reimv 230410 at a glance q2 april 2010

8/9/2019 Reimv 230410 at a Glance Q2 April 2010

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At a Glance

AXA Real Estates European Quarterly Overview

QUARTER 2 April 2010

Editorial p.3

Macro economic overview p.5

Office occupational markets p.9

Retail occupational markets p.11

Industrial occupational markets p.13

Investment markets p.15


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At a GlanceQUARTER 2- APRIL 2010


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A t a G l a n c e

This quarterly publication provides our clients with an overview

and analysis of recent activity and changes in the European

economies and in the occupational and investment property

markets

The eurozone (EA16) comprises Belgium, Germany,Ireland, Greece, Spain, France, Italy, Cyprus,Luxembourg, Malta, the Netherlands, Austria,Portugal, Slovenia, Slovakia and Finland.The EU27 encompasses Belgium, Bulgaria, the CzechRepublic, Denmark, Germany, Estonia, Ireland,Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania,Luxembourg, Hungary, Malta, the Netherlands,Austria, Poland, Portugal, Romania, Slovenia,Slovakia, Finland, Sweden and the United Kingdom.

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Edi tor ia l

Even if the real estate market is not very efficient at

quantifying risk, it knows it when it sees it. Hence

the rises in official interest rates of 2007 were met

with a massive withdrawal of investor demand. In

the event, what started as a perceived risk to capital values from

an increase in the cost of debt finance ended as an increased

risk from higher of equity finance costs altogether more difficult

to anticipate.

That risk peaked in late 2008, but it only peaked because

western governments took costly, but decisive, action by

financing economic stimuli packages. One of the most common

was the new car subsidy (or, as it was euphemistically dubbed in

an attempt to give it greener credentials, the car scrappage

scheme). There has been criticism that such schemes merely

brought forward purchases that would have occurred in due

course anyway. But that rather misses the point they were a

significant contributor to avoid the recessions turning into

something worse.

The gradual withdrawal of the various stimuli packages in the

current economic environment and their consequent fiscal costs

is having a polarising effect on the European real estate markets.

At one end of the yield spectrum the low yield end the risks

are reducing. The risks at this end primarily relate to rising

inflation and increases in central banks interest rates. As time

passes, the markets expectations of the start of interest rate

rises has shifted from 2009, to 2010, and now into 2011.

- 3 -


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- 4 -

With higher taxes doing that job of fighting inflation that interest

rates had almost exclusively done in the last decade, there are

valid reasons for questioning1 whether there will be a need for

higher rates for many years.

But, at the other end of the yield spectrum, those assets with

short unexpired leases, voids, poor locations, etc., all require

economic growth to return so as to breathe life into tenant

demand. Instead, growth appears to be faltering, with short-term

expectations becoming more pessimistic. While the markets

need to be circumspect about this volatility in growth is an

inevitable factor of a recovery and does not necessarily portend a

double-dip recession it does increase the risk premium for this

type of property.

The secondary property risk premium had already been rising to

reflect the fact that a post-boom expansion was necessary in the

yield spread between prime and secondary property, but that gapnow needs to widen by an exceptional amount, perhaps to an

historic high, to accurately price in the exceptionally slow rate of

this economic recovery.

By refusing to transact on the current offerings at the secondary

end of the market, the real estate market acknowledges that a

further price correction is necessary. The problem it has,

however, is that it is not very good at quantifying risk so that itfinds it difficult to assess the fair value of such assets. That is a

problem that was all too evident in the Examiners report on

Lehmans and one that market players will need to address

soon.

1In a Reuters poll of early March 2010, only about of a quarter of the economists polled, 22 of 82, still see interest rates rising this year --

down from about 40%, or 29 of 71 previously. Source: Forexyard.com, 31 March 2010.


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Macro economic overv iew

GrowthExh ib i t 1The fourth quarter of 2009, which was generally expected

to show a continuation of growth in the third quarter,

instead disappointed with a marginal 0.1% rise in GDP in

the EU27 and 0%2

in the eurozone. Compared to even

the pre-recession quarters, government spending was

exceptionally low (in part, reflecting the partial phasing out

of stimuli packages, such as the car scrappage schemes),

but without it being replaced by real (as opposed to

artificially-induced) growth in consumer spending (which

represents 60% to 75% of GDP in most western

economies).

EU-27 quarterly GDP components

-3

-2

-1

0

1

2

Q1200

7

Q2200

7

Q3200

7

Q4200

7

Q1200

8

Q2200

8

Q3200

8

Q4200

8

Q1200

9

Q2200

9

Q3200

9

Q4200

9

Source : Datastream

Note: seasonally adjusted, constant prices

% QoQ

Change in inventories

Net ExportsHousehold consumptionGovernment expenditureCapital expenditure

GDP

This has raised concerns that the recovery may be stalling

or, worse, that it could develop into a double-dip

recession. We believe that either of those scenarios,

while possible, is unlikely, partly because government

stimuli programmes are continuing through 2010, and

partly because other economic indicators continue to

show a trend rate of improvement. Quarter-on-quarter

volatility in GDP should not surprise, even in a recovery

phase, and even if it occasionally lapses into a quarter-on-

quarter fall.

