areas. The green dots, displaying internet service companies, are less plentiful and concentrated in the 9th and 2nd arrondissements. The area of the 9th, now dubbed “SoPi” is a typical edge of CBD location in strong demand by smaller office tenants due to its central location, mix of historical buildings and amenities. Investment in this area suits core investors looking for upside through rental growth.



Germany

Berlin was ranked

highest on the business environment measure

Germany comes out second

250,000 people are expected to be added to the

Munich region,which is almost as much as in Paris, a city

with a population nearly 3x the size.

number 73in the overall 2003 E-REGI Index and has since moved up to rank 15.

The gap between Munich,

the wealthiest German city

and Leipzig-Dresden, the least wealthy German city, is 37%, which is relatively low in an international context.

In the 2018 E-REGI Index Germany comes out second highest on the business environment measure


Germany: Country maintains dominance in E-REGI Index but shows a more mixed picture on city-levelIn the second half of 2018 Germany continues to drive growth in Europe. The country benefits from a secure business environment in the European context. In the 2018 E-REGI index Germany comes out second-highest on the business environment measure. Germany receives the strongest score possible on Trade Credit risk and outperforms all other countries included in the index with regards to Sovereign risk. However, due to external trade disputes and internal political instability, Germany’s position as Europe’s leader is slowly eroding. The recent refugee discussions between the leading German parties CDU and CSU highlighted the weakness of Merkel’s fourth term coalition. On a relative basis, however, Germany’s business environment score remains strong and is unlikely to change materially.



Population growth explains under or above average GDP scores

GDP Score (2018) & Population growth forecast (2018-22)


2018 E-REGI Rank

Munich 1.8 5 23 15 4 7

Stuttgart 1.6 8 31 56 5 12

Berlin 1.4 15 39 27 10 40

Frankfurt 1.4 18 48 43 24 15

Cologne -Bonn 1.3 28 60 33 32 22

Mannheim -Karlsruhe 1.3 29 68 54 26 21

Hamburg 1.3 30 56 41 48 23

Nuremburg 1.2 31 65 59 35 24

Düsseldorf 1.2 34 72 58 34 27

Bremen 1.1 47 59 66 74 28

Leipzig -Dresden 1.1 53 70 83 49 55

Hannover 1.1 54 88 75 60 29

Ruhr 1.1 60 85 81 66 38

Bielefeld 1.0 67 95 77 81 31

Saarland 0.9 80 97 88 88 34


GDP Rank

Employment Rank

Human Capital Rank

Wealth Rank


Germany is the largest country by GDP and population in the European Union. Over the last three years, the economy showed solid economic growth and the strong performance of the German A-cities in the 2018 E-REGI Index reflects that this is expected to continue. Munich (5/+2) leads the GDP ranks. Compared to 2017, Munich has improved its GDP score. Manufacturing (especially the car industry), IT and Real Estate Activity are important drivers to this growth. There is a strong connection between above or below average GDP scores and above and below average population growth forecasts. The Munich region is expected to see strong population growth over the next 5 years and in absolute terms, more than 250,000 people are expected to be added to the region – nearly as much as expected in Paris, a city with a population nearly three times the size. As a result, Munich’s GDP component ranks at place 23 this year. Bremen (47/+5) and Cologne-Bonn (28/+7) saw a relatively strong increase in their GDP score compared to 2017. Bremen increased its GDP rank by +6 places, Cologne-Bonn even climbed 24 ranks. Bremen’s improvement is driven by a high historical GDP growth. Its port facilities and the proximity to the North Sea, have turned the region’s economy into an attractive mixture of shipping, foreign trade and industry. In contrast, Düsseldorf (34/-4) slipped 16 ranks in terms of GDP score this year, as both historical and forecast GDP growth are projected below the German average. Düsseldorf’s population forecast is only marginally positive, illustrating the relationship between economic and population growth in a negative sense.

The German cities do less well in terms of employment scores, particularly if compared to French cities. An important reason for this weaker performance is a lack of labour supply since unemployment rates in most of the German cities are in the low single figures. Berlin (15/-2) stands out positively with a strong employment score in a German context. In our longitudinal E-REGI analysis2 Berlin is mentioned as the archetypical “Structural Mover”. The city was ranked 73 in the 2003 E-REGI Index and reached its highest rank last year at number 13, below Munich and Stuttgart, but ahead of Frankfurt. The reason underlying this positive trend is a combination of an increasing GDP score, employment score and the introduction of the Human Capital score in 2016. Over the years, Berlin has become increasingly attractive as a start-up location, but has recently transformed itself into the tech capital of Europe. Service sector employment growth in Berlin is relatively strongly driven by the tech sector with 17% of new jobs expected in IT. Hamburg (30/+1) saw a similar trend: based on strong job growth in the IT sector, it increased 5 places in the employment rank. In terms of number of jobs, professional, scientific & technical activities make the greatest positive contribution to service sector employment growth. Nuremberg (31/+8) stands out in this regard. It increased its employment rank by +11 places, due to strong growth in the sector.

