OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK

EUROPEAN QUARTERLYCOMMERCIAL PROPERTY OUTLOOK Q1 2019

RESEARCH

OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK

EUROPEAN QUARTERLYCOMMERCIAL PROPERTY OUTLOOK Q1 2019

RESEARCH

FIGURE 1

European commercial property investment volumes

Source: Knight Frank Research / Real Capital Analytics

€ bi

llion

0

10

20

30

40

50

60

70

80

90

100

Q1 Q2 Q3 Q42011 2012 2013 2014 2015 2016 2017 2018 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q4Q1 Q1Q2 Q3

Q1 2019 TRENDSQuarter-on-quarter change: -56%Year-on-year change: -32%

2

FIGURE 2

European prime office yields vs 10 year government bond rate, Q1 2019

Source: Knight Frank Research, Eurostat, Macrobond, Swiss National Bank

0%

2%

4%

6%

8%

10%

12% PRIME OFFICE YIELDYIELD GAP

Fran

kfur

t

Mos

cow

Buc

hare

st

Bud

apes

t

Pra

gue

War

saw

Lond

on C

ity

Bru

ssel

s

Dub

lin

Bar

celo

na

Vie

nna

Mad

rid

Lond

on W

E

Mila

n

Par

is

Gen

eva

Am

ster

dam

Mun

ich

Ber

lin

Zur

ich

Please refer to the important notice at the end of this report

A total of €34.1bn was invested in European commercial property in Q1 2019, according to Real Capital Analytics (RCA). While this is down -32% from the €50.0bn invested in Q1 2018, Europe is not alone. Global commercial investment volumes declined by -24% year-on-year (y-o-y), with the Asia Pacific region’s commercial investment volumes falling by approximately -27% over the same period.

Despite headwinds facing multiple markets, including Italy entering a technical recession, there were pockets of strong y-o-y investment volume growth in the Czech Republic (+240%), Sweden (+142%), Finland (+141%), Norway

(+36%) and Russia (+11%). Overall, office, retail and industrial investment volumes were all down y-o-y in Q1 2019, according to RCA. However, more investors saw opportunities in alternatives across Europe, with investment volumes increasing by +39% for Senior Housing and Care Homes, and by +8% for Hotels.

There remains a significant weight of capital targeting European assets, with just over 50% from cross-border sources. Evidence of this demand can be inferred through pricing, where European prime office yields came under further downward pressure in the year to Q1 2019. On average, European yields fell by -11bps.

The most significant falls were recorded in Warsaw (-55bps), Budapest (-50bps) and Zurich (-50bps). However, on a quarterly basis, many cities across the continent witnessed no yield movement in Q1 2019. This is expected, as yields in markets such as Berlin, Brussels, Dublin, Munich and Madrid are at multi-year lows.

In Q1 2019, the average European prime office rent grew by +3% year-on-year to €531 per sq m per annum. The +19% rental increase in Amsterdam and +13% increase in Berlin could not offset falls in Moscow and Geneva.

Take-up has increased, on average, by +8% y-o-y in Q1 2019 across our survey area. In Brussels, take-up increased by +202% in the year to Q1 2019. Brussels recorded one of its highest ever levels of quarterly take-up, with 236,209 sq m in Q1 2019. The city had one of its best quarters in terms of leasing activity, exemplified by a 67,000 sq m lease by Vlaamse Overheid at €215 per sq m per year.

Vacancy rates have continued to fall in Q1 2019. On average, the vacancy rate was 6.1% across our survey area, a fall of -0.69% y-o-y. The steepest falls recorded were in Moscow (-2.6% y-o-y), Prague (-1.9%) and Barcelona (-1.8%). The cities with the lowest vacancy rates in Q1 2019 were Berlin (1.5%), Munich (1.7%) and Paris (1.8%), highlighting the tight supply and demand in these markets.

In the coming year, we expect capital value growth in close to half the markets surveyed. Unsurprisingly, these are typically the markets with the lowest vacancy rates, including Paris, Prague and Zurich, where strong demand and limited supply play a substantial role. Furthermore, we expect rental price growth in multiple markets, including Moscow, Vienna and Milan. Ultimately, prime yields across office, retail and industrial markets are on the whole likely to remain stable over the year ahead, although, we do anticipate yield compression in office markets including Berlin, Prague and Brussels.

