european real snapshot / autumn 2013

Current developments in the key real estate markets in Europe

Special focus: Healthcare Real Estate

EUROPEAN REAL SnapShot!Advisory Real Estate/Autumn 2013

2 / European Real SnapShot! / Autumn 2013

European Real SnapShot! / Autumn 2013 / 3

Content

Germany 6Economic fundamentals support the German real estate market

United Kingdom 10Can second tier cities fill the void?

Nordic Region 15Time to invest

The Netherlands 24Attracting overseas capital

Luxembourg 27Stable market despite Eurozone uncertainty

France 31Market softening with even Paris showing signs of weakness

Switzerland 35Price trend for investment property levelling out

Austria 39Small country, but major regional variations

Italy 42Still struggling to achieve recovery

Spain 47Stable, but far from recovery

CEE 51Growth prospects are better for CEE than EU average

Russia 55Reaching a crossroads


Back to normality?

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Germany01 Berlin CBD02 Munich CBD 03 Frankfurt CBD

UK04 Edinburgh05 Manchester06 London West End07 London City

Office

Nordic Region08 Copenhagen CBD09 Helsinki CBD 10 Stockholm CBD11 Oslo CBD

The Netherlands12 Amsterdam South Axis 13 Amsterdam Central 14 Rotterdam 15 Den Haag16 Utrecht17 Eindhoven18 Amsterdam South East

Source: KPMG Qualitative Market Assessment

Luxembourg19 Station District 20 Luxembourg’s CBD21 Kirchberg

France22 Lyon 23 Paris CBD 24 La Défense

Switzerland25 Basel CBD 26 Zurich CBD 27 Geneva CBD

Austria28 Vienna29 Salzburg30 Innsbruck

Italy31 Milan 32 Rome

Spain33 Barcelona 34 Madrid

CEE35 Sofia36 Belgrade37 Zagreb38 Bucharest39 Warsaw40 Prague41 Bratislava42 Budapest

Russia43 Ekaterinburg44 Sankt-Petersburg 45 Moscow Centre

Thank you for your interest in KPMG’s Real SnapShot! This publication gives you an overview and insight into the developments of the real estate markets across Europe.

Transaction volume in investment property across Europe has increased by 7% y-o-y in H1/2013 and has reached approximately EUR 68.9bn according to RCA1. Investors’ regained confidence in Europe’s real estate markets is mainly based on the increasingly positive economic outlook. Eurostat expects a GDP growth of 1.4% for the coming year, after having experienced a mild recession (-0.1%) in 2013. Offices have been at the top of the real estate investors’ shopping list, accounting for approx. 39% of total transaction volume in H1 2013. Next on the list were retail properties which, having reduced their share by 8% y-o-y to 19%, were only just ahead of residential property which attracted just under 19% of total transaction volume. Industrial attracted 11% of the total transaction volume.

The main investment hotspots in Europe continue to be the UK (Investment volume EUR 20.2bn) and Germany (EUR 17.4bn). Combined, these areas attracted 54.6% of total investment in H1/2013.The 22% y-o-y increase in transaction volume in Germany was significantly influenced by one single major portfolio transaction (Apartment portfolio disposal of GBW by Bayern LB EUR 2.45bn). In the UK the transaction volume changed by +11%, with a lack of supply limiting activity in the London area.Elsewhere, activity in the peripheral countries is showing signs of regaining momentum. Where previously investors have tended to focus on prime assets located in safe haven countries, activity in the first half of 2013 has showed signs of a shift in attitudes towards risk with more diverse investment opportunities being considered and transacting. Italy and Spain recorded significant increases in transaction volumes, up 114% (H1/2013: EUR 2.3bn) and 106% (H1 2013: EUR 1.2bn) respectively in H1/2013 compared to the prior

Market Cycle Office

1 Real Capital Analytics. Countries reflected: UK, Germany, France, Russia, Austria and Switzerland; Benelux: Belgium, Luxembourg and Netherlands; Nordics: Denmark, Finland, Norway and Sweden; Peripherals: Greece, Ireland, Italy, Portugal and Spain; Central Europe: Czech Republic, Hungary, Poland and Slovakia; Eastern Europe: Albania, Bosnia/Herzegovina, Bulgaria, Croatia, Estonia, Latvia, Lithuania, Macedonia, Montenegro, Romania, Serbia, Turkey and Ukraine


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Source: KPMG Qualitative Market Assessment

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Germany01 Frankfurt 02 Munich 03 Berlin

Nordic Region04 Copenhagen 05 Helsinki 06 Oslo 07 Stockholm

The Netherlands08 Amsterdam09 Rotterdam10 The Hague

Luxembourg11 Avenue de la Gare (Station District) 12 Grand Rue13 Rue Philippe II

France14 Lyon 15 Paris 16 Marseille

Switzerland17 Basel 18 Zurich 19 Geneva

Austria20 Innsbruck 21 Salzburg 22 Vienna

Italy23 Milan24 Rome

Spain25 Barcelona 26 Madrid

CEE27 Warsaw28 Prague29 Sofia30 Belgrade31 Bucharest32 Zagreb33 Budapest34 Bratislava

Russia35 Novosibirsk 36 Sankt-Petersburg 37 Moscow

Retail

year. These rises come on the back of renewed interest in Ireland, which has attracted some value add or opportunistic investors over the past two years. The increased interest in real estate transactions in countries like Spain and Italy can be explained by the improving economic outlook and the relative gap in real estate yields between the north and the south of Europe: in Q2/2013, investment in office buildings in peripheral countries showed yields that were approximately 2.5% higher than in Scandinavian countries (+2.2% compared with the UK or +1.7% compared with Germany). Investors are having to balance their appetite for returns with the challenges arising from saturated markets. As a result investors are diversifying into secondary locations in the more saturated transaction markets but are still focusing on quality buildings in preferred locations that are backed by long term leases and strong covenants. The yield spread between direct real estate investments and government bonds remains interesting despite the progressive normalization of government bonds yields. An analysis of the relationship between these yields suggests that the various sub-markets react very differently to rising bond yields. The returns for high quality properties in prime locations in Germany, for instance, are less sensitive to such changes than

comparable investments in London or Paris. On the other hand, returns on secondary property locations are characterized by a weak correlation with the bond markets and therefore should remain rather resistant to interest rate changes. In the case of the probable scenario of a slow economic recovery, coupled with a gradual rise in interest rates, risk premiums will reduce on secondary locations and prime locations will most likely experience a yield increase. This will partially close the existing yield gap between the two asset qualities.An eye should still be kept on the refinancing of property investments. Although deleveraging is well underway in major markets and, compared with the position a year ago, significant reductions have taken place in Spain, Ireland and the UK, as well as Germany and the Netherlands, there is still a considerable European debt funding gap to be bridged. We expect to see increasing interest from non-bank lenders as they look to secure an opportunity to access attractive investment returns.

Stefan PfisterPartner, Head of Real Estate Europe / EMA

Market Cycle Retail Highstreet


Germany

Economic fundamentals support the German real estate marketMacroeconomic OverviewAfter several quarters of economic stagnation, the German economy (measured in terms of GDP) grew by 0.9% between Q2 2012 and Q2 2013; however, there was a contraction in the GDP in the first quarter of 2013, which was more pronounced than predicted by some experts. This situation demonstrates the volatility of the country’s return to sustained economic growth.

Economic Indicators

80

85

90

95

100

105

110

115

120

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

10%

2007 2008 2009 2010 2011 2012 2013

Inflation (2010 = 100)

GD

P g

row

th a

nd u

nem

ploy

men

t ra

te

GDP growth Unemployment rate Inflation

Source: Destatis (German Federal Bureau of Statistics, 2013)

The European financial crisis (in particular, uncertainty regarding the scale of Germany’s exposure to bailouts in Greece and to those potentially looming in other European countries), has not had any significant impact upon the German macro-economic climate. Whilst the Eurozone itself has only just emerged from 18 consecutive months of economic contraction, Germany narrowly avoided a recession with only one quarter of GDP decline in 2013. These trends are an indication of Germany’s economic strengths, such as robust consumption and a stable job market, which experts anticipate will help the economy to steer clear of recession.

Germany still provides a very attractive investment environment for real estate investors, supported by low interest rates, a robust labour market, healthy consumer spending and positive early indicators.

Office MarketThe top five office locations are Berlin, Dusseldorf, Frankfurt, Hamburg and Munich and the average prime rent across these top locations has recently increased compared to 2012 (although Munich and Hamburg saw minor decreases) driven by the sustained focus on modern office space in central locations. The reason for this is the sustained focus on modern office space in central locations. In addition, a lack of space and therefore decreasing vacancy rates in these locations means that owners do not need to offer the incentives normally required to attract new tenants.

Prime Office Rents

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012 Q2 2013

€/sq

. m p

.m.

Berlin Dusseldorf Frankfurt Hamburg Munich

Source: Thomas Daily Archive (2013)

Nevertheless, estate agents are now beginning to notice the typical initial signs of weakening demand, particularly as a result of companies taking longer time to make decisions. Decisions to relocate or expand operations are now subject to increasingly complex, internal approval processes. Tenants are renegotiating the leases with greater care. All of these factors could result in the postponing of many high volume letting transactions.

Prime Office Yields

4.0%

4.5%

5.0%

5.5%

6.0%

2007 2008 2009 2010 2011 2012 2013


Source: CBRE (2013)

Prime office yields ranged from 4.8% to 4.9% in the top five locations in the first two quarters of 2013.

The investment volume during the first six months in 2013 in the German commercial property market was approximately EUR 12.6bn, an increase of around 34% compared to the first six months of 2012. Office property remained the major use type, accounting for 44% of the total investment volume. 85% of the overall deal volume resulted from the purchase of single assets (as opposed to real estate portfolios) while Foreign investors accounted for around 36% of deal volume. The increased investment volume in the first half of 2013 was supported by a rise in rents and a fall in vacancy rates.


Retail MarketPrime retail rents have risen steadily in the top five locations since 2007. This upward trend is attributable to sustained strong demand and a limited supply of suitable retail space in prime locations. Demand is also being driven by a number of international clothing retailers (e.g. Abercrombie & Fitch, Zara, Hollister and Primark, etc.) expanding into the German market. However, all top retail locations are registering stable prime rents. Prime High Street Retail Rents

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2007 2008 2009 2010 2011 2012 2013

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Source: Brockhoff (2013)

As a result of comparatively positive fundamental indicators, the German retail investment market is still regarded as a safe haven by national and international investors. According to CBRE, around EUR 4.2bn was invested in German retail properties in H1 2013, which is around one third of the total commercial investment volume in Germany and corresponds to an increase of 33% compared to the same period in 2012. This is quite remarkable given the general supply shortage in the core segment. The retail investment market was dominated by national investors who accounted for 88% of the volume. Prime Retail Yields by Type of Use

4%

5%

6%

7%

8%

2007 2008 2009 2010 2011 2012 2013

Shopping Centre Premium Shopping Centre Secondary Retail Park Retail Warehouse/Supermarket High Street (top five & Cologne)

Source: CBRE (2013)

Prime retail yields have remained stable in the majority of asset classes in the retail segment; however, prime high street and shopping centre yields have shown downward tendencies. Prime shopping centres in top locations yield

4.8%, whereas comparable properties in secondary locations yield 5.6% and have remained stable for six consecutive quarters. Prime yields for retail parks and retail warehouses remained at 6.0% and 7.0%, respectively.A significant increase in the investment volume was observed between H1 2012 and H1 2013. This stems from stable prime yields and investors’ favourable views of this market.

Residential MarketFor institutional property investors, residential property remains one of the most popular asset classes, with a transaction volume in H1 2013 of EUR 6.1bn. This was almost as high as the outstanding residential transaction volume of H1 2012. The major transaction in the first six months of 2013 was the disposal by BayernLB of GBW for EUR 2.45bn to a consortium of several pension schemes, insurance companies, savings banks and two pension funds lead by Patrizia Alternative Investments (the appointed investment and asset manager). Twelve further transactions with purchase prices above the EUR 100m mark were concluded in the first half of 2013, with 84% of the deal volume accounted for by national investors. The major buyer groups were listed real estate companies and pension funds, followed by special purpose funds, equity/real estate funds and insurance companies.

Prices stabilised in 2013 following significant price rises over the last 12 to 18 months. High price levels are justified by the strength of demand over the entire risk-return spectrum. The supply of core and core-plus properties is dwindling, which is intensifying competition between bidders for properties in major cities and the main provincial centres. As a result, increases in purchase price are bringing down net initial yields. In the case of opportunistic properties, the difference in price expectations of buyers and sellers is beginning to widen.

The positive trends in the residential market are expected to continue over the next few quarters. As a result of the shortage of core properties, an increasing number of investors are focusing on project developments, which are concentrated in excellent residential locations in strong economic regions. Deutsche Wohnen AG’s public offer to purchase the company GSW was announced on 20 August 2013. If this transaction is completed, it will be a landmark deal in the second half of 2013, accounting for a transaction volume of EUR 1.66bn for a 94.9% stake (this corresponds to EUR 1.75bn for 100% equity), and would create the second largest housing company in Germany with a portfolio of around 150,000 residential units and a total value of EUR 8.5bn.

Asking prices for rental properties in Munich increased by nearly 5% compared to the 2012 levels and therefore more


Germany

strongly than the average of the top five locations. Consequently, the gap between Munich and the other top cities is beginning to widen once again. Munich remains the most expensive city, with an average asking rent of approx. EUR 13.60 per sq. m p.m., while Berlin remains the most inexpensive of the top five locations with an asking rent of approx. EUR 10.10 per sq. m p.m.The transaction volume in the first half of 2013 almost equalled the high level recorded in the second half of 2012. A major contribution to this figure was made by German investors who highly rate the residential market. This appears to be reflected in increases in asking rents in the top five locations.

Residential Asking Rent Level in selected Locations

4 5 6 7 8 9

10 11 12 13 14

2007* 2008* 2009* 2010* 2011 2012 Q2 2013

€/sq

. m p

.m.


Source: Empirica (2013) * calculated rents (KPMG)

Germany is considered to be the single largest European healthcare market based on World Bank and World Health Organisation estimates. Healthcare spending has increased steadily and is largely independent of the economic cycle due to medical progress and demographic changes.

Healthcare Spending in Germany and German GDP

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2005 2006 2007 2008 2009 2010 2011

€bn

Healthcare spending in Germany Annual GDP growth

Source: Destatis (German Federal Bureau of Statistics, 2011 and 2013)

Market for Hospitals and Rehabilitation ClinicsUnder the provisions of SGB V (“Sozialgesetzbuch” – German social law), the 16 federal states must establish a legal framework to support the provision of adequate hospital services in Germany. Hospital real estate projects are subject to formal approval by the state authorities, as long as in-patient services are not exclusively provided to private patients or individuals with private health insurance coverage.

Rehabilitation services are provided by the state pension scheme, health insurance organisations and other institutions. Health insurance providers such as Barmer and TKK operate rehabilitation clinics in buildings they own, but are generally willing to consider innovative rental solutions.

Due to regulatory constraints, the real estate investment market for hospitals and rehabilitation clinics appears to be very small and requires in-depth sectoral expertise. In addition, the alternative use potential of such properties is limited, as hospital buildings in particular are constructed to meet very specific needs. They therefore either remain in public sector ownership or are transferred to private healthcare groups as part of an operating business. This means that no transactional information is available for these types of properties.

Market for Medical Centres and Medical Care Centres (“MVZ”)The investment market for such properties is not regulated and may therefore offer an attractive real estate investment opportunity.

Market for Stationary Nursing CareAccording to the German Federal Statistics Office, approx. 2.5m people were in need of nursing care in mid-December 2011. Of these, 1.8m received outpatient care and the remaining 0.7m were cared for in 12,354 care homes. On average, each home offers approx. 70 beds and registers an occupancy rate of 88.3%. Charitable or church-funded organisations still account for 54% of the total market.

Germany – Nursing Care Services (Number of individuals)

in ’000 2011 2030 CAGR

Outpatients 1,758 2,296 1.4%

Inpatients 743 1,138 2.3%

Total 2,501 3,434 1.7%

Sources: Destatis (German Federal Statistics Office, 2013); Bertelsmann Stiftung “Themen report” Pflege 2030 CAGR = Compounded annual growth rate

Healthcare Real Estate


Announced Deals in the German Healthcare Segment

Year Target Description of Target Purchaser Deal Value (€ m)

Property Book Value 2011

(€ m)

Number of Beds/

Care Places(Approximation)

2013 Alloheim Senioren-Residenzen GmbH

Senior residential care and nursing facilities

Carlyle Europe Partners III LP

180 12.5 6,000

2013 Deutsche Fachpflege Holding GmbH

Home healthcare business

Chequers Capital Partners SA

not disclosed 0.6 n/a

2013 Heinrich Mann Klinik Hospitals RHM Kliniken und Pflegeheime

not disclosed n/a 271

2013 Peter Janssen Gruppe Care Services & Management GmbH

Nursing homes Silver Care Holding GmbH

not disclosed n/a n/a

2013 Schoen Klinik Verwaltung GmbH

Hospitals Undisclosed bidder 23 0.1

2012 Nexus Klinik; Klinik Carolabad

Rehabilitation centre Celenus Kliniken GmbH not disclosed n/a n/a

2012 Gesundheitsverbund Landkreis Konstanz GmbH

Hospitals Hegau-Bodensee-Hochrhein-Kliniken GmbH

not disclosed n/a 1,100

2012 Curanum AG Senior citizen and residential care homes

Korian SA 268 136.8 7,700

2012 proDIAKO GmbH Healthcare and medical services

AGAPLESION gAG not disclosed n/a n/a

2012 DIAK-Behinderten-einrichtungen

Health care company Sonnenhof e.V. not disclosed n/a n/a

2012 MVZ Medizinisches Labor Oldenburg Dr. Muller GmbH

Medical diagnostic laboratory

Sonic Healthcare Limited


2012 Pour la vie Ausserklinische Intensivpflege GmbH

Health care centre services

Groupe Bonitas not disclosed n/a n/a

2012 Semperdent B.V. Dental prosthetics Permadental B.V. not disclosed n/a n/a

2012 AHG Klinik Wolletzsee Rehabilitation center GLG Fachklinik Wolletzsee GmbH

not disclosed n/a 4,000

2012 Dr. Horst Schmidt Kliniken (49% Stake)

Hospitals Rhoen-Klinikum AG 300 n/a 1,027

2012 R.P. Scherer GmbH & Co. KG (49% Stake)

Health care products and services

Catalent Pharma Solutions, Inc.


