LaSalle E-REGI Index 2017

Transcription

1 LaSalle E-REGI Index 2017 EUROPEAN REGIONAL ECONOMIC GROWTH INDEX October 2017 LaSalle Investment Management LaSalle E-REGI Index

2 LaSalle E-REGI Index A forward-looking indicator of occupier demand LaSalle s annual European Regional Economic Growth Index (E-REGI) identifies the European regions and cities with the best economic growth prospects. E-REGI therefore approximates the relative strength of future occupier demand for real estate in the medium term. Our analysis covers nearly 300 regions across 32 European countries, with a total population of more than 745 million. Our main focus is on the 100 major city-regions (regions including cities with more than 500,000 inhabitants and all national capitals). E-REGI attaches a score to each region in Europe based on its medium-term economic growth prospects, its level of human capital and wealth and the quality of its business environment relative to the European average (see technical note p26 for more detail on our methodology). When combined with detailed real estate knowledge, supply side information and relative pricing, the LaSalle E-REGI index is a valuable tool 1 for determining real estate market outperformance and investment strategy. 1 The correlation between the E-REGI scores of the 33 largest office markets in Europe and office take-up in these markets in the following three years has averaged 62% over the last 14 years, showing robust relationship with occupier demand Berlin Alexanderplatz LaSalle Investment Management LaSalle E-REGI Index

3 LaSalle E-REGI Index 2017 Highlights of the 18 th edition London is back in 1 st position after losing out to Paris last year in the aftermath of the EU referendum. A softer, longer Brexit now appears more likely than a Hard Brexit following the snap General Election (June 2017). Nevertheless, the outlook for London will remain hampered by Brexit uncertainties for the coming years. Almost all UK cities recovered some of the ground lost last year, with Manchester, Birmingham and Cardiff the strongest improvers. Paris comes a close 2 nd this year, after topping the index last year, and continues to lead Europe in terms of its Human Capital score 2. Political uncertainty has reduced significantly in France with the election of Emmanuel Macron as President (May 2017), and the new government benefits from a large parliamentary majority. The score of Paris is also driven by a high wealth score. Stockholm remains in 3 rd position, boosted by its high level of wealth, strong GDP growth outlook and high Human Capital score. Nordic cities dominate the top of the ranking with Oslo in 8 th position, Copenhagen-Malmö 10 th and Helsinki 16 th due again to strong Human Capital scores. Istanbul reaches 4 th position this year despite the increasing political upheaval damaging the country s Business Environment score. This ranking reflects the size and exceptional growth potential of the region. Dublin s ascent continued; climbing two places to 5 th. A cyclical market, boosted by rapid economic growth and a wealthy population, Dublin achieved its highest score since Conversely, stable Luxembourg ranks 6 th and has been in the top ten for the past 13 consecutive years. German Cities continue to perform very strongly in the index. The German economy has outpaced expectations but is starting to face capacity constraints due to the scarcity of skilled labour across all sectors of the economy. Munich reached 7 th position and Frankfurt moved up two places to 19 th position. Berlin stands out as strongest improver in Germany reaching 13 th position, its highest rank ever, on the back of an improving Human Capital score. Polish cities fell in the ranking this year as the increasingly autocratic stance of the government weakened Poland s Business Environment score. The employment growth outlook is also clouded by declining demographics. Despite falling six places to 26 th position, Warsaw continues to lead in Central and Eastern Europe. By contrast, Prague moved up by 13 places to 34 th position due to stronger growth prospects. Of all European cities, Athens made the most progress in the ranking, jumping 35 places to 53 rd position. 2 LaSalle European Human Capital Index is one of the components of the E-REGI score. More detail on the Human Capital Index can be found on p25. LaSalle Investment Management LaSalle E-REGI Index

4 LaSalle E-REGI Index Top 15 Score components London Paris Stockholm Istanbul Dublin Luxembourg Munich Oslo Stuttgart Copenhagen-Malmö Zürich SCORES 12 Madrid 0.43 GDP Berlin Brussels Employment Human Capital Wealth 15 Lyon 0.34 Business Environment Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