International trade, having fallen badly during the

recession, is staging a recovery and that is benefiting, in

particular, port operations and is helping to support logistic

activities, which have suffered badly over the recession.

For the EU27, imports and exports are still both 13%3

below their peaks of Q1 2008 but, at their current trend

rate of growth (2% per quarter), should recover to that

previous level by about Q2 2011.

Although it is early days, the

current nature of the recovery

is favouring logistics operations over

production or consumption

activitiesIn contrast, although the EU27 general economies have

only shrunk by 5% from their peak in Q1 2008, they are

likely to require a considerably longer time to recover to

that earlier point particularly as growth over the next few

years will typically be below the historic growth rate.

Exhibit 2 shows how many quarters of growth have been

lost through the recession for a range of countries,

2Eurostat, second estimate, 7 April 2010

3Datastream

- 5 -


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Macro economic overview (ctd.)

Exh ib i t 2

- 6 -

Exh ib i t 3

Gross Domestic Product growth

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

EA16

EU27

Belgium

Denmark

Germany

Spain

France

Italy

Netherlands**

Finland

Sweden

United

Kingdom

Norway

Switzerland

Source : Datastream

% quarter-on-

quarter

2009 Q3 2009 Q4

Irelands rapidly reducing risk is

an emerging opportunity for

investors

with the numbers on the bars indicating the respective

years to which the sizes of the economies have reverted.

The European average figures do, however, conceal a

wide variation in the growth rates of the individual

European countries, as Exhibit 2 shows, ranging from a

consistently strong performance from Switzerland in the

third and fourth quarters of 2009, with an apparent

deteriorating performance from Sweden. Of the main

markets, the biggest concerns are in respect of Germany,

where the fourth quarter outcome surprised on the

downside, while France is looking particularly resilient.

The UK, while initially lagging, is now catching up andpossibly overtaking the other major European economies.

Source: AXA Real Estate Research and Strategy

Lost GDP output - number of quarters

0 5 10 15 20 25 30

Italy 2003

Japan 2005

Germany 2006

UK 2005

Spain 2006

France 2006

US 2007

National debt

For almost all western economies, high levels of national

debt are the result of government stimuli expenditure, and

although these are still increasing, at some point they

need to be stabilised (and, in some cases, significantly

reduced). The first step is to control the budget deficit,

and this typically translates into increased taxes and/or

lower government expenditure and lower economicgrowth. For European countries outside the eurozone,

currency devaluation can also take part of the strain. The

size of these deficits and the respective countries ability

to deal with them will be determining factors in growth

prospects over the next few years.

Hungary, the subject of an IMF bail-out, has a target 3.8%

(of GDP) deficit for 2010, but the OECD is already

warning4

that it might breach this at 4.1%. But, currently,

the biggest concern is the eurozone country of Greece.

Its estimated5

budget deficit is 12.7% for 2010, and itsimmediate need for finance to meet bond redemptions

(which will need to be refinanced at a 300bp+ premium to

the benchmark German bonds) has embroiled it in the

politics of the eurozone. A full solution is still to be found

4OECD, estimated 18 December 2009 and published 11

February 20105OECD


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- 7 -


and, until it is, other countries, such as Italy and Spain

are increasingly seen as being at risk. The marketsexpectations have now shifted to contemplate the

prospect of a partial default, although that would have

a devastating effect on the euro and might trigger

unforeseen events.

In contrast, Ireland (AA-rating6, Standard and Poors),

with a budget deficit estimated at 11.8% for 2010, is

taking decisive action to bring its deficit under control,

including implementing public sector pay controls. As

a result, Irish bonds outperformed most of the rest of

Europes in the first quarter of 2010. Unfortunately, at

the time of writing, concerns over Greece have even

spilled over to Ireland. Nevertheless, the risks for

Ireland are reducing and this is a clear signal for

investors to reassess the prospects for the country.

The UKs deficit, at an estimated 11.7% for 2010, can

at least be mitigated by its ability to devalue it currency.

That provides the flexibility to allow a longer period to

reduce its deficit and to permit higher economic

growth in the meantime.

Inflation

As expected, inflation, after having reached a trough of

0.2% (EU27, annual) and -0.7% (eurozone, annual

deflation) in July 2009, has been rising again to

1.7% (EU27) in January 2010 and 1.5% in February

(eurozone). Although the latter was above

expectations7, the ECB appears fairly sanguine about

the elevated rate, believing8

that much of the rise is

temporary. While there are short term risks of yet

higher inflation the monthly rates of inflation for

low

reases were in March, to 5.75% and

.5% respectively.

e

tonia,

%,

d

Germany both produced growth of 0.3%, while the UKs

6Cut from AA+ in June 2009; originally, it was AAA

7That is the fastest inflation since December 2008 and topped

the median forecast of 1.1% in a Bloomberg survey of 36economists. Source: Bloomberg 31 March 2010.8

Statement of Jean-Claude Trichet, President of the ECB, andLucas Papademos, Vice President of the ECB on 8 April 2010,Taking into account all the information and analyses that havebecome available since our meeting on 4 March 2010, pricedevelopments are expected to remain moderate over thepolicy-relevant horizon.

