SEPTEMBER 2016 RESEARCH. Real Estate for a changing world

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1 THE BNP PARIBAS REAL ESTATE INVESTOR CONFIDENCE INDEX SEPTEMBER 2016 RESEARCH Real Estate for a changing world

2 CONTACTS EXECUTIVE SUMMARY INVESTMENT RESEARCH Simon Williams Head of Investment, UK +44 (0) Olivier Ambrosiali Head of Investment, France +33 (0) Sven Stricker Head of Investment, Germany +49 (0) Stephen Ackroyd European Analyst +44 (0) Samuel Duah Head of Real Estate Economics +44 (0) The BNP Paribas Real Estate Confidence Index (RECI) quantifies how the different combination of challenges facing real estate in the present environment are impacting on investor sentiment, tracking the proportion that think that investment conditions will improve, worsen or stay the same over the next 12 months. The RECI tells us that investors expect 2017 will see favourable conditions for real estate investment, albeit at a slowing pace. Changes in performance expectations underpin this shift and are likely to manifest in actual buying decisions as investors exercise even greater selection with property. KEY FINDINGS No change in business conditions in 2017 is the majority opinion of real estate investors (70%) across the big three European markets in Q3. This position was subject to a dip in Q2, driven by UK investors who reacted negatively to the Brexit vote only to bounce back in Q3. Investors in France and Germany were largely unmoved by that event. The path of the RECI with its Q3 net balance figure of -11% shows that majority opinion may be to anticipate a slower market. With total returns, net balance of investor opinion is moving away from anticipating decline over the next year towards growth. Investors are still cautious, possibly a reflection of worries about how income growth will be affected by a slowing economy. Around 44% of investors take the position of holding assets across all sectors. The net balance change suggests that majority opinion of hold is moving towards favouring buying property. BNP Paribas Real Estate 5 Aldermanbury Square London EC2V 7BP Tel.: Most investors think the lending situation in Europe will not be any different next year. The net balance across the year of the survey has remained slightly negative (favouring tightening) for lending conditions in All of this suggests investors believe that central bank action is only having a limited effect on the commercial real estate market.

3 CONFIDENCE AT A GLANCE REAL ESTATE INVESTMENT CONFIDENCE THE MAJORITY POSITION The majority opinion of no change is held by 70% of real estate investors across the big three European markets when asked about business conditions for the year to September Confidence Outlook 12 Months Ahead What is also important is how majority opinion actually moves over time. This is where the net balance approach is helpful. The net balance approach is a relative measure that shows the shift in opinion from those expecting a positive state going forward against those expecting a negative state (and vice-versa). The net balance shift over time indicates the direction of change in majority opinion. This is indicated in the net balance of -11% for Q The BNP Paribas Real Estate Confidence Index (RECI) suggests that the number of investors expecting real estate investment conditions to improve over the next year is eroding very slightly in favour of those who think it will worsen. Net Balance -11% Improve 10% Worsen 21% OPINION GOING FORWARD The surveys consistently show investors in Europe who think conditions will either be unchanged or improve prevail over those who think conditions will decline This position is not surprising. Real estate investors are operating in a macro environment that is particularly favourable to acquisition, as indicated in the scale of investment currently undertaken. BNP Paribas Real Estate Confidence Index (RECI) Europe RECI France UK Germany Our transaction data shows investment levels at 34.7bn at Q2, running above long term averages. The investment market is very lively, a contrast to the activity in 2009 following the Great Financial Crash and even the Sovereign Debt Crisis What does this situation mean for real estate investment? Looking at the current market position indicated by the percentage of investors whose views are unchanged in the survey, plus the relative direction suggested in the net balance index suggests that 2017 will see continued good investment business, albeit at a slowing pace as investors exercise greater selection with property. 3

