Research & Forecasting December 2014 EMEA Predictions for Europe. Real Estate Investment Volumes in the UK

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1 Research & Forecasting December 214 EMEA Predictions for 215 Europe AS GOOD AS IT GETS FOR INVESTMENT IN CORE EUROPE? The key European real estate markets of UK and Germany are on track to reach the highest real estate investment volumes of the post-crisis era. Despite the weight of money chasing European real estate and more transactions on non-core properties, the lack of product and in some instances pricing, will hinder growth of investment volumes in 215. As a result, we anticipate UK and Germany 215 transactions to be roughly on a par with this year s levels, whereas certain periphery countries will see more meaningful increases. WINDOW OF OPPORTUNITY WILL REMAIN OPEN FOR TENANTS The weak economy means that office markets across Europe will remain largely neutral or tenant-favourable in 215. The UK will constitute the main exception, as supply levels shrink further and occupier demand accelerates. In this market more than anywhere else, occupiers will be under pressure to act quickly on their most pressing real estate requirements. UK RATE HIKE CAN WAIT Despite improved real wage prospects for 215 in the UK, weak tax receipts, high levels of government debt, low inflation and Eurozone weakness will influence the Bank of England and base rates will not rise until later 215, possibly early 216. Real Estate Investment Volumes in the UK billion INCREASED LIQUIDITY FOR SECONDARY PROPERTIES European Fundraising in 214 to-date has comfortably exceeded any year since 27, with 52bn of capital ready to be spent in the European Real Estate Markets as of October (source: Preqin). This will support transaction levels outside the prime end of the market in Core European markets such as the UK and Germany, which have been characterised by stronger fundamentals and greater risk appetite (f) Total Annual Volumes As of October 214 Forecast Range of Growth 215(f) Source: Property Data, Colliers STABLE VOLUMES IN 215 Momentum in direct property investment transactions will carry over into the first half of 215 due to weight of money in UK institutions and positive international investor sentiment in response to on-going geo-political uncertainty. Capital will increasing look at alternative property asset classes to achieve returns with limited stock availability. We expect total UK volumes for 215 to be in the 5-6bn bracket. RETURN OF SPECULATIVE DEVELOPMENT UK occupier markets will continue to strengthen in line with stable UK economic growth (ca. 3%). Rental increases will be experienced in UK CBD where new product becomes available as steady demand meets limited supply. Speculative development will become very visible across markets and asset classes.

2 GERMANY LACKLUSTER ECONOMIC GROWTH IN 215 The economic slowdown in the Eurozone and in Germany s other key trading partners has stalled the recovery. The growth rate for 215 will remain relatively weak, even if higher than in other core European economies, with inflation expected to stay well below the 2% target. FLAT OCCUPATIONAL MARKET Weak economic leading indicators and the level of enquiries being currently registered point to stagnation in office leasing activity in 215. Many businesses will stay put and remain reluctant to make long-term lease commitments. After modest growth in 214, office rental values are likely to stabilize next year. HEALTHY INVESTMENT VOLUMES IN 215 Despite a less rosy economic outlook, Germany will remain a preferred destination for real estate investment in Europe and will continue to attract safe-haven capital, with supply of suitable product the only barrier to a further growth in volumes. For 215, we are expecting investment volumes of 35-4bn, similar to this year. The weight of capital will see yields compress below 27 levels in key markets such as Munich. FRANCE TENANT-FRIENDLY MARKET TO EXTEND INTO 215 Even if France avoids another recession, the latest economic forecast of 1% in 215 (Oxford Economics) will do very little to support demand across the Parisian office market. Occupiers will continue to exercise caution and take advantage of the favourable terms on offer. The more established business districts (Paris CBD and Western Crescent) will remain attractive to occupiers, thanks to the availability of new buildings and the fall in rental values. RESILIENT INVESTMENT MARKET In spite of the economic uncertainties, the investment market is expected to show greater resilience. Paris, in particular, will continue to attract international capital seeking secure and liquid real estate investments. Continuing demand for core assets has the potential to drive prime office yields even lower from the already low levels (4-4.2), with low borrowing costs also playing a role. billion x 1, sqm sqm Real Estate Investment Volumes in Germany Total Annual Volumes Forecast 1-year average Net Take-up in Germany s Big 6 3,5, 3,, 2,5, 2,, 1,5, 1,, 1, , Q1-Q3 214 Range of Growth (f) (f) Paris Current and Future Supply to 219 as of Q3 214 buildings >5, sqm, New/Redeveloped/Refurbished Paris CBD Southern Paris North Eastern Paris La Defense Western Crescent Inner Northern Suburbs Inner Eastern Suburbs Inner Southern Suburbs Boucle Nord Outer Suburbs Building permit obtained Construction started Delivered Building permit requested 2 EMEA Predictions for 215