5 LaSalle E-REGI Index Top 15 E-REGI Scores Top 15 OSLO STOCKHOLM Top 15 Cities Coverage Cities COPENHAGEN-MALMÖ 10 DUBLIN LONDON BRUSSELS 14 LUXEMBOURG 06 PARIS 02 ZÜRICH LYON BERLIN STUTTGART 07 MUNICH ISTANBUL 04 MADRID 12 Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

6 LaSalle E-REGI Index 2017 Scores 2.5 ALL EUROPEAN REGIONS STRONG MEDIUM WEAK CITIES ONLY (n=100) STRONG MEDIUM WEAK Cities with strong scores Cities with medium scores Cities with weak scores Other regions Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

7 passporting rights - was the most likely scenario before the election. A softer, longer Brexit now appears more likely. However, London still faces ongoing uncertainty as the financial services sector remains exposed to a potential loss or dilution of passporting rights after 29 March The Employment scores of UK cities recovered even more than their GDP scores. A softer Brexit is more likely to result in a stronger job market and in a more flexible approach to EU immigration which will continue to drive population growth. However, all UK cities covered in the index lost out in terms of Business Environment score, as the uncertainty over the future relationship between the UK and the EU negatively impacts the ease of doing business. London The South Bank, facing the City of London A year on from the Brexit vote, how are UK cities faring in the index? Last year s edition of E-REGI was published in the aftermath of the EU Referendum (Brexit vote) in the UK. The sharp downward revision to the growth outlook for all UK cities weighed down on their E-REGI scores. London lost its top position to Paris, after four consecutive years of uncontested leadership. However, the fact that it fell only to 2 nd place is testament to its resilience. The outlook for the UK has since been upgraded due to several factors. Firstly, the UK economy has proved more resilient than previously expected, leading to a modest upward revision of economic forecasts. Secondly, the snap General Election in June 2017 was a turning point. A Hard Brexit scenario implying no access to the EU single market, tight immigration restrictions and a loss of UK cities benefited from higher Human Capital scores, particularly London, Manchester and Birmingham. These improvements were driven by improving university rankings, an increase in venture capital flows and, in the case of Manchester and Birmingham, a higher number of patents filed. All UK cities included in E-REGI now outperform the European average in terms of Human Capital. As a result, London (2017 rank:1 /change from 2016: +1) is back in 1 st position and almost all UK regional cities in the index recovered some of the ground lost last year, with Manchester (43/+14), Birmingham (49/+13) and Cardiff (72/+12) being the strongest improvers. Nevertheless, with the exception of Bristol (29/0) and Edinburgh (48/+2), the scores of all UK cities, including London, are lower this year than in 2015, pre-brexit. LaSalle Investment Management LaSalle E-REGI Index

8 How are the main European cities performing? There are several major cities hoping to benefit from Brexit and becoming a destination for some of London s financial jobs. The 2017 E-REGI Index does not explicitly take into account the recent announcements by financial firms to move part of their operations to other European cities. The E-REGI Index is a tool which looks at the medium term outlook and structural changes in the market. However, it is of interest to see how the main European financial centres are performing in the index. Frankfurt The European Central Bank s Building Frankfurt (19/+3), a relatively stable city, continues to underperform its European peers. Frankfurt moved up by three positions this year due to a stronger Employment score, but ranks only 19 th out of 100 European cities. Dublin (5/+2) reached number five this year. Construction activity is strong and the number of cranes towering over Dublin is increasing. The tech sector is the main source of office demand in Dublin, but a number of financial firms are planning to increase their footprint in the Irish capital. Many insurance groups have selected Luxembourg (6/-1) and Brussels (14/0) as their new EU legal headquarters. However, legal headquarters are not often associated with a high number of jobs. Paris (2/-1) is hoping to attract more staff, including decision-making positions. Last but not least, Amsterdam (20/-1), ranking 20 th out of 100 European cities, just after Frankfurt, has been favoured by a number of Japanese banks as a post- Brexit European base. The real estate impact of these relocations will vary greatly from market to market. Thousands of additional jobs could be easily absorbed by a large office market such as Paris (53 million sqm according to JLL), while Luxembourg s office market, with an office stock of 4 million sqm, would struggle to accommodate a large influx of workers. Major decisions on moving operations are still to come and will depend on the outcome of the ongoing negotiations between the UK and the EU. It is therefore too early to measure the impact of Brexit on continental European cities. LaSalle Investment Management LaSalle E-REGI Index