February was 0.3% over the month alone, we do not

believe that the low economic growth is conducive tohigher inflation and, certainly, there is little indication from

the bond markets that inflation expectations are rising.

Interest rates

The European Central Bank, the Bank of England, and the

Swiss National Bank have respectively maintained their

official rates at 1%, 0.5%, and 0.25% unchanged now

for about a year. Increasingly, expectations9

are that

there will be no rises for another year which would

provide an exceptionally long period of historically

rates.

In contrast, Hungary and Iceland have been raising their

rates the latest inc

9

Retail sales

Retail sales fell by 0.2% over the quarter to January 2010,

compared with the previous quarter in both the eurozon

and EU27. The Nordics produced mixed results, with

Sweden and Finland experiencing sales growth of 0.8%

and 0.6%, while Denmarks sales fell by 1.5%, the largestfall in western Europe. Bulgaria, Czech Republic, Es

Latvia, Lithuania, Hungary, Poland, and Slovakia all

produced exceptionally large falls10

of 2.3%, 0.5%, 1.3

3.3%, 7.7%, 2.1%, 0.5%, and 1.1%, respectively, while

Slovenia produced growth of 3.0%. These would appear

to be delayed economic responses in central Europe, and

indicate that caution should be exercised in respect of the

retail sectors in these countries. In contrast11

, France an

9In a Reuters poll of early March 2010, only about of a quarter of

the economists polled, 22 of 82, still see rates rising this year --down from about 40%, or 29 of 71. Source: Forexyard.com, 31March 2010.10Due the unavailability of data, the quarter to December has

been compared with the quarter to September for the CzechRepublic, and Hungary11Due the unavailability of data, the quarter to December has

been compared with the quarter to September for France and UK


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Exh ib i t 4

- 8 -

Euro 27 - Employment

-3

-2

-1

0

1

2

3

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Source : Datastream

Note: seasonally adjusted

% change overquarter

Construction Finance and Real Estate Industry (Excl . Construction)

It is therefore likely that the

numbers of office-based

workers will stabilise and start to

increase soon, in contrast to those

in the manufacturing sector,

which will lag

growth was of 0.4%. However, other economic indicators

suggest that these rates of growth have not beenmaintained in the first quarter of 2010.

Employment and unemployment

The perception that this is a jobless recovery continues to

be borne out by the figures12

. Unemployment in the

eurozone hit a record13

10% in February, with the EU27,

at 9.6%. While the rate of increase of unemployment is,

decelerating, it is not expected to stabilise until later this

year. Even then, government policies and employment

law in Europe have encouraged hoarding of labour (e.g.

the part-time working subsidy in Germany) and this willdelay employment growth.

As shown in the employmentchart of Exhibit 4, the

manufacturing and construction sectors have suffered the

greatest in the downturn, and although the number of

workers in these two sectors continued to fall in the fourth

quarter, stability appears to have just been achieved in the

financial and real estate sectors. In employment terms,

this is looking initially much more like an office-led

recovery than a manufacturing-led recovery, which will

have implications for space requirements in those two realestate sectors.

12Eurostat, 15 March 2010, Employment fell by 0.2% in the

eurozone and by 0.3% in the EU27 in the fourth quartercompared with the third quarter 200913From the date of the creation of the Euro, in 1999


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Of f ice occ upat iona l marke ts

In some markets, tenant

demand is starting to absorb

much of the better-quality

space

- 9 -

Exh ib i t 5

European office rental value growth

-30

-20

-10

0

10

20

30

40

50

Ma

r-05

Jun-05

Sep-05

Dec-05

Ma

r-06

Jun-06

Sep-06

Dec-06

Ma

r-07

Jun-07

Sep-07

Dec-07

Ma

r-08

Jun-08

Sep-08

Dec-08

Ma

r-09

Jun-09

Sep-09

Dec-09

Ma

r-10

Source : DTZ, IPD, Experian, AXA Real Estate Research (Austria and Portugal)

% y-o-y

CEE Western Europe Nordics

Southern Europe UK & Ireland

Exh ib i t 6

Office development completions

0

1

2

3

Q1-2006

Q2-2006

Q3-2006

Q4-2006

Q1-2007

Q2-2007

Q3-2007

Q4-2007

Q1-2008

Q2-2008

Q3-2008

Q4-2008

Q1-2009

Q2-2009

Q3-2009

Q4-2009

Q1-2010

Source: DTZ

m sq m

DemandThe most significant letting activity continues to involve

occupiers taking advantage of the availability of

modern/new space in core city/CBD locations (or where

such large-volume space is not available, in peripheral

locations) to consolidate and improve their business

operations. In some markets, this is starting to absorb

much of the available better-quality space and is limiting

tenant choice in London, and to an extent in Warsaw, Oslo,

and Copenhagen. Occupiers are still, however, price

sensitive and depressed rental values (and landlords

willingness to offer incentives) are still the pre-requisitestimulants for tenant relocations.