3 SPAIN INCREASINGLY POLARISED OFFICE MARKET Better economic prospects for GDP growth of 2% and a further decline in unemployment (even if from a high base) - will gradually start to filter through to occupational markets. However, demand will be focused on grade A buildings in established office areas, while obsolete buildings and peripheral locations will continue to struggle to attract tenants. OFFICE, RETAIL AND RESIDENTIAL MAIN FOCUS IN 215 The Spanish investment market will remain strong in 215. Offices, retail and large residential portfolios put up for sale by banks will be the main focus of international investors. Debt portfolios will also continue to attract interest from a broad group of buyers, including large European institutional investors. INVESTMENT VOLUMES COULD REACH 9-1BN The improvement in financial markets will drive a relaxation in LTV ratios, with 6%-7%LTVs increasingly common for prime properties, and a further increase in investment activity. Given the current level of interest, we anticipate 215 investment volumes not far off the 9-1bn mark, levels not seen since 28. ITALY OPPORTUNITIES IN THE NPLs SEGMENT Whilst an Italian public bad bank like SAREB in Spain is not yet on the cards, we expect to see more transactions in the Italian Non-Performing Loans market. This follows recent efforts from some banks to tackle the issue of NPLs as part of the ECB-led Asset Quality Review process. The value of Italian real estate-backed NPLs portfolios that could potentially come to the market in the next years has been estimated at some 4bn. EXPECT INCREASE IN ITALIAN CROSS BORDER INVESTMENT Italian capital has the potential to become a new driving force of cross border investment in Europe as a number of Italian funds are starting to turn their attention to the rest of Europe for future acquisitions. billion Office Vacancy Rates in Madrid; by District 4% 3 3% 2 2% 1 1% % 28Q4 29Q4 21Q4 211Q4 212Q4 213Q4 214Q3 215(f) CBD Prime City Decentralised Periphery Madrid Real Estate Investment Volumes in Spain Volumes Italian Investment in Europe Q1-Q3 214 Forecast Range of Growth Source: RCA 1,6 1,4 1,2 1, Q1-Q3 214 Source: RCA 3 EMEA Predictions for 215

4 RECOVERY TO CONTINUE The economic recovery will continue at a moderate pace, driven by an improving housing market and consumer confidence, with downside risks mainly linked to the impact of geopolitical uncertainties and hesitant economic growth in the Eurozone. TMT BRIGHT SPOT IN SLUGGISH MARKET Caution from larger office occupiers will continue to constrain total leasing volumes. CBD offices and the TMT sector will be the main bright spots in an otherwise sluggish market. ANOTHER GOOD YEAR FOR INVESTMENT IN 215 The investment market will continue to witness healthy transaction levels, driven by residential portfolios, prime office and logistics. Retail will remain a difficult market, with high demand for limited high street product, and lower demand for shopping centers, partly a reflection of increasing vacancies. Investment volumes are predicted to reach bn in 215, a similar level to 214. Residential Investment in the Netherlands 2,5 SECONDARY LOCATIONS TO GAIN MARKET SHARE High investor interest and looser financing conditions will continue to support investment activity in 215. The growing shortage of investment opportunities will force some investors, particularly domestic, away from prime locations (i.e. Stockholm) into more secondary locations. 4 EMEA Predictions for 215 3% 2 1,5 2% 1, 1 1% Volume As of Nov 214 % of total Real Estate Investment in Stockholm SWEDEN 7, 6% 6, 5, SHIFTS IN OFFICE DEMAND In major cities, lack of supply and increasing demand for modern and efficient office space is causing the balance of interest to shift from central areas to development areas outside the CBD offering greater real estate options. 3 2, NETHERLANDS 4% 4, 3% 3, 2% 2, 1% 1, Q1-Q3 214 Volume % of total

