Threats and opportunities in Dutch Office Investment Market

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1 9th April 213 Threats and opportunities in Dutch Office Investment Market Alphons Spaninks Local Head of Asset Management Benelux & Nordics Real Estate Investment Seminar 213

2 Dutch Real Estate: Office market Content Economy Office market What went wrong? Situation today Outlook What next? Opportunities..

3 F 214F 215F 216F 217F F 214F 215F 216F 217F Dutch GDP and office employment % YoY Netherlands contributions to GDP growth Household consumption Government consumption Fixed investment Net Exports Change in inventories GDP Forecast % YoY Netherlands - office employment growth Forecast Financial services Business services Public administration Source: Datastream, AXA Real Estate Research Source: Experian, AXA Real Estate Research Declining household spending, lower net exports and reduced government expenditure put the Netherlands into recession Due to austerity measures and low confidence, household spending will continue to decrease in 213 Depressed growth will result in no private office employment growth and public sector office-jobs destruction Foreign demand will drive Dutch exports and will drive the recovery from 2nd half 213 but growth will remain below average 3

4 General real estate fundamentals in The Netherlands Economy Dutch economy is expected to contract by.6% according to the DNB in 213 Budget deficit expected to reach -3.5% (DNB) in 213, which could lead to a new round of austerity Overall rising unemployment (reached 7.7% in Feb 213 according to CBS) Forecasted decline in office employment in the short-term ( ) Occupier markets-office Due to consolidation, centralization and workplace strategies like the New World of Work, take-up dynamics will remain modest Supply will further stabilise within the major important office locations, partly due to conversions of vacant office buildings into hotels and student apartments Supply mainly concentrates on secondary, mono-functional and less accessible locations (public transport) On a positive note, the current office development pipeline is relatively small and largely pre-let 4

5 What went wrong in offices? Commonly said a collective mistake was made in the industry the first years of this century: Municipalities offered great attractive office developments with relative low land prices in order to attract business to their cities (creating revenues: land and tax) Developers focussed on green field developments, motorway locations, satellite cities, not interested in brown field re development (too many challenges) Tenants were triggered by substantial incentives, compensation for moving costs etc from developers and new (first grade) quality: office hopping Investors were triggered by new grade stock and had pressure to invest, very competitive and pushing yields down. Wall of money, financiers were extremely competitive, LTV s up to 9%, why not? Overbuild, under demolished

6 But the real cause is in the last decade of the last century million sqm of office space added Most if it in the periphery Office stock: million sqm million sqm million sqm Office employment growth and office stock growth employment + 31% stock + 36% employment + 11% stock + 12% Office stock per segment source EIB, 21 Periphery Other Central Average sqm per office employee 2: 24 sqm 211: 16 sqm Trend: RGD is targeting 14 sqm

7 Q Q Q4-199 Q Q Q Q Q Q Q Q Q Q4-2 Q4-21 Q4-22 Q4-23 Q4-24 Q4-25 Q4-26 Q4-27 Q4-28 Q4-29 Q4-21 Q4-211 Q4-212 High overall vacancy will force conversions if not demolitions % 25 Office availability rate Amsterdam Rotterdam ' sq m 6 Office take-up, 12 months rolling Amsterdam Rotterdam Source: DTZ, AXA Real Estate Research Source: DTZ, AXA Real Estate Research Vacancy is over 15% in the four major Dutch office markets With a lack of net absorption expected for the next two to three years, conversions and demolitions will be the only way reduce vacancy 7

8 F 214F 215F 216F 217F Scarcity of prime office space to drive rental value growth EUR / sq m/ pa 4 Prime rents Rotterdam Amsterdam Forecast % pa 12 IPD - total return forecasts Netherlands Europe Source: JLL, DTZ, AXA Real Estate Research Source: AXA Real Estate Research Occupier s interest is focused on more centrally located modern office space But negative growth will limit prime rental value growth in 213 Secondary assets are undergoing a significant repricing that will continue into 213 However, due to IPD universe asset quality, Dutch IPD equivalent office total return will outperform the European average although it will be impacted by yield rises in 213 8