9 LaSalle E-REGI Index 2017 Lessons learnt from 18 years of E-REGI History LaSalle s E-REGI index has a proven 18-year track record of efficiently predicting future occupier demand. This long history allows us to draw conclusions on the performance of European cities throughout cycles which is of particular interest to longterm investors. This year we identified clusters of cities by analysing their key characteristics and the main drivers of their scores over time. We are able to identify four distinct groups of cities that exhibit similar E-REGI patterns over time: the Consistent, Affluent, Movers and Aspiring cities. Paris Avenue de l Opéra in Paris CBD LaSalle Investment Management LaSalle E-REGI Index

10 The Consistent HELSINKI STOCKHOLM Tier 1 Cities Tier 2 Cities Tier 3 Cities GLASGOW EDINBURGH GOTHENBURG COPENHAGEN-MALMÖ LIVERPOOL BIRMINGHAM LONDON PARIS AMSTERDAM LILLE BRUSSELS UTRECHT DÜSSELDORF STUTTGART HAMBURG COLOGNE-BONN FRANKFURT MUNICH DRESDEN-LEIPZIG VIENNA LYON TOULOUSE MARSEILLES-NICE BOLOGNA NAPLES Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

11 The Consistent The most stable cities in the rankings T he Consistent cities are the most stable in the E-REGI rankings over the years. Given their stability, these markets are considered as attractive investment markets throughout the cycle for those investors seeking relative stability in returns. The consistently strong cities include: London (1/+1), Paris (2/-1), Stockholm (3/0) and Munich (7/-3) which can be found in the top 10 of the ranking every year since the first edition of the index. In 18 years of E-REGI analysis, London has been a Top 5 city 16 times, Paris 18 times, Stockholm and Munich 12 times. Smaller but affluent cities such as Brussels (14/0) and Vienna (27/0) also tend to perform consistently strongly in E-REGI. All German cities, with the notable exception of Berlin, are present in the Consistent group and have been consistent outperformers in the index over the last 18 years. Frankfurt s inclusion in the Consistent group may come as a surprise to many. Frankfurt s underlying economy is less volatile than its office market. Indeed, Frankfurt s performance in E-REGI has been remarkably stable over the past 18 years. Although Munich (7/-3) and Stuttgart (9/0) are consistently in the top of the E-REGI ranking, their scores have also increased steadily since This improvement over time has been driven by their high levels of wealth, strong GDP growth and high Human Capital scores. Both Munich and Stuttgart score well in terms of patent production and investment in R&D, with the automotive industry being a key driver. Munich also performs well in terms of venture capital investments. Further down the ranking, Mannheim-Karlsruhe (24/+1), Munich Viktualienmarkt Düsseldorf (30/+6), Hamburg (31/-3), Bremen (52/-4) and Leipzig-Dresden (54/+6) have all also improved their scores since 2000, but to a lesser extent. The German cities continue to be held back by their relatively weak Employment scores, although the German labour market has shown more spare capacity than previously assumed. This reflects increasing labour market participation rates (notably from the over 60-yearolds) and positive net migration. LaSalle Investment Management LaSalle E-REGI Index

12 Stockholm Sergels Torg Square All French cities covered in the index are also included in the Consistent group. Paris came a close second this year, after topping the index last year. Of all European regions, Paris has the strongest Human Capital score, ranking first for patent production, second for the quality of its universities and fourth in terms of venture capital. Paris Human Capital score improved compared to last year. However, its GDP and Employment scores dropped slightly. Lyon (15/-2) and Toulouse (28/-4) have consistently performed strongly in E-REGI, backed by high Human Capital scores. While Lyon s Human Capital score is broad-based, Toulouse s strong performance in terms of investment in R&D is linked to the presence of the Airbus group. Marseilles-Nice (41/-9), Nantes (45/-3) and Bordeaux (47/-2) have performed relatively well while Lille (65/-13) slid down the ranking this year due to a lower GDP growth outlook. The Dutch cities are close to each other in the ranking but while Amsterdam (20/-1) and Utrecht (23/+3) have had very stable scores over the past 18 years, Rotterdam-Den Haag (22/-4) has followed an upward trend since 2011 and is therefore included in the Movers group (see page 20). Amsterdam scores well in terms of venture capital and a high share of its population has a university degree. However, Amsterdam generates less investment in Research & Development than other Dutch cities such as Eindhoven (where Philips and ASML a leader in the semiconductors - are based) and in the life sciences clusters of Utrecht and of the Arnhem-Nijmegen region ( Health Valley ). The Nordic region is well-represented in the Consistent group with Stockholm (3/0), Copenhagen-Malmö (10/+1), Helsinki (16/+1) and Gothenburg (21/0) all performing well. Nordic cities benefit from a higher Wealth and Human Capital scores than most cities in the Consistent group. LaSalle Investment Management LaSalle E-REGI Index