2012 Fachklinik fur Amputationsmedizin Osterhofen GmbH

Surgery and rehabilitation

Zeneus GMBH not disclosed n/a n/a

Source: Merger Market (2013), Company Information (2013)

Despite the favourable impact from the increase in life expectancy, demand for properties adapted to the requirements of older people is expected to accelerate, but may become more diversified with significant regional differences. Due to the high cost of providing inpatient care, demand for alternative services, such as day-care and assisted living is increasing. Migratory patterns, with a shift in the population towards major cities, would suggest that demand will increase in these areas in future, whilst demand in more rural areas will decrease. From 2040, it is possible that overall demand could reduce once the “Baby Boom” phenomenon has passed.

As a result of demographic changes and long-term lease agreements, this market segment continues to attract real estate investors (principally closed-end real estate funds and special funds). Investors consider properties rented by solvent and reliable operators as a comparably safe asset class. Transaction volumes in this segment are much lower than volumes registered for office, retail or residential properties (EUR 0.3bn in 2010 according to CBRE).Healthcare real estate remains an attractive investment, primarily for specialised investors, although the transaction volume remains much lower than the volume accounted for by the retail, office and residential real estate markets.


United Kingdom

Can second tier cities fill the void?

Macroeconomic OverviewThe recession is over! So declared George Osborne recently, a theme which was repeated by a significant proportion of the UK commentators.

A raft of positive economic data, including improvements in the construction sector, retail sales, sentiment and even an increase in manufacturing output has led many commentators to declare the end of the great recession.

Indications are that the UK experienced GDP growth of 0.7% in Q2 2013, following growth of 0.3% in Q1 2013.

However, the trade deficit continued to widen in July, highlighting ongoing weakness in the export sector. This raises uncertainties regarding the robustness of the recovery.

Nonetheless, for the next five years the prevailing view is that the UK will experience improved GDP growth starting at 1.4% for 2013, rising to 1.8% in 2014 then gradually falling back to growth of 0.8% by 2017.

The improved economic outlook has raised expectations that unemployment will fall from current levels of around 8% to around 7% by 2016. This may, at last, provide a stimulus for the office property markets outside of London.

Inflation is forecast to remain stubbornly above the Bank of England’s 2% target until beyond 2017. However, with higher levels of growth forecast to return, consumers may finally breathe a sigh of relief as growth in real levels of disposable income returns in 2014. On the back of the strongest improvement in retail volumes since 2011 (up 3% on a y-o-y basis to the end of July), the outlook for UK retailers (the worst performing sector in recent years) is finally improving.

The Bank of England (BoE) undertook the unprecedented step of issuing forward guidance suggesting that the BoE would leave interest rates unchanged until the second half of 2016 at the earliest. Given the improving economic prospects outlined above, there is much speculation as to whether that is still achievable.

Economic Indicators

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-4%

-2%

0%

2%

4%

6%

8%

10%

Real GDP growth

2006

2007

2008

2009

2010

2011

2012

2013

F

2014

F

2015

F

2016

F

2017

F

Inflation (CPI)Unemployment rateReal personal disposable income growth

Source: Economist Intelligence Unit F – forecast

And back to the Real Estate!Transaction volumes in H1 2013 grew versus the same period in 2012, but were unable to maintain the levels witnessed in H2 2012. Overall, transaction volumes in the year to 30 June 2013 grew by 13% y-o-y.

London’s dominance has been well documented in previous editions; however as investment opportunities within London have become increasingly difficult to secure, investors are turning to alternative markets. In Q2 2013, London accounted for the smallest percentage of quarterly transaction volumes since Q4 2011, at 58%. As the outlook for the UK economy continues to improve and access to opportunities in London continues to be constrained, we expect to see a trend towards more diverse investment across the UK throughout the remainder of 2013.

Transaction Volume Composition

0%

25%

50%

75%

100%

Big 6

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Rest of UK London

Source: Real Capital Analytics


This may be further exacerbated by the yield positions in London. While yields for prime London commercial properties are at extremely low levels, they continue to offer an attractive spread over government bonds. However, the change in the interest rate outlook has already started to cause this spread to narrow. In our view, any significant changes in stance by the Bank of England could precipitate a period of volatility in the London real estate markets as secure yield driven investors withdraw.

UK Property Yields: London vs. the “Big Six” vs. the Rest of UK

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2%

3%

4%

5%

6%

7%

8%

Q1

2008

Q4

2007

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Differen

ceYiel

d

London UK average

Difference London vs Big Six Big Six Rest of UK

Source: Real Capital Analytics, KPMG analysis Note: “Big Six” includes Birmingham, Manchester Metro, Edinburgh, Bristol, Glasgow and Leeds

Overseas investors continued to dominate activity (52% of transactions in the UK, 60% in London) but notably overseas investor activity actually declined by around 6% compared to 2012. While this gap has predominantly been filled by local institutional investors, a number of factors, including supply and pricing, are combining which may see a decline in London’s dominance and potentially a decline in capital flows to the UK if its other markets cannot provide alternative attractive investment opportunities.

Office MarketOffices continue to be the best performing real estate sector in the UK, showing strong rental growth as take-up increased against a generally limited increase in supply.

UK capital values have also grown in 2013, reversing the falls seen in 2012. Total returns are therefore expected to exceed 7% in 2013, according to DTZ, outperforming total returns on industrial and retail properties by around 2.5% and 4% respectively.

In line with the wider UK commercial transaction volumes, and despite falling back from the high levels of activity seen in H2 2012, office transaction volumes in H1 2013 increased relative to the same period in 2012, resulting in overall y-o-y growth of c.18% to June 2013.

London’s dominance declined from 90% of 2012’s transactions to c.86% in the first six months of 2013. Similarly, we continue to see significant variations in yields across the UK, even within the prime market, as illustrated in the graph below. In the secondary markets, the picture is more extreme.

Prime Office Yields (Net) – June 2013

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

10%

Current Quarter Last YearLond

on (W

est

End

)

Lond

on (C

ity)

Man

ches

ter

Birm

ingh

am

Rea

ding

Bris

tol

Edi

nbur

gh

Gla

sgow

Leed

s

Car

diff

New

cast

le

Source: Cushman and Wakefield

London recorded the strongest take-up of office space since 2010, according to data from Jones Lang LaSalle, led by the technology, media and telecommunications sector. With no significant increases in supply, vacancy levels have remained at c.6% in central London, driving rises in rents.

As the economy and employment rates rebound, we expect rents to continue to rise in London and improve elsewhere in the UK. Limited supply combined with economic improvement should also encourage new development within London together with more diverse investment across the UK. It is expected that this interest will initially focus on the major commercial centres and secondary markets in the south east.

Prime Office Rents – June 2013

-6%-4%-2%0%2%4%6%8%

0200400600800

1,0001,2001,4001,600

Lond

on (W

est

End

)

Lond

on (C

ity)

Man

ches

ter

Birm

ingh

am

Bris

tol

Leed

s

New

cast

le

Rea

ding

Car

diff

Edi

nbur

gh

Gla

sgow

CA

GR

%

Prime Rent CAGR (5yr) CAGR (1yr)

€/sq

. m p

.a.

Source: Cushman and Wakefield CAGR: Compounded annual growth rate


United Kingdom

Retail MarketIn general, the retail sector, which has faced significant challenges throughout the downturn, has yet to reflect the upswing in sentiment noted in other sectors. For some time now retailers have had to contend with the continuing shift in consumer behaviour which is driven by trends including the rise of internet shopping and the demand for entertainment options. The issues faced by the UK’s high streets have been well documented but regardless of location, retail landlords need to actively manage their assets to ensure that they remain relevant.

While investment volumes in H1 2013 were strong, reflecting 34% growth versus the same period in 2012, Q2 2013 reflected a notable reduction in transactions compared to the previous 3 quarters. We believe this is a reflection of a strong investor focus on prime retail space exhausting the supply of suitable stock.

Demand from overseas investors also remains strong, continuing the upward pressure on capital values. Yields have now reached 2.75% on Bond Street, with properties around Oxford Street now trading at around 3.5% yields.

Prime Retail Yields – June 2013

2%

3%

4%

5%

6%

7%

Lond

on (W

est

End

)

Lond

on (C

ity)

Lond

on (C

royd

on)

Man

ches

ter

Birm

ingh

am

Bris

tol

Leed

s

New

cast

le

Car

diff

Edi

nbur

gh

Gla

sgow

Sol

us –

Bul

ky g

oods

Par

k –

Ope

n co

nsen

t

Reg

iona

l Sho

ppin

g C

entr

es

High Street Shops Retail Parks

Current Quarter Q2 2012


London, and particularly the West End, continues to follow a completely different trajectory to the rest of the UK. Rents in the West End and the City of London have risen by 15.6% and 6.4% repectively, as international luxury, boutique and high street brands continue to compete for space.

Outside of Central London, high street rents continued to fall in the first half 2013 as retailers have continued to rationalise their portfolios.

Prime Retail Rents – June 2013

-10%-5%0%5%10%15%20%

02,0004,0006,0008,000

10,000

Lond

on (W

est

End

)

Lond

on (C

ity)

Lond

on (C

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The positive economic data noted may at last point to a significant turning point for the retail sector outside of London. Although this may take until beyond the end of 2013 to be felt in rents and capital values, the outlook is more positive than it has been for 5 years.

Residential MarketWhat a difference six months makes. In our Spring edition, we reported very little movement in UK house prices, a theme which was unchanged for some time before that. An unexpectedly warm summer later and not only have UK house prices started to rebound, but the Royal Institution of Chartered Surveyors (RICS) has gone as far as raising the alarm that the UK market may be overheating.

Official government house price statistics, which tend to lag other indicators, are yet to reflect this improved market sentiment with house prices across the UK remaining broadly unchanged in the 12 months to June 2013. However, other market commentators have reported rises of 3%–4%.

House prices in London have risen by 5% in the first six months of 2013 (according to government data) with prime properties continuing to outperform the rest of the London market, showing rises of around 7% according to Knight Frank. We reported in our previous edition that prime London house prices had risen by 53% in the previous four years – this figure is now estimated to have reached around 57%.


The “Funding for Lending” scheme, on which we commented previously, has started to have a significant impact on the UK property market, especially given ongoing low interest rates. The Council of Mortgage Lenders reported a 29% increase in gross mortgage lending in July 2013 compared to July 2012. Lending to first time buyers reached the highest quarterly total in Q2 2013 since 2007. Similarly, the volume of new buy to let mortgages issued reached the highest quarterly total since 2008.

The increased availability of financing is expected to continue to propel house prices upward for the rest of 2013. This is particularly the case in London where foreign demand continues unabated, aided by the weak pound.

In fact, as mentioned, certain commentators such as the RICS, have called for the government to step in to prevent another debt fuelled house price bubble.

The supply of new homes remains constrained, but recent economic data point towards increases in housing construction output.

Another impact of the increased availability of finance is that residential rents in the UK have broadly risen in line with inflation in 2013, versus a previous backdrop of above inflation increases for several quarters. In London, however, rents have continued to fall, by around 2%-3% in 2013 driven by uncertain employment markets and increasing levels of rental stock driven, in part, by significant overseas investment.

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UK Healthcare – Selected Transactions

Address Purchaser Covenant Price NIY % Date

Spire Portfolio (12 hospitals) Moor Park Capital Spire Healthcare £700m 7.00% Jan 13

44 care homes Griffin American Healthcare REIT II (US) Caring Homes £297m 7.00% Jul 13

Five care homes Health Care REIT (US) Sunrise £154m 6.90% Mar 13

Five care homes in Suffolk (Forward funded) Schroders (SPF) Care UK £28m 7.00% Feb 13

Four care homes Target Healthcare REIT (UK) Ideal Care Homes £18m 7.25% Mar 13

GP Surgery, Cambridge (Forward funded) MedicX GMS £5.2m 5.70% Mar 13

Source: Knight Frank LLP

The UK healthcare sector has come to the fore in 2013, at least as far as international investors are concerned. Overseas investors, previously absent from the UK healthcare property market, have had a major impact in 2013 – we set out below a selection of various transactions. The investment case is straightforward: UK healthcare investments typically offer long term, Retail Price Index linked income (20–30 year leases), underpinned by UK demographic trends, namely an ageing population. The primary risk is political, as a significant proportion of the healthcare sector is linked to government spending. Political risk in the UK is widely viewed as benign.

As with other property sectors in the UK, the healthcare sector is highly polarised, with properties in the South East commanding around a 2% net income yield premium compared to properties elsewhere in the UK. Another defining line between healthcare properties are those supported by government spending versus private pay models. Owing to a rising proportion of old stock, investors are typically prepared to pay a premium for “future proof” properties.

The political focus on the cost of healthcare has put pressure on operating margins and rental levels, with rents remaining broadly unchanged in the last 12 months. Nonetheless, occupational demand remains strong, resulting in broadly stable rental rates and occupancy levels.

With the lessons having now been learnt following the demise of Southern Cross, sale and leaseback transactions are back in favour but at much more conservative levels of rent cover (EBITDAR over rents). Another notable development is the emergence of not only US REITs as significant players, but also the launch of a new UK REIT: Target Healthcare.

Yields for prime healthcare properties are currently around 5.75%, with modern, secondary properties trading nearer to 6.5% to 7.5%.


Nordic Region

Time to invest

The Nordic RegionThe Nordic Region comprises the four countries Sweden, Norway, Finland and Denmark. These four countries share a common history, a similar language base, and a similar political and economic environment, but there are differences. Finland is part of the Eurozone, whilst the other countries have retained their national currency, the Krona. Finland is closely linked to Russia and the Baltic States and has a distinct language, although most Finns understand Swedish (or Scandinavian as we could call it). Norway is not part of the EU and generates most of its income from oil and gas in the North Sea, and although Denmark is not part of the Eurozone, it was a founding member of the EMS (European Monetary System); the Danish Krona is therefore closely linked to the Euro (no free float). Denmark is influenced by Germany as its closest neighbour to the south.

Macroeconomic OverviewAll four countries are relatively strong compared to other EU countries and are all rated AAA by the agencies (Fitch, Moody’s and S&P). Therefore the Region is currently seen as a safe haven for real estate investors.

Sweden GDP: sluggish growth in H1, but expected to grow by 1.7% this year

Inflation: very low in H2, but expected to grow in 2014

Employment: to decrease over the rest of the year and improve in 2014

Healthy domestic DemandThe Swedish economy is showing strong growth, driven by the domestic demand.

For six consecutive quarters consumption has been robust, with households supported by the strong Krona, low inflation, falling prices of imported goods and improved employment.

Exports to increase in 2014It is expected that exports will remain low this year; however, demand from the Eurozone is expected to improve in 2014, which will increase exports. In addition, Sweden’s key trading partners (which include Norway and Germany) are in excellent economic shape, which means that high demand for Swedish goods and services is forecast.

Exporters will receive some support from the recent weakening of the Krona, which has lost 5% against the Dollar and the Euro since April.

Furthermore, the Riksbank has declared that it will not tighten its monetary policies until late 2014. This means that

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there will be no additional pressure placed on the Krona and export competitiveness.

OutlookRobust domestic demand is likely to drive growth in 2013 and 2014.

Fiscal and monetary policies will ensure strong economic growth. It is also expected that private consumption and investment will rise as banks increase lending.

Conversely, household debt as a share of income has been rising, mainly as a result of the lack of adjustment of house prices during the recession. Consequently, consumers are expected to cut spending, despite the otherwise positive economic climate. However, these risks are not expected in the short-term.

Norway GDP: modest growth in 2013 and improvement in 2014; expected to grow by 2.2%

Inflation: expected to rise due to an easing of monetary policies

Employment: labour market is expected to remain stable

The Norwegian economy contracted modestly in the first quarter of 2013, as the sharp decline in oil output was not sufficiently offset by robust domestic demand. Business investment and private and public consumption remained positive and recent surveys confirmed a continuation of this trend, with the Purchasing Managers Index (PMI) in the manufacturing industry registering a 12-month high in May.

Easing of Monetary PolicyPrivate consumption is expected to remain healthy in the short term. The Euro has fallen by 7% since 2013 and the Norwegian currency should strengthen in H2 2013. The Norges Bank is concerned that low inflation may become entrenched; however, it has decided not to tighten its monetary policy until 2015 due to financial imbalance and its increasing concern about high household debt, which is growing faster than income, despite a stabilisation of house prices. On the other hand, the Bank may wish to cut the base interest rate in 2013 in order to take advantage of low inflation, boost the domestic economy and weaken the currency, which would give exports a competitiveness boost.

OutlookThe Norwegian economy is expected to rebound strongly in 2014, then to recover slowly from 2013 due to sluggish demand for Norwegian exports caused by a further fall in oil prices.

Finland GDP: flat growth in 2013 and a rebound in 2014 Inflation: expected to edge up at the end of the year Employment: unemployment not likely to fall from current high levels until 2014

OverviewAccording to Statistics Finland, the economy stagnated in Q2 2013 following a 2.1% drop in Q1 2013.

The Consumer Price Index fell by 1.3% to 1.6% in July 2013; however, the index rose by 0.2% from June 2013. This was primarily due to a rise in prices for prescription medicines, food, restaurants, transport, housing services and rent.

The unemployment rate was 8.5% in May 2013, which was a three year high.

Falling Consumer Spending and subdued ExportsIn the first quarter of 2013, consumer spending fell due to deteriorating labour market conditions and higher tax rates.Furthermore, a positive net trade balance was reported, with subdued exports and a fall in imports. Experts also forecast restrained demand from the Eurozone.

The depreciation of the Yen was more advantageous for Japanese exporters (of electronics and capital goods) than for Finnish exporters.

OutlookDomestic businesses are expected to benefit from “good” availability of bank lending and the economy may attract foreign investment due to its low levels of debt.

Consumer price inflation will be affected by: Downward pressure caused by weak domestic demand Subdued import prices due to the strong Euro exchange rate Moderate oil prices Unemployment is expected to reach 8.6% in 2014

Denmark GDP: expected to grow moderately in 2013, but at a higher rate in 2014

Inflation: expected to increase marginally from the current low levels

Employment: labour market is expected to remain stable

StagnationThe Danish economy stagnated in Q1 2013, although government spending, investment and net exports remained high. Furthermore, private investment was driven by low inflation and a stable unemployment situation.

Although industrial production fell by 1% in June compared to the month of May, overall it increased by 0.4% over the


three months leading to June. The primary driver of this was the capital goods sector, which contracted by 3.1% between May and June.