5 CEE BORDERLINE BIFURCATION We will see a distinct split in economic activity across the region resulting from the Russia/Ukraine situation. Both Russia and Ukraine have witnessed a decline in economic performance over 214, and with no clear end to the conflict in sight, this is likely to drag the national economies down in 215. For the remainder of the CEE region, however, positive economic growth is expected to continue with some countries showing signs of further improvement. INVESTMENT TO FOLLOW SUIT In line with economic growth fortunes, investment flows are likely to continue to follow suit as capital continues to run its course through the EMEA investment cycle. The Tier 1 markets of Poland and the Czech Republic will remain strong while Tier 2 markets in Hungary, Romania, Bulgaria, Serbia and the Baltics are set to show further improvement in investment activity. The Russia/Ukraine situation may induce growth in capital flows from these countries into other CEE and EMEAwide locations. Yet in Russia in particular, domestic investors and occupiers will continue to see the current situation as a great buy-side window of opportunity. LOGISTICS EXPANSION The regional logistics market will continue to expand on the back of improving infrastructure and omni-channel retail demand. The hot markets of the Czech Republic and Poland will be the main beneficiaries of this growth in 215, driving an increase in both investment and strategic land-banking, but we expect some spill-over to occur in Slovakia. SOUTH AFRICA INCREASE IN DOWNSIDE RISKS The outlook for the South African economy remains fragile, with core inflation to increase further from relatively high levels (5.8%), and risks of another downgrade if the South African government does not implement more growthinducing initiatives, and deal with the country s electricity supply issues. sqm Real Estate Investment Volumes in Selected CEE countries 2,5 1,75 1, ,25 Russia Poland Czech Republic Q1-Q3 214 Romania Hungary Y-o-Y Growth Industrial & Logistics Space Leased by E-Commerce Retailers in CEE sqm % of the market Slovakia 2% 1 1% % - 1% 7, 6, 5, 4, 3, 2, 1, H1 1% 9% 8% 7% 6% 4% 3% 2% 1% OFFICE MARKET TO MIRROR ECONOMY The office market has been sluggish and is predicted to remain so, reflecting the weak state of the economy. Nationally vacancies are currently at a multi-year high (11.6%), with the present level last seen in 26. Sandton in Johannesburg is a significant contributor to this, due to the heightened development activity in the area. The next year will be characterised by increased pressure on asking rents. INDUSTRIAL MARKET BUCKS THE TREND This market is currently bucking the trend and performing very well. Despite demand at a national level being fragile, growth is expected in certain regions, such as Western Cape. The demand side of the economy will, however, need to improve to drive manufacturing production. This improvement in production is anticipated to lead to expansion and an increase in capacity utilisation. South Africa Real GDP Growth 6% 4% 3% 2% 1% % % (f) (f) (f) -2% Source: IHS 5 EMEA Predictions for 215

6 485 offices in 63 countries on 6 continents United States: 146 Canada: 44 Latin America: 25 Asia Pacific: 38 EMEA: billion in revenue Contacts: Richard Divall Head of Cross Border Capital Markets I EMEA TEL richard.divall@colliers.com Bruno Berretta Senior Research Analyst, EMEA Research & Forecasting TEL bruno.berretta@colliers.com Colliers EMEA 5 George Street London W1U 7GA United Kingdom emea.research@colliers.com million square metres under management 15,8 employees About Colliers International Colliers International is a leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and a shared sense of initiative, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. We connect through a shared set of values that shape a collaborative environment throughout our organization that is unsurpassed in the industry. That s why we attract top recruits and have one of the highest retention rates in the industry. Colliers International has also been recognized as one of the best places to work by top business organizations in many of our markets across the globe. colliers.com Copyright 214 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.