13 London and Paris neck and neck at the top this year Stockholm and Munich have improved over the last 18 years In addition to London, Consistent UK cities include Edinburgh (48/+2) and Birmingham (49/+13) which improved this year due to a stronger economic outlook. Other Consistent UK cities are medium-scoring in a European context but have had very stable scores over time E-REGI SCORES OVER TIME (The Consistent) London Paris Bologna (57/-4) and Verona-Venice (64/+5) are Italian cities standing out as very stable relative to a stronger but more cyclical Milan It is important to note that the Consistent group also includes consistently weak cities, such as Liège (79/-5), Sheffield (85/+2), Belfast (86/0), Porto (90/+2), Naples (95/+1) and Palermo (96/-2) E-REGI SCORES OVER TIME (The Consistent) Stockholm Munich Brussels Frankfurt Amsterdam Hamburg Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

14 The Affluent OSLO Tier 1 Cities Tier 2 Cities Tier 3 Cities ANTWERP LUXEMBOURG BASEL-MULHOUSE GENEVA ZÜRICH BERN GENOA Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

15 The Affluent Strong performers, but small and expensive real estate markets W ealth is the dominant feature of the Affluent cities. Their Wealth score, measured by GDP per capita, represents more than 25% of their total score. However, the Affluent could be considered as a subgroup of the Consistent, as their scores have also been very stable over time as well. The Affluent group includes all Swiss cities covered in the index as they boast the highest GDP per capita. Swiss cities also perform very strongly in terms of Human Capital. Zürich (11/+1) scores well as a high share of its population has a tertiary education degree, while Geneva (17/+6) scores well in terms of patent production. Luxembourg (6/-1) is one of the most affluent cities in Europe. The Grand Duchy has seen its score steadily increase over Luxembourg LaSalle Investment Management LaSalle E-REGI Index

16 Strong performance of Swiss cities driven by wealth & human capital the past 18 years to a record high this year. Luxembourg has established itself as a centre for the administration of investment funds. It is also a large international private banking centre and the largest captive reinsurance centre in Europe. As a result, GDP growth in Luxembourg has outpaced the wider Eurozone in each of the last eighteen years (except 2008). Other Affluent cities include Oslo (8/+2). Oslo s score has improved steadily since the early 2000s, despite swings in oil prices. The city moved from 48 th position in 2001 to 8 th position today. While wealth is a dominant characteristic, the Norwegian capital also benefits from a high Human Capital score and strong growth prospects. The harbour cities Antwerp (40/-3) and Genoa (91/-1) are also included in the Affluent group. The Affluent are strong performers in E-REGI but with small stocks of investable real estate and very active domestic investors, these markets are not always easy to access for international investors and are often considered expensive E-REGI SCORES OVER TIME (The Affluent) Zürich The main train station, the new district Europaallee and the Prime Tower Luxembourg Zürich Geneva Basel- Mulhouse Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

17 The Movers Tier 1 Cities Tier 2 Cities Tier 3 Cities NEWCASTLE DUBLIN BRISTOL MANCHESTER ROTTERDAM-THE HAGUE BERLIN TURIN MILAN BILBAO ZARAGOZA LISBON MADRID BARCELONA ROME THESSALONIKI VALENCIA SEVILLE ATHENS Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