Consumption gains Momentum Consumption was boosted by a fall in inflation rates and record low interest rates, despite high but stable unemployment.

The reversal of the government’s decision to cut the length of entitlement to unemployment benefit from 4 years to 2 years safeguarded the disposable incomes of the poorest households.

OutlookThe Danish economy is expected to grow on the back of an increase in consumer spending and recovery of exports. Recent increases in house prices are a sign that the housing sector has started to recover.

The main risks to the growth forecast relate to the high household debt levels, restricted credit availability and a downturn in Eurozone demand.

Overall investment is expected to increase in response to the government’s plans to reduce corporation tax.

Office MarketSwedenMarket Outlook Prime rents are expected to rise Yields are expected to hold steady for the remainder of 2013

Balanced supply level due to upbeat demand Demand is likely to remain strong due to the availability of high-quality space

OverviewThe office sector was buoyant in Q2 2013 as a result of sustained economic growth in Sweden. Office rents increased across Stockholm, as well as in Gothenburg’s decentralized submarket, with other areas holding firm throughout the quarter.

Rental MarketDemand for office space remained steady during the quarter and stable letting activity has ensured that take-up levels remain at the same secure levels as Q1 2013.

In order to cut costs and secure high-quality premises, many tenants continue to show interest in the Stockholm submarkets. As a result, rents in the decentralized and non-


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Nordic Region

central business districts (CBDs) have come under increasing pressure over the last few quarters.

Speculative supply is practically non-existent, which has ensured that vacancy in Stockholm’s CBD remains low. This is also due to the lack of available high-quality space in popular CBDs.Vacancy rates in other city areas are much higher and office rents have continually fallen in these areas over the quarter.

Outlook Given the robust conditions, the Swedish office market is expected to remain steady but strong. With growth aided by limited supply amidst healthy demand, it is expected that prime rents will rise in both the central and less central city submarkets.It is also likely that investment will pick-up in response to increased lending from banks.

NorwayMarket Outlook Rents are likely to increase further in Oslo’s CBD due to limited supply

Increased activity saw yields harden further No significant growth in vacancy is expected Leasing activity should see improving volumes in the second six months of 2013 as the economy regains strength

OverviewDespite the weaker economic climate in Q2 2013, the office rental and investment markets both fared well. There were pockets of growth evident, albeit focusing on central office areas. Prime rents in Oslo’s CBD increased by 6% on Q1 2013, while yields reduced by 10 basis points in the three months to June.

Investment MarketTrading activity in the office sector increased in the second quarter of 2013, with a total transaction volume of around EUR 800m. The bulk of activity in the second quarter was accounted for by national investors.

Banks are slowly easing lending conditions and the availability of debt is gradually increasing. This could encourage activity in the secondary segment and consequently narrow the gap between prime and secondary yields as happened in the first six months of 2013.

Rental MarketOccupiers favour central office submarkets with high specification accommodation. A substantial number of refurbishment projects are taking place in the central areas of Oslo, and this space tends to be absorbed relatively easily in the current market. In Q2 2013, the most prominent

deals took place in Oslo’s CBD and Lysaker submarkets, with the legal and corporate business sectors taking the leading roles as tenants.

Despite a fall in vacancy rates in the CBD, the relocation of tenants from peripheral submarkets to central areas and the release of new space onto the market meant that overall vacancy levels increased slightly to 8%.

OutlookThe rental market is expected to see healthy activity in the months ahead and further rental growth is forecast for the CBD and other key submarkets. Furthermore, the increasing availability of credit would suggest an improvement in the investment market in the second half of the year.

FinlandMarket Outlook Prime rents should remain stable in 2013, with expected positive growth in 2014

Prime yields in city centre markets should remain stable, while those in decentralised areas may soften

Supply will stagnate as vacancy levels remain high outside prime areas

Demand is likely to remain stable, depending on incentives and shorter lease lengths

OverviewFinland’s office market has around 19m sq. m of office space, around 8.4m sq. m of which is located in the Helsinki metropolitan area.

Q2 2013 saw little activity in the investment and rental markets, which was mainly due to the overall economic uncertainty and rising unemployment.

Rental MarketInternational firms are focusing on modern office buildings in order to cut costs, primarily by streamlining their space and increasing efficiency in operations.

High vacancy across most markets (e.g. Espoo has 25% vacancy) has led to a reduction in the volume of new supply in city centres.

The majority of available space for rent comprises standard office space in peripheral submarkets.

OutlookOffice demand and rents are expected to remain stable in 2014 as tenants look to optimise rents and achieve space efficiency.

Prime office supply is expected to increase as a result of new office completions.


DenmarkMarket Outlook The outlook for rents is positive, and rents should remain stable with increased activity

Prime yields are expected to fall as investment market performance remains positive

Supply is expected to increase gradually Demand is expected to remain weak and steady

OverviewNo significant lettings were concluded over the second quarter of 2013, and it takes even longer now than a year ago to finalise a lease. This makes it difficult to ascertain prime rents, although it is suggested that rents held firm over the quarter.

Rental MarketDemand for office space remained low and steady in Q2 2013. Figures remained on a par with those in the previous quarters.

Demand for new leases for premises of around 1,000-6,000 sq. m accounted for the majority of the activity in this sector, which suggests sustained interest from new entrants into the Danish market.

Stable demand within the market has ensured that there has been no major fluctuation in vacancy rates, despite a

rise in office supply due to the release of several large commercial development projects. During the quarter, vacancy rates in the Copenhagen area decreased slightly by 7 bps.

Vacancy rates are substantially higher in secondary locations, which is often due to the fact that many properties are outdated.

Demand for office space has been negatively affected by the decline in employment in the service sector.

Outlook The outlook for the Danish office market is more positive, as the economy is expected to pick-up in 2014.

Despite the longer length of time it takes to conclude leases, demand is expected to remain weak but stable. Prime rents are expected to remain stable on the back of the demand for Danish office space.

The outlook for regions outside of Copenhagen is as follows:The long-term outlook for the office sector is expected to be bright for Aarhus. Demand is expected to be sustained by the strong demographic trends in the city; however, the main challenge is the high vacancy rate. Aarhus also faces the challenge of providing jobs for the expected influx of


Nordic Region

new residents. Thus, the outlook for Aarhus depends greatly on Denmark’s economic recovery.

The outlook for the “triangle region” (which encompasses the six Danish municipalities of Billund, Fredericia, Vejle, Kolding, Middelfart and Vejen) is expected to be bleak. The commercial property market is cyclical in nature and in view of the current economic situation, is not expected to recover for the next 2–3 years.

The outlook for the commercial market in Aalborg, much like that in other regions of Denmark, will be heavily dependent on economic growth. Aalborg has a high number of office projects under construction and will need economic growth in order to ensure that vacancy rates remain low.

Retail MarketSwedenMarket Outlook Stable in Stockholm CBD and prime shopping centres Downward trend in prime high street yields

Supply of retail space is high, with a large number of projects under construction or recently completed

Retail sales increased by 2.1% during 2012 and the same growth rate is expected in 2013

OverviewIn 2012, healthy economic growth and consumer spending have encouraged new international retailers to establish themselves in the market. Approx. 80% of retail property transactions which took place in the second half of 2012 were cross-border.

As a result of the tougher economic climate and competition from online retail, retailers in Sweden are focused on securing high-quality space. This means that rents in prime locations in Sweden are increasing more than rents for space in secondary locations.

During Q2 2013, the average retail prime rent in Stockholm CBD remained stable at SEK 13,500 per sq. m p.a.

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Demand for retail property in central Gothenburg remained high, whereas the availability of high-quality premises in prime locations was poor. The average prime rent in the central areas remained stable at SEK 12,000 per sq. m p.a.

Prime YieldsPrime yields remained stable in Q2 2013.

OutlookIt is anticipated that Sweden will record retail sales growth of 2.6% p.a. between 2014 and 2017, compared to 1.3% growth p.a. expected in the Western European region over the same period.

Out-of-town retail and shopping centres are expected to grow; however, in order to survive the increased competition from online retail, retail parks and shopping centres will have to stand-out from the competition to attract well-known retailers. Property owners will have to adapt their portfolio in line with changes in retailers’ requirements for space.

NorwayMarket Outlook Rents are likely to increase further Yields expected to remain stable Close to zero vacancy in central high-quality units in Oslo International retailers are driving demand

OverviewEconomic activity in Norway reduced marginally, but accelerated on the mainland in Q1 2013. GDP expanded by 0.7% in Q2 2013, with consumer spending growing modestly. Higher retail spending was evident in Q2 2013 as retail sales volumes (work-day adjusted) grew in May (2.0%). Sales volumes over the March to May period edged up by 1.8%.

Rental MarketThe retail market in Oslo remained healthy, due to strong demand from national occupiers and the high purchasing power of its inhabitants. There is high demand from international brands for prime retail locations in the luxury market; however, there are very few available properties in central locations, and therefore almost zero vacancy. Prime rents were largely stable, with the exception of stand-alone retail warehouse units and retail parks which saw rises over the quarter and double-digit increases compared to the same period last year.

Investment MarketInvestment market activity slowed considerably in Q2 2013, with approx. EUR 174m worth of retail assets sold. This contrasted with the total transaction volume of just over EUR 2.2bn registered in the previous two quarters.

Key transactions in the second quarter of 2013 included the sales of two shopping centres, namely the acquisition of City Shopping in Tønsberg by a joint venture of Middelborg AS, Crowded Properties and Vestcorp AS /AS Partner for EUR 25m, and the purchase of Hvaltorvet Kjøpesenter in Sandefjord by KLP Eiendom for approx. EUR 75.6m.

OutlookLow inflation, unemployment and robust consumer spending will continue to aid the retail market. An interest rate cut is a possibility in 2013.

As a consequence, the current market trends are expected to continue in the months ahead, with strong demand from international brands supporting an increase in prime rents, potentially reaching new record levels.

FinlandMarket Outlook Likely to remain stable throughout 2013 in most areas Will remain stable over the short-term Some shopping centres in the pipeline for 2013, and renovation of older projects, but generally new developments are on hold

Vacancy rates remain low, implying stable demand for high-quality space

OverviewAccording to Statistics Finland, Finland’s GDP contracted by 2.1% in Q1 2013, although the outlook for the economy is stable.

Retail sales have increased by 4.5% p.a. since May 2012.

Rental MarketPrivate consumption increased by 0.3% in Q1 2013 compared to the final quarter of 2012. The volume of exports also increased by 0.9% over the same period.It is expected that 131,100 sq. m of shopping centres will be released onto the market in 2014. The investment volume is expected to increase as a result of the strong demand in the market.

OutlookIn 2013, the Finnish economy is expected to contract. However, economic growth is anticipated in 2014, which may strengthen demand from consumers and retail occupiers.


Nordic Region

DenmarkMarket Outlook Prime rents are expected to remain stable; however, there is a potential for a rise in rents in selected high street locations in Copenhagen

Prime yields are expected to remain unchanged Supply rising in secondary pitches Good demand for prime units and assets

OverviewThe Danish economy grew by 0.2% in Q1 2013, after falling by 0.9% in Q4 2012. Economic forecasts for 2014 are positive.

Nevertheless, consumer confidence remains slightly negative, due to a perception that the economic situation has worsened since last year.

Rental MarketVacancy rates have remained almost constant over the last year; however, the situation differs across the country.

Despite a slight increase in vacancy rates in prime locations in Copenhagen, overall vacancy remains low and such locations remain attractive to both occupiers and investors.

Vacancy rates for secondary locations in large commercial cities and generally in smaller towns remain high.

There has been a slight increase in the supply of retail space in the inner city and secondary areas of Copenhagen, principally due to new retail opportunities in the Scala project and the new development by Dansk Industries.

New-build convenience stores which are leased to supermarket chains on long-term contracts have become a popular investment vehicle.

OutlookThe Danish retail market has seen encouraging signs from the economy. Consumer sentiment is improving marginally, with the Consumer Confidence Index turning positive in June for the first time since July last year. Annual inflation remained relatively low at 0.9% in May, and the unemployment rate has fallen to its lowest rate (5.8%) in the last 3 years.

The Retail Trade Index is currently around 93, re-based to 2010 values. However, it is expected to rise again in 2013 despite the challenges faced by the retail industry.

Residential MarketSwedenOverviewThe Swedish housing market is recovering in spite of the economic slowdown.

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House prices in Sweden increased by 3.1% in Q1 2013. On an annual basis, house prices increased by 2.2% after y-o-y falls of 1.3% in Q3 2012, 2.9% in Q2 2012 and 3.5% in Q1 2012.

PricesAccording to data provided by Statistic Sweden, house prices increased in 16 out of 21 counties y-o-y. The highest rise was recorded in Jämtland County at 9%, which was followed by Jönköping County at 6%. Västernorrland County reported the largest fall in prices of 4%. In metropolitan areas such as Greater Malmö, Greater Stockholm and Greater Gothenburg, prices rose by between 2% and 4%.

OutlookPrices are expected to level out after the sharp rises over the past 10 years.

It is also anticipated that the level of household debt will stabilise.

NorwayOverviewHousing prices increased between Q1 and Q2 2013.

Demand for housing is stable yet strong.

The housing segment is exposed to a shift in sentiment due to speculation by potential buyers.

PricesPositive inward migration since 2007 has contributed to the rise in house prices. Prices have also risen as a result of speculation about house prices in the future.

SupplyDemand for housing has increased in Norway as a result of high population growth and high labour-driven migration. As a result, residential construction activity has risen steadily over time.

The increase in supply has ensured that the number of houses matches the increase in the population. It is estimated that the number of completed homes may soon (this year) exceed the increase in the number of households for the first time since 2005.

Government InitiativesThe Norwegian government plans to introduce a housing policy in 2013 and intends to set aside NOK 24bn for various housing initiatives and subsidies.

Additional funds have been allocated as subsidies to stimulate home ownership for private individuals and to lower the cost of rented accommodation.

Outlook It is expected that prices will level out during 2013 and possibly fall in 2014.

Higher mortgage interest rates are anticipated after new regulations were introduced by the government on bank loan reserves. In turn, this will reduce demand for residential property and therefore impact on prices.

FinlandPricesAverage prices of existing properties in Greater Helsinki increased y-o-y by 2.4% to EUR 3,505 per sq. m.

Average prices of existing properties in the rest of the country increased y-o-y by 0.6% to EUR 1,693 per sq. m.

House prices are expected to continue rising in 2013, driven by demand from new real estate funds looking to build up their portfolios.

Private demand has been hit to some extent by the increase in real estate transfer tax in Spring 2013 (as well as rather low overall private consumer confidence). There is still strong structural demand for apartments in the Helsinki metropolitan area.

YieldsThe Finnish residential market reported lower gross rental yields due to the rise in sale prices and relatively stable rents.

The market witnessed high rental returns on smaller apartments, while the larger apartments generated the lowest returns.

DenmarkPricesThe Danish housing market remained sluggish, with property prices falling across Denmark in 2012.According to the Association of Danish Mortgage Banks (ADMB), prices of detached and terrace houses fell by 2.84% (4.92%, adjusting for inflation) across Denmark, while property prices in Copenhagen increased by 1.1% nominally, but fell by 1.1% after adjustment for inflation.

YieldsAs a result of falling house prices and stable rents in Copenhagen, there has been a noticeable increase in rental yields for apartments in Copenhagen.


Netherlands

Attracting overseas capital

Macroeconomic OverviewThe Dutch economy has contracted for the second year in succession and there is still no sign of the recovery expected in the second half of 2013. Nonetheless, slight economic growth is expected in 2014. Purchasing power continues to decrease in 2013 and, as a result of this and the fall in house prices, household spending is under pressure.

The Dutch economy shrank by 0.4% in the first quarter of 2013 compared to the quarter before. There was a 1.8% contraction of the economy y-o-y. This contraction was worse than expected last quarter, but has since levelled off.

The first quarter of 2013 saw a weaker than expected pick-up in exports and a sharp decline in investment. Household spending flat-lined, and fiscal austerity measures took greater hold.

The fourth quarter of 2012 and the first quarter of 2013 saw relatively strong exports. Exports are expected to accelerate throughout the second half of 2013 due to anticipated increase in demand from Germany, Sandinavia and the US. This demand is expected to deliver growth in exports of as much as 4.2% in 2013, up from 0.3% in 2013. The stable and

strong export market, combined with a calm domestic demand resulted in a large current account surplus of 10% of GDP in 2012.

The ECB’s decision, to extend the deadline for the Netherlands to achieve the 3% budget deficit target by one year, led to the Dutch government abandoning the EUR 4.3bn of additional cuts planned for this year. It is still expected that the fiscal policy will be tightened by an equivalent of 1% of GDP in 2013.

Economic Indicators

-5% -4% -3% -2% -1% 0%1% 2% 3% 4% 5% 6% 7% 8%

-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

2010 2011 2012E 2013F 2014F

Unem

ployment &

Inflation

GD

P g

row

th


Source: Economist Intelligence Unit E – estimate F – forecast


Recent research data suggests that the turning point for the economy is approaching and growth is expected as early as H2 of 2013, continuing into 2014. Due to the weak labour market and continuing falls in house prices household spending will be limited. However, confidence in the business sector is likely to return due to improvements in external demand.

Office Market Office market conditions in the Netherlands were largely unchanged due to the insecurity of the economic climate.

The rental market is still poor, with any rises in activity subdued by the difficult economic conditions. As a result, prime rents have not changed over the past quarter, with little movement expected for the rest of the year.

Although office market take-up was steady in the second quarter of 2013, the total take-up during the first half of 2013 was lower compared to the take-up in the same period in 2012. The poor economic climate has weakened demand, with the result that the limited interest is currently focused on well-located, multi-functional and high-quality space. Therefore the demand is concentrated around the “Randstad” area, which has good private and public transport links and an available labour force.


-1.0% -0.8% -0.6% -0.4% -0.2% 0.0%0.2% 0.4% 0.6%

050

100150200250300350400

Am

ster

dam

(Sou

t A

xis)

Am

ster

dam

(Cen

tral

)

Am

ster

dam

(Sou

th E

ast)

Rot

terd

am

The

Hag

ue

Utr

echt

Ein

dhov

en

CA

GR

% €

/sq.

m p

.a.



The investment market was rapidly restored in the second quarter, despite the moderate conditions in the rental market. Indeed, in the second quarter of 2013, the office investment market was the most active of all asset classes, accounting for 40% of the total transaction volume. This is largely due to the favourable pricing of office space which has attracted foreign buyers, whilst many domestic investors continue to suffer from a lack of available finance.

