Money into Property Europe 2013 - cushmanwakefield.com.ua · Market sentiment is the focus of the second section, where we share the findings of our investors’ and lenders’ surveys

Money into Property Europe 2013

Better than expected

DTZ Research

1 May 2013

Contents

Introduction 2

Section 1 – Stock and gap update 3

Section 2 – Market sentiment 7

Section 3 –Liquidity and value 11

Authors

Magali Marton

Head of CEMEA Research

+ 33 (0)1 49 64 49 54

[email protected]

Nigel Almond

Head of Strategy Research

+ 44 (0)20 3296 2328

[email protected]

Hans Vrensen

Global Head of Research

+ 44 (0)20 3296 2159

[email protected]

Despite ongoing uncertainty and turmoil in 2012, prospects for the European economy in 2013 and beyond are less dark than expected. A strong recovery is certainly not for tomorrow, but the worst is now behind us.

European invested stock continued to grow in 2012, albeit at a modest 3% in Euro terms. The three core markets all grew, whilst CEE growth slowed. But, echoing macro trends, the periphery recorded another year of decline.

Deleveraging continued across Europe in 2012, with equity growth close to 5% and debt at 1%. Non-bank lending and corporate bond issuance expanded further, while traditionally dominant bank lending remained flat.

Property market sentiment remains mixed, as the macro outlook varies across Europe. Lenders are more cautious than investors in our annual survey. Highly selective lenders do expect growth in their loan books, but no better lending conditions. Investors feel buying opportunities have returned to normal and debt availability has improved. In our view, sentiment has been slow to improve due to the debt-related workout, especially in Europe. But, things are not as bad as they seem, considering:

European investment volumes were up 6% in 2012. Cross-border investment activity has increased with a wide range of capital sources – from US to Asia Pacific – focused on investing in Europe.

Most of the markets are now fairly priced with our Fair Value Index at its highest score since 2003. Property markets have never been so attractive, especially compared to the historically low bond yields.

The total liquidity ratio remains still below its 10-year average in Europe. However, based on inter-regional liquidity, Europe is the most attractive region for new international investors. Apart from stock size, investors should consider these liquidity ratios. This should trigger more interest in a few alternative markets across Europe such as Sweden or Poland.

Figure 1

Stock size and long term liquidity

CZ

FR

DE

IT

LU

NL

PL

RUS

BE

ES

SE

UK

-1%

0%

1%

2%

3%

4%

5%

6%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

10 y

r av

erag

e cr

oss

bo

rder

liq

uid

ity

10 yr average overall liquidity

Hot

Fair Value Index

Warm

Cold

Source: DTZ Research

Europe 2013

www.dtz.com Money into Property 2

Introduction

It is with great pleasure that we present the 39

th edition of

Money into Property. The focus of this report is Europe. We have published similar reports for Asia Pacific, Europe, North America and the UK. This report is divided into three main sections. . The first section provides a detailed update of invested stock, which is defined as investment-grade commercial real estate held by investors. Invested stock is different from owner occupied real estate, both investment and non-investment grade (Box 1). The majority of stock globally (37%) is currently invested. A further 26% is considered investable, but is owner-occupied (Figure 2). The debt funding gap is defined as the difference between the current debt secured by commercial property minus the new debt available to replace it. Our analysis also accounts for regulation and alternative lending sources, which is particularly relevant for Europe where the gap has hindered the recovery in many markets (Figure 3). Market sentiment is the focus of the second section, where we share the findings of our investors’ and lenders’ surveys which were undertaken between February and March 2013. The surveys provide an insight into current sentiment. In the final section we provide an update on transaction volumes and associated liquidity across markets. Finally, we consider whether investment is focused on the relatively most attractive markets, using the DTZ Fair Value Index

TM.

The appendix provides an overview of definitions and methodologies used.

Figure 2

Conceptual breakdown of total stock, USD tn

37%

26%

36%

10 10 13 33

Europe North America Asia Pacific Global

Non-investable

Investable(owner-occupied)

Invested


Figure 3

Conceptual breakdown of debt funding gap

0

50

100

150

200

1 2 3

Regulation

Refinancinggap

Non-bankfinance

Net debt funding gap


Box 1: Stock definition

Total stock is all commercial real estate, measured by either monetary value or space. Total stock comprises non-investable owner occupied stock, investable owner occupied stock and invested stock.

Non-investable owner occupied stock is commercial real estate that is not available to investors due to use or quality of the property.

Investable owner occupied stock is commercial real estate stock that is currently held by occupiers but is attractive to investors in terms of use and quality. This represents potential for investors as occupiers sell their properties or undertake sale and leasebacks.

Invested stock is commercial real estate held by investors in the relevant country. As a consequence the invested stock should:- a) Rise as owner occupiers sell property to investors b) Rise as new developments are unveiled and added to the invested stock c) Rise with the general rise in capital values d) Be negatively impacted by depreciation and retirement of stock.

Europe 2013


Section 1 – Stock and gap update

Invested stock trends

Asia Pacific drives global stock to new record level Following growth of 7.6% in 2011, invested stock grew by a more modest 1.5% in 2012 to reach a new record level of USD12.4tn. Asia Pacific was the only region to post growth in 2012 as its invested stock grew 8% to USD4.2tn. The region is now close to surpassing Europe to become the region with the largest stock. In North America stock fell by 0.6% driven by a fall in the US stock. Following growth in 2011 the stock in Europe fell 2.6% to USD4.4tn.