Again, we would emphasise that this growing restriction in

supply is limited to only a few markets. As Exhibit 5

shows, rental values are still falling in all sub-regions, and

it is only the index for UK and Ireland (really UK only) that

is approaching a point indicating that rental values have

stabilised. Indeed, on a Pan-European basis, worryingly,

there is still an almost record number of office

developments completing (as can be seen in Exhibit 6).

Many of these will be in the wrong locations to satisfytenant demand and that will add to the differences

between markets and sub-markets.

The rent indices in Exhibit 5 refer to headline rents and,

over the last couple of years, the incentives, or rent-free

periods, offered on new leases have been rising. With

poor transparency in most markets, it is difficult to quantify

these, but we believe that they have now generally

stabilised. Both landlords and tenants treat this as a

capital payment and, with the availability of finance being

generally restricted, it is generally valued accordingly.

Even where there is tenant demand, letting negotiations

tend to be prolonged despite the pressure on some

landlords to reduce their vacancy rates and improve their

income. In many cases, the obstacle to the letting

progressing is the landlords decision to wait in the hope


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- 1 0 -

The office occupational markets (ctd.)

of a better offer rather than accept the current one.

Very often this turns on a policy decision in the

knowledge that accepting a lower rent can have

ramifications for other properties in the landlords

ownership, and a change in a landlords policy can

occasionally be observed when announcements are

made of a sequence of new lettings.

Rental values

Such scenarios can vary between markets and,

generally, those markets that have seen the fastest

and most severe falls are likely to be those that see

the earliest turning points. An example of that is

London, where prime rental values in the City market

stabilised towards the end of 2009 and, in the first

quarter of 2010, are showing signs of rising. In Spain,

one of the worst hit markets was Barcelona, but a

comment14

in the RICS Global Commercial Property

Survey suggests that it ...is already showing some

signs of improvement that will have to be confirmed

over the next quarters to really establish that the

crisis is over in the investment market. That might

be slightly premature, considering that further falls inthe Spanish market were expected by the survey

respondents in the first quarter of 2010.

According to CBRE, prime European rental values15

rose by 1.1% over the first quarter of 2010, although

this is attributable in rises in only two countries

(excluding Israel) UK and France, with the biggest

rises in London City (9%) and Lyon (7%). While the

former can be attributed in large part to the low level

that rents dropped from their peak (-29% to end of Q1

for London City), the same cannot be argued for Lyon

(-2% to end Q1). Overall in Europe, of the 55 rent

points being measured, falls were recorded in 9, rises

in 5, and stability in the 41 majority.

14Q4 2009, data assembled at the end of 2009/beginning of

2010, quote attributable to Nicholas Wride MRICS,CB Richard Ellis15CB Richard Ellis MarketView EMEA Rents and Yields, Q1

2010 V1, EU15 countries

While there is a significant difference between demand for

grade A space and average space, and that explains the

large difference in their respective rental value movements,

the credibility of rental value indices therefore continues to

be called into question, particularly when there is so much

anecdotal evidence suggesting that tenants who exercise

their break causes or terminate their leases are offered

substantial, discounts on the market rental value to entice

them to stay.

Although the financial sector represents a minority of

occupation in most markets, it also supports other business

activities and, therefore, it can be a benchmark for thehealth of many cities. Currently, its varying responsiveness

to the recovery in different markets represents a factor that

is, and will, differentiate the performance of these markets.

A recent report16

on the Swiss market indicated that the

number of job advertisements had been increasing since

June 2009, and a survey at the beginning of April showed

that the number of jobs on offer was a third higher than the

middle of last year. In the UK, a report17

on job vacancies

in the City of London indicates that they have risen by

120%, to 11,000 in the first quarter of 2010 compared to ayear ago. The report forecasts that the City will create

53,000 vacancies (equating to a demand of 640,000 sq ft)

this year. The pick-up has started in investment banking,

and is now spreading to commercial banking and traditional

fund management.

16Source: Swisster, 7 April 2010, Recruiters see upswing in

financial sector jobs17Financial Times, 13 April City sees job vacancies jump 120%


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Reta i l occ upat iona l marke ts

The retail indices are

catching up with reality

- 1 1 -

The categorisation of prime

locations can change

without apparently affecting

the figures

In contrast to the office markets. CBRE reports18

that, onaverage in Europe, prime retail rental values were virtually

static in the first quarter of 2010, with a small rise (0.3%)

recorded over the 12-month period. The largest quarterly

falls were recorded in Sofia, Bulgaria (-10%), Athens,

Greece (-12%), Dublin, Ireland (-13%), Oporto, Portugal (-

13%), Bucharest (-19%), Belgrade (Serbia), and City of

London (-13%). With one or two locational exceptions, the

core markets of France, Germany and UK are showing no

change.

With agents having previously been much more defensiveabout retail rental values, generally showing rises until

early 2009 and subsequent stability, we believe that there

is now much more realism in the acknowledgement of

individual market downward movements although we

also believe that the indices have been lagging reality in

other markets.