Germany City Scores and Sub-Score Ranks

2First published in 2015, subsequently revisited in 2017.

All German cities have Wealth scores above the European average


As historically in the E-REGI Index, Stuttgart (8/+1) scores strongly on Human Capital. The city ranks the second highest on this metric in Germany, in part due to the automotive sector investing heavily in the future of the city. The city does relatively well in patent production and R&D expenditure, thereby attracting skilled labour and making Stuttgart even more competitive. Student cities do generally well in the Human Capital ranking. Mannheim-Karlsruhe (29/-5) and Leipzig-Dresden (53/+1) are two examples that benefit from the presence of strong universities. However, with little venture capital investing in tech firms in these cities, it will be difficult to keep skilled labour after graduation – limiting their Human Capital scores. A high share of business graduates moves to Frankfurt (18/+1). The metropolitan region is known as the financial centre of Germany. Thus, it has the third highest population with a tertiary education in the country. This year, Frankfurt climbed by 4 ranks in the Human Capital component of the E-REGI Index.

All German cities have Wealth scores above the European average. Even the four weakest German cities in the E-REGI Index, Hannover (54/+2), Ruhr (60/-5), Bielefeld (67/-4) and Saarland (80/-5) are relatively wealthy in a European context. The gap between Munich, the wealthiest German city, and Leipzig-Dresden, the least wealthy German city, is 37%, which is relatively low in an international context. However, as current forecasts suggest that GDP per capita in the weaker German cities will rise relatively less compared to their stronger scoring counterparts, this would imply that even in Germany the wealth gap will be increasing.



LegendPopulation Density 2015

> 162,500

- 100,000

< 42,500

Urban Fabric

Large residential

developments under

construction

Munich East: Long term densification potential Munich’s strong population growth and influx of people is changing the face of the city. The map displays a combination of Munich’s population density by bezirk, the city’s urban fabric

and large residential developments (of more than 200 units) currently under construction. It shows that central parts of the city are already very dense and open space is scarce; large

residential developments therefore take place in clusters at some distance from the centre. At close proximity to the centre, few options for large scale transformation remain. Munich East is one of these areas: due to its good transport connections and more affordable prices,

the area currently hosts several residential and commercial developments and is expected to develop into a vibrant mix-use areas over the10-15 years.

Munich East: Long term densification potential

Munich’s strong population growth and influx of people is changing the face of the city. The map displays a combination of Munich’s population density by bezirk, the city’s urban fabric and large residential developments (of more than 200 units) currently under construction. It shows that central parts of the city are already very dense and open space is scarce; large residential developments therefore take place in clusters at some distance from the centre. At close proximity to the centre, few options for large scale transformation remain. Munich East is one of these areas: due to its good transport connections and more affordable prices, the area currently hosts several residential and commercial developments and is expected to develop into a vibrant mix-use areas over the10-15 years.



LegendPrime office rental

growth (since Q1 13)

Rental growth

> 8%

- 6%

< 4%

IT companies that

received Venture Capital

Office developments

under construction

Berlin City West: Rebirth of the forgotten city centreBerlin has seen an influx of tech companies. The map shows that the areas with the greatest concentration of tech companies, Friedrichshain, Prenzlauerberg, Kreuzberg and

Medienspree have recorded the highest office rental growth and are currently seeing the greatest number of office developments. The increasing status of Berlin as “tech capital” is

causing tremendous pressure on these areas with competition from high value uses such as residential and hotel, making office use less viable. We expect that this to work in the favourof the commercial areas in West Berlin, and in particular the area around Bahnhof Zoo.

Occupier outside the tech sector are attracted to the great transport links and great amenities. This provides opportunities both for standing investments as well as refurbishments that can

benefit from the low vacancy rates.