Currency movements impact Europe The continued weakness in Europe’s economies led to an appreciation of the dollar relative to the Euro. As a consequence Europe’s stock fell 3% in dollar terms, but in local currency terms it stock actually grew by 3% (Figure 5). Across North America the currency impacts were negligible, as they were too is Asia Pacific, although marginally stronger growth of 9% was recorded in local currency terms.

Debt hinders recovery in Europe Europe’s recovery continues to be hindered by its sizable debt funding gap (Figure 6). Our latest analysis estimates a refinancing gap across Europe of USD77bn, with regulatory impacts more than doubling this to a gross USD163bn. Efforts by some banks to delever their commercial real estate (CRE) loans has helped to shrink this figure. A further gap of USD22bn remains in Asia Pacific, and mostly in Japan where we see the gap shrinking. New non-bank lenders – insurers and debt funds are helping to shrink this gap. So too is an increase in property company bond issuance. Globally there remains plentiful new equity capital (USD314bn) available for investment over the next two years, with over USD120bn available for investment across Europe. Combined with new non-bank lenders this should be sufficient to plug the funding gap in the near term.

Figure 4

Global real estate invested stock, USD tn

3.9 4.2

3.8 3.7

4.5 4.4

12.212.4

0

2

4

6

8

10

12

14Global

Europe

North America

Asia Pacific

2012

1.5%

-2.6%

-0.5%

8.0%


Figure 5

Change in invested stock, 2012

-1%

-3%

8%

1%

0%

3%

9%

4%

North America

Europe Asia Pacific Global

USD Local Currency


Figure 6

Net debt funding gap and available equity 2013-14, USDbn

0

50

100

150

200

250

300

350

Global Europe Asia Pacific North America

Available equity Net debt funding gap Non bank debt


Europe 2013


Growth in France, Germany the UK while rest of Europe saw declineUK

In Euro terms, Europe invested stock kept its growing trend but at an even slower pace, +3% in 2012, following a 4% in 2011 (Figure 7).

The growth came from the 3 major markets in Europe with rates ranged between 4% and 5% while the rest of the region posted a 1% decline in Euro terms, after having registered a 6% growth in 2011.

The UK market saw a reverse of its downward trend for invested stock in Euros terms; however in local currency the decline seen since 2010 has continued as result of a continuing contraction in the debt component combined to a modest rise in equity.

UK, France and Germany dominated the European stock The ranking of the major markets remained unchanged in 2012 compared to 2011. The UK, Germany and France, which account for 50% of the total, continue to dominate the market (Figure 8). We do not expect any significant changes in this ranking in the short term. The development pipeline in the office and retail sectors is still limited across the region except in CEE. However capital values there are quite low and clearly not enough to impact significantly the hierarchy of invested stock across the region.

Growth slows in CEE whilst PIIGS join the Baltic on decline

Invested stock growth spread across Europe in 2012, with a still large majority of countries rising (Figure 9). However the fragmentation of the European market is more obvious than ever, with the UK and Germany only posting a higher growth rate in 2012 than in 2011. France and the Nordics remain in positive territory but growth was weaker than last year. The most spectacular slowdown comes from CEE with a growth rate of 3% in 2012, down from 17% in 2011.

Invested stock continued to decline in the Baltic countries but at a slower pace (-2% in 2012). The “PIIGS” now fully impacted by the repricing of their assets values, recorded a 5% decline in 2012 following a 1% fall in 2011.

Figure 7

European invested stock, EUR tn

0.5 0.5

0.5 0.5

0.6 0.7

1.7 1.7

3.33.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Rest of Europe

UK

Germany

France

-1%

4%

4%

5%

Europe 3%

2012


Figure 8

Invested stock, EUR bn

0 100 200 300 400 500 600 700

United Kingdom

France

Germany

Spain

Nordics

Italy

Netherlands

CEE

Baltic states

2012 2011


Figure 9

Change in European invested stock, local currency

-10%

-5%

0%

5%

10%

15%

20%

Nordics France Germany UK CEE Baltic states

PIIGS Europe

2011 2012


Europe 2013


Sources of capital

Equity continues to recover Growth this year has again been driven by increases in the equity quadrants, albeit the pace of growth has moderated (Figure 10). Private equity added USD273bn to invested stock, and was main driver of global growth. The increase reflects a general recovery in capital values during 2012. Growth in public equity was more modest at less than 2% as listed companies continued to restructure in many markets with some becoming net sellers.

Rotation to non-banks in deleveraging process Overall the value of debt outstanding fell marginally, although we did see some variations in growth across the different debt components (Figure 11). Following growth of 5% last year, debt outstanding to banks stood still in 2012 as many banks, particularly in Europe, actively engaged in deleveraging. Bad banks also actively engaged in selling down loans. In contrast non-bank lenders, predominantly insurers saw growth as they pick-up the slack from traditional banks.

Corporate bond issuance continues to grow In the public markets property companies continued to use bond markets as a means of accessing cheap debt. Globally, new bond issuance grew by 30% to USD92bn leading to an aggregate growth in outstanding debt. This growth was not sufficient to offset the redemption of existing CMBS and covered bonds leading to an overall fall in public debt (Figure 11).