EUROPEAN OUTLOOKDespite headwinds, there are still local growth stories and opportunities in new sectors

RUSSIA

€0.2 bn+11%

POLAND

€0.7 bn-65%

NETHERLANDS

€1.8 bn-38%

FRANCE

€3.8 bn-7%

BELGIUM

€0.2 bn-92%

IRELAND

€0.5 bn-42%

GERMANY

€6.4 bn-47%

SWEDEN

€2.3 bn+142%

NORWAY

€1.4 bn+36%

FINLAND

€1.6 bn+141%

SWITZERLAND

€0.7 bn-19%

CZECHREPUBLIC

€0.7 bn+240%

AUSTRIA

€0.2 bn-76%

PORTUGAL

€0.3 bn-81%

SPAIN

€1.6 bn

-30%

UK

€9.5bn-22%

ITALY

€1.2 bn-19%

HUNGARY

€0.2 bn

+3%

ROMANIA

€0.04 bn-59%

DENMARK

€0.3 bn-77%

-32%Change y-o-y

€34.1 bnCommercial investment,

Q1 2019

EUROPE

EUROPEAN QUARTERLY Q1 2019 RESEARCH

FIGURE 4

European commercial property investment volumes, Q1 2019

Investment volumes comprise of: office, retail, industrial, and hotel. Source: Knight Frank Research / Real Capital Analytics. Source: Knight Frank Research / Real Capital Analytics

43

BARC

ELON

A

LISB

ON

MAD

RID

BERL

IN

PRAG

UE

DUBL

IN

MUN

ICH

FRAN

KFUR

T

BUCH

ARES

T

BUDA

PEST

WAR

SAW

AMST

ERDA

M

0%

2%

4%

6%

8%

10%

12%

14%

Berlin

Mun

ich

Paris

Zuric

h

Prag

ue

Vien

na

Gen

eva

Lond

on C

ity

Dubl

in

Lond

on W

E

Barc

elon

a

Buda

pest

Brus

sels

War

saw

Mos

cow

Buch

ares

t

Mad

rid

Mila

n

Q1 2019 VACANCY RATEQ1 2018 VACANCY RATE

FIGURE 3

European office vacancy

MARKET HIGHLIGHTSVIENNA

Compared to the previous quarter, Vienna’s vacancy rate fell by -0.54% to 5.2% in Q1 2019. This highlights the strong demand in the city.

DUBLIN

Take-up in Dublin increased by +85% y-o-y in Q1 2019, to 128,394 sq m. Prime rents and prime yields in the city have not moved in the year to Q1 2019, with vacancy rates falling by -0.8% to 5.4%.

BERLIN

Vacancy rates are at an all time low at 1.5%, a decline of -0.3% from Q4 2018. In 2018, prime rents surged, due to strong demand factors. This trend has continued in Q1 2019, with the city’s prime office rent increasing by +12.5% q-o-q, to €432 per sq m per annum.

ZURICH

Prime office yields compressed by -50bps in the year to Q1 2019 to 2.5%. Zurich is experiencing significant demand in the office sector, especially in the CBD. In conjunction with this rise in demand, office rents are expected to increase in 2019.

MADRID

Office investment in Madrid reached a record breaking €960m in the first quarter of 2019. The largest deal of the quarter was the sale of llunion Portfolio which was acquired by Zurich for €163m.

PARIS

In Q1 2019, 571,500 sq m of office space was let or sold in the Greater Paris Region, which was an increase of +8% compared to the ten-year average, but a decrease of -23% y-o-y. This was to be expected due to lack of supply in the city, combined with the fact that in Q1 2018, there were multiple transactions of large office buildings.