18 The Movers Either recovering or structurally improving U nlike the Consistent, the Movers have moved up and down the rankings over the years. We have identified two types of Movers: the Cyclical and the Structural. The Cyclical Movers have slid down the ranking during downturns but have demonstrated an ability to recover strongly in upturns. The archetypal Cyclical Mover city is Dublin (5/+2), a volatile economy and real estate market and also a very volatile city in the E-REGI Index. The Celtic Tiger of the early 2000s saw its score fall gradually from 2000 to 2009 and has been recovering, after a staggering economic turnaround, to reach its highest score since 2001 in With the next construction boom well under way, Dublin s property roller-coaster ride may be set to continue. All Spanish cities covered in E-REGI are included in the Cyclical Movers category. The Spanish cities in the index have balanced E-REGI scores but are still very cyclical. Their E-REGI scores dropped sharply after the Global Financial Crisis but are now back at the top of the ranking after an impressive recovery since 2014/15. Madrid (12/-4) jumped from 73 rd place in 2012 to 8 th position in 2016, while Barcelona (18/-3) hopped from 83 rd to 15 th place during the same period. None of the Spanish cities have progressed in the ranking this year, as Spanish economic growth is expected to have peaked in The Portuguese capital, Lisbon (61/+12), is also part of the Cyclical Movers. The city s GDP growth outlook and Human Capital score improved significantly this year, but adverse demographics constrain employment growth. Dublin Developments in the North Docklands LaSalle Investment Management LaSalle E-REGI Index

19 In contrast to Spanish cities, Italian cities have only experienced a modest recovery since the sovereign debt crisis and continue to lag behind their European peers. Milan (32/-1) stands out as the strongest Italian city, but ranks only 32 nd out of 100 cities, far behind other large Western European markets. Milan s score improved after 2012 but is still well below its previous peak of 9 th in the early 2000s. Political uncertainty and banking sector problems continue to limit employment growth and investment. Bologna (57/-4) stands out as a strong performing second-tier city. The Structural Movers are cities whose performance has improved dramatically over the last 18 years of the E-REGI Index. The archetypal Structural Mover is Berlin (13/+3), which has steadily improved since 2004 when the city ranked 75 th out of 100 European cities and reached its highest position this year. Berlin has established itself as a dominant tech hub in Europe. Berlin is now the third best performing German city after Munich and Stuttgart, ahead of Frankfurt. Berlin Mauerpark in Prenzlauerberg LaSalle Investment Management LaSalle E-REGI Index

20 The Movers: Cyclical and Structural Other Structural Movers include Bristol (29/0) and Manchester (43/+14). These cities have followed an upward, yet bumpy trend since the early 2000s. Manchester slid down the ranking last year following the Brexit vote but has bounced back, while Bristol s score hit a record high this year. Outside the greater South East, Bristol and Manchester are the best performing cities in the UK, driven by strong Human Capital scores. Bristol benefits from a highly-educated population and from significant inflows of venture capital, while Manchester has a number of strong universities. Rotterdam-Den Haag (22/-4) is also included in the Structural Movers. The Dutch harbour city fell to rank 85 in 2008 but has gradually recovered from 2012, boosted by a strong Human Capital score. The city scores particularly well in terms of patent production E-REGI SCORES OVER TIME (The Cyclical Movers) E-REGI SCORES OVER TIME (The Structural Movers) Dublin Madrid Barcelona Milan Berlin Rotterdam Bristol Manchester Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

21 The Aspiring TALLINN ST PETERSBURG NIZHNY NOVGOROD MOSCOW Tier 1 Cities Tier 2 Cities Tier 3 Cities RIGA VILNIUS TRICITY (GDANSK) SZCZECIN POZNAN WROCLAW PRAGUE WARSAW LODZ KATOWICE KRAKOW BRATISLAVA BUDAPEST LJUBLJANA ZAGREB BUCHAREST ISTANBUL ANKARA IZMIR ANTALYA Source: LaSalle (09/17) LaSalle Investment Management LaSalle E-REGI Index