Deleveraging driven by equity growth Overall gearing levels in the market continued to fall across all regions. The global average fell to 59% from 60% last year (Figure 12). Similar reductions in gearing were observed in all other regions. With the exception of Asia Pacific, gearing is now back to levels seen in 1997. With the amount of debt outstanding remaining broadly flat globally, it was growth in equity that has again driven the reduction in aggregate gearing.

Figure 10

Global invested stock by capital source, USD tn

5.8 5.8

1.5 1.50.9 0.9

4.0 4.2

12.2 12.4

2008 2009 2010 2011 2012

Private equity

Public equityPublic debt

Private debt

5%

-3%2%

0%

2012

Global 1%


Figure 11

Change in components of debt

-10%

-5%

0%

5%

10%

15%

20%

Banks Bad Banks Non-banks CMBS Covered Bonds

Corporate Bonds

2011 2012

Private debt Public debt


Figure 12

Total debt as a percentage of invested stock

63%58%

73%

66%

55%54%

64%

59%

40%

50%

60%

70%

80%

2000 2002 2004 2006 2008 2010 2012

NorthAmerica

Global

Europe

Asia Pacific


Europe 2013


Return to positive growth for all the quadrants, private equity still ahead 2012 saw the return of growth in all quadrants of European invested stock, with public debt reversing its declining trend with a modest 1% growth over the year compared to -7% in 2011 (Figure 13). Private equity continued to post the most significant increase at 6% in 2012, down from +10% recorded in 2011. The changes of the real estate debt landscape appear clearly in the debt quadrants of the European invested stock. Public debt - covered and corporate bonds mainly - reversed its declining trend (-7% in 2011) and posted a 1% growth last year. More surprising is the growth of private debt which has continued last year, however at a slower pace from 5% in 2011 to 1% in 2012.

Lending landscape is changing in Europe

If we look closer to the debt side, some structural changes of the lending landscape started to be visible in our invested stock figures (Figure 14). Private debt is still dominated by the commercial banks with 96% of market share. However non-bank lending providing by institutions or debt funds is emerging with an 80% increase to EUR34bn in 2012 from EUR19bn in 2011. On the public side, the decline in CMBS (-14%) continued in 2012, whilst property company bonds have largely been used by REITs or large investment funds to get finance at a cheaper price. They posted a 22% increase over the year to EUR57bn.

Strong rebound of corporate bonds issuance in 2012 In their search for alternative sources of lending, a growing number of property companies have raised public debt through the issuance of corporate bonds. A total of EUR14.9bn, a record level since 2006, has been raised in 2012 through corporate bonds; this represents a 70% increase over the year (Figure 15). This new source of debt has been used to raise massive amount of cash as issuance of bonds above EUR250m accounted for EUR7.7bn i.e. more than half of the total volume raised in Europe last year. Corporate debt on medium lot sizes (between EUR50m and EUR250m) experienced a more buoyant activity as well.

Figure 13

European invested stock by source of capital, EUR bn

1,463 1,480

464 467189 195

1,176 1,242

3,292 3,384

2008 2009 2010 2011 2012

Private equity

Public equity

Public debt

Private debt

6%

3%1%

1%

2012


Figure 14

Change in components of debt, Europe, EUR bn

0

100

200

300

400

Commercial

Banks

Non-bank

Lending

Bad Banks Covered

Bonds

CMBS Property

Company Bonds

2012 2011

0.1%

80% -15%

1.8%

-13.5%

22%

€1,421

Private debt (1.2%) Public debt (0.5%)


Figure 15

European property company bonds issuance, EUR bn

0

4

8

12

16

2006 2007 2008 2009 2010 2011 2012

under 50m 50-99m 100-249m 250m plus


Europe 2013


Section 2 – Market sentiment Our lenders’ and investors’ surveys illustrate the prevailing market sentiment, which sets the stage for the future performance of commercial real estate markets.

Lenders’ survey

Loan originations grow In 2012 half of the respondents to our survey showed an increase in the value of new loan originations (Figure 16). On balance the value of loan extensions increased, although close to half of lenders reported no overall change in the value of extensions in 2012 compared to 2011. The positive balance in new loan originations appears somewhat surprising against the challenging markets conditions, especially in Europe, although with many banks having separated their non-core divisions, our analysis could reflect more upbeat sentiment in new lending teams.

Growth in loan book A positive balance of lenders (12%) in 2012 reported an increase in their loan book. This reflected 48% of respondents showing an increase and 36% reporting a fall (Figure 17). The change in loan book was mostly driven by an increase in new lending, with roughly half of respondents reporting a rise, saying this reflected limited new growth. The growth is primarily being driven by non-bank lenders who showed the biggest net growth. Looking forward to this year there is an expectation for growth in loan book size, especially from traditional banks with a net balance of 11% expecting growth. We see little change in the trends for other non-bank lenders.

Recovery in lending conditions delayed again However this improvement is tempered in the outlook for lending conditions, with 70% on lenders not expecting a substantial recovery in lending conditions until beyond 2014 (Figure 18). Throughout each of our past three surveys, lenders have showed a recovery coming later, with the proportion reporting later increasing. Just 6% of respondents expect a recovery in 2013.