Although the office investment market was active this quarter, the total volume of EUR 580m generated in the first half of 2013 was lower than the volume invested during the corresponding period in 2012. Prime office yields have held firm across the country.

Prime Office Yields (Gross) – June 2013

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

10%

Current Quarter Last Year

Am

ster

dam

(Sou

th A

xis)

Am

ster

dam

(Cen

tral

)

Am

ster

dam

(Sou

th E

ast)

Rot

terd

am

The

Hag

ue

Utr

echt

Ein

dhov

en

Source: DTZ Zadelhoff, CBRE, JLL, Colliers

Retail MarketFor the most part, retail sales were unchanged in the second quarter of 2013, as the volume of sales continued to decline in May (-3.0%), driven by a 5.1% fall in non-food sales. However, the market is still observing high demand for luxury retail space and a good level of interest in prime pitches in major cities.


Despite the rising vacancy in secondary locations, occupier demand in the retail market was relatively stable in the second quarter of 2013. In fact, international retailers are still focusing their attention on prime locations in major cities, but the most popular destinations have very few available units.

The activity in the investment market remained relatively moderate in the second quarter, with approximately EUR 92m of retail assets sold. With the majority of assets sold involving high street units, supermarkets and retail parks also attracted interest. However, sales of shopping centres remained low, mainly due to the limited availability of prime schemes on the market.

Residential MarketWith Q2 2013 showing more positive indicators compared to Q1, the increase in confidence in the residential market is remarkable and could be an early indicator of structural recovery.

While structural economic recovery can take time for the effects to be felt in the residential market, Q2 of 2013 has seen a total of 20,600 homes sold by NVM brokers, with a

total of around 27,900 sold in the market as a whole. This sales volume is 19.8% higher than the volume recorded in Q1 of 2013.

Residential Sales

0

10,000

20,000

30,000

40,000

Q2 2008 Q4 2010 Q4 2011 Q3 2012 Q2 2013

Source: NVM

Netherlands


This market is enjoying rapid growth, due to demographic trends and the privatisation of the Dutch healthcare sector. The market is starting to open up, and a number of new opportunities are now available.

The book value of healthcare real estate in the Netherlands is approximately EUR 20 to 22bn with total annual investment estimated to be in the region of EUR 2–3bn.

In the past, accommodation costs of healthcare real estate were reimbursed by the government. More recently however, healthcare organisations have taken over responsibility for the funding of their real estate, which is forcing them to consider the economic value of the assets and accommodations of care real estate.

Unlike other real estate sectors, demand for this type of accommodation, driven by an ageing population, is expected to increase over the next 20 years. Demand for more intensive nursing care and a higher quality of care and/or accommodation is also rising. As a result, the combined effect indicates a positive trend for the sector over the coming years.

In the Netherlands, there is currently a high volume of healthcare facilities under construction, with many being constructed under Patient Perception Program initiatives, which means that an increasing number of investors are becoming the owners of healthcare properties, rather than the healthcare institutions themselves.

Investments in healthcare real estate often boast long-term leases, attractive yields and creditworthy tenants.

The market for healthcare real estate in the Netherlands has been developing over the past 5 – 10 years and is now considered as a separate asset category. The high volume and the aforementioned demographic and social factors and increasing demand for alternative asset categories will ensure that a greater number of investors will become active in this market.

This will open up the market to a wide range of players and bring greater transparency. The increasing demand for socially responsible and sustainable investments combined with increasing demand for new, high quality properties should continue to attract investment in this sector.


Luxembourg

Stable market despite Eurozone uncertainty

Macroeconomic OverviewAccording to Luxembourg’s National Statistics Office (STATEC), a 2.2% recovery in economic activity in Q4 2012 was followed by a 1.6% reduction in Q1 2013. In this context, STATEC forecasts GDP growth of approx. 1% in Luxembourg over the course of 2013.

Job creation has reduced sharply since November 2012. The average monthly employment growth rate was less than 0.1% (seasonally-adjusted), which has resulted in higher unemployment. According to STATEC, new employment is expected to range between 1.2% and 1.3%, and unemployment could rise to 7% by the end of this year.

Inflation is expected to be lower than last year (1.9% in 2013 compared to 2.7% in 2012).

Economic Indicators

0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2011 2012 2013F 2014F


Source: STATEC (July 2013)

In June 2013, manufacturers’ outlook on output and order books recovered after reaching a low in March 2013. However, stock levels are still too high for the current low capacity utilization. Employment prospects have also not improved. Seasonally-adjusted figures on output appear to have bottomed out, and the first estimate for May 2013 is 1.6% higher than the April 2013 figure.

Over the first four months of the year, output in the construction sector contracted by almost 10% compared to 2012 (y-o-y) due to the particularly difficult weather conditions at the start of the year. Much of the sharp rise in unemployment in the first six months of 2013 was explained by the high number of job seekers previously employed in this sector. In terms of building permits, the volume of construction projects in Q1 2013 was relatively low (down 20% over one year), particularly in terms of non-residential projects.

Confidence indicators in non-financial services were relatively positive at the end of June (with confidence levels close to their historical averages). Nonetheless, y-o-y, retail

turnover figures for the first four months of 2013 decreased by over 3%, and private car registrations for the first six months of 2013 reduced by 8%. Conversely, turnover in other non-financial services appears more in line with the improvement in the confidence indicators.

The financial sector, which accounts for a quarter of Luxembourg’s output and contributes to growth in other sectors, grew strongly in terms of banking income before provisions (+13.4% in H1 2013 compared to H1 2012). This growth was driven by price effects (revaluation of portfolios) and higher commission income from fund administration services. Recent developments in the private banking sector, including the discontinuation of withholding tax and the adoption of the automatic disclosure of information, could adversely impact upon funds under management in the private banking sector and further erode this key sector of the economy.

Economic Summary

Economic Indicators

2010 2011 2012 2013F 2014F

GDP growth 2.9% 1.7% 0.3% 1.0% 2.3%

Unemployment rate 5.7% 5.6% 6.1% 6.6% 6.8%

Inflation (CPI) 2.3% 3.4% 2.7% 1.9% 1.8%

Source: STATEC (July 2013) F – forecast

In conclusion, the recession in the Eurozone and the weakness of its external demand are affecting Luxembourg’s economic recovery, its public finances and labour market. Therefore, STATEC’s forecast of 1% GDP volume growth for 2013 may have to be lowered, depending on the performance of the financial markets and the Eurozone’s general outlook.

Office MarketDuring the first six months of 2013, occupant demand continued to slow-down as a result of weak economic growth and rising unemployment. Office take-up fell by 9% in the first half of 2013 compared to the same period in 2012.


Annual Evolution of Office Take-Up

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008 2009 2011 2012 2013

’000

sq.

m

H1 H2

Source: BNP Paribas Real Estate

Despite a slow-down in economic activity, the financial sector still accounted for the largest share of take-up (40%) during the first six months of the year, mainly driven by the Credit Suisse and the China Construction Bank transactions.

Largest Take-Up Transactions in Luxembourg Q2 2012 – Q2 2013

Date District Building sq. m Tenant

Q2 2012 Gare Central Plaza

9,126 Société Générale

Q2 2012 Kirchberg Weicker 4 8,627 University of Luxembourg

Q4 2012 Strassen Espace Strassen

8,200 DZ Bank

Q2 2013 Clôche d’Or Drosbach E 5,130 Translation Centre for the EU

Q2 2013 Kirchberg IIK 5,072 Credit Suisse

Q4 2012 Kirchberg BHK 4,814 EIB

Q1 2013 Esch Square Mile Lot 4

4,654 University of Luxembourg

Q4 2012 CBD Aurora 4,600 Bourse de Luxembourg

Q2 2013 CBD Warlon 4,417 Service de l’Etat

Q2 2012 CBD Stena 4,296 Banque Privée Ed-mond de Rothschild

Q1 2013 Bertrange Puits Romain

3,750 KPMG

Q2 2012 Kirchberg Kubik 3,552 EFSF

Q2 2012 Hamm Neudorf 672

3,000 Deloitte

Q3 2012 Bertrange Puits Romain 21

2,760 KPMG

Q2 2013 CBD Royal 1 2,551 China Construction Bank

Source: Jones Lang LaSalle

According to Jones Lang LaSalle, the vacancy rate decreased slightly (from 6.2% to 5.8%) over the course of

the first six months as a result of strong letting activity and a low volume of completions of new projects. The vacancy rate in Luxembourg City’s central office districts remained low compared to most European office markets, reaching 3.6% in the CBD, 3.3% in the Station district and 2.1% in Kirchberg. It is expected that the overall vacancy rate will be around 5.5%, considering the limited volume of completions and current levels of demand. The rise in unemployment is also expected to impact adversely on this rate.

Average rent in the CBD increased to EUR 34.90 per sq. m p.m. in H1 2013 (+2.7% compared to H1 2012) and the prime office rent has remained stable at EUR 40.00 per sq. m p.m. since H1 2011.

Office Rents

15

20

25

30

35

40

45

50

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 13

€/sq

.m p

.m.

Prime CBD Average


The investment market has improved following a worse than expected performance in 2012. The investment volume reached a seasonal high of EUR 200m in Q1 2013. Potential investors continue to screen the market, improving the overall outlook for 2013 in terms of real estate investments in Luxembourg.

Office Prime Yields

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 Q1 2013

Source: DTZ, CBRE

Luxembourg


Retail MarketA long-lasting positive trend in retail turnover, high density of shopping centres per inhabitant and relatively high prime rents in high street retail are the main features of Luxembourg’s retail landscape. In addition, over the last few years, the removal of a legal moratorium on large retail developments has generated new, significant retail schemes.

The country’s high street retail market is mainly concentrated in two areas of Luxembourg City: Grand Rue/Rue Philippe II and the Station district.

Retail Market Overview

Key Areas Consumer Profile

Major Retailers

Rent (€/

sq. m p.m.)

Range Of Unit

Sizes

Grand Rue Tourists, local and regional shoppers

H&M, Max Mara

125.0 40–2,000 sq. m

Rue Philippe II

Tourists, local and regional shoppers

Gucci, Hermès 125.0 50–400 sq. m

Avenue de la Gare

Local and regional shoppers

Saturn, Veritas, Okaidi, WE

83.3 30–2,500 sq. m

Cactus Belle Etoile

Local shoppers

Freelanders, Benetton, Ern-ster, Vedette

75.0 60–2,000 sq. m

Auchan Kirchberg

Local shoppers, white collars

Mango, Zara, Guess, Ober-weis, Bigor

83.3 40–2,000 sq. m

Cora City Concorde

Local shoppers

Bram, Ober-weis, Kaas, Lacoste, Descamps

62.5 50–3,000 sq. m

Esch-sur-Alzette

Local shoppers

Foot Locker, Promod, Jen-nyfer, Guess

41.7 50–1,500 sq. m


Residential MarketInvestmentDuring the first quarter of 2013, activity was slightly higher than Q1 2012: +7.4%, with a larger increase in volume (+16.5%).

In the same quarter, apartment sales accounted for 53.5% of activity and 44.9% of the volume.

Breakdown of Q1 2013 Volume by Type of Real Estate Asset

(total: €952m)

Apartments€428m44.9%

Houses€353m37.1%

Land€171m18.0%


Apartment prices per sq. m have increased y-o-y by +1.6% to EUR 4,036 per sq. m for existing apartments and by +5.5% to EUR 4,963 per sq. m for new apartments.

As at Q1 2013, the average price for a house was EUR 3,556 per sq. m and EUR 4,315 per sq. m for an apartment.

RentalAverage rental levels published during Q1 2013 in Luxembourg were EUR 2,336 p.m. (EUR 12.20 per sq. m) for houses, and EUR 1,241 p.m. (EUR 17.30 per sq. m) for apartments.


The Luxembourg residential rental market is largely concentrated in the Centre-South region, which accounts for more than 60% of the properties on offer. Luxembourg City is the main focus of attraction for the rental market.

During Q1 2013, Luxembourg City accounted for 18% of house rental offers and 44% of apartment rental offers. The average published rent for a house in Luxembourg City was EUR 2,893 p.m. (= EUR 14.80 per sq. m), and for an apartment was EUR 1,476 p.m. (= EUR 20.30 per sq. m).

Price and Rents Evolution of the Residential Market, Q1 2005=100

90

95

100

105

110

115

120

125

130

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

2005 2006 2007 2008 2009 2010 2011 2012 13

House sales Appartment sales

House rental Appartment rental

Source: L’Observatoire de l’Habitat


According to the OECD, the number of hospital beds in Luxembourg is 5.4 per 1,000 population, which is higher than the OECD average (4.8 beds). As in most OECD countries, the number of hospital beds per 1,000 population in Luxembourg has fallen over time. This decline has coincided with a reduction in the average length of stay in hospitals and an increase in the number of surgical procedures performed on a same-day (ambulant) basis.

In Luxembourg, 98% of the population is covered by health insurance. Private health insurance plays a minor role, as most benefits are covered by the mandatory health insurance. Nevertheless, 75% of the population has additional private health insurance. Approx. 80% of all hospital investments are carried by the state.

Hospitals in Luxembourg

Regional hospitals Area

Centre Hospitalier de Luxembourg

L-1210 Luxembourg

Hôpital Kirchberg Fondation Francois Elisabeth

L-2540 Luxembourg-Kirchberg

Hôpital de la Ville d'Esch-Alzette (Emile Mayrisch)

L-4240 Esch-sur-Alzette

Clinique St. Joseph Centre Hospitalier du Nord

L-9080 Ettelbruck

General hospital Area

Clinique Ste Thérèse (ZithaKlinik) L-2763 Luxembourg

Proximity hospital Area

Clinique Sainte-Marie (FFE) L-4350 Esch-sur-Alzette

Other hospitals Area

Haus OMEGA L-1713 Hamm

Specialized acute care Area

Haerzfondation - INCCI L-1210 Luxembourg

Centre François Baclesse L-4240 Esch-sur-Alzette

Specialized average stay centers

Area

Rehazenter L-2674 Luxembourg-Kirchberg

Centre Hospitalier Neuro-Psychiatrique CHNP

L-9012 Ettelbruck

Other average stay centers Area

Hôpital Intercommunal Steinfort L-2674 Luxembourg-Kirchberg

Fondation Emile Mayrisch (convalescence)

L-8527 Colpach-Bas

Thermal cure Area

Domaine Thermal Mondorf L-5601 Mondorf-les-Bains

Source: Luxembourg’s Ministry of Health


France

Market softening with even Paris showing signs of weaknessMacroeconomic OverviewAs seen in other parts of the Eurozone, the economic situation in France deteriorated in Q1 2013 (reduction in the GDP of 0.2% according to INSEE). In particular, household spending decreased by -1.3% compared to -0.8% in Q4 2012.

This negative trend can be explained by the sharp increase in unemployment during the last quarter (+2.9%) in response to austerity measures and redundancies in the private sector. Currently, the unemployment rate in France stands at 10.9%. The economy is expected to remain fragile while the outlook for employment and demand for exports remain weak. Nevertheless, a slight economic recovery could occur earlier than expected, with the manufacturing PMI (Purchasing Managers Index), which reflects economic health, for May reaching its highest level in over a year. GDP growth

-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%

Q4

2003

Q2

2004

Q4

2004

Q2

2005

Q4

2005

Q2

2006

Q4

2006

Q2

2007

Q4

2007

Q2

2008

Q4

2008

Q2

2009

Q4

2009

Q2

2010

Q4

2010

Q2

2011

Q4

2011

Q2

2012

Q4

2012

Q2

2013

Inflation rate

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Unemployment rate

5%

6%

7%

8%

9%

10%

11%

Q4

2003

Q2

2004

Q4

2004

Q2

2005

Q4

2005

Q2

2006

Q4

2006

Q2

2007

Q4

2007

Q2

2008

Q4

2008

Q2

2009

Q4

2009

Q2

2010

Q4

2010

Q2

2011

Q4

2011

Q2

2012

Q4

2012

Q2

2013

Source: INSEE

In line with the faltering economy, the real estate market remained sluggish during the first half of 2013 with EUR 6bn invested, a decrease of 5% compared to the same period in 2012. The Greater Paris and the Rhône Alpes regions accounted for 70% and 12% of total volume respectively.

Major deals such as the acquisition of rue de la Fayette, 33 (Paris 10th) by DEKA IMMOBILIEN for EUR 277m sustained activity in the second quarter, increasing the total investment volume by 40% compared to the previous quarter. However, the shortage of prime assets could cause a reduction in activity during the second half of 2013, with the total investment volume for 2013 expected to be in the region of EUR 15 – 16bn, compared to the figure of EUR 17.6bn recorded in 2012.

In the Greater Paris region, the future development of new transport facilities could increase the attractiveness of certain suburban districts (southern bend of the Western Business District). Yet for the time being, it has had little impact on prices or transaction volumes in the areas of future hubs.

Office MarketRepresenting about 70% of the total French investment market, the office market and more precisely the Greater Paris office market remains the key driver of the real estate market in France.

In the Greater Paris region, overall take-up in the first six months of 2013 fell short of the H1 2012 figures, reaching only 833,000 sq. m (a 13% decrease compared to H1 2012). The second quarter of 2013 was the worst performing second quarter since 2000. This poor result is due mainly to a shortage of high volume deals, with a 36% reduction in lettings of units of more than 4,000 sq. m in the first six months of this year. This downward trend is even stronger for very large deals (of over 10,000 sq. m), with a y-o-y decrease of 48% registered and only ten deals worth more than EUR 100m taking place. Transactions in the medium space category remained stable, whilst transactions of units of less than 1,000 sq. m also decreased by 21%.

Within the Greater Paris area, there were disparities in performance in the various districts. The inner-city fared better than other districts, experiencing only a 15% decrease in take-up over the past year. This can be explained by the conclusion of major deals in Q1 2013. The Rectorat de Paris moved into a 15,000 sq. m building in Paris’s 19th Arrondissement and the law firm CMS Bureau Francis Lefebvre moved into a 16,500 sq. m building in Neuilly sur Seine. The La Défense CBD underperformed, with take-up reaching 40,700 sq. m in the first six months of 2013, the worst performance for the first six months of a year since 2003; vacancy rates increased from 6.3% (end of 2012) to


France

7.4% following a 20% increase in immediate supply, generated by the delivery of the Eqho (79,000 sq. m) and Carpe Diem (44,000 sq. m) towers. The Outer Rim experienced the most dramatic decline, with a 42% decrease in the take-up volume over the past 12 months.Only the Inner-city and Western Crescent markets (Boulogne Billancourt area) recorded a y-o-y increase.