Part of the problem is that these indices purport to

measure prime locations. But, in the recession, prime has

been a shrinking category but that is something that is

not picked up by the indices which, in effect, may only be

measuring one or two units in a city. If the indices were to

measure a fixed definition of prime, we would see that the

average of the rental values in those locations has been

falling, even as the most prime locations stayed relative

static.

It is a characteristic of recessions and their recoveries that

retail trade becomes concentrated in the prime locations.

Retailers in such locations clearly find that the additional

rental values required are more than compensated by the

additional turnover. That is very much a cyclical factor,

which will tend to re-adjust towards the original as growth

continues. However, where these retail locations lose

their critical mass, recovery will prove very difficult and,

more likely, impossible. Thus, each cycle concentrates

retailing locations into fewer centres.

18CB Richard Ellis MarketView EMEA Rents and Yields, Q1 2010

V1, EU15 countries. We have excluded non-European countriesfrom our analysis


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The retail occupational markets (ctd.)

Demand really is focussed

ontwo or three main

shopping streets in London West

End and Paris, and the single

main shopping streets in the

larger German cities

- 1 2 -

There is also the issue o

format obsolescence

f

But this means that we need to be cautious about

extrapolating the prime retailer demand too widely it

really is focussed on the two or three main shopping

streets in London West End and Paris, and the single main

shopping streets in the larger German cities. Although

there is evidence of falling voids in the prime pitches in

Spanish cities, there is, as yet, no evidence that rental

values have stabilised.

Those markets that have experienced net additions to the

retail stock in 2009 are likely to be experiencing a short-

term over-supply: Lisbon (9.4%), Athens (4.6%), Lyon

(3.7%), and Barcelona (2.6%). Although someinternational retailers are taking advantage of stock

availability to expand, retailers are generally cautious about

taking additional space. In most markets, the retailer

failures rate is still increasing although, in the UK, it

appears to have peaked, albeit at a higher level than in

other markets.

But there is also the issue of format obsolescence. That is

not evident in unit shops, because they usually have

universal utility i.e. they can be adapted to different

occupiers requirements and, therefore, have theadvantage of adaptability to meet changing customer

demands. But in more specialist retail unit types, such

adaptability may not be available.

Two current examples are (a) the department store format

in Germany as evidenced by the Karstadt 120 unit

department store insolvency for which there are a very

limited range of trade buyers and (b) the hypermarket

format in France and, to a large extent, in southern Europe

where the non-food part has suffered from competition,

and the food part is often over-sized for the reducedcatchment areas that market saturation has produced.

While such obsolescence is part of the retail evolution,

recessions tend to accelerate the process. While

adaptation of some of these formats is possible, it not

always be financially viable without accept a large write-

down on the existing values.


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I ndus t r ia l occupat iona l marke t s

Exh ib i t 7

- 1 3 -

European prime industrial rental value growth

-10

-5

0

5

10

15

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Source : DTZ, IPD, Experian, AXA Real Estate Research (Austria and Portugal)

% y-o-y CEEWestern Europe

Nordics

Southern Europe

UK & Ireland

Europe

Prologis is cautious over nettenant demand and short-term

rental declines

Towards the end of last year, the rate of fall of prime rentalvalues of European industrial (including logistics) property

appeared to stabilise. In the Nordics and the UK, the rate

of fall is indicated to have reduced, although there is some

evidence that rental values may be starting to increase,

particularly in the latter market.

Again, it is important to emphasise that this data applies to

prime property. The rental values of average or

secondary property is still lagging.

One of the developer/investors in this specialist market is

Segro which, in its December year-end19 annual report

and accounts, singles out logistics property for a particular

warning, ...with substantial amounts of industrial vacancy,

particularly amongst the larger logistics warehouses, it is

likely to be some time before we see overall demand for

space outstripping supply. Whilst industrial rents have

remained relatively resilient to date, we expect to see

modest falls continuing across most of the UK and Europe

in the first part of 2010.

But the biggest European logistics player is Prologis, both

as a developer and as an investor through its quoted (but

illiquid) fund. At its year-end announcement in February20

,

the latter commented, However, we remain cautious over

net occupier demand and short-term rental declines.

The CBRE estimation of rental value growth in the sector

is 0.2% over the first quarter of 2010 for prime logistics

property. Despite the (mild) positiveness of the overall

figure, the only market in which positive growth was

identified was Rotterdam, Netherlands (4%). Over 2009,

CBRE has recorded a fall in European rental values of

4.7%, although that contrasts with the fall in Prologissopen market value per square metre of its like-for-like

portfolio of 13.4%, with continental European countries

19Segro, a UK-based industrial property company, but with 28%

of its portfolio outside the UK. 19% of its portfolio is in logisticsproperty20Source: Prologis, 11 February 2010 fund announcement


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The industrial occupational markets (ctd.)

Prologiss (prime)

European portfolio yield is

9.1% or, adjusting for

over-renting, 8.3%

- 1 4 -

The European unweighted

recording market rent valuation decreases of between

12.3% and 18.9%. While the UK was down 5.2% in 2009,

this was net of a surprising recovery of 5.5% in the second

half of the year.