Figure 16

Change in loan originations and extensions, 2012

0%

20%

40%

60%

80%

100%

Originations Extensions

Down

Same

Up


Figure 17

Change in loan book size

0%

20%

40%

60%

80%

100%

Banks Funds & Insurers

Other Banks Funds & Insurers

Other

Down

Same

Up

2012 2013

-17% 29% 62% Net 11% 43% 76%


Figure 18

Expectations for a substantial recovery in lending markets

0%

20%

40%

60%

80%

20102011Later 20112012Later 20122013Later 20132014Later

2010 Survey 2011 Survey 2012 Survey 2013 Survey


Europe 2013


Substantial progress in non-prime workout Progress in working out problem loans is well underway, with lenders reporting some substantial progress in working out non-prime assets. In 2011 42% of respondents were reporting that the non-prime workout was well underway (Figure 19). In our survey this year, this portion has increased to 69%. Only 31% are reporting that there has been no start in the non-prime workout compared to over half two years ago. Progress on prime assets continues and over a fifth of respondents now report completion in the workout of prime. Surprisingly, 12% of respondents still highlight that the workout of prime has yet to start.

Lending activity in secondary assets and markets Over half of lenders have indicated that they have lent against both secondary assets and assets in Tier 2&3 cities (Figure 20). Whilst banks remain more conservative in what could traditionally be called their traditional playing field, it is alternative lenders who are more active in these markets. This provides some positive news for investors who are seeking to increase their activity in these markets.

Lenders still selective in opportunities However, when we asked lenders about their expectation of lending by type of investment in Tier 1 and Tier 2&3 cities there remained a clear focus towards prime standing investments (Figure 21). Overall, a net balance of 74% is seeking to increase lending towards prime standing investments in Tier 1 cities. This balance shrank to a net 29% in Tier 2&3 cities. On balance debt towards speculative development in Tier 1 cities is expected to be down. Attitudes towards Tier 2&3 cities are more conservative. A positive balance of 27% of lenders is expected debt to increase on prime assets in these cities. However, on balance most lenders expect lending on non-prime assets and development (pre-let and speculative) to be down in second tier cities. This highlights that lenders still remain cautious in second tier cities, with a clear focus towards core assets.

Figure 19

Trends in work out of prime and non-prime loans

0%

20%

40%

60%

80%

100%

2011 2012 2013 2011 2012 2013

Alreadyfinished

Wellunderway

Not yetstarted

Prime Non-Prime


Figure 20

Lending to secondary assets and markets by lender type

0%

20%

40%

60%

80%

100%

Banks Funds & Insurers

Other Banks Funds & Insurers

Other

No

Yes

Secondary assets Tier 2 & 3 Cities


Figure 21

Willingness to lend in Tier 1 and Tier 2&3 cities

0%

20%

40%

60%

80%

100%

Tier 1 Tier 2&3

Tier 1 Tier 2&3

Tier 1 Tier 2&3

Tier 1 Tier 2&3

Up Same Down

Prime standing investments

Non-prime standinginvestments

Pre-letdevelopment

Speculative development


Europe 2013


Investors’ survey

Real estate to underperform equities Investors’ expectation for the performance of commercial real estate compared to other assets shows a rather subdued view. Whilst a net majority (72%) expect real estate to outperform bonds, most on balance expect direct real estate to underperform relative to both equities and real estate equities in 2013. A majority only marginally expect direct real estate to outperform property debt instruments (Figure 22). Still pressure on prime assets sourcing; non prime is easier to access Difficulty in accessing prime products highlighted last year is still a market reality for EMEA investors with 61% of respondents reporting hard conditions in accessing it (Figure 23). Risk aversion leads investors to focus mainly on this specific market segment, increasing the competition between them. By contrast, the situation seems to ease on the non-prime assets as 69% of our respondents consider it easy or normal to source, a level up from 60% in last year survey. With banks accelerating their work-outs we would expect these trends to remain the same as the work out of secondary gets well underway.

Ease of access to debt finance With markets returning to normal, it is encouraging that over three quarters of investors find access to new acquisition finance not an issue compared to just 61% last year (Figure 24). Refinancing of existing debt is not considered a major issue with 70% of respondents having no issue in accessing debt.

Figure 22

Performance of CRE compared other asset classes and net balance

0%

20%

40%

60%

80%

100%

Bonds Property Bonds

Real Estate Equities

General Equities

Outperform

Same

Underperform

72% -25%-3%4% Net


Figure 23

EMEA buying opportunities by property grade

0%

20%

40%

60%

80%

100%

2011 2012 2013 2011 2012 2013

Hard

Normal

Easy

Prime Non-prime


Figure 24

Difficulty in obtaining debt finance

0%

20%

40%

60%

80%

100%

2011 Survey

2012 Survey

2013 Survey

2011 Survey

2012 Survey

2013 Survey

No

Yes

New acquisition finance Refinancing of existing debt


Europe 2013


Non-bank lenders to pick up slack One of the reasons why investors feel relaxed with regard to the funding markets is the access to finance from alterative sources (Figure 25). During 2012 a clear majority of investors felt that lending would be down from banks, with institutions picking up the slack. Moving forward to this year sentiment is clearly changing. Banks are expected to be net lenders again with a net 19% expecting the availability of debt to be up. A higher proportion expects an increase in debt from institutions along with other sources of finance.