Prime rents for office space remained stable in Q2 2013 (EUR 820 per sq. m p.a. in Paris CDB and EUR 430 per sq. m p.a. in the southern loop). However, this trend is not reflected in effective rents which are decreasing.The average prime rent paid for new offices in the Greater Paris region (EUR 320 per sq. m p.a.) decreased by 9% in the first six months of this year compared to the corresponding period in 2012. This fall in prices is expected to continue in response to the high volume of new available office space. The negotiating power of tenants is strengthening, as owners try to avoid high volumes of vacancy. Owners are now offering longer rent-free periods, which explains the decrease in real rents.

Prime Office Rents – Q2 2013

-10%

0%

10%

5%

-5%

0100200300400500600700800900

Par

is (C

DB

)

Par

is (R

ive

Gau

che)

Par

is (L

a D

éfen

se)

Lyon

Mar

seill

e

Bor

deau

x

Str

asbo

urg

Lille

Toul

ouse

Nic

e

Nan

tes

CA

GR

€/sq

. m p

.a.


Source: Cushman and Wakefield, BNP Paribas Real Estate CAGR: Compounded annual growth rate

In the Greater Paris region, 460,000 sq. m of new office space were built in 2012; a further 450,000 sq. m are due to be completed by the end of the year and 740,000 sq. m in 2014. There are doubts as to whether the market will have the capacity to absorb such a high volume of space. This could lead to higher vacancy rates and further impact prices in the Greater Paris region.


Results were mixed in the provincial offices markets. In Marseille, the office market experienced a 43% decline in the first six months of 2013 compared to the same period in 2012. Take-up this year included only three transactions of over 1,000 sq. m, compared to nine transactions which were recorded in 2012.

Prime Office Yields

Q2 2013

Q1 2013

FY 2012

10YearHigh

10YearLow

Paris

CBD 4.50% 4.50% 4.50% 6.30% 3.80%

Rive Gauche 5.30% 5.30% 5.30% 6.80% 4.50%

La Défense 6.00% 6.00% 5.80% 6.80% 4.50%

Provincial

Lyon 6.00% 6.00% 6.00% 7.80% 5.80%

Other 6.30% 6.30% 6.30% 9.00% 6.30%


However, the Greater Lyon region was extremely active in H1 2013, with a take-up of 152,500 sq. m, up 65% compared to H1 2012. This performance is explained by three very large deals (over 20,000 sq. m).

Retail MarketThe retail market has shown the most resilience over the recent years (with a total of over EUR 1.1bn of transactions taking place in the first six months of this year). Retail property sales are up by 25% compared to H1 2012, and by 50% compared to H1 2011. Investment volumes were also higher in the first quarter of the year (EUR 616m) than in the second (EUR 567m).

This performance is mainly explained by the strong performance of the high-end market in Paris, which is supported by tourist activity: rents have doubled over the last 18 months in the Parisian “Triangle d’Or”. Over the same period, transactions on Champs Elysées reached more than EUR 1bn, with one of the most recent deals being the acquisition of No.118 (Mercedes) by Pramerica for EUR 135m.

Driven by the extremely low vacancy rates in the core districts, top retail brands are also expanding into new areas such as boulevard Saint Germain (Rive Gauche, Paris 6th).

From a global perspective, major retailers are focusing extensively on securing prime locations in high streets and shopping centres. An example of this is H&M, which opened a premium store on rue Saint Honoré. Consequently, secondary markets have seen a sharp downturn.

Prime Retail Rents – Q2 2013

-10%0%10%20%30%40%50%

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

Par

is “

Zone

A”

Par

is

Lyon

Mar

seill

e

Bor

deau

x

Str

asbo

urg

Lille

Toul

ouse

Nic

e

Sho

ppin

g ce

ntre

s

Ret

ail p

arks

CA

GR

%

€/sq

. m p

.a.

Prime Rent CAGR (5 yr) CAGR (1 yr)


In the shopping centre segment, vacancy rates in existing facilities remained low compared with other European countries. However, newly-built shopping centres may experience difficulties due to the reduced number of new tenants in the retail market.

Over the coming months, the retail market may be adversely affected by the rise in unemployment. However, low inflation could offset this development by supporting the level of consumption.

The booming luxury market should also help to maintain a certain level of activity.

Prime Retail Yields

Q2 2013

Q1 2013

FY 2012

10YearHigh

10YearLow

High Street Retail

Paris 3.75% 3.75% 4.25% 6.50% 3.75%

Lyon 5.00% 5.00% 5.25% 6.75% 4.75%

Marseille 5.25% 5.25% 5.25% 6.75% 4.75%

Bordeaux 5.25% 5.25% 5.25% 7.00% 4.75%

Strasbourg 5.00% 5.00% 5.25% 6.50% 5.00%

Lille 5.00% 5.00% 5.25% 7.25% 4.75%

Toulouse 5.50% 5.50% 5.75% 7.00% 4.75%

Nice 5.50% 5.50% 5.75% 6.75% 4.75%

Shopping Centres

Paris Region 5.00% 5.00% 5.00% 5.75% 4.00%

Retail Parks

Paris Region 6.25% 6.25% 6.00% 8.00% 5.00%



France

Residential MarketFollowing 2012’s downward trend, the transaction volume in the residential market is expected to decrease by 10.4% over the course of 2013.

In the second-hand market, despite a fragile recovery in February, the total transaction volume decreased by 17% between May 2012 and May 2013. Prices have experienced a decrease over the last 12 months (-1.5%), but increased slightly during the first quarter of this year (+0.2%). However, there are major regional disparities. Prices remained strong in major cities such as Paris (with an average of EUR 8,250 per sq. m), but the regions did not fare as well. The biggest losers were the Var (-9.1%) and Charente regions (-7%), whereas Hérault (+8.5%) and Garonne (+6%) performed well.

The situation is also gloomy in the new housing market, with 98,300 unsold residential units in Q1 2013, an 18% increase compared to Q1 2012. Furthermore, the sales volume over the same period is said to have decreased by between 2.6% and 6.9%. Accordingly, the number of new building permits has decreased by 13%.

Price Variation for second hand Homes

HousesQ1 2013

onQ4 2012

HousesQ1 2013

onQ1 2012

FlatsQ1 2013

onQ4 2012

FlatsQ1 2013

onQ1 2012

France -0.10% -1.20% 0.40% -1.80%

Paris region -0.10% -0.50% -0.20% -1.50%

Provincial -0.10% -1.90% 0.50% -1.80%

Source: Notaires de France and INSEE

In order to boost the depressed residential market, the government announced an expansion of conditions for tax exemptions on capital gains for 2013/2014; however, this announcement may only affect a small number of owners.

Despite the historically low interest rates (2.95% on average for second-hand housing) and the standstill in prices, a recovery of the new housing market is not guaranteed because of the poor macro-economic situation (the market could contract by up to 5% by the end of the year according to S&P).


In France, healthcare real estate can be divided into two segments: public and private, the latter currently being an attractive sector for investment.

Due to its public sector mandate, hospital projects have historically been financed by the public sector and investors. However, since 2000, many hospital projects have taken the form of public-private partnerships (PPPs) in which government-backed entities award contracts to private sector operators to participate in the design, construction and the operation of hospitals under development. Once a hospital has been built, the public sector retains control of medical operations whilst the private sector partner is responsible for building maintenance and other basic non-medical services such as food and cleaning services. Today, over 30 hospitals across France have been completed and are operating under the PPP scheme.

In France, an increasing number of private clinics are operating under sale-and-leaseback schemes. This practice is now widely used by private healthcare groups. For example, Générale de Santé, the largest French private group, recently sold the real estate of “Hôpital Privé de la Loire”, a 13th hospital to ICADE Santé (the largest investor in this sector), for EUR 58m.

ICADE Santé, a public-listed company and subsidiary of Caisse des Dépôts, owns the real estate of 58 private clinics in France, with a portfolio worth more than EUR 1.7bn. In May 2013 it announced a further capital increase of EUR 110m, which is indicative of the opportunities available in this market segment. The total value of the property portfolio of the eight biggest French medical groups is estimated to be worth EUR 4bn.


Switzerland

Price trend for investment property levelling outMacroeconomic OverviewWhilst the debt crisis continues to be felt in southern Europe, and the growth of Germany as Europe’s economic powerhouse is slowing down, the Swiss economy showed positive development in the first six months of 2013.

For the first quarter, the State Secretariat for Economic Affairs SECO estimates a growth in real GDP of 0.6% compared to the previous quarter and 0.5% for the second quarter. The resilience shown by the Swiss economy is due mainly to the growth in private consumption, with significant growth arising from the healthcare sector. The relevant research institutes forecast further growth in economic performance for the second half of the year. As a result 2013 is expected to deliver growth of 1.7%, against expectations of a slight decrease in the GDP for the European Union. In 2014 GDP growth is expected to increase to 2.1%, with distinct growth in economic performance also expected for the EU.

Macroeconomic Indicators

-3%-2%-1%0%1%2%3%4%5%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

F 20

13

F 20

14GD

P g

row

th, u

nem

ploy

men

t an

d C

onsu

mer

Pric

e In

dex

GDP growth Unemployment rate Consumer Price Index

Source: BAKBasel, Credit Suisse, KOF, SECO, UBS F – forecast

After last year’s deflation (-0.7%), the negative price trend continued in the first half of the year, which was mainly due to lower transport costs (incl. private cars) and energy prices. This resulted in an overall inflation forecast of -0.2% for the full year. An increase in the national index for consumer prices of 0.6% is expected for the year 2014. The expected inflation rate is at a low level despite the recent significant expansion in money supply by the Swiss National Bank in order to stabilize exchange rates.

The Fed’s likely tapering of the Quantitative Easing has increased expectations with regard to interest rate development. The yield for 10-year Swiss government bonds rose by almost 40% in June and at the end of the month was at around 135% above the historic low point in 2012. There were similar effects observed with regard to mortgage interest rates.

Despite the continued strength of the Franc and international pressure on its outline conditions, the Swiss labour market remained stable. The monthly unemployment figures for the first half year were 0.2–0.3 percentage points above the level of the previous year. For the current year and also for 2014, the expected average unemployment rate is 3.2% (2012: 2.9%).

The strong economic performance has led to a rising demand for qualified foreign workers and increased Switzerland’s status as an attractive migration destination. Over the last five years, the Swiss population has grown by an average of almost 1% per year mainly due to migration.

Office MarketThere has been a reversal of trend in the Swiss office market. Rising levels of supply of office space and the faltering demand have recently resulted in higher vacancy rates and a slight reduction in asking rents.

The increased building activity is the result of the continued demand for direct investments, low interest rates, and the trend towards the consolidation of workplaces. In the next three years there will be around 800,000 sq. m of new office space completed across Switzerland. In the Zurich agglomeration alone, 350,000 sq. m are at the planning stage.

The main demand segments for office space, such as the banking industry, are going through a period of structural transformation and are rationalising their space requirements. Furthermore, the implementation of new workplace concepts such as desk sharing is reducing the space required per employee.

Vacant Office Space in the Principal Cities

050

100150200250300350400

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014

Basel Bern Geneva Zurich

in 1

,000

sq

. m

Source: KPMG Real Estate Research F – forecast


Switzerland

However, the current increase in supply has until now had little effect on asking prices. The main reasons for this are the level of new-build activity and the subsequent high proportion of state-of-the-art offices especially in central locations.

Asking Rents for Office Space in the Principal Cities

0

100

200

300

400

500

600

700

800

2008

2009

2010

2011

2012

2013

F201

420

0820

0920

1020

1120

1220

13F2

014

2008

2009

2010

2011

2012

2013

F201

420

0820

0920

1020

1120

1220

13F2

014


CH

F/sq

. m p

.a.

90%-Percentile

Median10%-Percentile


An increase in marketing periods has been observed for older rental space with inflexible space layout and suboptimal accessibility. Over the medium-term, it is expected that a proportion of this space must be repositioned because of the limited marketing perspectives.

The current situation in the office market is reflected by an increased selectivity on the part of investors when purchasing office property. They prefer high-specification properties with long-term leases and high tenant creditworthiness in central locations. The marketability of peripheral locations is lower in the current market. In addition, properties in central locations, which require repositioning, are difficult to sell in the investment market.

Retail MarketAs in the previous year, Swiss retail turnovers are stagnating, despite increased real incomes, improved consumer confidence and continued population growth. The reasons for this include the negative inflation rate and the continued retail tourism to neighbouring countries.

Retail Turnovers and Consumer Confidence

80

85

90

95

100

105

110

115

120

125

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-60

-50

-40

-30

-20

-10

0

10

20

Ret

ail t

urno

ver

inde

xed

Consum

er Confidence Index

Retail turnover seasonally adjusted

Consumer Confidence Index (EU-compatible)

Source: BFS No significant change in the rental levels for retail space is expected in the medium-term. Peripheral locations have become fundamentally less attractive, partly because of the growth in online trade. This development is also reflected in the results of an investor survey carried out by KPMG2, which shows the negative price expectations for retail property and peripheral locations.

Retail space in the top locations, such as the Rue du Rhône in Geneva or Bahnhofstrasse in Zurich, remain popular with large fashion chains and luxury brands for flagship stores. The rents in these zones remain at a high level or are even continuing to increase slightly.

Asking Rents for Retail Space in the Principal Cities

0

50100150200250300350400450500

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014


CH

F/sq

. m p

.a.


Residential Market The Swiss construction sector operates close to its capacity limit. The number of apartments under construction is at a historic high. This development is likely to continue as there has been an increase of 20% in the number of new building permits for apartments compared to last year.

2 sresi.ch


The continuing migration-based population increase has led to a good absorption level of newly completed apartments. The vacancy rate across Switzerland is stable at the low level of 0.96% (2012: 0.94%). In Bern and Basel, there has been a continual reduction in the number of vacant apartments in the past few years. In Geneva and Zurich the vacancy levels slightly increased in 2013.

Vacancy Rates in the Principal Cities

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014


Source: BFS, KPMG Real Estate Research F – forecast

Due to the existing shortage of apartments and the continuing strong demand in the principal cities, a slight increase in average asking rents is anticipated. For peripheral locations, rents are expected to stagnate. Asking Rents for Residential Space in the Principal Cities

0

100

200

300

400

500

600

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014

2008

2009

2010

2011

2012

2013

F 20

1420

0820

0920

1020

1120

1220

13F

2014


CH

F/sq

. m p

.a.

90%-Percentile

Median10%-Percentile




The introduction of the new healthcare financing system on 1st January 2012 (DRG System) meant an increase in corporate freedom and also stronger competition between Swiss healthcare providers. The core of the new law is the transfer from object financing to service financing with so-called diagnosis-based flat rate per case. This harmonizes cost transparency and is intended to increase efficiency. Healthcare providers must now finance a proportion of building projects via the DRG System and obtain the remaining funds required in the future from the capital markets. Initial experiences show that the change in the financing system has thrown up a number of questions. A survey carried out by KPMG has shown that investor interest in healthcare investments does exist.

According to the survey, investment in special-purpose property, e.g. care facilities, has played a subordinated role

Investment PropertyAccording to the index provider IAZI, there has been an average price increase for Swiss investment property of 0.9% per quarter over the past 10 years. This equates to an annualized price increase of 3.6%. Over the last five years there has been an annual increase of 5.7%. This price development is likely to be the result of the increased attractiveness of property as an investment class following the financial crisis.

Price Development for Swiss Investment Property

Price change investment properties per quarter (left hand axis)Average price change per quarter (left hand axis)Indexed price trend (right hand axis)

0

20

40

60

80

100

120

140

160

-6%

-4%

-2%

0%

2%

4%

6%

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

IAZI price index for investm

ent properties,B

asis Q4 2002=

100

Pric

e ch

ange

inve

stm

ent

prop

ertie

s

Source: IAZI, KMPG Real Estate Research

to date due to the investors’ lack of expertise, complex regulations, risks of clustering and limited alternative use potentials. In the event that the property user ceases business, the possibilities to reposition healthcare property are very limited, which increases the level of liquidity risk for such properties. However, demographic change and the resulting ageing of the population increase the overall demand for care and healthcare services.

The opening up of the market and the good perspectives create opportunities for capital investments. As part of the survey which produces the KPMG Swiss Real Estate Sentiment Index, almost half of the respondents said that they could envisage investing in healthcare property. Preferences included direct investment as owner (26%) or indirect investments via specialized funds. Also public-private partnership solutions could be an investment option for 17% of those surveyed.

The current risk aversion of market participants is reflected in a strong preference for supposedly secure residential property and central locations. Commercial properties and peripheral locations have lost in popularity due to their greater price volatility.

The forecast development will put the yields for central locations and residential property under further pressure, whilst poorer locations and commercial property will see something of a decompression. There is still an attractive gap between the yield for direct real estate investments and refinancing rates, which means that institutional investors are still increasing their real estate allocation at the expense of fixed-income securities.

Investment behaviour in the Swiss property investment market, with its focus on residential property and central locations, contrasts with the overall European trend, whereby investors are increasingly returning to secondary markets and properties with development potential.

Switzerland


Austria

Small country, but major regional variations

Macroeconomic Overview Although the Austrian economy has shown only moderate growth in 2012 and 2013 (< 1%), the outlook for the economy is more positive. Y-o-y, by mid-2013, the economic outlook was much more favourable. The economic picture for Austria since 2009 has been mixed, with a dramatic downturn in 2009, which was initially followed by recovery in 2010, but ended with the further contraction of the economy. In 2014, however, GDP growth of 1.7 % is forecast. This does not mean that Austria has escaped the global economic downturn, but it is in remarkable condition considering the recession in the Eurozone.

Inflationary pressure on real wages, which has severely reduced households’ propensity to spend, has caused private consumption to stagnate.

The unemployment rate has risen slightly since 2011, and currently stands at around 4.3% (although this is well below the European average of 10.5%). Current forecasts suggest that the unemployment rate in Austria will continue to rise, but will stabilize at below the 5% mark.

Economic Indicators

-1%

0%

1%

2%

3%

4%

5%

6%

-5%-4%-3%-2%-1%0%1%2%3%4%5%

2008 2009 2010 2011 2012 2013F 2014F

Unem

ployment &

Inflation

GD

P g

row

th

GDP growth Unemployment rate Inflation (HICP)

Source: Eurostat, Statistik Austria, WKO, AMS F – forecast

Over the next few months, inflation (HICP) is expected to fall for the first time since its rise in 2011, and should level off in 2013 at around 2.3%. This fall will be the result of a reduction in oil prices and labour costs. It is assumed that the inflation rate will settle at around 2.0%.