Overall, Prologiss portfolio yielded 9.11% (or 9.6% if the

3.9% void is let) at the end of 2009, but it is over-rented to

8.6%. Adjusting for-rentedness, by assuming a reversion

to the December rental values produces a gross yield of

8.3%, 0.5% points higher than CBREs figure.

We believe that little, if any, speculative developments are

still completing in this sub-sector and those that beingdeveloped are built to order for specific tenant

requirements. To an extent, that will detract from their

universality of utility (which should, theoretically, also

detract from their capitalisation yields) and will have the

effect of increasing obsolescence in the earlier generations

stock.

The rents for those under construction are, therefore, more

correlated to construction costs and (depressed) land

values, with minimal (but positive) developers profits. The

solution for vacated stock, assuming that it is appropriately

located which usually means being close to consumer

markets (where there is a substantial land value

component) is refurbishment or, in some case,

redevelopment.

average void rate is 15%

All of this is contributing to the voids in logistics property,

which are high for the main European centres, it is an

unweighted rate of 15%21

. The highest vacancies are in

the UK Birmingham (38%) and Manchester (37%), which

explains why the incentives on offer in the UK are higher

than those in continental Europe. But voids are also high

in other peripheral locations, such as Dublin (21%),

Budapest (20%), and Prague (17%). Voids are still

trending upwards in France and Spain, but are typically

stabilising elsewhere.

21Source: PMA, Spring 2010


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I nves tmen t marke t s

Exh ib i t 8

- 1 5 -

European quarterly transaction volumes

0

5

10

15

20

Ma

r-09

Jun-09

Sep-09

Dec-09

Ma

r-10

Source: DTZ ITD

EURbn

United Kingdom France

Germany Rest of Europe

Spain

Quarterly volatility is inevitable,

but we believe that the fall in thefirst quarter is indicative of r

investor nervousness

aised

Transactions

The first quarter of 2010 produced a slight set-back in the

upward trend of transactions volumes from the low point of

the first quarter of 2009. While volatility in quarterly

numbers is, to some extent, inevitable and not necessarily

significant, we believe that the 17% fall (quarter on

quarter) is at least partially a reflection of raised

nervousness in the markets.

Spain experienced the greatest rise in percentage terms,

from EUR0.3bn in Q4 2009 to EUR0.9bn in Q1 2010,

although was really due to Q4 being exceptionally low.

More significant was the 53% rise in transaction volumes

in Germany, the 31% fall in UK, and 53% fall in France.

Although the Corio transaction (described below) skewed

the figure for Germany, there is a shift of interest to other

markets from UK and France.

The largest transactions (in capital value terms) over the

first quarter included:

Corio acquired, from Multi Corporation, a portfolio of

four shopping centres in Germany, Spain and Portugal

for EUR662m, a net initial yield of 6.7%, and acommitment to five German development projects

(forward sales and joint ventures, subject to some

rental guarantees) which were stated as having a total

development expenditure of approximately EUR660m.

A residential portfolio, comprising 4,700 apartments in

western Germany was sold by BGP to Swiss-based

Corestate Capital for an undisclosed sum, but we

believe is likely to be nil equity, subject to the

purchaser assuming EUR150m of outstanding debt.

The office building at 103 Champs-Elysees and 15

Rue Vernet, Paris, was eventually sold by HSBC

France (it was originally marketed in April 2009) as a

sale-and-leaseback (nine years, with breaks at four,

five, and six) to French Properties Management (an

OPCI vehicle), for EUR400m. Given that the building

was acquired by HSBC as part of a corporate

acquisition, its commitment as a tenant is not obvious


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- 1 6 -

Investment markets (ctd.)

(and its imposed break clauses is likely to be

signalling something), but the location is good.

Of the largest 10 purchasers (representing EUR15bn)

in the last2212 months, 37% were German institutions

and 24% US fund managers. This confirms the

recorded activity of the former, but also indicates the

large tactical plays by the US fund managers. In

contrast, the sellers included a substantial number of

listed property companies and unlisted fund managers,

both of which had a need to raise capital to improve the

quality of their balance sheets.

Demand and supply

Demand is still concentrated on the prime end of core

markets and, for offices, this has spread from London

and Paris to cities like Munich and Hamburg, although

Berlin has been a particularly active market for

domestic players. Demand for retail properties is, in

geographic terms, more widely spread across Europe,

and micro-location is more important.

Most significantly, however, is the change in sentiment

from the second half of 2009 when, at that time, therewas a belief that investment demand would spread

more widely beyond the core markets. In part, that is a

reflection of investors becoming slightly more risk

averse (as evidenced by rising bond yields), but it is

also a reflection of the reality that while purchasers in

core property are able to assess the risk-return

characteristics of that type of property to reach a value

that is broadly acceptable to the sellers or potential

sellers, the difficulties in quantifying the risks (the risk of

inaccurately assessing the risks) at the other end of the

market imply prices that are, apparently, unacceptable

for potential sellers.