Exposure to loan and partial equity positions down Overall marginally fewer investors (55% compared 58%) invested in loan or partial equity positions in 2012 compared with 2011 (Figure 26). The proportion investing in both has increased, as has those purely investing in loan positions. Equally there are a higher proportion of respondents who have no capability. The variation in these trends could be reflective of a higher response rate to our survey this year.

Investors more positive than lenders Investors are more positive in their macro economic outlook. Outside of the base case of a slow recovery, investors are of the belief that the outlook is marginally more positive (Figure 27). This assessment contrasts with lenders who are marginally more pessimistic, with far more expecting a slightly worse outlook. Given the scale of debt issues, particularly across Europe, this trend is to be expected, although like investors we see a change in sentiment to the upside.

Figure 25

Availability of debt finance by lender type

0%

20%

40%

60%

80%

100%

2012 Survey

2013 Survey

2012 Survey

2013 Survey

2012 Survey

2013 Survey

Institutions Banks Other*

Up

Same

Down

*Other covers corporate bonds, covered bonds, CMBS and mezzanine finance Source: DTZ Research

Figure 26

Investors’ exposure to loan and partial equity positions

0%

20%

40%

60%

80%

100%

2012 Survey

2013 Survey

2012 Survey

2013 Survey

2012 Survey

2013 Survey

Yes

No

Propertyloans

Equityposition

Both

Nocapability

Nointerest

Yes No


Figure 27

Most likely economic scenario outside base case

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Investors Lenders

Signifcantly more positive

Marginally more positive

Slightly worse

Signifcantly worse


Europe 2013


Section 3 –Liquidity and value

Economic Outlook

More balanced, as downside recedes The overall consensus outlook for economic growth has transitioned over the last year into a more balanced situation, similar to what our survey results show. Figure 28 highlights that we have a historically high probability for the base case scenario, which implies a slow, but steady recovery. Despite recent trouble in Cyprus, we are also seeing a reduced chance of the downside scenario coming through. A strong return for the upside scenario leaves us with a more balanced global economic outlook, compared to the recent past.

Bond yields have come in In response to this more balanced global economic outlook and the strong monetary and liquidity support, we have seen a strong reduction in risk aversion with investors across asset classes. As a result, government bond yields have tightened across the board, even in peripheral European markets. Of course, these still remain elevated relative to core markets globally (Figure 29). Australia’s yields are more related to the higher growth and inflation concerns.

Transaction volumes

Global investment volumes up 4% in 2012 Global investment transactions volumes of commercial real estate in 2012 were up 3.5% on 2011 levels at USD475bn (Figure 30). 2012 volumes exceeded levels recorded in 2005. Strong growth in North America offset declines in Asia Pacific and Europe. Also, the fourth quarter volumes were strong and made up for weaker volumes in the earlier quarters. Given the more balanced economic outlook and the re-balancing of the lending markets, we expect further growth for 2013 and beyond. Future transaction volumes will be further helped by improving liquidity and good relative value.

Figure 28

Evolution of probabilities of various economic scenarios

10%

15%

45%

60%

35%

10%

10%

15%

0% 20% 40% 60% 80% 100%

Jan-12

Jul-12

Jan-13

Apr-13

Upside Base Case Other Downside

Source: Oxford Economics

Figure 29

Five-year government bond yields in select countries

0%

5%

10%

15%

0%

1%

2%

3%

4%

Mar-13 Mar-12

Source: Bloomberg

Figure 30

Global investment volumes, USD bn

157 152

145 143

157 180

459 475

0

200

400

600

800

2005 2006 2007 2008 2009 2010 2011 2012

Global

2012

North America

Asia Pacific

Europe

3.5%

14.5%

-3.0%

-1.4%

Source: DTZ Research, Propertydata, RCA, RealNet

Europe 2013


European investment volumes held up by UK and Germany

Despite the continued uncertainty in the Eurozone and the worsening economic context in some countries, total real estate investment volume remained stable in 2012 with EUR118bn invested, up from EUR112 recorded in 2011 (Figure 31). Still a high degree of risk aversion leads most investors to focus on a few core markets - the UK, Germany - and to a lesser extent France.

Elsewhere market activity has been subdued except in Nordics which benefit from a large basis of sub-regional rich-equity investors.

Inter-regional investment activity rebounded in 2012

Looking at capital flows, year 2012 showed some significant changes, with cross-border investors increasing their activity to the detriment of domestic players. Inter-regional – those investing outside their region – posted the biggest increase and accounted for 24% of market share, up from 17% a year ago. This figure illustrates the capacity for a wider range of European countries to attract foreign capital coming from outside the region on large lot size and prime office and retail assets (see page 15 our Fair Value Index analysis for Europe). We do expect this trend to continue over the next few years, as sovereign wealth funds and investment fund managers start with or return to a strategy of more international portfolio diversification. This is a big positive sign for many property markets, as more active overseas buyers provide greater liquidity to local owners.

North American and Qatari capital drives inter-regional investment Moreover than the volume of net investment itself (EUR13.4bn up from EUR7.6bn), the diversity of the cross-border capital flows active on the European market is an encouraging sign for market players (Figure 33). US-based investors, which were active in the past on the European market, have been joined by a wide range of new players coming from Asia-Pacific and the Middle-East, and Qatar more specifically. Year 2012 saw also some significant purchases from Chinese investors in Europe, with London, Spain and Germany as first choices in their European investment strategy.