Berlin City West: Rebirth of the forgotten city centre

Berlin has seen an influx of tech companies. The map shows that the areas with the greatest concentration of tech companies, Friedrichshain, Prenzlauerberg, Kreuzberg and Medienspree have recorded the highest office rental growth and are currently seeing the greatest number of office developments. The increasing status of Berlin as “tech capital” is causing tremendous pressure on these areas with competition from high value uses such as residential and hotel, making office use less viable. We expect that this to work in the favour of the commercial areas in West Berlin, and in particular the area around Bahnhof Zoo. Occupier outside the tech sector are attracted to the great transport links and great amenities. This provides opportunities both for standing investments as well as refurbishments that can benefit from the low vacancy rates.


Further results


Further Results• One of the largest improvers in this year’s index is Warsaw, achieving its highest

score ever. Warsaw reaches 17th position (+9) on the back of broad-based improvement, but most notably due to its GDP score, the third highest in the index after Istanbul and London, driven by an upgraded growth outlook underpinned by strong consumption. All Polish cities improve in both score and ranking boosted by improved GDP and Employment scores, but are held back by their Wealth and Business Environment scores which are below the European average.

• Italian cities are generally lower or stable in the ranking this year as slowing economic momentum and a downgraded population growth outlook result in lower Employment scores. Milan (33/-1) remains the only Italian city in the index with a strong score and is forecast to see the second-highest GDP growth rate over the next five years after Bologna (57/-). Turin (77/+4) is an outlier in an Italian context as the city marginally improves due to stronger historic and forecast GDP growth. At a national level, high debt levels will continue to weigh on the economy, as will ongoing concerns about the new populist government, reflected by the weak Business Environment score of Italian cities.

• Despite historically being some of the most volatile cities in the E-REGI index, Spanish cities are relatively stable in this year’s ranking. Lower GDP scores, mostly due to a change in base year, were offset by higher Employment scores driven by a stronger service sector employment growth outlook. This upgrade is supported by the population growth outlook changing from negative last year to positive this year.

• All three Dutch city regions in the E-REGI index, Amsterdam (20/-), Rotterdam-Den Haag (24/-2) and Utrecht (26/-3), are found in the top third of the index. Relatively high Human Capital, Wealth and Business Environment scores mean the strength of these cities in the ranking is broad-based. Rotterdam-Den Haag in particular has benefited from the introduction of the Human Capital component in 2016; in the 16 years prior to this Rotterdam-Den Haag averaged 57th position in the ranking but has averaged 21st position over the last three years.

• In general, the main Nordic cities demonstrate stability at the top of the ranking, with Stockholm (3/-), Oslo (9/-1), Copenhagen-Malmö (10/-) and Helsinki (14/+2) all remaining in the Top 20. The underlying strength and consistency of these cities in the E-REGI ranking is due to high levels of wealth and strong Human Capital scores. The Human Capital scores of these cities are driven particularly by a high percentage of the population with tertiary education and high levels of patent production.

• Of all the cities in the index, Ljubljana made the most progress in the ranking, jumping 21 places to 25th position having improved on all components.

Large improvements from

Warsawachieving highestscore ever

Most progress in the rankings was

Ljubljanajumping 21 places

Nordic cities demonstrate

stabilityat the top of the ranking

A fall in the rankings from

Italian citiesfrom slower economic momentum


Score of 1 is European averageLaSalle Investment Management | LaSalle Research Seminar 2018 14

LaSalle E-REGI Index Scores 2018

Score of 1 is European average

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Lond

on (

1)Pa

ris (2

)St

ockh

olm

(3)

Ista

nbul

(4)

Mun

ich (5

)D

ublin

(6)

Luxe

mbo

urg

(7)

Stut

tgar

t (8)

Osl

o (9

)C

open

hage

n-M

alm

ö (1

0)Zü

rich

(11)

Mad

rid (1

2)Br

usse

ls (

13)

Hel

sink

i (14

)Be

rlin

(15)

Gen

eva

(16)

War

saw

(17)

Fran

kfur

t (18

)Ly

on (1

9)Am

ster

dam

(20

)Ba

rcel

ona

(21)

Got

henb

urg

(22)

Vien

na (

23)

Rot

terd

am-D

en H

aag

(24)

Ljub

liana

(25)

Utre

cht (

26)

Bern

(27)

Col

ogne

-Bon

n (2

8)M

annh

eim

-Kar

lsru

he (2

9)H

ambu

rg (

30)

Nur

embu

rg (3

1)To

ulou

se (3

2)M

ilan

(33)

Düs

seld

orf (

34)

Prag

ue (

35)

Base

l-Mul

hous

e (3

6)An

twer

p (3

7)Bi

lbao

(38)

Sevi

lle (3

9)Va

lenc

ia (4

0)Br

atisl

ava

(41)