5

EUROPEAN QUARTERLY Q1 2019 RESEARCH

Commercial property prime rents, yields and outlooks

Offices Logistics Shopping centres High streetCity Prime rents Prime yields Prime rents Prime yields Prime rents Prime yields Prime rents Prime yields (€/sq m/yr) (%) (€/sq m/yr) (%) (€/sq m/yr) (%) (€/sq m/yr) (%)

Amsterdam 475 4 3.25 4 85 4 4.50 4 N/A N/A 3,000 4 3.00 4Barcelona 270 4 4.00 4 82 4 5.25 4 600 4 4.50 5 3,480 4 3.50 4Berlin 432 5 2.75 6 84 5 4.50 4 1,380 4 3.75 4 3,900 4 2.50 4Brussels 320 4 4.25 6 55 4 5.25 4 1,650 6 4.25 4 1,800 6 3.75 4Bucharest 216 4 7.25 6 48 4 8.25 6 N/A N/A 840 4 7.25 4Budapest 294 5 5.50 5 51 5 7.25 5 120 4 5.50 5 1,350 5 5.50 5Dublin 673 4 4.00 4 105 4 5.25 4 3,500 4 4.50 4 7,000 4 3.50 4Frankfurt 522 5 3.10 4 80 5 4.45 4 N/A N/A N/A N/A

Geneva 626 4 3.00 4 179 4 5.00 4 1,019 4 4.00 4 3,576 4 3.75 4London 1,312 (WE) 5 874 (City)53.75 (WE)4 4.50 (City)4 224 4 4.00 4 N/A N/A 11,101 4 3.00 4Madrid 366 4 3.75 4 66 4 5.25 4 600 4 4.50 5 3,600 4 3.00 4Milan 580 5 3.40 4 55 4 5.25 4 900 4 4.75 4 11,500 4 2.75 4Moscow 703 5 9.75 4 65 5 11.00 4 3,097 4 10.25 4 N/A N/A

Munich 438 5 2.80 4 84 5 4.25 4 N/A N/A 4,400 4 2.90 4Paris 845 5 3.00 4 58 4 4.50 6 1,800 6 4.25 5 20,000 4 2.90 4Prague 270 5 4.75 6 50 4 5.75 6 N/A N/A 2,760 4 3.50 4Vienna 312 5 3.75 4 72 4 5.20 4 1,920 4 4.10 4 7,200 5 3.30 4Warsaw 288 4 4.70 4 60 4 5.25 4 1,200 4 4.75 4 N/A N/A

Zurich 738 5 2.50 4 223 4 5.25 4 1,341 4 4.00 4 8,046 4 2.50 4

Indicative prime yields, as quoted locally, based upon a hypothetical Grade A unit. Office rents are for prime city area Grade A space, 2,000 sq m. Shopping Centre rents are based on prime covered shopping malls, quoted on best position, 100 sq m units. Retail Warehouse rents are for units of 1-5,000 sq m located in purpose built parks. Typical Retail Warehouse schemes vary between countries. Logistics rents are for prime industrial space of units over 5,000 sq m. The data above is provided for general reference purposes only. Local market conditions will vary. *Zoned/weighted figure. Arrows provide a broad indication of recent movements and the short-term outlook for prime rents and yields. London office data is quoted for the West End (WE) and City (C) submarkets.

All yields are in local convention, net yields are in red.

Source: Knight Frank Research

London CityLondon West EndWarsawZurich

BarcelonaGenevaMadridMoscowParis

FIGURE 5

Prime office rental cycle

The above diagram is intended to provide a comparative guide to the current positions of European prime office markets in their rental cycles. Markets will move through their cycles at different speeds and, sometimes, in different directions. The positions indicated in the diagram do not constitute formal forecasts of future rental trends.

AmsterdamBerlinBrusselsBucharestFrankfurtMilanPrague

BudapestDublinMunichVienna

EUROPEAN MARKET INDICATORSThe average European office yield fell 11bps y-o-y in Q1 2019. The majority of yields are expected to remain stable into the first half of 2019.

Knight Frank Research Reports are available at KnightFrank.com/Research

Important Notice

© Knight Frank LLP 2019 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

EUROPEAN RESEARCH

Victoria Ormond Partner, Capital Markets Research +44 20 7861 5009 victoria.ormond@knightfrank.com

Antonia Haralambous European Research Analyst +44 20 3866 8033 antonia.haralambous@knightfrank.com

EUROPE

Richard Laird Partner, Capital Markets +44 20 7861 1663 richard.laird@knightfrank.com

Mike Bowden Partner, Capital Markets +44 20 7861 1546 mike.bowden@knightfrank.com

Caroline Bathgate Head of European Valuations +44 20 7861 1287 caroline.bathgate@knightfrank.com

Colin Fitzgerald Head of International Occupier Services +44 20 7629 8171 colin.fitzgerald@knightfrank.com

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