Economic Summary

Economic Indicators 2010 2011 2012 2013F 2014F

GDP growth 2.0% 2.8% 0.9% 0.5% 1.7%


Inflation (HICP) 1.7% 3.6% 2.6% 2.3% 2.0%

Source: STATEC (July 2013) F – forecast

Traditionally, international real estate investors have focused on Vienna as an investment location. As a result, other provincial

capitals are considered to be less transparent real estate markets. Given this international interest, our report focuses mainly on Vienna, rather than the smaller provincial capitals.

Office MarketOverall, the office market in Vienna has developed well. Prime rents have risen slightly to approx. EUR 25.00 per sq. m p.m. and the average rent for office space currently stands at approx. EUR 14.50 per sq. m p.m. The vacancy rate stands at approx. 7.0%, which is a slight fall since last year. The prime office yield is currently around 5.25%, which is an improvement compared to the last few years (-0.25%). Nonetheless, the investment market is weakening as a result of the poor economic situation in the Eurozone (international investors were previously major players in the real estate market in Vienna).

Prime rents in the main cities (Linz, Salzburg, Innsbruck and Graz) lie considerably below prime rents in Vienna, ranging between EUR 11.00 and EUR 15.00 per sq. m p.m.

Prime Office Rents – September 2013

0

5

10

15

20

25

30

Vienna Salzburg Linz Innsbruck Graz

€/sq

. m p

.m.

Source: KPMG Research, EHL, CBRE, Colliers, H&H

Due to the small number of transactions which have taken place in the provincial capitals and the lack of transparency in the smaller real estate markets, it is only possible to roughly estimate prime yields. These are expected to range between 5.75% and 6.5%.

Retail MarketIn 2012, around 40% of the total transaction volume in Austria was generated in the retail sector, which is a reflection of the international trend towards further investment in this segment.

Austria has around 1.75 sq. m of retail space per capita and therefore holds a top position in Europe. Approx. 120,000 sq. m of new retail space was built (in shopping centres) last year. Despite this, vacancy in the commercial real estate sector is assessed as relatively low; however fewer new developments are expected in future, with a greater focus placed on the revitalization and refurbishment of existing retail properties.


High Street: the prime rent in top locations in Vienna (Kohlmarkt/Graben) currently stands at EUR 380 per sq. m p.m. In general, moderate rental growth is expected in prime locations. An increase in vacancy rates and stable rental levels are assumed for secondary and peripheral locations.

In the largest provincial capitals (Linz, Salzburg, Innsbruck and Graz), prime rents lie below the top values of Vienna, ranging between EUR 65 and EUR 150 per sq. m p.m. However, prime rents have risen by up to 20% over the past 3 to 5 years.

Prime High Street Retail Rents – September 2013

€/sq. m p.m. Min.

€/sq. m p.m. Max.

Vienna 150 380

Linz 70 100

Salzburg 65 130

Innsbruck 80 150

Graz 70 100

Source: KPMG Research, EHL

The prime yield in this segment is approx. 4.0% (prime pitch in Vienna).

Shopping Centres: there is still strong demand for space in this segment; however, as the result of an oversupply of space (due to new construction), vacancy is expected to increase over the medium-term. With sales productivity of up to EUR 6,000 per sq. m gross leasable area (average for the best centres), prime rents of up to EUR 150 per sq. m p.m. are achievable. The prime yield in this segment is around 5.75%.

Retail Parks: with the exception of the traditional shopping centres in Austria, multiple retail parks have appeared on the outskirts of the city in recent years. These developments are able to command rents of up to EUR 13.00 per sq. m p.m. and a prime yield of about 6.5%.

Prime Retail Parks Rents – September 2013

€/sq. m p.m. Min.

€/sq. m p.m. Max.

Vienna 11.0 13.0

Other Areas 9.5 11.0

Source: KPMG Research

Residential MarketResidential properties are of high interest for institutional investors, due to the security offered by the investment, particularly in the current market climate. This strong demand means that asking prices for new apartments, e.g. in Salzburg, are currently up to 10% higher than last year. This increasing price trend can be observed across Austria, but is particularly strong in Vienna and the western provinces.

Average Sales Prices Flats – 2013

0%

2%

4%

6%

8%

10%

12%

14%

0

2,000

4,000

6,000

8,000

10,000

12,000

Vienna (1st District)

Salzburg Linz Innsbruck Graz

€/sq

. m

Sales Price % change to 2012

Source: KPMG Research, WKÖ

In Vienna’s 1st District, for example, an average of EUR 10,000 per sq. m can be paid for a newly constructed or completely renovated residential unit. It is also possible to achieve prices of up to EUR 30,000 per sq. m for exceptional properties in the luxury segment.

Austria



The market for healthcare real estate in Austria is of historic interest and, because of the social system (subsidies, health and pension insurance system), is primarily public sector-orientated. This means that hospitals and specialist clinics are mainly owned and operated by public authorities and companies. In the past, such properties have been classified as being of little interest for real estate investors.

However, demographic trends (increasing life expectancy, reduction in home-based care) are making the sector for retirement and nursing homes much more interesting. According to the Federal Ministry, Austria currently offers 877 nursing and retirement homes.

These healthcare facilities are spread across Austria´s nine provinces as follows:

Number of retirement and nursing homes

0

2

4

6

8

10

12

0

50

100

150

200

250

Number of retirement/nursing homes

Wie

n

Nie

derö

ster

reic

h

Num

ber

of r

etire

men

t/nu

rsin

g ho

mes

places per 1,000 inhabitants

Obe

röst

erre

ich

Bur

genl

and

Ste

ierm

ark

Kär

nten

Sal

zbur

g

Tiro

l

Vor

arlb

erg

places per 1,000 inhabitants

Source: BMASK

It is estimated that there are a total of 77,000 care places in retirement and nursing homes, with approx. 40% of these owned by individuals or companies. Subject to province, an average of 6.1 to 11.1 care places per 1,000 inhabitants are available.

This real estate segment is expected to grow as a result of the rise in demand for such properties in future. The proportion of privately-owned healthcare real estate is also expected to increase.


Italy

Still struggling to achieve recovery

Macroeconomic OverviewAlthough economic indicators in Italy suggest that the recession, which began in 2008, is still not over, the country’s economy is showing some signs of recovery.

Business confidence, measured by the Italian manufacturing purchasing managers’ index (PMI), recovered in July 2013 reaching the level of 50.0 (threshold value between contraction and expansion), and export orders expanded for the sixth consecutive month.

Preliminary data points to a marked slow-down in the pace of Italy’s economic downturn during the second quarter of 2013; the reduction in GDP is expected to slow down by the end of 2013, reaching a figure of -1.5% (compared to -2.4% in 2012). Analysts are confident that the economy will return to growth of about 0.5% in 2014, triggering recovery in the Italian economy (+1.2% GDP growth expected in 2015 and +1.4% in 2016 and 2017).

The number of people out of work in June 2013 edged down to approx. 3.0m. Italy’s forecasted unemployment rate for 2013 remains stable (12%), at the same level as the Eurozone average in June.

Stable nominal wage growth combined with a sharp slow-down in the pace of consumer price inflation in the first six months of 2013 should provide some relief to households after two years of steadily falling real incomes; the annual inflation rate is expected to be around 2.0% by the end of 2013. Economic Indicators

-8%-6%-4%-2%0%2%4%6%8%10%12%

-3%-2%-1%0%1%2%3%4%5%6%

2011 2012 2013F 2014F 2015F 2016F

Unem

ployment &

Inflation

GD

P


Source: International Monetary Fund, April 2013 F – forecast

Moreover, demand for new mortgages in July and August 2013 has seen a trend reversal, registering slight recovery (+4% compared to August 2012).

Although the country’s political stability remains key to the economic upturn, actions taken by the Italian Government so far have had a positive effect and have been well received at both European and investor level. In the second half of

2013, the gap in yields between the Italian government bonds and the German bonds continues to narrow, reaching approx. 250 basis points in August (compared to 300 basis points recorded in December 2012).

Spread Italian Government Bonds/German Bonds Yields

0

100

200

300

400

500

600

Jan-

08

May

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Bas

is p

oint

s

Source: Market Data Provider

The improvement of some macro-economic indicators has also triggered a slight trend reversal in the real estate sector: during the second quarter of 2013, there was a strong uplift in investment activity, with a total volume of approx. EUR 1,400m invested; this is higher than the transaction volume registered in the quarter before, and during the same period in 2012.

Investments in the second quarter exceeded the quarterly average of the last three years by 45%, but a reduction in transaction volume suggests that the positive signals seen in some macroeconomic indicators have not yet reached the real estate market.

Office Market By the end of 2012, there had been a reduction of approx. -26% y-o-y in the number of transactions (10,402 compared to14,085 in 2011). During the first quarter of 2013, the number of transactions in the office sector reduced again slightly to 2,378, corresponding to a -9.2% decrease compared to the same period in 2012.

Number of Office Transactions

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012 Q1 2013

N°o

f tr

ansa

ctio

ns

Source: Market Data Provider


The total investment volume recorded in the Milan property market in the first six months of the year was higher than the total volume recorded for the whole of 2012 (approx. EUR 800m compared to approx. EUR 500m).

This uplift resulted mainly from Qatar Holding’s acquisition of a 40% stake in the Hines’ Porta Nuova mixed-use project development in Milan (comprising the new Unicredit headquarters), for an investment of approx. EUR 400m). Another two important transactions were recorded in Milan during the second quarter: the acquisition by AXA Real Estate Investment Managers of two prime office buildings (24,000 sq. m) and two retail buildings (4,000 sq. m) in the Bodio Center business park from Aberdeen Asset Management (for approx. EUR 64m), and the purchase by Fondo Crono (fund managed by Beni Stabili Gestioni SGR and owned by the pension funds CNPR and ENPAB) of a 5,000 sq. m office building in the centre of the city (for approx. EUR 30.5m).

The current economic climate and the lack of financing provided by financial institutions mean that new development activities continue to be delayed or put on hold.

Weaker demand and an increase in the supply of office space continue to impact upon prime rents, which reached EUR 500 per sq. m p.a. (compared to EUR 520 per sq. m p.a. in the second quarter of 2012).

Vacancy rates remained steady during the first six months of the year (12%).

Office Market Highlights – Milan

Q2 2013 Q1 2013 Q2 2012 2012

Investments (€m) 617 202 132 469

Office market share 33% 67% 96% 68%

Take-up (sq. m) 61,000 28,000 59,000 241,000

Prime Rents (€/sq. m p.a.)

500 500 520 510

Prime yields 5.6% 5.6% 5.5% 5.6%

Vacancy rate 12.1% 12.0% 11.0% 11.2%

Source: BNP Paribas Real Estate Research

In Rome, the total investment volume in office properties in the second quarter of 2013 was approx. EUR 90m. The main contributor to this figure was the purchase by Mittel Real Estate SGR of a building fully let to the Ministry for Employment and Social Policy from Fondo Immobili Pubblici (fund managed by Investire Immobiliare SGR) for approx. EUR 70m.

During the first three months of the year, office space take-up reached approx. 61,000 sq. m, of which 42,000 sq. m

was accounted for by the pre-letting of the new BNP Paribas offices which are under construction close to the Tiburtina Railway Station (the development should be completed in three years).

The vacancy rate increased slightly to 7.1% between the first and second quarters of this year (compared to 6.9%). In addition, the high volume of available space continues to put pressure on rents: prime rents decreased slightly y-o-y (EUR 400 per sq. m p.a. compared to EUR 420 per sq. m p.a. in the second quarter of 2012). Yields remain stable at the level recorded in the first quarter of 2013 (6.1%).

Once the new City Government has been established, some future development projects may have to be revised or deferred, as it appears that the new authority wishes to concentrate on the redevelopment of existing real estate to minimise the use of new tracts of land. The majority of developments currently at the planning stage are focused on the consolidation of office space for the Municipality of Rome (which involves the construction of “Campidoglio 2”, a complex offering approx. 135,000 sq. m of new space).

Retail Market During 2012, there was no change in the trend affecting the retail sector, with a further reduction in the number of transactions to 23,299 from the figure of 30,851 recorded in 2011 (-25%); 5,957 transactions were registered in the first quarter of 2013.

Number of Retail Transactions

0

10,000

20,000

30,000

40,000

50,000

60,000

2006 2007 2008 2009 2010 2011 2012 Q1 2013

N°o

f tr

ansa

ctio

ns

Source: Agenzia del Territorio

Consumer confidence improved significantly in June: retail sales have improved in Italy and, as a result, the downturn in the sector has slowed; however retailers remain cautious, awaiting initiatives aimed at increasing consumer spending (i.e. abolition or deferral of VAT increase).

Retailer demand for premises on high streets in the major cities and in shopping centres is unchanged since the previous quarter: demand remains stable for prime pitches and weak for units in off-centre locations. The high street sector remains highly active, particularly as a result of insufficient supply to meet current demand.


Two notable transactions were recorded in the first six months of the year: in the first quarter Fondo Crono purchased a property in Milan, with H&M and Vodafone as tenants, for EUR 67m from the Fiorucci family; in the second quarter of this year, the H&M Group purchased a property in one of Rome’s prime locations from Benetton, which it intends to use as one of its most important flagship stores in the capital (total purchase price was approx. EUR 180m).

In general, prime yields have remained steady since the start of the year.

Prime Retail Rents and Yields – June 2013

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

01,0002,0003,0004,0005,0006,0007,0008,000

Mila

n

Rom

e

Bol

ogna

Nap

les

Turin

Mila

n

Rom

e

Mila

n

Rom

e

High Street Shops Retail Parks Shopping Centres

Yields%€/

sq. m

p.a

.

Prime rents Prime yields(Q2 2013)

Prime yields(Q1 2013)


Residential MarketIn 2012, the residential market in Italy continued to suffer from the effects of high property taxation (i.e. IMU) and a reduction in bank lending: financing criteria imposed by Italian banks became much stricter, making it harder for people to gain access to new funding. By the end of 2012, residential mortgage lending by banks was EUR 19,600m, which was a reduction of 43% compared to 2011 (EUR 34,300m). As a result, the total number of transactions decreased to 448,364 by the end of 2012 (-26% compared to 2011), and in the first quarter of 2013, the total number of transactions reached only 94,503 (-14% compared to the first quarter of 2012).

Number of Residential Transactions

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

2007 2008 2009 2010 2011 2012 Q1 2013

N°o

f tr

ansa

ctio

ns

Source: Agenzia del Territorio The market continues to suffer from the discrepancy between demand and supply: in Q2 2013, the final negotiated purchase price was on average 15.7% below the initial asking price.

Average Discount to Initial Price Proposed by Sellers

9%

10%

11%

12%

13%

14%

15%

16%

17%

Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3 Q4 Q1 2012

Q2 Q3 Q4 Q1 2013

Q2

% d

isco

unt

Source: Agenzia del Territorio

Despite the downturn, the government is considering a number of structural initiatives to encourage recovery in the residential sector: some of these reforms include the abolition of property taxation on primary residences (IMU) and the use of “Cassa Depositi e Prestiti” (the Italian financial institution owned by the Ministry of the Economy and banking foundations) to purchase asset-backed securities issued by banks to release capital for the financing of new mortgages.

Italy



In Italy, most healthcare facilities are out-dated: only 9% of approx. 1,000 healthcare facilities recently surveyed were built over the past twenty years. These facilities are in urgent need of investment, particularly in view of the recent seismic events affecting the Abruzzo and Emilia Romagna regions.

As a result, Italian construction players are looking to design and construct state-of-the-art properties in order to provide modern healthcare facilities. Major construction groups are playing a significant role in the development of healthcare facilities and are even participating in project financing: an example of this was the construction of the Venice – Mestre hospital (contract value approx. EUR 238m), which was completed in 2007. A current major development project involves the construction of four hospitals in Tuscany. The construction company will be responsible for the funding, design, construction and management of the four hospitals, which will occupy a total area of 200,000 sq. m. The hospitals will offer a total of 1,710 beds, 52 operating theatres, 134 dialysis units and 106 paediatric beds. The term of the operating lease will be 22 years and 9 months.

Healthcare investments still account for a minor share of asset allocation by Italian real estate funds (1%). Such funds focus mainly on healthcare assets in northern Italy, which offer a return on investment of approx. 6%–7%. AUM breakdown of Italian RE funds (H2/2012)

Office55%

Retail14%

Other10%

Residential9%

Leisure & Tourism

5%

Industrial4%

Logistics2%

Healthcare1%


Main Italian RE Asset Managers investing in Healthcare Sector

Asset Manager Investments in Healthcare

(EUR m)

% of AUM

Beni Stabili Gestioni SGR 150 ~3%

Fabrica Immobiliare SGR 132 6.6%

Aedes BPM Real Estate SGR 96 14.9%

IDeA FIMIT SGR 44 0.5%

Finanziaria Internazionale Invest. SGR 35 4.2%

BNP Paribas REIM SGR 25 0.6%

Prelios SGR 23 0.6%

Castello SGR 20 2.4%

Mediolanum Gestione Fondi SGR 19 5.0%

Vegagest Immobiliare SGR 14 4.9%

Sorgente SGR 11 0.5%

Source: KPMG elaboration on Assogestioni data (H2/2012) and publicly available data

One of the main investors in the healthcare sector is Beni Stabili Gestioni SGR. In 2011, it launched its “Spazio Sanità” fund, which focuses on investments in healthcare facilities managed by the primary healthcare provider, the KOS Group (the KOS Group took over the management of the St James Institute of Oncology in Leeds and the Cancer Centre in Belfast City Hospital in August 2013).

Other players active in the sector include the “Socrate” and “Aristotele” funds (managed by Fabrica Immobiliare SGR) and “Investietico” fund (managed by Aedes BPM Real Estate SGR): 19% of the AUM of the Socrate fund is currently invested in healthcare assets, whilst the Aristotele fund is strongly focused on hospice (25% of AUM) and clinical facilities (27% of AUM).

The recovery of the healthcare sector in Italy will ultimately depend on the future plans for the healthcare spending of the regions: although the outlook remains uncertain, a number of property developments are underway in several regions in the country.

Italy


Spain

Stable, but far from recovery

Macroeconomic OverviewThe Spanish economy enjoyed two consecutive quarters of only relatively minor contraction in 2013 since the major downturn in the final months of 2012. Initial estimates suggest that the country’s Gross Domestic Product (GDP) will shrink by only 0.1%

This relative improvement in the GDP was due to the strength of net exports, comprising of goods and services.