22 The Aspiring Growth-driven but lack of transparency T he cities in the Aspiring group are mostly driven by their GDP component. This tends to represent more than 30% of their total E-REGI score. By contrast, Aspiring cities are held back in the ranking by their low Human Capital, Wealth and Business Environment scores compared to the rest of Europe. In practice, the lack of transparency of the real estate markets of the Aspiring continues to deter institutional investors. The Global Real Estate Transparency Index jointly published by JLL and LaSalle every two years can therefore be used as an additional filter. The latest edition of the Transparency Index (2016) indicates that Poland, Czech Republic, Hungary and Slovakia have made significant progress in terms of real estate market transparency in recent years. However, smaller markets such as the Baltic States and Slovenia are still not considered transparent enough to be attractive to institutional investors. Warsaw LaSalle Investment Management LaSalle E-REGI Index

23 Warsaw has a stronger growth outlook but Prague is more balanced REAL ESTATE TRANSPARENCY IN EUROPE TRANSPARENCY LEVEL High Transparent Semi Low Opaque MARKET United Kingdom France Netherlands Ireland Germany Finland Sweden Poland Switzerland Belgium Benmark Norway Czech Republic Italy Spain Austria Hungary Portugal Slovakia Romania Israel Luxembourg Greece Russia - Tier 1 Turkey Croatia Bulgaria Solvenia Serbia Russia - Tier 2 Ukrane Russia - Tier 3 Kazakhstan Belarus 2016 SCORE E-REGI SCORES OVER TIME (The Aspiring) Source: LaSalle (09/17) Warsaw Prague Although transparency has improved political risk is increasingly an issue, particularly in Poland and Hungary. In this year s edition, Polish cities slid down in the ranking as the result of lower Business Environment, Employment, and Human Capital scores, despite stronger GDP growth prospects. Warsaw (26/-6) is a large market with a strong GDP outlook, ranking an impressive third in Europe for its GDP score. Indeed, Warsaw is one of the few major European cities that avoided a recession in the last ten years. Smaller Polish cities Poznan (67/-9), Wroclaw (68/-2) and Krakow (69/-15) also fell in the ranking. The downgrade of Budapest (50/-10) is mostly driven by its weaker employment growth outlook due to severe domestic labour shortages. The most improved Aspiring city this year is Prague (34/+13). Stronger employment growth prospects and a higher Business Environment score helped lift the overall score of the Czech capital. Alongside Moscow and Budapest, Prague also benefits from a high Human Capital score compared to the rest of the Aspiring cities. Prague profits from a broad-based economy including strong international media & technology sectors. It is not simply a back-office business services location. Prague s high Business Environment score is reflected in the transparency of its real estate market, which is equivalent to Spain s. Real Estate Transparency in Europe Source: JLL, LaSalle Investment Management LaSalle Investment Management LaSalle E-REGI Index

24 Other strong-scoring Aspiring cities include Bratislava (44/-10), Ljubljana (46/+5) and Tallinn (51/+5), while Sofia (82/-5), Riga (87/-6), Vilnius (89/-18) and Zagreb (93/0) are weaker and have fallen down the rankings due to a downgrade in their GDP and employment growth outlook compared to last year. Bucharest (59/-26) experienced the sharpest drop as the pace of economic growth is expected to ease after four very strong years. Nevertheless, Bucharest will remain one of the fastest growing cities in Europe over the medium term. Turkey s political situation has noticeably worsened over the last two years with President Erdoğan tightening his grip on power since the failed coup in July Turkey s Business Environment Score has been downgraded further and is now as low as Russia s. Despite these conditions, the Turkish cities Istanbul (4/+2), Ankara (36/+10), Izmir (62/-1) and Antalya (83/0) have remained resilient, supported by their improving wealth scores and strong economic growth outlook. Prague Wenceslas Square Russian cities remain at the bottom of the E-REGI ranking, dragged down by negative Employment and Business Environment scores. Moscow (97/0) and St Petersburg (98/+1) do relatively better on Human Capital than other Aspiring cities, showing high levels of educational attainment as well as strong levels of R&D investment and venture capital inflows. LaSalle Investment Management LaSalle E-REGI Index