This marginal increase in caution by investors is

confirmed by the latest survey23

of sentiment by PMA,

22Data from Real Capital Analytics, to beginning April 2010

23Q1 2010, circulated 1 April 2010

which dipped slightly from the local peak in autumn 2009

but is still above the long-term average. In contrast,

development sentiment rose slightly, but is below the long-

term average. The improving attitude towards

development may appear somewhat inconsistent with a

more risk-averse attitude, but early stage developments

carry no risk of voids, unlike standing investments.

Generally, there is a convergence of views on values of

prime properties, which has obviously facilitated

transactions at this end of the markets. This market is, by

definition, limited in size and represents perhaps 5% of the

total investment markets. There is effectively, moredemand than supply, even if the demand has abated in

recent months. In addition, there is less need to sell core

properties by previously-distressed sellers indeed, many

of the listed property companies are now acquiring rather

than selling markets.

What still exercises the markets collective mind is

whether there will be a trigger or increasing stresses on

existing holders of other assets to release them on to the

market to achieve whatever prices the markets find

acceptable. For this, the market continues to look to thebanks and how their policies may change in terms of loans

that are in breach of covenant or in default.

Over the last 12 months, Capital Analytics estimate that

EUR31bn of property has been in various stages of

distress. Of this, EUR2.4bn has been categorised as

having been resolved, meaning that they have been

refinanced or sold. That leaves EUR28.6bn as stock that

could/will be released into the market at some stage. This

is almost equal to the average quarterly European

turnover over the last 10 years, which was just overEUR30bn.

France stands out as something of an oddity in this

analysis, in that there are virtually no properties

categorised as resolved but EUR2.4bn is classified as

restructured/extended, but not yet permanently resolved.


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The three countries with the

largest distress are Germany,

Spain, and UK

- 1 7 -

60% of Irish bank loans

are non-performing

Presumably, that reflects a policy decision by the banks

not to reflect the value impairment on their balance sheets.

The scenario is confirmed by a comment24 in the RICS

Global Commercial Property Survey "Distress does not

exist in the same way in France as in UK or USA."

The three countries with the largest amount in current

distress are Germany (EUR2.9bn), Spain (EUR2.6bn),

and the UK (11.8bn). Although that would represent

almost two quarters of 10-year average volume of

transactions for Spain, the figures for UK and Germany

are both less than an average quarter. In other words, the

volume of property that could potential be released by thebanks are relatively small from almost all perspectives. In

addition, the average size of the properties is relatively

small, at EUR19m, which suggests that a significant

number are from private property companies, smaller fund

special purpose vehicles, etc.

These figures do not include properties (used as security

for loans) in the Irish governments newly-formed25 (at the

beginning of April) bad bank the National Asset

Management Agency (NAMA) which took over real

estate loans from the Irish banks at a 47% discount totheir book value of EUR17bn, more than EUR3bn of which

relate to the UK. A further EUR37bn is due to follow soon.

According to a report26 60% of the loans are non-

performing. The government has also previously taken a

majority holding in Allied Irish Bank which, it is expected,

will need to raise additional capital and, as part of that, to

sell off assets in the UK, the US, and Poland.

It is believed that, where the LTV has exceeded 100% and

there is little immediate hope of recovery, NAMA will

dispose of the properties on the open market. Althoughthe timing of that is uncertain, the total amount of Irish

Banks toxic loans represents some 50% of Irelands

24From Paul Betts MRICS

25Brought into operation at the beginning of April 2010

26Dublin law firm William Fry estimate, as reported in

PropertyWeek.com, 26 March 2010


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- 1 8 -


GDP and the government will be seeking an early

recovery of capital to help rebuild the economy.

Clearly, with tenant stress still to fully run its course,

there will be further significant volumes of distressed

property in all markets over the next two years.

According to the RICS December survey27

of distressed

property, agents were expecting two European

countries in particular to have an increased number of

distressed properties on the market in Q1 2010

Germany and UK. But, so far, on the basis that the

banks are not going to release all of the distressed

properties onto the market at one point, the numberslook manageable.

The long-awaited confirmation28

of the Norwegian

governments Global fund (in which oil revenues are

placed to provide a long-term annuity) to allocate 5% to

real estate was received in March. That represents

EUR16.1bn to be invested over several years

reflecting both the size of the allocation to real estate

and the [perceived] volatility of the market. That,

together with the decision of the Norwegian parliament

to reduce the overall funds tracking error from 1.5% to1%, indicates the strategy that the fund will employ

market replication with core-type investments.

Preqin29

estimates that EUR9.5bn was raised by funds

in 2009, with EUR1.9bn in the fourth quarter alone.

Although 2009s raising was the lowest of recent years,

even institutional commitments are strongly correlated

to the performance of real estate over the cycle and

they should, therefore, pick up in 2010.

Values

CB Richard Ellis, probably the single-largest European

valuer, reports30

that the fourth quarter of 2009

27RICS Global Distressed Property Monitor, published

February 201028Source: AllBusiness, reported 26

thMarch 2010

29Reported in IPE Real Estate, March/April 2010

30CB Richard Ellis MarketView European Valuation Monitor,

Q4 2009

represented a market turning point in values. Based on its

European quarterly fund valuations, all property values

rose by 0.4% over the quarter although, over the year,

values had fallen by 9.4%. At a sector level, it was retail

that drove the growth, which represented a significant

change as, in the other quarters of 2009, it had

underperformed the office sector.

