Prospects for Property · Overview Steve Mallen Principal, SM Consulting ... UK AVERAGE PRIME YIELDS AT ALL TIME LOWS % Source: CBRE Prime Rent and Yield Index % ... 43 Mayfair Buildings

Welcome……..

Prospects for Property In a post-crash Election Year

November 13th 2014

Your Panel……..

Steve Mallen

– Principal, Steve Mallen Consulting

– Catz, 1984, Geography

Michael Brodtman

– Head of Valuation & Advisory, CBRE

– Magdalene, 1978, Economics/Land Economy

Robert Peto

– Chairman, DTZ Investment Management

– Corpus, 1968, Economics/Land Economy

Mike Bryant

– Head of Asset Management (Europe), GE Capital Real Estate

– Queens, 1985, Geography/Land Economy

Agenda……...

Chairman……..

Overview Steve Mallen

Principal, SM Consulting

November 13th 2014

Steve Mallen

“Events, dear boy….events !”

UK Economic Growth (GDP: 1980 – 2018)

Source: HM Treasury/IMF

%

Forecast

30 yr Average (1980-2010) = 2.19%

Sharp

Recovery

Steve Mallen

GDP Growth by Sector (Q1 2008 to Q2 2014)

Source: ONS

Q1 2008 = 100

Steve Mallen

Confidence Rebounds……

Steve Mallen

……Ahead of materials !

Source: BIS

Steve Mallen

Construction costs will rise….…

New Private Sector Housing Construction

Orders (2000 to 2014)

Source: ONS

£ millions

Steve Mallen

Planning for Growth………

Residential Planning Approvals - England Moving Annual Total (2007 – 2014: 10+ units)

Source: HBF/Glenigan

Steve Mallen

Source: DCLG

Housing Completions - England (1970/71 to 2013/14)

Current Demand

Steve Mallen

UK Gross Mortgage Lending (Q3 2011 to Q3 2014)

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

Q32011

Q32012

Q32103

Q32014

£ million

Steve Mallen

UK Gross Mortgage Lending (2003 to 2013)

20,000

70,000

120,000

170,000

220,000

270,000

320,000

370,000

420,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

£ million

Steve Mallen

Other Sectors

Steve Mallen

Looking to the Future……..

IPF Commercial Property Forecasts (2014 to 2018)

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18

2014 2015 2016 2017 2018 2014-18

Rental Growth Capital Growth Total Returns

Steve Mallen

%

21 CULS MARKET TRENDS SEMINAR | NOVEMBER 2013

Michael Brodtman

Head of Valuation & Advisory

CULS MARKET TRENDS SEMINAR

Thursday 13th November 2014


NOVEMBER 2013 PREDICTIONS;

Occupier markets stabilising in improving economy

Positive fund allocations and improving debt market

30% improvement in investment volumes leading to

lower yields

Growing interest in alternatives

Strong momentum for 2014

Were They Right?


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Rental Value Growth Capital Value Growth

UK ALL PROPERTY RENTAL AND CAPITAL VALUE GROWTH

Index

Source: CBRE Monthly Index

CBRE Monthly Index rebased to Dec - 99 Index


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All Offices All Shops All Retail Warehouses All Industrials All Shopping Centres

UK AVERAGE PRIME YIELDS AT ALL TIME LOWS %

Source: CBRE Prime Rent and Yield Index

%


STRONG NET FLOWS TO PROPERTY UNIT TRUSTS

% £ m

Source: IMA/IPD Monthly Index

-400

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Oct-

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Feb-1

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Total Rolling 3-month Net Flows to Property IPD Capital Growth

% £ Million


RECORD CRE INVESTMENT IN THE UK

0

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Leisure and Other Industrial Retail Rest of UK Office London Office

£ Million

Source: CBRE/Property Data

By sector

£ Million


SUMMER OF LANDMARK DEALS

Land Securities – luewater 30%, £656m, 4.25%

Oxford Properti – Bond Street £318m, £850 ITZA, 2.5%

– £381m, 65%, 43 Mayfair

Buildings , c2.5%

– c£720m, 3.9%, 11yr

WAULT Joseph Safra


PROPERTY’S POSITIVE YIELD GAP

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Sep-9

2

Sep-9

3

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Yield Gap 10Y Gilt All Prime Property Yield

%


KEY THEMES FOR 2015

London as a global magnet

Rerating of all property, especially prime

Rental growth spreading out from London

Transformed landscape for debt

Sustained economic recovery and investment demand will

override political uncertainty

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CULLS Market Trends Panel Robert H H Peto: DTZ Investors Thursday 13th November 2014

PRIVATE & CONFIDENTIAL www.dtz.com

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Questions Raised in November 2013 Seminar

What has Changed?

TRENDS • Improving Economic environment • Weight of money – Yield Advantage, Safe Haven, Pension Auto enrolment. • Secondary Property Yield Compression • Loosening of debt scarcity • London v. Regions • Government Policy support for demand side on Residential ISSUES

•Interest Rates – purchase yields and “trailing yields” – Fair Value Inflation/deflation The wrong type of inflation – Excessive real Wage Growth •Economic Fragility and impact on Occupier Demand “Events, Dear Boy, Events!” London v. Regions •Property Supply Side – Capacity and Pricing

OUTCOME •?