Figure 31

European investment volume, EUR bn

17 16

23 25

35 42

37 36

112 118

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012

Rest of Europe

UK

Germany

France

-4%

21%

8%

-7%

Europe 6%

2012


Figure 32

European investment volumes by source of capital

65% 58%

17%19%

17% 24%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012

Domestic Intra-regional Inter-regional


Figure 33

Net investment by inter-regional investors, EUR bn

-2

0

2

4

6

8

10

12

14

16

2011 2012

United States Qatar Canada Malaysia

International China Other

Source: DTZ Research, Property Data

Europe 2013


Market liquidity

Back to 10-year average, North America most liquid now Liquidity

1 has returned to its long run 10-year average on a

global level. But, in both Asia Pacific and North America it is well above and marginally higher than the historical average. As in most things, Europe lags behind. As highlighted above, there is still some remaining blockage from the workout of legacy debt (Figure 34). Since not all investors buy and sell in a single year, we do think that volatility in liquidity is relevant. As highlighted by the historical maximum and minimum levels, North America shows the greatest range over the period. Europe has also been more volatile relative to Asia Pacific.

But, Europe is more attractive for cross-border buyers If we finally consider not just total liquidity but also the more limited inter-regional liquidity

2, we see some

interesting trends over time. All three regions show a sort of boomerang effect – improving liquidity from 2003 to 2007 at peak of the cycle, but dropping back in 2012 (Figure 35). Overall, Asia Pacific shows less of a shift post peak, as volumes were supported by robust growth in China. At year-end 2012, Europe showed the highest inter-regional liquidity of all regions at 0.8%. Within Europe, the UK is by far the most liquid market at 2.2% for overseas investors. This is well above the 0.2% in Asia Pacific and 0.4% in North America. This has been a consistent trend over the period. Liquidity rises in Nordics and falls in PIIGS As a perfect reflection on the economic slowdown in Europe, the liquidity ratio shows a wide range of figures, with Nordics (Sweden and Norway) at the top in 2012. Ranked in 3

rd position, the UK market benefitted from

strong cross border activity in 2012, boosting its liquidity ratio above its 5-years average. By contrast, Germany and France are still below their past performance.

At the other end of the scale, market activity is still at a very low level in the peripheral countries. A rebound in market activity there is linked to the debt deleveraging process (Ireland and Spain) or more clarity on the political and therefore economic side (Italy). Some investment funds have recently shown some signs of interest in the Italian market, leading us to think that a rebound of the investment volume could happen in 2013. The picture is less clear for Spain.

1 Liquidity is defined as investment turn-over as percentage of invested stock

2 Inter-regional liquidity is investment from capital sources outside of the region as a

percentage of invested stock

Figure 34

Trends in regional and global liquidity ratios 2003-2012

0%

2%

4%

6%

8%

10%

Asia Pacific Europe North America

Global

10-y Max

10-y Average

2012

10-y Min


Figure 35

Regional total and inter-regional liquidity & stock size

AM 2012

APAC 2003

EU 2003

AM 2003

APAC 2007

APAC 2012

EU 2007

AM 2007

EU 2012

-0.1%

0.3%

0.7%

1.1%

1.5%

0.0% 2.5% 5.0% 7.5% 10.0%

Inte

r-re

gio

nal

liq

uid

ity

Total liquidity Source: DTZ Research

Figure 36

Liquidity ratios in main European markets

0%

2%

4%

6%

8%

10%

2012 Average 2007-2011


Europe 2013


Relative Market Value

US currently ranks top across regions Based on our latest Fair Value Index

TM (FVI), more than two

thirds of our 201 covered markets are classified as attractive (hot). This is not really surprising, given that our classification is based on the difference between expected and required returns for each market. As highlighted above, lower bond yields and reduced investor risk aversion have brought down the required “hurdle” rate well below our forecasted market returns. In many Western markets, the prolonged lack of new development activity, a return to positive economic growth and space demand has also increased our expected returns. The net effect of these two trends is that all regions show many attractive markets. But, the US market is the most attractive across the three main regions.

Best relative value across global property in eight years When we look back at relative value historically, we note that the FVI score is highest since March 2005. In fact, the global FVI score is currently at a new record high. It is not only up from 58 a year ago, but has recovered from the low point of 16 in 2008. Therefore, it has never been a better time to invest in commercial property. Investors have 136 attractive markets to choose from (Figure 38) and only 15 unattractive markets to avoid. Good liquidity and stock size essential for new investors New generations of Asian investors continue to emerge onto the global investment market. But, as risk aversion recedes further, many European and American investors are also expected to return to a more active international diversification strategy in the coming years. For both new and returning investors to markets, we think that apart from the currently abundant relative value, good liquidity and stock size are essential. If you cannot buy (and later sell) into a market, relative value is immaterial. Based on this, the US, UK, Germany, China and Japan are especially attractive for international investors based on pricing and liquidity (Figure 39 and Map 1). Singapore and Sweden also look attractive from a liquidity perspective, but offer less attractive pricing.