9 F 214F 215F 216F 217F Very weak outlook for secondary office property / sq m pa 4 Prime office rents versus average rents Average rent Prime rent Forecast Source: JLL, PMA, AXA Real Estate Research Average/ secondary rents are forecasted to see a further fall in values reflecting the on-going obsolescence in this segment The prime end of the market is projected to see some, but very little rental growth at the end of the forecast period due to demand recovery from 215 onwards (more effective growth than headline rental growth) A recovery for the secondary segment of the Dutch office market is not expected within the next five years 9

10 F 214F 215F 216F 217F Prime Yields: Slight adjustment and stabilisation % Prime net yields Amsterdam Rotterdam Forecast 4. Source: PMA (historic data), AXA Real Estate Research (forecast) Yields will adjust further into Stabilisation is expected from onwards

11 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec Secondary Yields: Further downward pressure expected % 1 Secondary yields Netherlands Offices Shopping Centres % 12 Secondary yield forecast office retail Source: CBRE, AXA Real Estate Research Source: AXA Real Estate Research Average/ secondary yields have already seen some major adjustments, in particular on the retail side Office yields have also increased, but to a lesser extent than retail In line with more distressed properties entering the market, we expect secondary yields to move out further, in particular in 213 We expect yields to move out until 214 and to remain flat between

12 Very little liquidity in recent years EUR bn 12 Netherlands investment volumes Office Retail Industrial Mixed Use Other/Unknown Source: DTZ, AXA Real Estate Research Investment volumes in 212 were almost 8% below their long term trend (22-211) Remaining investors are focussing on prime assets with long lease profiles (1y+) There is still a large gap between sellers and buyers expectations, at the same time there is a lot more property to come onto the market 12

13 Germany France Netherlands Italy UK Belgium Spain Luxemburg Poland German-open-ended fund disposals Assets within GOEF's in liquidation by EUR bn country 8 7 Office Retail Others % of LTA total transactions Netherlands Expected GOEF office sales Germany Italy Belgium France Spain UK Annual average GOEF office sales relative to LTA transaction volume Source: AXA Real Estate Research Source: DTZ, AXA Real Estate Research, * annual transaction volumes excluding exceptional years of 26/27 German open-ended funds under liquidation still have an asset value of over EUR25 billion (12 funds) Around 2.7 billion are located in The Netherlands (96% office) The majority of the GOEF s under liquidation have to sell their properties by the end of 214 However, as the largest funds have their liquidation date by end 217( SEB ImmoInvest, CS Euroreal), only 31% of the assets have to be liquidated by 214 (EUR8 bn) The average annual amount of office assets to be sold in the Netherlands is almost 3% of the average annual office investment volumes over the last 1 years (excluding exceptional years of 26/27) 13

14 Pressure of sales not yet reflected in valuations Normal cycle Peaking at a lower level Valuation perspective Market in denial Recovery slower than usual caused by slow economic recovery Market accepting Current position in cycle Source: AXA Real Estate Research In a normal cycle, a substantial proportion of the assets are not valued to reflect the reality of the market in the down-phase. Investors hope to bridge the trough so that they never acknowledge the real depth In this cycle, however, such a strategy is far less effective because The recovery phases will be slow and extended The banks are coming under increased pressure to reveal their true losses We believe that investors/valuers will be forced to switch from being in denial to accepting of the reality 14