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As a consequence, investors have moved up the risk curve in search for value, resulting in strong bidding on secondary properties. Property Market Review: IPD yields and capital growth prime vs. secondary

Prime vs. secondary IPD initial yields Prime vs. secondary IPD Capital Growth

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Retail Quartile 1 Retail Quartile 3 Office Quartile 1

Office Quartile 3 Industrial Quartile 1 Industrial Quartile 3

%

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Source: IPD

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Continued uncertainty, slowed global growth and limited upward inflationary pressures have shaped markets expectations of lower interest rates for longer. UK inflation and interest rate outlook

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BoE interest rates & interest rate forecast (end Oct-14)

CPI Inflation

Interest rate forecast (end Jun-14)

Market interest rate expectations:

(based on interest rate swaps curve)

Source Bloomberg, Oxford Economics, FT, PMA

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Reduced inflationary pressures both externally and domestically have benefitted UK households over the last two years. External and internal inflationary pressures

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Food and non-alcoholic beverages

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CPI inflation (YoY)

Services = 58%

Other goods / misc= 0.27%

Clothing= 7% Energy & Fuel= 13%

Food = 11%

2014 weights to CPI

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Domestic growth has been strong and more balanced, but there are signs that demand particularly from the consumer sector may moderate in the short term. Domestic economy

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Sentiment surveys are also starting to weaken signalling slower

economic growth in the short term.

Continued slack in the labour market and marginal rises in job-

to job may mean wage inflation will be slow to pick up.

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UK Manufacturing PMI Markit Survey

UK Services PMI Markit Survey

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Contraction < 50

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f re

spondents

Consumers willingness to spend has improved

alongside increased job security & consumer

confidence, but at the cost of savings.

However will this continue? The rapid pace of employment

growth is showing signs of abating which may mean that

consumers are likely to pause for breath in the short term.

Source Bloomberg, ONS, Oxford Economics

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The wide margin between fixed and variable rates and the Bank of England rate suggests that further interest rate hikes may not automatically be passed onto new mortgages.

Bank of England Interest Rates vs. mortgage interest rates

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Source: Bank of England

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PMA’s UK property risk indicator (which accounts for residential house prices, amongst other things), suggest weaker property returns over the next two years. Is a pricing bubble forming? PMA Property Risk Indicator

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PMA Risk indicator is a good lead indicator of property recessions and includes the following measures:

• Commercial property pricing – relative to its long term trend and other asset classes.

• Commercial property development activity – is development activity running at unusually high levels?

• Commercial property lending – is lending on property at high levels relative to overall lending?

• Housing - are similar factors observed in the housing market with a knock on effect on consumer spending and

borrowing?

Source: PMA

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Commercial property looks attractively priced against most bond metrics, fair value against its own history but expensive against equities. Is a commercial pricing bubble forming? Property pricing against other asset classes and itself

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Source: PMA

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1 UK Commercial Property looks attractive and risks near a record low DTZ Fair Value Index and Risk Multiplier

Source: DTZ Research

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Looking forward we expect the office and retail fair value index scores to fall more sharply and industrial property to remain the most attractive sector over the next five years. DTZ Fair Value Index projections by sector


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1 Total Return and Fair Value Classifications by sector and across UK regions Total Return and Fair Value Classifications – by sector

Retail Office

Industrial


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Our longer term forecasts suggest continued strong investment sentiment in the short term and lower income dominant returns post 2015. DTZ IM All Property Forecasts

18.8%

15.8%

3.5%3.4% 2.3% 3.2% 5.5%

-5.0%

0.0%

5.0%

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2014 2015 2016 2017 2018 2019 2015-19

Required Return Income Return

Capital Return Total Return

ERV Growth

Source: DTZ Investors

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With building costs anticipated to surpass ERV growth for all property over the next five years this will further dampen new supply in the short run. Index of Construction Tender Prices BCIS

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BCIS All-in Tender Price Index

Source: BCIS, IPD

Imagination at work

GE Capital Real Estate Mike Bryant – European CRO

Europe

million square feet

of owned real estate * 2Q’14 total

assets ($B)

years of experience

in Europe

11.2 33

Snapshot

Professionals across

Europe, including 36

JVs

290 27

*square footage excludes multifamily, hotel

Who we are

We offer real estate financing solutions in key

markets and we also have a significant real

estate owned portfolio that we manage. We

maintain relationships with real estate investors,

developers and brokers in the United Kingdom,

France, Germany, The Nordics, Spain, Italy,

Central and Eastern Europe.

What we do

Asset management of our real estate

owned portfolio to maximize value

Asset / loan management of our property

loan book to protect principal

Flexible debt offer in key markets on both

traditional (office, retail, industrial) and also

niche property types

Ellen Brunsberg President, GE Capital Real Estate, Europe

Key Themes - Direct Market

Investment market vs occupier market

Improving debt supply

UK: growing appetite for secondary

Germany: increasing overseas investor interest

France: Ile de France vs Paris core

Spain: strong appetite

Italy: NPL markets attracting interest

Key Themes - Lending Market

Improving debt supply

More regulation for banks

Margins under pressure

Loan terms under pressure: amount & structure

Creditor landscape

Cross border deals

Questions……...?

Thank you…...

Documents

Prospects for Property · Overview Steve Mallen Principal, SM Consulting ... UK AVERAGE PRIME YIELDS AT ALL TIME LOWS % Source: CBRE Prime Rent and Yield Index % ... 43 Mayfair Buildings