Anka

ra (4

2)M

arse

illes

-Nic

e (4

3)Ed

inbu

rgh

(44)

Birm

ingh

am (

45)

Athe

ns (4

6)Br

emen

(47

)M

anch

este

r (4

8)Br

isto

l (49

)N

ante

s (5

0)Bo

rdea

ux (5

1)Bu

dape

st (5

2)Le

ipzi

g-D

resd

en (

53)

Han

nove

r (54

)Ta

llin

(55)

Krak

ow (5

6)Bo

logn

a (5

7)Po

znan

(58)

Wro

claw

(59)

Ruh

r (6

0)N

ottin

gham

-Der

by (6

1)Li

sbon

(62)

Izm

ir (6

3)R

ome

(64)

Car

diff

(65)

Zara

goza

(66)

Biel

efel

d (6

7)Tr

icity

(Gda

nsk)

(68)

Gla

sgow

(69)

Lille

(70)

Lièg

e (7

1)Ka

tow

ice

(72)

Vero

na-V

enice

(73)

Stra

sbou

rg (7

4)R

ouen

-Le

Hav

re (7

5)Le

eds

(76)

Turin

(77)

Live

rpoo

l (78

)An

taly

a (7

9)Sa

arla

nd (8

0)Fl

oren

ce (8

1)Lo

dz (8

2)Be

lfast

(83)

New

cast

le (8

4)Bu

char

est (

85)

Sofia

(86)

Shef

field

(87)

Porto

(88)

Thes

salo

niki

(89)

Viln

ius

(90)

Gen

oa (9

1)R

iga

(92)

Szcz

ecin

(93)

Nap

les

(94)

Zagr

eb (9

5)Pa

lerm

o (9

6)M

osco

w (9

7)Ye

kate

rinbu

rg (9

8)St

Pet

ersb

urg

(99)

Niz

hny

Novg

orod

(100

)

City Ranking

Growth Wealth Business Environment

LaSalle E-REGI Ranking 2018

City Ranking


Technical NoteThe LaSalle E-REGI (“European Regional Economic Growth Index”) was first published by LaSalle Investment Management in 2000 with the aim of identifying those European regions with the greatest economic growth potential over the medium term. E-REGI complements other more real estate specific approaches to determining target markets. The index is updated annually and published in October.

E-REGI CoverageThe model covers 295 regions across 32 countries in Europe with a total population of more than 745 million. This report focuses on a subset of 100 major cities (metros with ≥500,000 inhabitants and all national capitals). Compared to last year, the coverage has remained unchanged.

The E-REGI analysis is undertaken on geographic regions as defined by Eurostat, the central statistical bureau for the European Union. Eurostat has adopted a classification system, the Nomenclature of Territorial Units for Statistics, referred to as “NUTS”. This classification provides a breakdown of administrative units for the production of regional statistics within the European Union and beyond.

NUTS is a hierarchical classification. The country level is referred to as NUTS 0. NUTS 1, 2 and 3 are sub-national levels. The E-REGI model uses the NUTS 2 level classification, which we believe is best suited to capture urban agglomerations. However, one should be aware that in formulating the NUTS-level classification, Eurostat has attempted to standardise a disparate set of national classification systems and as a result, NUTS 2 regions do not always provide the most appropriate definition of a city region. In some cases, a combination of NUTS 2 and 3 areas that better correspond with the physical and economic agglomeration of those cities has been used for the E-REGI analysis.

E-REGI ModelThe E-REGI model is expressed as the function set out in Figure 1 and presents a weighted overall score based on three sub-scores consisting of 18 variables. The variables used in the model are set out in Figure 2. For each variable, the model calculates a score based on the region’s performance relative to the average of all regions, with the average represented by a score of unity (“1.00”). The E-REGI ranking then sorts the city regions based on their weighted overall score.

The model combines variables on economic growth, the overall level of wealth, and the relative attractiveness of the business environment. The overall score is made up from three component scores.

The growth score accounts for 60% of the model and is composed of three components:

• GDP (22.5%): together with employment growth the principal driver of real estate occupier demand. The model uses historic growth (to capture momentum) and forecasts, both in absolute and relative terms.

• Service sector employment (22.5%): together with employment growth, the principal driver of real estate occupier demand and also closely correlated with population growth. The model uses historic growth (to capture momentum) and forecasts, both in absolute and relative terms.

• Human Capital (15%): an important indicator of long-term economic value. The model uses the outputs from the LaSalle’s European Human Capital index (LEHCI) which aims to measure Skilled Labour, Creativity and Investment and is composed of six variables (Tertiary Education Attainment Level, University Ranking, Population Density, Patent Production, R&D expenditure as % GDP, and Capital Venture Invested in Tech Firms).