Domestic demand softened the pattern of decline very slightly (-0.6% compared to -0.7% in the first quarter of the year), in a context in which the spending of households and businesses continued to be influenced by adverse financial conditions, the need to reduce debt and the direct and indirect effects of fiscal consolidation.

Economic Indicators

0%3% 6% 9% 12% 15% 18% 21% 24% 27% 30%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2010 2011 2012 2013F 2014F 2015F 2016F

Unem

ployment &

Inflation

GD

P g

row

th



There are now clear signs that the Spanish economy is beginning to recover in response to the restructuring of the financial system, these include a fall in the risk premium. September 2012 saw the end of 14 consecutive months of capital outflows. Exports have increased 2.5% y-o-y. International car manufacturing companies have chosen to remain in Spain, due to the flexibility of the labour market and tourism is re-invigorating the economy. Companies’ EPSs are stabilising and the fiscal deficit is reducing in response to the structural reforms.

Furthermore, forecasts for the next few months would suggest that Spain will emerge from recession in the third quarter of the year. The Secretary of State for the Economy expects the GDP to grow by between 0% and 0.2% in the third quarter of the year.

Although most analysts agree that there has been trend reversal in the Spanish economic cycle, the unemployment rate remains a major concern, as experience has shown that the GDP must grow by at least 1.0% in order to generate new jobs.

Economic Summary

Economic Indicators 2010 2011 2012 2013F 2014F

GDP growth -0.3% 0.4% -1.4% -1.7% -0.4%


Inflation (CPI) 2.0% 3.0% 2.4% 1.3% 0.8%


Office MarketDemand remains weak and continues to decrease in the major office markets in Spain, in particular Madrid and Barcelona; however, there is still an obvious trend of occupiers wishing to relocate to higher quality areas at affordable rents. Such occupiers are not only searching for better locations, they are also reconsidering their space requirements and are looking for smaller premises. As a result, office space in the smaller size categories in prime locations is in the highest demand in Madrid and Barcelona. Conversely, large rental units are lying vacant, which is putting landlords under pressure to reduce rents. The negotiating position will be weaker for large office tenants located in peripheral areas and smaller cities.


-11%

-9%

-7%

-5%

-3%

-1%

1%

0

50

100

150

200

250

300

350

Madrid(CBD)

Madrid (Decentralised)

Barcelona (CBD)

Barcelona (Decentralised)

€/s

q. m

p.a

.

CA

GR



The issues affecting commercial and residential buildings are identical (lack of credit, low demand, increasing supply of space). In the absence of signs of short-term economic improvement, demand for new office space will continue to weaken. This will continue to affect the project development pipeline in 2013 (-20%) and 2014 (-11%).


Spain

Prime Office Yields (Gross) – June 2013

5%

6%

7%

8%

9%

10%

Madrid (CBD)

Madrid (Decentralised)

Barcelona (CBD)

Barcelona (Decentralised)



Retail Market Prime yields in primary locations have been falling since 2008 due to a lack of suitable investment properties. Yields have also reduced in secondary retail locations, although to a lesser extent due to increased supply and higher risk profile. Investors are currently looking for prime shopping centres with value growth potential.

By the end of 2012, a total of 605,415 sq. m of new retail space was released onto the market. The new centres are performing well, although much of this can be explained by the novelty aspect. It is becoming evident that the success of a project depends on the carrying out of a comprehensive feasibility study, and on the quality of its location in terms of communication and access.

Conversely, in December 2012 the Consumer Confidence Index produced by the European Commission remained at a very low level, unchanged since August. This, in conjunction with the high unemployment rate, is affecting retail activity and putting downward pressure on rents; however, prime locations in major cities are less affected than secondary ones. As a result of the strong level of interest showed by major retailers (national and international), which are looking to significantly expand their presence, prime rents remain, to the most part, stable or have decreased only slightly.

Moreover, the extension of trading hours has been welcomed by consumers, who are now enjoying being able to shop at different times and especially on Sundays; however, this change has not yet been enforced everywhere. Retailers in shopping centres and high streets where it has been implemented have registered an increase in weekly sales of between 15% and 20%. Major chains favour this policy, as they firmly believe extended hours will incentivise consumer spending. Conversely, small and medium retailers are still questioning whether the rise in costs associated with employing additional staff or increasing current working hours will be sufficiently offset by the increase in sales.

Prime Retail Rents – June 2013

-12%

-9%

-6%

-3%

0%

3%

6%

0

700

1,400

2,100

2,800

3,500

Mad

rid

Bar

celo

na

Sev

ille

Bilb

ao

Val

enci

a

Mal

aga

Pal

ma

Zara

goza

Mad

rid

Bar

celo

na


CA

GR

% €

/sq.

m p

.a.



With no recovery expected in trading activity in the short-term, tenants are focusing on prime locations rather than secondary pitches. This is causing the gap between rents and yields in primary and secondary locations to widen, resulting in a two tier model. In line with previous years, the gap between prime and secondary shopping centres is widening in response to the economic uncertainty and difficulties in securing project financing.

Prime Retail Yields (Net) – June 2013

4%

5%

6%

7%

8%

Mad

rid

Bar

celo

na

Sev

ille

Bilb

ao

Val

enci

a

Mal

aga

Pal

ma

Zara

goza

Mad

rid

Bar

celo

na

Spa

in


Shopp- ing

Centres



Residential MarketResidential construction remains at a standstill as a result of the continuing falls in house prices, low number of transactions and difficulty in obtaining financing, although the outlook has changed slightly after the introduction of initiatives in the second half of 2012: residential taxes have been increased, a “bad-debt bank” has been created and new social housing policies have been introduced. The market has again reacted by slowing down housing construction, which is expected to see a further reduction of 17% in 2013. This will be the sixth consecutive year of downturn in the residential market.


The residential market continues to suffer from over-supply, with around 700,000 unsold newly-built properties (figures vary between different analysts). The location of these properties is of major relevance, as most are to be found in specific coastal areas in the south and east of the country. Conversely, prime locations in major cities have very little new housing stock. This, in combination with limited access to mortgages, has been continuously putting downward pressure on prices since 2008.

House Price % Change

-5%

-3%

-1%

1%

3%

5%

2006 2007 2008 2009 2010 2011 2012 2013

Q1 Q2 Q3 Q4

Source: Banco de Espana

The reanimation of the residential market will require both a general economic recovery (in particular, a fall in the unemployment rate) and a higher availability of finance for both developers and buyers.

House prices are expected to continue to fall throughout the rest of 2013 in response to the significant reduction in household income over the last 3 years (3.8% in 2012). This situation is not expected to improve in 2013 as wage levels continue to reduce.

Home ownership will continue to fall as a result of weak demand and the reduction in purchasing power. Market recovery will depend on a reduction in house prices and the rebalancing of house prices and household income.

Prices and Yields – June 2013

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

01,0002,0003,0004,0005,000

50sq. m sq. m sq. m sq. m sq. m sq. m sq. m sq. m sq. m sq. m sq. m sq. m

75 120 200 45 75 120 200 75 120 160 225

Barcelona-Apartments

Madrid-Centre Apartments

Madrid-Suburbs Apartments

Yields

Buy

ing

pric

e (€

/sq.

m)

Price to buy Yield %

Source: Global Property Guide


Spain


Although the healthcare real estate market in Spain is still at its infancy stage, recent government budget constraints have created a trend of outsourcing the construction and management of healthcare facilities, especially of large public hospitals. Key players in the market are major national infrastructure groups (many of them with specialized healthcare service branches) and some independent private operators and investors. In the case of private healthcare, there are very few facilities where core healthcare services are provided by the owner. Nonetheless, some major private healthcare groups have started to separate their real estate from their healthcare businesses, by applying recognised hospitality models.

The combining of tourism and healthcare in Spain opens up clear business opportunities for this type of property. A report by the Court of Auditors discusses the difference between the cost of providing healthcare to non-Spanish citizens in Spain and the cost paid for healthcare for its citizens travelling outside the country. In 2009, Spain paid EUR 441.1m for providing medical assistance to the citizens of 26 EU countries, Iceland, Liechtenstein, Norway and Switzerland, whilst it spent EUR 46.2m on healthcare provided to its citizens abroad. The main reason for this discrepancy is the country’s major role as a tourist destination and home for expats.

As a result of the severe economic crisis in Spain, a plan has been announced which will restrict the right of access to state-funded healthcare in order to ease the burden on state finances, with the intention of charging non-Spanish residents for their use of such services.

This control on spending by health authorities will open up opportunities for the private sector. Although the cost of such health services will become more expensive for foreigners, it will still be less expensive than the treatments offered in their own countries.

Consequently, the healthcare and tourism sectors have joined forces and are looking to make Spain an international centre for health tourism. By combining the infrastructure and experience of each sector, it could be possible to generate a turnover of EUR 500m in two years, compared to EUR 140m today.

Spain has a network of hospitals and high-quality healthcare facilities. It also has a long-established and acknowledged experience in tourism management. As a result, the two sectors have joined forces to attract patients to Spain’s medical facilities and therefore to increase the country’s profile in health tourism.

According to Turespaña, 21,898 tourists were attracted by the healthcare sector to Spain in 2012, spending EUR 12.1m. These tourists spent much more than conventional tourists and their lengths of stay were much longer. This is therefore a sector with very good potential for growth, which will have a clear impact upon the healthcare real estate market.


CEE

Growth prospects are better for CEE than EU averageMacroeconomic OverviewThe continued economic struggle in the Eurozone, the Central and Eastern European (CEE) region’s key export market, is slowing down the economic performance of countries in the CEE. The primary reasons for this are reductions in external demand and a lack of investment and bank financing.

Some CEE countries have made efforts to inject life into their economies by streamlining their monetary policies. For instance, the central banks of Hungary and Poland have cut base interest rates from 5.5% to 3.8% and from 4.0% to 2.5% respectively.

In addition, due to the increasing capital adequacy ratio of Western European banks, cross-border credit lines have reduced, resulting in a reduction in the flow of foreign direct investment into the CEE region.

Real GDP Growth Rate

2010 2011 2012 2013F 2014F 2015F

CRO -2.3% 0% -2.0% -0.3% 1.7% 2.0%

CZE 2.3% 1.8% -1.2% -0.7% 1.3% 2.5%

HUN 1.3% 1.6% -1.7% 0.4% 1.6% 2.2%

POL 3.9% 4.5% 2.0% 1.0% 2.3% 3.2%

ROM -0.9% 2.3% 0.7% 2.4% 3.0% 3.8%

SRB 1.0% 1.6% -1.7% 2.0% 3.0% 3.6%

SVK 4.4% 3.2% 2.0% 0.7% 2.3% 3.2%

SVN 1.1% 1.0% -2.2% -2.6% -0.2% 1.9%

BGR 0.2% 2.0% 0.8% 0.9% 2.5% 3.0%

Source: Economist Intelligence Unit, August 2013 F – forecast

There are major differences in economic growth in the region in 2013: for example, Romania and Serbia are achieving growth which is amongst the highest on the continent, of 2.4% and 2.0% respectively; whilst weaker performers include Slovenia (-2.6%), followed by the Czech Republic (-0.7%) and Croatia (-0.3%).

GDP Growth: Global Outlook

-1%

0%

1%

2%

3%

4%

5%

2010 2011 2012 2013F 2014F 2015F 2016F 2017F

Eastern Europe

Eurozone

EU28

World

Source: Economist Intelligence Unit, 5 September 2013 In this table East Europe includes Azerbaijan, Bulgaria, Croatia, Czech Republic, Estonia, Hungary,Kazakhstan, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine Note: growth figures for 2013-17 are forecasts by Economist Intelligence Unit. F – forecast

According to the Economist Intelligence Unit, the EU’s GDP is forecast to grow by 0.8% in 2014. After 2014, the figure is expected to pick up gradually, reaching 1.5% by 2016. Most recent forecasts predict that the CEE region will outperform the EU and the Eurozone in terms of GDP growth in the future; however, these signs are not yet reflected in real estate investment growth. InvestmentDespite the overall turmoil in the Eurozone, the CEE region recorded significant investment activity in Poland and the Czech Republic. More than 50 investment transactions totalling over EUR 1.6bn were concluded in the first six months of 2013, representing a 22% y-o-y increase compared to the same period in 2012.

Total Real Estate Investment Transactions in CEE 2009–2013

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2010 2011 2012 H1 2012

H1 2013

€ m

Bulgaria Croatia Czech Republic

Hungary Poland Romania

Slovakia

Source: CBRE, JLL


Similar to last year, Poland and the Czech Republic are the market leaders in the region, providing approx. 80% of the overall investment volume during the first half of 2013. By contrast, the rest of the CEE real estate market is still struggling to draw potential investors’ attention.

CEE Investment Market by Country, H1 2013

64%15%

11%

5% 5%0%

Poland

Czech Republic

Hungary

Slovakia

Romania

Others

Source: CBRE, JLL

In the second quarter of 2013, prime yields in the office and retail sectors remained stable, with minor adjustments registered in the Warsaw office and Bucharest retail markets. The highest yields can be found in Belgrade and Sofia, and the lowest in Warsaw and Prague. Indicative Yields and q-o-q Change, Q2 2013

Prime Office

Change Prime Retail

Change

Belgrade 9.50% 8.50%

Bratislava 7.25% 7.00%

Bucharest 8.25% 8.50%

Budapest 7.50% 7.00%

Prague 6.50% 6.25%

Sofia 9.00% 9.00%

Warsaw 6.15% 5.90%

Zagreb 8.30% 8.25%

Further improvements in the investment market will greatly depend on how the crisis in the Eurozone evolves, and on the cost and availability of debt financing. Office Market The economic uncertainty in the Eurozone, coupled with the relatively substantial volume of office space under construction, has improved the position of tenants in lease negotiations.

Despite the limited demand levels, a number of developments are expected to be delivered in the next 36 months, particularly in more well-established markets such as Warsaw and Prague, where around 450,000 sq. m and

225,000 sq. m of office space is under construction, respectively. Whilst Warsaw’s supply pipeline is substantiated by a relatively high pre-letting ratio of 45%, Prague’s supply pipeline is being driven by long-term speculative investments.

Office Supply and operational Vacancy Rate, Q2 20103

BelgradeBucharest

Zagreb

Sofia

Budapest

Warsaw

BratislavaPrague

5%

10%

15%

20%0.

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Vac

ancy

Rat

e

Office Stack + Active Pipeline / per Capita in sq. m

Source: CBRE, JLL

In the first six months of 2013, occupier demand remained moderate across the CEE, with the exception of Warsaw and Belgrade. New demand is being generated as a result of the requirement of tenants to make cost savings and consolidate premises at a lower rent.

Due to the weak demand, developers and investors have had to reduce rents in order to lease accommodation in some cities. Therefore, rents have decreased marginally in Bucharest and Bratislava, but in other cities remained largely stable compared to the first half of 2012. The highest rents can be found in Warsaw (EUR 27.00 per sq. m p.m.) and Prague (EUR 21.00 per sq. m p.m.), whilst the lowest can be found in Sofia (EUR 13.00 per sq. m p.m.). Prime Office Rents and Yields, Q2 2013

Belgrade

Bratislava

Bucharest

Budapest

Prague

Sofia

Warsaw

Zagreb

5%

6%

7%

8%

9%

10%

10 12 14 16 18 20 22 24 26 28

Prim

e yi

eld

€/sq. m p.m.Prime rent

Source: CBRE, JLL As an asset class, offices have remained interesting for global investors, which has resulted in a fall in the prime yield in Warsaw (6.15%). In more developed countries such as Germany and the UK, yields are primarily driven by the low returns offered by government bonds. In addition, the


CEE

announcement by the Federal Reserve of its plans to potentially cut financial support to the US economy has also led to a rise in bond yield levels. This has caused the gap between bonds and real estate yields to narrow.

Although occupiers remained cautious in the first six months of 2013, there are signs of an improvement in economic activity in the second half of the year. Retail Market The retail market is significantly dependent on the disposible incomes of households, which are currently being squeezed by the sustained high unemployment affecting the CEE region. Retailers’ demand for new space has therefore remained limited, with the exception of Poland where retail sales grew by 4.5% in the first quarter of this year compared to the same period in 2012.

As a result of this growth, investors are increasingly focusing their attention on Poland, especially in respect of major shopping centres and convenience-type stores. This shift in focus is also reflected in the retail pipeline, with a considerable 800,000 sq. m of retail space currently under construction in the country.

Outside Poland, retailers have turned towards smaller, downtown retail schemes such as the Tesco Express concept, which can be less capital-intensive. Prime Rents in Shopping Centres, H1 2013

0 20 40 60 80 100 120

Zagreb

Warsaw

Prague

Budapest

Bucharest

Bratislava

Belgrade

€/sq. m p.m.

Source: JLL Q2 2013 Note: Belgrade relates to Q1 2013 data

Prime Rents in High Streets, H1 2013

0 50 100 150 200

Zagreb

Warsaw

Prague

Budapest

Bucharest

Bratislava

Belgrade

€/sq. m p.m.

Source: JLL Q2 2013 Note: Belgrade relates to Q1 2013 data

According to CBRE, prime rents remained stable with the exception of Slovakia, where a slight downward pressure on rents was noted. Rental levels are the highest in Prague, both in terms of shopping centres and high street retail space, whereas the lowest average prime rent is registered in Zagreb.

Prime Yields, Q2 2013

8.50%

Bel

grad

e

Buc

hare

st

Zagr

eb

Bra

tisla

va

Bud

apes

t

Pra

gue

War

saw

8.50% 8.25%

7.00% 7.00%6.25%

5.90%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Source: CBRE

Yields are unchanged since last year, as investors remain risk-adverse. The only exception to this is Poland, where prime yields decreased by 10 bps y-o-y; in this case, the limited supply of prime shopping centers is intensifying competition, which constrains retailers to consider high street locations.

The outlook for the CEE is positive. According to the IMF, all CEE countries are expected to realise per capita GDP growth by 2017, which should provide the necessary impetus for an increase in retail activity.

On the other hand, online retail remains relatively unpopular in the CEE, accounting for only 3.5% of sales (compared to


10% in Germany and the UK). As the CEE market becomes more established, online trading may assume a greater share of the retail market. Residential MarketAfter the regime changes in the region in the early 1990s, the past five years have certainly been amongst the most challenging in the history of the housing investment markets in each country. However, as most housing markets in the CEE bottomed out by the end of 2012, developers are now actively resuming construction activity, although the recovery rates in each region vary significantly.