25 What is Human Capital? LaSalle defines Human Capital as The stock of skills, knowledge, creativity and innovation, which is enhanced by investment and embodied in the ability of the labour force of a region to produce economic value. Skills and abilities that reside in people and how to put these to productive use are indeed major determinants of longterm economic success. How to attract and cultivate Human Capital has therefore become one of the main determinants of economic growth. Human Capital has a tendency to cluster in places which benefit from the presence of universities, high value-added companies or research centres. This creates a virtuous circle as technological progress spawns faster in areas with higher stock of human capital. Spatial concentration of Human Capital in urban areas also facilitates knowledge exchanges known as the agglomeration effect 3. Accessing these agglomeration benefits and a large pool of Human Capital is the reason why companies are willing to pay high rents. This can be seen as an investment by the company where higher productivity - and therefore higher profits - would be the return on this investment. Similarly, workers are willing to pay higher residential rents/house prices to get access to these productive companies which are capable of paying higher wages. For this reason, regions with high Human Capital are likely to be outperforming real estate markets in the long run. LaSalle s European Human Capital Index (LEHCI) was introduced in the E-REGI model in It is entirely based on structural variables which do not tend to vary significantly over time. The LaSalle Human Capital index therefore complements the rest of the E-REGI model which is predominantly driven by macroeconomic variables, notably GDP and employment growth forecasts. THEME INDICATOR VARIABLE DATA SOURCE Skilled Workforce Creativity Investments LASALLE EUROPEAN HUMAN CAPITAL INDEX Education level Quality of education Patent production Agglomeration effect R&D Investments Tech Venture Capital investments Tertiary Education Attainment Level of population aged years University ranking score Number of patents filed Population density R&D expenditure as % of GDP Venture capital investment in tech firms Eurostat Center for World University Rankings (CWUR) OECD Eurostat Eurostat Thomson Reuters Source: LaSalle (09/17) For more information on Human Capital, read our whitepaper LaSalle s European Human Capital Index. 3 See The Geography of Discovery, Nature, vol. 533, 5 May 2016, p. 40, for detailed case studies. LaSalle Investment Management LaSalle E-REGI Index

26 Technical Note T The LaSalle E-REGI (European Regional Economic Growth Index) was first published by LaSalle Investment Management in 2000 with the aim of identifying those European regions with the greatest economic growth potential over the medium term. E-REGI complements other more real estate specific approaches to determining target markets. The index is updated annually and published in October. E-REGI COVERAGE The model covers 295 regions across 32 countries in Europe with a total population of more than 745 million. This report focuses on a subset of 100 major cities (metros with 500,000 inhabitants and all national capitals). Compared to last year, the coverage has remained unchanged. The E-REGI analysis is undertaken on geographic regions as defined by Eurostat, the central statistical bureau for the European Union. Eurostat has adopted a classification system, the Nomenclature of Territorial Units for Statistics, referred to as NUTS. This classification provides a breakdown of administrative units for the production of regional statistics within the European Union and beyond. NUTS is a hierarchical classification. The country level is referred to as NUTS 0. NUTS 1, 2 and 3 are subnational levels. The E-REGI model uses the NUTS 2 level classification, which we believe is best suited to capture urban agglomerations. However, one should be aware that in formulating the NUTS-level classification, Eurostat has attempted to standardise a disparate set of national classification systems and as a result NUTS 2 regions do not always provide the most appropriate definition of a city region. In some cases a combination of NUTS 2 and 3 areas that better correspond with the physical and economic agglomeration of those cities has been used for the E-REGI analysis. LaSalle Investment Management LaSalle E-REGI Index