The wealth score (accounting for 20% of the model) acts as a further screen to ensure that regions catching up from a lower base are not unduly represented. Market intelligence also suggests that wealth levels are correlated with demand for real estate.

The business environment score (accounting for 20% of the model) has been included as future growth potential is partially determined by the attractiveness of the business environment. Best prospects are likely to be in those countries that benefit from a stable political, monetary, fiscal and regulatory environment.

GDP

22.5%

Human Capital

15%

Business Environment Score

20%

Service Sector Employment

22.5%

Wealth score

20%


Data SourcesData for the E-REGI model is primarily provided by independent data provider Oxford Economics, which supplies historic data and provides forecasts on NUTS 1, 2 and 3 levels for GDP, service sector employment and population. Oxford Economics also provides the risk scores that underpin the business environment scores. These data are provided at national level.

Data for LaSalle’s European Human Capital index is primarily provided by Eurostat (for the variables Tertiary Education Attainment Level, Population density, R&D expenditure as % GDP). The University Ranking score is provided by the Centre for World University Rankings (CWUR). This consulting organisation publishes annually global university ranking based on quality of education, alumni employment, quality of faculty, number of publications, number of publications in renowned journals, citations and number of patents. Data on Patents are provided by the Organisation for Economic Co-operation and Development (OECD), while the data on Venture Capital in to Technology companies is from Thomson Reuters.

The E-REGI model is based upon data which LaSalle Research & Strategy believes to be reliable. Whilst every effort has been made to ensure the accuracy and completeness of the data used, we cannot offer any warranty that factual errors may not occur. National statistical offices across Europe continue to make progress in their efforts to improve data comparability and accuracy. As such, economic data are commonly revised many years after events have occurred.

Figure 1

E-REGI = F[GDP, EMPm, HC, WEALTH, BEnv]

GDP Change in GDP

EMPm Change in number of Employees in Market Services

HC Stock of Human Capital

WEALTH Level of GDP per Capita

BEnv Quality of Operating Business Environment

Figure 2

1. GROWTH 60%

A. GDP 22.5%

GDP growth 2015-17 2.5%

Forecast GDP Growth 2018-22 7.5%

Forecast GDP Growth 2018-22 (% growth) 12.5%

B. Service Sector Employment 22.5%

Employment Growth 2015-17 2.5%

Forecast Empl. Growth 2018-22 (absolute) 7.5%

Forecast Empl. Growth 2018-22 (% growth) 12.5%

C. Human Capital 15%

Education Level 3.7%

Quality of Education 2.3%

Patent Production 3.0%

Agglomeration Effect 1.5%

R&D Expenditure as % GDP 3.0%

Venture Capital Invested in Tech Firms 1.5%

2. WEALTH

GDP per Capita 2016

3. BUSINESS ENVIRONMENT 20%

A. Risk Metrics

Sovereign Default 5.0%

Political Stability 5.0%

Trade Credit 5.0%

B. Participation in EMU / EFTA / EU 5.0%

TOTAL 100%

20%


Simon Marx Investment Strategist / Managing Director – UK London +44 207 852 4492 [email protected]

Eduardo Gorab Associate Strategist – UK London +44 207 852 4214 [email protected]

Ryan Daily Research Analyst – UK London +44 207 852 4107 [email protected]

Contacts

Mahdi Mokrane Head of European Strategy London +44 (0)20 7852 4605 [email protected]

Anne Koeman-Sharapova Senior Strategist (Project Leader) London +44 (0)20 7852 4520 [email protected]

Chris Psaras Associate Strategist – Continental Europe London +44 (0)20 7852 4016 [email protected]

Sabrina Zimmermann Research Analyst – Continental Europe London +44 (0)20 7852 4016 [email protected]

This document does not constitute an offer to sell, or the solicitation of an offer to buy, and is subject to correction, completion and amendment without notice. This document has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients. No legal or tax advice is provided. Recipients should independently evaluate specific investments. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes.The views expressed in this document represent the opinions of the persons responsible for it as at its date, and should not be construed as guarantees of performance with respect to any investment. LaSalle has taken reasonable care to ensure that the information contained in this document has been obtained from reliable sources but no representation or warranty, express or implied, is provided in relation to the accuracy, completeness or reliability of such information. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this document for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this document.Copyright © LaSalle Investment Management 2018. All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management.LaSalle Investment Management is authorised and regulated by the Financial Conduct Authority in the UK.

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