Demand is driven mainly by local first-time buyers focused on low to lower-middle end market segments, which is pulling down average price levels. This trend, coupled with restricted mortgage financing, has resulted in a shift in demand towards one/two-bedroom apartments with relatively small floor areas.

In order to adjust to these new demand patterns, developers have brought schemes to the market which reflect general requirements. Warsaw, where supply once again exceeded demand, stands out as developers have launched many housing projects since the “Developer Act” came into force.

Prices in the region have essentially stabilised; however, there has been a marginal decline in some CEE capital cities, such as Bucharest and Zargeb. Conversely, prices in Bratislava and in Prague have risen slightly, which is the result of the higher asking prices of new supply entering the market.

The outlook for the housing market very much depends on banks’ policies towards developers and buyers; however, major demand drivers (low supply of high-quality housing) present promising long-term prospects for the residential markets in the region.


Russia

Reaching a crossroads

Macroeconomic OverviewThe Russian economy performed well in 2012. The outflow of investment capital increased further in Q1, and then slowed in Q2 2013. Russian economic growth is expected to recover marginally in the second half of 2013, followed by accelerated growth in 2014. However, the Russian Ministry of Economic Development has revised down the expected growth rate from 3.6% to 2.4% for 2013.

The Russian economy is expected to recover by the end of 2013 and to grow in 2014, with domestic demand being the main driver behind this growth.

The Consumer Price Index (CPI) for 2013 showed a slow-down in August (0.1% compared to 0.8% in July), amounting to 4.5% since the beginning of the year and 6.4% on a y-o-y basis. Experts expect a further decrease in the CPI from its current level.

The marginal decline in economic growth in Q1 2013 was due to external and domestic factors, such as the sluggish Eurozone and a decrease in oil prices (USD 102.27 per barrel in May 2013, which is a fall of 6% y-o-y from USD 108.86, last seen in May 2012). These factors led to a reduction in exports and high inflation, which impacted on real wage growth and lowered consumers’ propensity to spend. However, recent economic indicators have been optimistic, with the manufacturing PMI index standing at 51.7 in June 2013, which is an increase since May. In addition, the MED forecasts an average oil price of USD 105 per barrel in 2013.

Economic Summary

Economic Indicators

2010 2011 2012 2013F 2014F

GDP growth 4.5% 4.3% 3.4% 2.2% 3.3%


Inflation (CPI) 6.8% 8.4% 5.1% 6.4% 5.5%


In August 2013, the Central Bank left the main rates unchanged. This decision was supported by a slow-down in inflation and by monetary policy. The base interest rate is currently 8.25%.

According to the Russian Ministry of Economic Development, growth in consumer prices is expected to remain at a moderate level of 5% to 6% y-o-y at the end of 2013.

Economic Indicators

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The total volume of investment in commercial real estate in Russia reached USD 2.0bn in Q1 2013, up 104% compared to Q1 2012. The annual figure in 2013 is expected to be around USD 7.5bn. During the first six months of 2013, investments were concentrated on the retail and office segments, which accounted for 57% and 37%, respectively.

The 2014 Winter Olympic Games and 2018 World Cup preparations are expected to generate a spike in overall construction growth in late 2013, 2017 and 2018, but, as this will dissipate after the Olympics and World Cup have ended, the industry may fall back on the resources sector to drive growth.

Office MarketThe Russian office market is expected to remain steady until the end of the year; however, it remains dependent on economic growth. The office stock is expected to grow by approx. 700,000 sq. m by the end of the year, with 75% to 90% of buildings scheduled to be delivered in 2013 now at the final stages of construction.

Construction activity remained moderate in Q2 2013. There were significantly fewer buildings completed than in similar quarters over the past nine years. By the end of the first half of 2013, there was 13.44m sq. m of high-quality office space in Moscow. Twenty new office buildings with a combined lettable area of 341,041 sq. m were released onto the market in the first months of this year. The majority of this space was commissioned in Q1 2013 (76% of volume commissioned). 80% of the new space is vacant and available on the market. The office market remained healthy in Q2 2013, with steady demand registered. Prime office rents across Moscow were unchanged at a level of USD 1,200 per sq. m p.a. The economic outlook remains positive and is expected to boost demand over the next quarter.


In 2013, investor interest is expected to remain concentrated on core assets in the Moscow office market.

The overall vacancy rate increased from 12.1% in Q1 to 13% in Q2 2013. The vacancy rate for prime office space in Moscow reached 17.6% in Q2 2013, compared to 16.4% in Q1 2013. Almost 60% of tenants were domestic companies.

Deals have been concluded at a uniform rate across Moscow, with all districts enjoying proportional success. A total of 1,427 transactions were recorded in 503 buildings over the course of the quarter.

A total of 868,063 sq. m of high-quality office space was leased or purchased in the first six months of 2013 (415,960 sq. m, and 431,059 sq. m in Q1 and Q2, respectively).

Whilst overall demand for office space has remained steady, a number of tenants are looking to renegotiate or consolidate their leases.

Tenants are primarily focused on premises which are ready for immediate occupation, i.e. completed and fully-fitted.

Major Deals in Office Segment H1 2013

Buyer Seller Price, USD m Object GBA, sq. m

Millhouse AFI Development, Snegiri 361 Four Winds Plaza 26,762

Kaspersky Lab O1 Properties 334 Olympia Park 45,128

Private investor Forum properties 248 Hermitage Plaza 26,400

Moscow government Metropol Group 92 AZLK Moskvich Bldgs 30,000

Central properties Wells REITII 68 Dvintsev Business Centre Tower B 13,471

Gazprom Adamant 64 Nevsky Prospect 58 8,019

O1 Properties VTB Bank JV TPG Capital JV AIG/Lincoln 1,014 White Square 74,000

AFI Development, Snegiri Super Passion Ltd 455 Aquamarine III 51,000 Source: KPMG analysis, Real Capital Analytics database

Continuing the previous trend, pre-lettings still account for only a small percentage of the total take-up.

Major Indicators of Moscow Office Real Estate Market

Yield Average rent USD/sq.m p.a.

Vacancy rate

Prime 8.5%–9.0% 1,200 8%

A Class 9.5%–10.0% 870 15%

B Class 10.5%–11.0% 500 10%

Source: KPMG analysis, CBRE, Cushman and Wakefield, Colliers Int., JLL

In Class A buildings, the average asking rent increased from USD 850 per sq. m p.a. in Q1 to USD 870 per sq. m p.a. in Q2 2013. Rents in Class B buildings and for prime office premises remained stable throughout the first six months of the year. It is worth noting that, even at this rate, Moscow rents are still 70% lower than the record levels registered in 2007.

Rental levels are expected to remain stable, as tenants continue to look for shorter-term lease contracts. Controlling costs is expected to be the primary consideration of those seeking to occupy premises, as they alter their strategies in alignment with the revised GDP growth figures.

Russia


The number of incentives offered to tenants by landlords increased and remain competitive. The biggest discount offered in the current rental market was 15%. A reduction in the size of the required deposits was noted in many business centres, as was an increase in contributions towards tenant improvements.

Moscow Office Market Dynamics, for classes A and B

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In response to current market conditions, the volume of completed developments in St. Petersburg is set to increase noticeably in 2013, with space actively under construction increasing by 150% from 111,000 sq. m in 2012 to 270,000 sq. m at the beginning of 2013. St. Petersburg has seen prime net effective rents reach their highest level since 2006, of USD 650 per sq. m p.a. In the event of positive economic growth, demand is likely to be strong in the year ahead, which will keep vacancies stable and maintain pressure on rents in both Moscow and St.

Petersburg. Moscow may see vacancy rates fall further, leading to more aggressive rental growth.

The regional office market in Russia continues to stagnate, as this segment is currently considered the least attractive for investment.

There are relatively attractive office markets in Samara, Kazan, Ufa, Yekaterinburg, Perm, Krasnodar, and Chelyabinsk, although prime rents in these locations rarely exceed USD 500 per sq. m p.a.

Retail Market The consumer market remains strong. Retail trade turnover between January and May 2013 increased by 11.4% in nominal terms compared to the same period in 2012. Even after adjusting for inflation, it shows strong growth of 4%. On this basis, retailers are continuing to positively evaluate the market and many continue to actively plan expansion. In addition, many retailers are moving into the Russian regions. Sportmaster, a Russian retail chain in the sports sector, has started opening stores in cities with populations of less than 100,000. Many international brands have also prepared plans for smaller cities. There are new retailers entering the market, and existing brands are testing new formats and marketing approaches.

Russian Retail Market Summary

Indicator Value

Vacancy rate 0.5%

Prime rental rate indicator, USD per sq. m 3,800

Total quality stock, Russia, m sq. m 16.05

Source: AEB Real estate monitor

Demand for retail space in Moscow remains high as retailers continue to expand. The focus in Russia has remained on well-established retail space in areas of high

Major Lease Deals in the Office Segment in H1 2013

Company Property Address Class Size, sq. m

Gazprom Varshavka-Sky Varshavskoe hw, 118 B+ 24,600

Tinkoff Credit Systems Mirland Khutorskaya 2nd str., 38a B+ 7,300

INLINE Technologies SkyLight Leningradsky ave., 39 A+ 5,000

Roszheldorproekt Chaika Plaza 4 Schepkina str., 42 B+ 3,500

Gazprom Neft BC at Letnikovskaya Letnikovskaya str., 10 B+ 2,600

ESK ARMZ Svaytogor BC Letnikovskaya str., 10 B+ 2,300

Nikon Delta Plaza Syromyatnicheskiy 2nd lane, 1 B+ 2,000

MasterCard Legend Tsvetnoy blvd, 2 A+ 1,700

Microsoft White Gardens Lesnaya str., 27 A+ 1,700

Source: KPMG analysis


footfall and with high levels of revenue. This resulted in double digit growth in prime rents in Q2 2013 in many high street locations in Moscow.

Prime Retail Rental Rates, March 2013

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In the first six months of 2013, rents remained stable in Moscow and other Russian regions, continuing the 2012 trend. In Moscow, the deficit in the supply of space in shopping centres caused interest in high street retail premises to increase, pushing up rents in this segment.

Quality Retail Contruction in Moscow, ’000 sq. m

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Source: KPMG analysis, Cushman and Wakefield, Colliers Int., JLL

In 2013, 103 high-quality retail premises are expected to open for business in Russia (shopping centres, outlets, retail parks), offering a total gross leasable area (GLA) of 3.2m sq. m. New high-quality retail projects are planned for delivery in 58 Russian cities: four high-quality shopping centres with a total GLA of 112,350 sq. m opened in the second quarter of the year. In St. Petersburg alone, over 52,300 sq. m of retail space was put into operation in the first six months of 2013, and more than 45 retail complexes with a total area of 1.53m sq. m are to be commissioned by the end of the year across the country.

Two of the biggest shopping centres opened in the first half of 2013, Indigo Life (39,750 sq. m) and Avenue

(31,500 sq. m), which are located in cities with populations of over 1m (Nizhny Novgorod and St. Petersburg).

Retailers with further Development Plans in Russia

Region City Newcomers 2013

Coming soon

Privolzhsky Beloretsk Gloria Jeans

Kazan Leroy Merlin

Naberezhnye Chelny

Leroy Merlin

Nizhny Novgorod Telemax

Orenburg Sbarro

Penza H&M

Ufa Decathlon

Sibirsky Angarks Detsky Mir

Krasnoyarsk Lenta

Novosibirsk Karusel Hamleys, Mamas&Papas

Nyagan New Yorker

Omsk Decathlon

Tyumen Auchan

Far East Vladivostok Metro Cash & Carry

Uralskiy Ekaterinburg Decathlon, Nespresso

Miass Karusel

Nizhny Tagil Lenta

Central Balashikha Lenta

Bryansk OBI, O'Key

Ivanovo Media Markt

Moscow Marukame

Tver Leroy Merlin

Southern Armavir Lenta

Volgograd Leroy Merlin

Sochi Louis Vuitton

Taganrog Lenta

The main driver for expansion is expected to be increasing private consumption; however, over the next decade, the growth rate is expected to be less than half of that recorded during the preceding decade. Households’ purchasing power is expected to be supported by the strength of the labour market, although the poor demographic profile of Russia will put pressure on the country to improve its long-term labour productivity. Over the short-term, prime rents will be pushed up by high demand from retailers for the prime shopping streets in Moscow; at the same time, yields are forecast to harden further.

The share in the supply of high-quality shopping centres in large cities (such as Moscow, St. Petersburg and cities with populations of over 1m) is expected to decline as the share

Russia


in demand for space in smaller cities, including cities in the Moscow region is expected to increase from 30% to 35% and by 4% to 7%, respectively.

Residential MarketThe Russian Ministry for Regional Development forecasts the commissioning of 65–68m sq. m of residential property across the country by the end of 2013. Between January and May 2013, around 17.5m sq. m of residential property was delivered in Russia, which is an approx. 10% increase compared to the same period in 2012. The Moscow region has traditionally contributed most to growth (1.8m sq. m), with regions such as Krasnodar and the Republic of Tatarstan adding an impressive 2.5m sq. m. The St. Petersburg residential market grew by more than 2.2m sq. m during this period.

The Moscow primary market remained the major driver for construction volume. Of the planned 3m sq. m, 1.2m sq. m have already been commissioned. In line with the city’s construction policy, the focus is shifting to low-rise building projects (which are expected to increase their market share up to 50%) starting from 2013.

Prices are marginally increasing following inflationary adjustments. The Russian price index for all resales rose by 3% after adjustment for inflation (10% nominal). The inflation-adjusted index for resale apartments fell by 0.9% and 1.7% in Moscow and St. Petersburg respectively. Average Price on the Secondary Market per sq. m

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Rostov Novosibirsk Russia (average)

Source: rosrealt.ru


Gross rental yields for apartments (if fully-rented) range from 3.1% to 4.5% in Moscow, whilst in St. Petersburg rental yields range from 4.25% to 6.1%.

The weighted average rate for mortgages in Moscow reached 12.7% at the end of January 2013, and the weighted average credit term for mortgages amounted to 14.5 years.

Overall, the long-term market outlook for Russia is positive, although the effects of the economic uncertainty in Europe were being felt in Russia in the first half of the year. The Russian construction market is expected to increase by 3% in 2013, according to the Euroconstruct forecast (in June 2013).

Average Moscow Residential Selling Prices, USD per sq. m

Source: RWay magazine


Most healthcare facilities in Russia were constructed during the Soviet period, and significant under-investment since then has caused them to fall into disrepair. Russia has a higher rate of hospital beds per 1,000 population compared to average world rate: in 2008, there were 9.86 beds per 1,000 population in Russia; whereas in 2007, this figure was 10.72 per 1,000 population. Most developed countries are now focusing on preventive care and ambulant medical treatment, whereas Russia still has no established polyclinic network, an area requiring substantial investment.

As of 2012, approx. 56% of hospitals and 30% of polyclinics require extensive modernisation. Many do not have central heating, hot or cold running water, and around 57% of the equipment is obsolete.

Since 2007, more than USD 5bn worth of fixed assets have been commissioned in healthcare each year, doubling the total value of fixed assets in healthcare in Russia between

2005 and 2011. However, this investment is still insufficient to maintain the quality of services to a proper level.

In 2009, the Russian government initiated reforms for the healthcare system and introduced a national healthcare programme with a total investment of more than RUB 600bn (the programme will be supported up to 2020). This has resulted in a greater emphasis on technology and better primary care, aiming to reduce the high mortality rate and increase the construction of specialised tertiary care centres.

The government has been working on developing international cooperation on healthcare issues by establishing new rules for the medical technology and equipment market and enhancing the role of information management in the healthcare sector. Legislation governing large-scale Russian healthcare reform was passed in 2012, increasing the planned volume of investments to


USD 15.1bn between 2011 and 2014. The reforms aim to improve spending efficiency and public access to medical services, to raise the salaries of medical staff, and to provide patients with medicines, food and modern diagnostic equipment.

At the end of 2011, there were approx. 58,000 healthcare facilities in Russia, of which around 33% were located in large cities with populations of over 1m.

According to the healthcare modernisation programme, 117 new medical facilities are to be constructed, whilst approx. 4,000 hospitals and polyclinics are to undergo extensive modernisation, with the aim of having one medical facility for 1,200–1,500 people. The official figure in 2012 was approx. one facility per 1,800 residents (the actual figure was estimated to be one per 4,000 residents).

As of 2012, around 15% of medical services were provided by private i.e. non state-owned institutions, whereas approx. 64% of the population used private healthcare institutes.

The Targeted Investment Programme for Moscow for 2013–2015 will include the construction of an additional 54 polyclinics, with 12 of these clinics being constructed in 2013. Some of the clinics are expected to be of modular construction, with equipment already installed. The modular clinics will be built quickly, but will cost one-and-a-half times more than standard buildings.

As investment in Russia’s healthcare infrastructure continues to increase, with many new-build projects planned and many other renovation projects underway, the Russian healthcare infrastructure market is set for massive growth. This will create opportunities not only for construction companies and architectural firms, but also for service providers such as organisations involved in the HVAC/MEP/Security/Landscaping/Hospital Equipment and Devices markets.

Private, and particularly foreign, investors are showing increasing interest in the Russian healthcare sector, including medical services and technology (not “just” hospitals/clinics). Due to the financial instability created during the financial crisis, there has been a squeeze in the debt market, which has resulted in falling leverage ratios; nevertheless, the return on equity is still at a relatively high rate of over 9% and the sector remains profitable and attractive for the private sector.

In many regions, there is a pipeline of projects in healthcare in which the private sector is participating. The public sector is also showing interest in the involvement of private investors in the provision of healthcare services.

Nevertheless, there are very few examples of PPP deals in healthcare in Russia due to the inflexibility of existing federal legislation “On Concession agreements” 115, and to the public healthcare system structure (which raises questions of demand and revenue forecasts).

Despite the existing problems affecting the structuring of PPP deals in Russia, there is a clear need and interest in the public and private sector working together to move forward the development of PPP projects in healthcare in Russia. We can see examples of the concession structure in the prenatal-center for the City of Kazan, the concession scheme used for Hospital 63 in Moscow and Avicenna clinics in Novosibirsk. There are also a number of other schemes evolving, which involve the cooperation of the public and private sectors. The PPP market in healthcare is beginning to develop and a number of projects are planned for release onto the market, in which international operating companies will be invited to participate. There are a number of PPP projects under discussion and at the development stage in St. Petersburg, which is considered to be the most developed regions in terms of PPP. The city has its own PPP legislation that opens doors for the private sector, suggesting flexibility in PPP contracts and structures.


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european real snapshot / autumn 2013

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