27 Figure 1 E-REGI = F[GDP, EMPm, HC, WEALTH, BEnv] GDP Change in Regional GDP EMPm Change in number of Employees in Market Services HC Stock of Human Capital WEALTH Level of GDP per Capita BEnv Quality of Operating Environment for Business Figure 2 1. Growth Component: 60% A. GDP (22.5%) GDP growth % Forecast GDP Growth % Forecast GDP Growth (% growth) 12.5% B. Employment (22.5%) Employment Growth % Forecast Employment Growth (absolute) 7.5% Forecast Employment Growth (% growth) 12.5% C. LaSalle European Human Capital Index (15%) Education Level 3.7% Quality of Education 2.3% Patent Production 3.0% Agglomeration Effect 1.5% R&D Expenditure as % GDP 3.0% Venture Capital Invested in Tech Firms 1.5% 2. Wealth GDP per Capita % 3. Business Environment Components: 20% A. Country Business Environment Sovereign Default 3.3% Political Stability 3.3% Trade Credit 3.3% Regulatory Environment 5.0% B. Eurozone/European Union Participation 5.0% TOTAL 100% E-REGI MODEL The E-REGI model is expressed as the function set out in Figure 1 and presents a weighted overall score based on three sub-scores consisting of 18 variables. The variables used in the model are set out in Figure 2. For each variable, the model calculates a score based on the region s performance relative to the average of all regions, with the average represented by a score of unity ( 1.00 ). The E-REGI ranking then sorts the city regions based on their weighted overall score. The model combines variables on economic growth, the overall level of wealth, and the relative attractiveness of the business environment. The overall score is made up from three component scores: The growth score (accounting for 60% of the model) includes regional GDP output (22.5%) and service sector employment (22.5%), as the principal drivers of real estate demand. For both GDP and service sector employment, historic growth (to capture momentum) and forecasts, in both absolute and relative terms, are used. Employment growth is closely correlated with population growth. Additionally, LaSalle s European Human Capital Index is included (15%) as an important indicator of longterm economic value. LaSalle s European Human Capital Index is itself based on six variables measuring Skilled Labour, Creativity and Investment. The wealth score (accounting for 20% of the model) acts as a further screen to ensure that regions catching up from a lower base are not unduly represented. Market intelligence also suggests that wealth levels are correlated with demand for real estate. The business environment score (accounting for 20% of the model) has been included as future growth potential is partially determined by the attractiveness of the business environment. Best prospects are likely to be in those countries that benefit from a stable political, monetary, fiscal and regulatory environment. DATA SOURCES Data for the E-REGI model is primarily provided by independent data provider Oxford Economics, which supplies historic data and provides forecasts on NUTS 1, 2 and 3 levels for GDP, service sector employment and population. Oxford Economics also provides the risk scores that underpin the business environment scores. These data are provided at national level. Data for LaSalle s European Human Capital Index is primarily provided by Eurostat (for the variables Tertiary Education Attainment Level, Population density, R&D expenditure as % GDP). The University Ranking score is provided by the Centre for World University Rankings (CWUR). This consulting organisation publishes annually global university ranking based on quality of education, alumni employment, quality of faculty, number of publications, number of publications in renowned journals, citations and number of patents. Data on Patents are provided by the Organisation for Economic Co-operation and Development (OECD), while the data on Venture Capital in to Technology companies is from Thomson Reuters. The E-REGI model is based upon data which LaSalle Research & Strategy believe to be reliable. Whilst every effort has been made to ensure the accuracy and completeness of the data used, we cannot offer any warranty that factual errors may not occur. National statistical offices across Europe continue to make progress in their efforts to improve data comparability and accuracy. As such, economic data are commonly revised many years after events have occurred. LaSalle Investment Management LaSalle E-REGI Index

28 CONTACTS Mahdi Mokrane Head of European Strategy London +44 (0) Carol Hodgson National Director London +44 (0) Anne Koeman-Sharapova National Director London +44 (0) Irène Fossé (author) Associate Paris +33 (0) Chris Psaras Associate London +44 (0) IMPORTANT DISCLOSURES This document does not constitute an offer to sell, or the solicitation of an offer to buy, and is subject to correction, completion and amendment without notice. This document has been prepared without regard to the specific investment objectives, financial situation or particular needs of recipients. No legal or tax advice is provided. Recipients should independently evaluate specific investments. By accepting receipt of this publication, the recipient agrees not to distribute, offer or sell this publication or copies of it and agrees not to make use of the publication other than for its own general information purposes. The views expressed in this document represent the opinions of the persons responsible for it as at its date, and should not be construed as guarantees of performance with respect to any investment. LaSalle has taken reasonable care to ensure that the information contained in this document has been obtained from reliable sources but no representation or warranty, express or implied, is provided in relation to the accuracy, completeness or reliability of such information. LaSalle does not undertake and is under no obligation to update or keep current the information or content contained in this document for future events. LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this document. Copyright LaSalle Investment Management All rights reserved. No part of this document may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of LaSalle Investment Management. LaSalle Investment Management is authorised and regulated by the Financial Conduct Authority in the UK. LaSalle Investment Management LaSalle E-REGI Index

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