It was, however, the UK that produced overwhelmingly

positive growth in the quarter in contrast, the other main

European markets all fell. Arguably, on that basis, the

non-UK markets may still be trending downwards,

Although these valuations are what might broadly be

classified as institutional property, a comparison with

prime property31

suggests that the latter fell by only 1.6%

points less that the fund valuations in 2009. This, we

would suggest, is a very significant under-estimation of the

falls of average property, and provides a very graphic

illustration of how unrealistic valuations of the latter have

been during the recession. This is compounded by an

estimated difference in 2008 of 1.9% points but with

prime property underperformingthe fund values.

One explanation proffered is that prime values are more

sensitive to changing sentiment, but a better translation of

the point would be that average or secondary property lost

most of its liquidity during the recession and valuers

responded by not altering their values on the basis that

there was little or no comparable evidence to support a

change.

Market practitioners would certainly argue that values

have fallen by much more than the formal fund valuations

are indicating taking the end of 2007 to the end of the

third quarter of 2009 (as a valuation trough) represents a

fall of only 21%, whereas the market evidence suggests

falls of 30%+.

31Based on CBREs calculations of a synthetic calculation of

EU27 centres prime property


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Investment yields

Yields for prime properties are typically either stable or

are falling because they represent, by definition, the

most secure income. But the rate of the fall has been

slowing in different markets as the yields meet

resistance points between 5% and 6%.

In contrast, yields of average or secondary property are

more likely to be rising or, at best, stabilising. That is a

marginal negative shift relative to the third and fourth

quarters of 2009, when demand for real estate

investments was exceeding the stock on offer, resulting

in demand spilling over into the more-average stock

and forcing down the yields in that part of the market.

- 1 9 -

There are two reasons for this marginal adverse change

in sentiment for non-prime property. First, the market

has become more risk averse, partly because of the

evolving economic scenario and partly because of

cumulative tenant risks. Second, rental values are

continuing to fall, lease lengths to shorten (even if only

through the progression of time), and tenants to make

increased demands on landlords (particularly if they are

aware that the landlords are in financial trouble). Theseare, in turn, feeding through to falls in rental income.

Offices

Yield shift (% points) Q4 2009 Q1 2010

CEE 0.00 0.00

Western Europe -0.06 -0.15

Nordics -0.04 -0.12

Southern Europe 0.09 -0.01

UK & Ireland -0.54 -0.32

Europe (weighted ave) -0.12 -0.15

Source: DTZ; AXA Real Estate Research

As the above table shows, the European office yield

falls in the first quarter of 2110 are marginally greater

than those in the fourth quarter of 2009 and, in

particular, the falls have started feeding through to the

Nordics indicating a widening of investor interest.

The gap between prime and secondary yields has been

widening. There are the usual difficulties in estimating

how big the yield difference is, but one estimate32

is 4%

points for the UK. We have no reason to believe that it is

much different elsewhere in Europe, although the gap will

obviously depend on the definitions of prime and

secondary.

In contrast to the office sector, the yield falls in the retail

sector are giving the impression of slowing, although that

is almost entirely attributable to the UK; other parts of

Europe are experiencing faster yield falls.

Retail


CEE 0.00 -0.08

Western Europe -0.03 -0.18

Nordics 0.01 -0.05

Southern Europe -0.10 -0.06

UK & Ireland -0.62 -0.23



In the industrial sector, there is a trend of continuing yield

falls. While not shown in the table below, the change of

the third quarter of 2009 was a fall of 0.3% points. Again,

the UK is contributing most to the slowing rate of falls and,

largely because of that, there is also a convergence in the

rate of falls between the sectors.

32Source: CBRE Investors, quoted in IPE Real Estate, March

April 2010

Industrial


CEE -0.2 -0.1

Western Europe 0.0 -0.3

Nordics -0.1 -0.1

Southern Europe 0.2 0.0

UK & Ireland -0.6 -0.2




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Other publ icat ions

Periodic

At a Glance a quarterly overview of the European real estatemarkets in the context of an analysis of the European economy

Country Spotlights a quarterly in-depth review of 19 Europeanmarkets. A reference source, to be consulted for the latest analysis

- 2 0 -

covering the

ing

short research articles on items of topical interest to the industry

Market Mechanics dealing with technical issues of relevance to theproperty industry

Looking Ahead our quarterly house forecasts,European economies and the property markets

Real Directions building on our analysis and forecasts, offerquarterly strategic recommendations and investment themes

Asian Eye and European Eye two publications of five to seven

Occasional notesContac t

Alan PattersonHead of Research and S

Market Edge dealing with particular market issues in greater depth

trategyTel: +44 20 7003 1372e-mail:alan.patt

[email protected]

C

lient mailing list

Nathalie AndroussevitchTel: +33 1 44 45 96 41e-mail:[email protected]

reimv 230410 at a glance q2 april 2010

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