1 uk & european markets robin n goodchild phd frics head of european strategy islamic real...
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UK & European Markets
Robin N Goodchild PhD FRICSHead of European Strategy
Islamic Real Estate Finance 2004 London, 29th June
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22
Agenda – Real Estate in UK, EuroZone and Central Europe
European Economy & Capital Markets
Offices
Retail
Warehouse
Investment Markets
Best Picks
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33
A Good 2004 But With Rising Risks
2004 set to see global economic growth rise at its fastest level since boom of 2000
US elections means highly simulative fiscal policy… for this year
Global growth further buoyed by Japan, China and South East Asia
Eurozone remains depressed, strong euro dampens prospects for export led recovery
Terrorism, oil prices, US hangover ~ anything to look forward to in 2005?
Stronger growth to resume 2006/71
2
3
4
1997 2000 2003 2006
Forecast
Global Real GDP %
Source: EIU
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The Europe and especially the EuroZone will Lag
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
US UK Euro-Zone Asia Pacific excl.Japan
Japan
2003 2004 2005
Source: EIU, March 2004
GDP %
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1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Germany
Netherlands
Italy
Belgium
France
EU
Portugal
Sweden
UK
Spain
Czech Rep
Hungary
Ireland
Poland
GDP growth % per annum end 03 -08
The Fringes Continue To Grow Faster
Source: LaSalle Investment ManagementSource: PMA
Core Europe are the laggards
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Business Confidence Indicators Improving
-40
-30
-20
-10
0
10
20
1998 1999 2000 2001 2002 2003 2004
Germany Spain France Italy Sweden UK
Balance
Source: DataStream
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77
Consumer Confidence Index – Moving Sideways
-40
-30
-20
-10
0
10
20
30
1998 1999 2000 2001 2002 2003
Germany Spain France
Italy Sweden UK
Balance
Source: DataStream
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UK House Price to Earnings Ratio – well into uncharted water
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
Source: LaSalle Investment Management
3.64
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The Shape of the Recovery: The Economy
UK at heart of global recovery – key risk its housing market
Europe will take several years to get back to trend
In a low inflation world low cost providers will do well - the fringe
But there are still some sweet spots :– provision of modern space : logistics, multi-anchored retail, big box– local 'monopolies' : Brussels as EU capital (particularly CBD)– corporate sale and leaseback : provincial markets - growth + yield– capacity constrained markets
bounce back in 2005/06 : Barcelona, Paris, Stockholm, Madrid?
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1010
5 Year Swap Rate – 2002 to date
2
3
4
5
6
Jan-02
Apr-02
Jul-0
2
Oct-02
Jan-03
Apr-03
Jul-0
3
Oct-03
Jan-04
Apr-04
UK
EUROZONE
5.63
3.67
4.93
3.14
5.22
3.91
5.68
5.09
Source: Thomson DataStream
11
Office Markets
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Summary of Q1 2004 : the Roller Coaster Reaches Bottom
Prime rents down just 0.4% in most Western markets
European vacancy rate has increased from 9.1% to 9.4%
JLL “showings” index has turned up in London Office investment totalled at €36 billion, down by 17% on 2002. Cross-border deals
accounted for 50% of the market.
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Prime Office Rents Bottom, Incentives will Reduce Before Growth Recovers
Source: Jones Lang LaSalle
0100200300400500600700800900
1000110012001300
Q1 2003 Q4 2003 Q1 2004
€
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Vacancy Rates Peaking
Source: Jones Lang LaSalle
0
5
10
15
20 Q1 2003 Q4 2003 Q1 2004
%
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Office Take-Up Trends : a Patchy Recovery
Source: Jones Lang LaSalle
0
100
200
300
400
500Q1 2003 Q4 2003 Q1 2004
(‘000 sqm)
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Years to Absorb Office Space Coming Available in 2004/05
0
1
2
3
4
5
6
Years of Take-Up*
* Based on average gross take-up 1998/2003
Source: LaSalle Investment Management
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New Supply Set To Fall
Source: PMA European Office Stock Completions - 18 largest markets
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Jones Lang LaSalle Short Term Rental Cycle Q1 2004
Rentalgrowthslowing
Rentsfalling
Rentalgrowth
accelerating
Rentsbottoming
out
Antwerp, Copenhagen
Dublin, Milan, Rome
Amsterdam, Düsseldorf
Brussels
Prague, BudapestStockholm
OFFICES
Edinburgh, Lyon, Helsinki
Lisbon
Oslo, London, Luxembourg, Warsaw
Note:
• This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end March 2004.
• Markets can move around the clock at different speeds and directions.
• The diagram is a convenient method of comparing the relative position of markets in their rental cycle.
• Their position is not necessarily representative of investment or development market prospects.
• Their position refers to Prime Face Rental Values
Frankfurt, Munich
Paris, Berlin, Hamburg
Moscow
Athens
Barcelona, Madrid
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Office Yields Still Resisting Upward Pressure but for how Long?
0
1
2
3
4
5
6
7
8
9
Lyon
Lisbon
Bruss
elsPari
s
Madrid
Barcelo
na
London
MunichBerl
in
Dusseld
orf
Rome
Hamburg
Milan
Frankfu
rt
2000
2003
%
Source: Jones Lang LaSalle
20
Retail Markets
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Cross Border Investment in European Shopping Centres
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High Street Retail Yields Are Falling Except in Germany – is Value Emerging in German Retail?