Figure 37

Global and regional Fair Value Index scores for Q1 2013

0%

20%

40%

60%

80%

100%

Europe Asia Pacific US Global

Cold Warm Hot

77 81 87 80


Figure 38

Evolution of Global Fair Value Index scores Q1

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Cold Warm Hot

58 16 80


Figure 39

Stock size, long term liquidity and relative value

Ove

rpri

ced

Un

de

rpri

ced

Low liquidity

UKUS

SE

SG

JP

CN

FR

IR

ES

IT

DEAU

High liquidity

$500 bn

$250 bn

$100 bn Europe

Asia Pacific

USA

Stock Region


Europe 2013


Improved sentiment on Euro pushes up fair value index Our DTZ Fair Value Index™ score for Europe rose to 77 in Q1 2013 from 51 a year ago, making European commercial property appearing as the most attractive since end of 2003. The rise in the index was driven by more positive sentiment on the Eurozone pushing bond yields and required returns down. This has resulted in property looking better value in comparison to bonds Our Fair Value index indicates that European commercial real estate market recovered from 2008 when most of the markets were classified as cold and don’t allow investors to be paid for their risk premium. Five years later, the situation has reversed with just a handful markets (9) still over-priced. 66 HOT markets in Europe There are 66 HOT, 30 WARM and only 9 COLD markets in Europe, indicating that many property markets look attractive from an investment perspective. Germany looks particularly good value, with 8 HOT markets, 3 WARM markets and no COLD markets. The UK remains very attractive, as 18 out of the 20 markets in the UK are now classified as HOT (Figure 41). As usual in Europe, these good figures are balanced by a handful of markets still classified as COLD (9). They are located mostly in Spain and France with a few others in CEE and Nordics. Sweden offers highest liquidity ratios The European market offers currently plenty of opportunities for investors; however making the right choices is always a challenge. Combining the size of the market and the liquidity ratios on both total and cross border activity should help investors to identify the most promising markets (Figure 42). Sweden appears as the most liquid market over the last 10 years, with ratios well above the European average but the medium size of its market could put a damper on investors not able to pay such high prices. This story is even more relevant for Poland and Czech Republic. The UK and Germany remain the best places to invest in Europe thanks to the size of their market and an overall liquidity ratio above the regional average.

Figure 40

Changes in European Fair Value Index scores Q1

0%

20%

40%

60%

80%

100%

2003 2005 2007 2009 2011 2013

Cold Warm Hot

96 7 59 77


Figure 41

Fair Value Index scores in Europe, Q1 2013

0%

20%

40%

60%

80%

100%

Cold Warm Hot

93 86 87 77 79 55 42 50 77


Figure 42

Stock size and long term liquidity

CZ

FR

DE

IT

LU

NL

PL

RUS

BE

ES

SE

UK

-1%

0%

1%

2%

3%

4%

5%

6%

0% 2% 4% 6% 8% 10%

10 y

r av

erag

e cr

oss

bo

rder

liq

uid

ity

10 yr average overall liquidity

Warm

Hot

Cold

Fair Value Index


Europe 2013


Map 1

Market liquidity versus fair value scores


Europe 2013


Europe 2013


Definitions Invested stock refers to the value of investment grade commercial real estate held by different investor groups.

The total value of the real estate capital market is defined as the total volume of commercial real estate debt outstanding plus the total value of equity in commercial real estate holdings.

Private debt refers to the total outstanding loan value to the real estate sector that is not held in the form of listed financial securities. Loans granted and subsequently securitised prior to maturity are not included in this data. Private debt relates to the activity of all participants involved in the provision of commercial real estate loans including institutional lenders, commercial bank lending and insurance companies.

Public debt refers to the total outstanding loan value to the real estate sector held in the form of listed financial securities, i.e. property company corporate bonds, covered bonds with commercial property as collateral and commercial mortgage backed securities (CMBS).

Private equity refers to the equity proportion of the commercial real estate holdings of insurance companies, pension funds, private property companies, high net worth individuals and unlisted property vehicles. The debt proportion has been stripped out by applying a different gearing ratio for each investor group.

Public equity refers to the equity proportion of the commercial real estate holdings of listed property companies, REITs and other listed property vehicles. The debt proportion has been stripped out by applying a different gearing ratio for each investor group.

Gearing (or LTV) ratio is defined as debt/(debt+equity). The various investor groups have different gearing levels based on their risk profile, investment strategy, as well as their capital sources.

Money into Property methodology Private debt allocation In order to capture the value of commercial real estate loans issued by domestic banks to fund

cross-border investment and likewise by foreign banks to fund domestic property investment, private debt is allocated based on the pattern of cross-border investment transactions.

Cross-border allocation in invested stock

The value of the commercial real estate held by different investor groups is allocated based on the location of the property rather than the origin of investor.

Currency conversions Invested stock and its components are converted by using the average quarterly exchange rate for each year under review.

Transaction volumes Transaction volumes represent the buying and selling of property and are independent of stock. For example there

can be a lot of transactions, but if price does not change and the property is already in the invested stock figures then there will be no change in invested stock. The only change is the owner of the property, which could trigger a change in quadrant (say public to private). Higher transaction volumes do indicate interest in the market, they tend to imply more development activity or capital values are rising.