4 INVESTMENT PERFORMANCE OUTLOOK PRIME YIELDS Investors were asked about expectations for yield movement by sector. Positive net balance indicates increase and negative suggests the net balance is decreasing. Investor perception that office markets are strong may lie behind expectations for yield decrease in the office sector. In contrast the net balance for retail yield is on the borderline with increase. Net balance is shifting towards yield compression Offices Retail The logistics net balance suggests that investors think yields will continue to decrease. The net balance decrease is smaller, perhaps reflective of investor awareness of the dynamics of warehouse property. PRIME RENTS European office rent net balance shows strengthening expectations for rental growth over the year. This is probably driven by Germany and by Paris where the occupational markets are growing. The change in net balance is favouring rental growth in offices and logistics Offices Retail Retail rent net balance is favouring decline over the upcoming year. The position has been consistent since the start of the survey although the net balance is starting to move towards increase. The logistics rent net balance is rising although not as quickly as for offices. Constraints on rental growth with logistics property may be influencing opinion. TOTAL RETURNS The net balance outlook favouring total returns decline, a position seen for most of the year, is now showing signs of levelling out. It is important to remember that total returns are the combination of capital growth plus income growth. The survey shows yield stability is the majority position with net balance slightly favouring decrease. Total return net balance is heading back towards expecting growth Offices Retail It is probable that it is the income growth element that investors are thinking about, which is tied to wider economic performance. Potential economic slowdown over the next year and its impact on tenants could be shaping opinion, although the net balance improved in Q3, after the Brexit vote.

5 CONFIDENCE AT A GLANCE MARKET POSITIONS CYCLE EXPECTATIONS Investors asked about their opinion on whether to hold, buy or sell property one year from now is shown in cycle expectations. The average for investors taking the position of hold is 44% in this quarter. Investor opinion towards holding has barely altered across the year of the survey. The net balance has slightly favoured selling of real estate but has subsequently seen a move towards favouring acquisition. Investor opinion is moving back toward favouring acquisition Offices Retail Over 2016 the net balance of opinion moved to favouring buying property, altering most strongly in favour of offices. This may be reflective of investors thinking about how vibrant the occupation markets are in each sector. At sector level, offices, especially in the big city markets, is where take-up continues to be the most robust, followed by logistics. The uncertainties that surround retail across Europe may be fostering some hesitation. LENDING EXPECTATIONS When asked about whether lending conditions will ease, tighten or stay the same, the majority of investors (60%) think that lending conditions will stay unchanged over the next 12 months. Investors think lending conditions will stay unchanged... Easing 17% Our survey suggests that investors think central bank action will only have an incremental effect on the availability of finance going forward. The net balance over the year is slightly negative as the proportion of respondents who think the ability to obtain financing will become more difficult consistently outweighs those who think it will ease. Net Balance -6% Tightening 23% In Q3 the net balance of lending expectations moved towards positive (more people expecting easing) after a dip in Q2. Those investors who favour tightening conditions dominate this quarter at 23%....with opinion shift remaining slightly negative across the year 5

6 CURRENT NET BALANCES BY SECTOR AND COUNTRY PRIME YIELDS PRIME RENTS Central London Offices Central London Offices TOTAL RETURNS Central London Offices Regional Offices Central Paris Offices Frankfurt Offices Munich Offices Belrin Offices Hamburg Offices Hogh Street Retail Central Paris Offices Frankfurt Offices Munich Offices Belrin Offices Hamburg Offices Hogh Street Retail Central Paris Offices Frankfurt Offices Munich Offices Belrin Offices Hamburg Offices Hogh Street Retail

7 CONFIDENCE AT A GLANCE METHODOLOGY BNP Paribas Real Estate undertakes an online survey every quarter of investors in France, Germany and the UK, receiving an average of 120 responses. INVESTORS WERE ASKED SIX QUESTIONS: Question 1: How do you see real estate investment conditions evolving in your main market of operation over the next 12 months? Question 2: This time next year where do you think total returns for the sectors you know will be? Question 3: This time next year where do you think prime initial yields for the sectors you know will be? Question 4: This time next year where do you think rental values for the sectors you know will be? Question 5: This time next year what position do you think the sectors you know about will be at in the property cycle? Question 6: How do you see lending conditions to evolve in your market over the next 12 months? 167, Quai de la Bataille de Stalingrad Issy-les-Moulineaux Cedex Tél. +33 (0) Fax +33 (0) BNP PARIBAS REAL ESTATE SAS with a capital of RCS Nanterre SIRET Code NAF 7010 Z Headquarters: 167,Quai de la Bataille de Stalingrad Issy-les-Moulineaux Cedex BNP Paribas Real Estate is a subsidiary of the BNP Paribas banking group. Pursuant to French law No from 6th January 1978, modified, relating to Information Technology, Files and Civil Liberty, you have a right to access, delete or modify data concerning you, which you may exercise by post at the following address: BNP Paribas Real Estate personal details protection coordinator, 167, Quai de la Bataille de Stalingrad Issy-les Moulineaux Cedex or by at the following address: informatiqueetlibertes.bnppi@bnpparibas.com September

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