0
2
4
6
8
10
12
Warsaw
Prague
Lyon
Bruss
ells
Berlin
Dusseld
orf
Hamburg
Frankfu
rt
Munich
Amsterd
am
Stockholm
Paris
Madrid
Barcelo
na
LondonMila
n
Dublin
2000
2003
%
Source: Jones Lang LaSalle
except in Germany
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Development Activity Strong in Southern Europe
Source: PMA
SC completions 2004
By size band (m²)
40 k
10 to 40 k
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Retail Provision: Still Below Par
0.00 0.10 0.20 0.30 0.40 0.50
Madrid
Valencia
Alicante
Zaragoza
Sevilla
Barcelona
Tarragona
Retail Floorspace (m 2) per capita
2008
2003
Spain Italy
Source: PMA
Euro Average Euro Average
0.00 0.10 0.20 0.30 0.40 0.50
Pescara
Torino
Milano
Roma
Genova
Pisa
Bari
Retail Floorspace (m 2) per capita
2008
2003
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Shopping Centres: Rental Growth
0.0 1.0 2.0 3.0 4.0 5.0 6.0
Netherlands
Germany
Sweden
Spain
France
Belgium
Italy
“focus on Southern Europe, with possible exception of Sweden”
Source: LaSalle Investment Management
Rental Growth 2004/07Prime Yield (%)
6.3
6.3
6.0
6.3
6.3
5.8
6.3
Expected Inflation
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Emerging Trends
Aging Core : Experiential retail : mixed usePopulation
Increasing : Multifunctional trips : mixed use or out Congestion of town
Collapse of the : Growth of new : flexible space big brands - C&A, formats - Inditex provisionM&S…..Carrefour?
Slower Growth Core : increased focus on : out of townvalue for money
Faster growth fringe : main demand for : logistics manufactures relocation?
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Warehouse Markets
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European Comparison: Rental Levels and “Growth”
Source: Jones Lang LaSalle
161
58 48 4970
84
5070
9573 79
3757 63
0
50
100
150London
Par
is
Antw
erp
Bru
ssel
s
Rott
erdam
Fra
nkf
urt
Lyo
n
Mila
n
Am
ster
dam
Mad
rid
Bar
celo
na
War
saw
Budap
est
Pra
gue
€/sq
m/p
a
-13
0 0
-1
72 3
03
-14
-3
-33
-19
-5
-35
-30
-25
-20
-15
-10
-5
0
5
10
% c
hang
e pr
ime
rent
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Warehouse Yields : Yields Still Falling
0
2
4
6
8
10
12
14
Prague
Warsa
wBer
lin
Stockho
lmLyo
n
Dusseld
orf
Paris
Bruss
ells
Munich
Milan
Frankfu
rt
Barce
lona
Madrid
Hambur
g
Amsterd
amDubli
n
Londo
n
20002003
%
Source: Jones Lang LaSalle
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Forecast Prime Warehousing Rents 2004-2007
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Amsterdam*
Madrid
Barcelona
Rome
Milan*
Lyon
Paris
“focus on markets that have not yet started to outsource to specialist operators”
Source: LaSalle Investment Management
Nominal Rental Change Prime Yield (%)
8.75
8.9
8.1
8.5
8.4
8.1
7.1
* Rental growth does not match inflation over the forecast period% pa
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The Pull to the East
Source: King Sturge
Main Markets
Significant Markets
GDP2004
Pop. (m)
Poland 3.7 39
Czech Republic
3.7 10.3
Hungary 3.2 10.1
Source: Eurostat
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France: Main markets
LONDON ROTTERDAM RUHR
BARCA
LOMBARDY
Current Stock
Principal Distribution Hubs
Secondary Road Hubs
Secondary Maritime Ports
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3333
Ile-de-France: Investment Yields ~ Stability & Still a Significant Yield Gap
Source: Jones Lang LaSalle
0
2
4
6
8
10
12
1419
94
1995
1996
1997
1998
1999
2000
2001
2002
Q1
03
Q2
03
Q3
03
Q4
03
Q1
04
%
Warehouse 8.50-8.75%
OAT 4.38%21.05.04
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Investment & Future Prospects
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Source: IPD Monthly
Quarterly trend pa
UK Property: Capital & Rental Value Movements
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1997 1998 1999 2000 2001 2002 2003 2004
Rental Values
Capital Growth
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Capital Flows into German Open-Ended Funds
-4,000
0
4,000
8,000
12,000
16,000
20,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004est
Euro
mill
ions
Source: BVI, LaSalle Investment Management
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Drivers of Property Yields
Inflation/Inflationary Expectations
Real Risk Free Rate – Index Linked Gilts
Property Yield / 5 Year Swap Rate Spread
Acceleration in Rental Growth
(+ ve )
- ve
+ ve
- ve
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UK Long Run Yield Comparison
0
2
4
6
8
10
12
14
16
1977 1980 1983 1986 1989 1992 1995 1998 2001
Property Yield Gilt Yield Stock Dividend Yield
Source : Thomson Financial, IPD
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Conclusions on Yields
2004 UK returns 12 - 15%
Property Yields shouldn’t go lower – IPD Monthly 6% initial yield key threshold
Number of Signals Pointing to Higher Yields:
– Rise in Index Linkers Yields in 2004
– Narrowing of 5 Year Swap spread over Equivalent Yield
Strong Momentum could well take the Market to Irrational Levels
– Continuing Track Record
– Improving Fundamentals
– New Forms of Vehicle: PIFs, New Authorised PUTs
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UK Total Returns Forecasts - Risks
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 2008
Tota
l Ret
urn
pa %
Source: LaSalle Investment Management
Source: IPD, LaSalle Investment Management
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European Property 2004 – Best Opportunities
Exploit office market recovery
– London, Madrid, Paris
– But avoid Germany
Retail for core stable returns
Warehouses for a leveraged income play
– especially in France
Key Property Risks
– scale of new spec development
– attitude of the banks on new lending
– housing market correction