Europe 2013


Fair value methodology The DTZ Fair Value Index

TM was launched in August 2010 and has now been rolled out for all 201 markets covered by DTZ

forecasts. Fair value is the value at which an investor is indifferent between a risk free return and the expected return from holding property, taking into account the extra risk of investing in the property asset class. When the property price is at fair value, an investor is being adequately compensated for the risk taken in choosing to purchase real estate; similarly, when the property price is below the fair value price, an investor is being more than compensated for the risk taken in choosing to purchase real estate. When buying at or below fair value, an investor does not necessarily buy at the bottom of the market. Our fair value analysis focuses on prime assets and a five-year investment horizon, and hold for the market overall; individual transactions may provide opportunities and risks beyond the average market view. For more information see the note DTZ Fair Value Estimates – Methodology and Examples at www.dtz.com

http://www.dtz.com/

Europe 2013


Other DTZ Research Reports Other research reports can be downloaded from www.dtz.com/research. These include:

Occupier Perspective Updates on occupational markets from an occupier perspective, with commentary, analysis, charts and data. Global Occupancy Costs Offices Obligations of Occupation Americas Obligations of Occupation Asia Pacific Obligations of Occupation EMEA Office Occupier Review Asia Pacific Office Occupier Review Europe The TMT Sector - October 2012 The European Insurance Sector - June 2012

Property Times Regular updates on occupational markets from a landlord perspective, with commentary, charts, data and forecasts. Coverage includes Asia Pacific, Bangkok, Beijing, Berlin, Brisbane, Bristol, Brussels, Budapest, Central London, Chengdu, Chongqing, Dalian, Edinburgh, Europe, Frankfurt, Glasgow, Guangzhou, Hangzhou, Ho Chi Minh City, Hong Kong, India, Jakarta, Japan, Kuala Lumpur, Luxembourg, Madrid, Manchester, Melbourne, Milan, Nanjing, Newcastle, Paris, Poland, Prague, Qingdao, Rome, Seoul, Shanghai, Shenyang, Shenzhen, Singapore, Stockholm, Sydney, Taipei, Tianjin, Ukraine, Warsaw, Wuhan, Xian.

Investment Market Update Regular updates on investment market activity, with commentary, significant deals, charts, data and forecasts. Coverage includes Asia Pacific, Australia, Belgium, Czech Republic, Europe, France, Germany, Italy, Japan, Mainland China, South East Asia, Spain, Sweden, UK.

Money into Property For more than 35 years, this has been DTZ's flagship research report, analysing invested stock and capital flows into real estate markets across the world. It measures the development and structure of the global investment market. Available for Global, Asia Pacific, Europe and UK.

Foresight & Outlook Quarterly commentary, analysis and insight into our in-house data forecasts, including the DTZ Fair Value Index™. Available for the following regions: Global, Asia Pacific, Europe and in the UK. In addition, we have been publishing our Annual Global Outlook report for the last three years. This report provides a concise market outlook for the year ahead and is presented to key client audiences around the globe.

Insight Thematic, ad hoc, topical and thought leading reports on areas and issues of specific interest and relevance to real estate markets. China Healthcare – April 2013 European Sustainability Guide – April 2013 Great Wall of Money – March 2013 European Retail Guide - Shopping Centres – March 2013 China Property Market Sentiment Survey - January 2013 India Special Economic Zones - December 2012 Singapore Executive Condominiums - December 2012 UK Secondary market pricing - December 2012 Singapore office demand - December 2012 China Ecommerce & Logistics - November 2012 Net Debt Funding Gap - November 2012 German Open Ended Funds - October 2012

DTZ Research Data Services

For more detailed data and information, the following are available for subscription. Please contact [email protected] for more information.

Property Market Indicators Time series of commercial and industrial market data in Asia Pacific and Europe.

Real Estate Forecasts, including the DTZ Fair Value Index

TM

Five-year rolling forecasts of over 200 commercial property markets in Asia Pacific, Europe and the USA.

Investment Transaction Database Aggregated overview of investment activity in Asia Pacific and Europe.

Money into Property Data covering capital flows, size, structure, ownership, developments and findings of annual investor and lender surveys.

http://info.dtz.com/collect/click.aspx?u=/G1GTPto3VUxllk12cIlFjq/qHXI56GybRmUQ9u+aZY=&rh=ff00054c332ad84056dc2c66ff48ae56c7af2099


DTZ Research Contacts

Global Head of Research

Hans Vrensen

Phone: +44 (0)20 3296 2159

Email: [email protected]

Head of Strategy Research

Nigel Almond

Phone: +44 (0)20 3296 2328


Head of Global Forecasting

Fergus Hicks

Phone: +44 (0)20 3296 2307


Head of Asia Pacific Forecasting

Kate Barrow

Phone: +852 2250 8864


Head of Research Information Management

Graham Bruty

Phone: +44 (0)20 3296 2297


Head of CEMEA Research

Magali Marton

Phone: +33 1 49 64 49 54


Head of UK Research

Ben Burston

Phone: +44 (0)20 3296 2296


Head of SEA & ANZ Research

Dominic Brown

Phone: +61 (0)2 8243 9999


Head of Americas Research

John Wickes

Phone: +1 312 424 8087


DISCLAIMER

This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, DTZ can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to DTZ.

© DTZ May 2013

Documents

Money into Property Europe 2013 - cushmanwakefield.com.ua · Market sentiment is the focus of the second section, where we share the findings of our investors’ and lenders’ surveys