15 Summary Threats: Refinancing and fund liquidations Continuing uncertainty and lack of confidence Shrinking office employment More efficient use of sqm (RGD 14sqm / office user) Municipalities reducing land costs for new office developments But: Is 15% vacancy really dangerous or is it acceptable overcapacity? Will trends continue? Office employment & efficiency? Will trends be compensated by other trends? Good news, opportunities: Asset selection in each sector Office occupiers in general have survived the crisis so far and became leaner and meaner Office: Prime, core, value add New entrepreneurial business models, investors will become entrepreneurs in real estate, customer focus Sustainability by re using existing offices Development pipeline has dried up

16 Is it all that bad in The Netherlands? A brief European comparison CBRE, February 213

17 Amsterdam Zuid-As (CBD) vacancy rate much lower than market average % 3 Amsterdam vacancy rates by subarea Zuidoost West Zuid-As (CBD) Total Frictional level Source: DTZ, CBRE, AXA Real Estate Research Amsterdam has one of the highest vacancy rates (18.8%) amongst the European cities Much lower vacancy rate in Zuid-As (CBD) with strong improvements over the last three years (from 16% to 7%) Zuid-As has a high attraction for national and international occupiers 17

18 and vacancy is expected to remain low ' sq m Zuid-As (CBD) office demand and supply Net absorption Forecasts Net addition Vacancy rate (RHS) % % Zuid-As (CBD) headline and effective rental growth Effective rental growth Headline rents growth Vacancy (RHS) % Source: JLL, AXA Real Estate Research Source: JLL, DTZ, AXA Real Estate Research Zero net additions in the last two years have supported the fall in vacancy rates No further additions to the market until 214 in Zuid-As (CBD) Vacancy rates in Zuid-As (CBD) expected to decline further even with low demand Employment growth forecast for Amsterdam is very weak Zuid-As (CBD) is expected to see positive net absorption due to continuing relocations of companies from other parts of the market Prime rents have remained stable since 28 Headline office rent still insulated by incentives 18

19 Q4 21 Q4 22 Q4 23 Q4 24 Q4 25 Q4 26 Q4 27 Q4 28 Q4 29 Q4 21 Q4 211 Q4 212 Proposition: Taking re-leasing risk in 214 % Prime net office yields Munich Amsterdam Madrid Central London Paris Source: PMA, AXA Real Estate Research Yields in Amsterdam are expected to adjust further - Current mispricing of Amsterdam Moderate effective rental growth can be expected from 215 onwards Investment strategy: Buy office building with single tenant and remaining short lease term 19

20 Conclusion The Dutch office market will on a macro level continue to face challenging times On a micro level prime / central office locations will continue to perform Pricing for prime might slip a bit further before stabilising or even some growth is expected In-depth local knowledge will be key when investing in value add or core

21 Important notice Restrictions on use This document has been prepared for information and discussion purposes with prospective institutional investors and does not constitute an offer or solicitation, nor is it the basis for any contract, for the purchase or sale of any investment. Due to its simplification this document is partial. It may not be copied or circulated, in whole or in part, without the prior written consent of AXA Real Estate Investment Managers ( AXA Real Estate ). Analysis and conclusions express the views of AXA Real Estate and may be subject to change without notice. It shall not be deemed to constitute investment advice and should not be relied upon as the basis for a decision to enter into a transaction or as the basis for an investment decision. AXA Real Estate disclaims any and all liability relating to a decision based on or for reliance on this document. Subscriptions to funds or any products are accepted only from eligible investors on the basis of the relevant current prospectus or information memorandum. Risk warnings The value of investments may fall as well as rise. Past performance is not necessarily indicative of future returns. Target returns are not guaranteed. Property investments can be illiquid and there is no guarantee that properties can be sold at valuation levels. Investments may be subject to gearing and should be considered higher risk than a similar ungeared investment. Investment returns may be subject to foreign currency exchange risks. Responsibility This document has been prepared and issued by AXA Real Estate Investment Managers, Marketing & Communication Team, Coeur Défense Tour B, 1 Esplanade du Général de Gaulle, Paris La Défense Cedex. Sources The information and data used in this document has been sourced from a number of recognized industry providers. We believe it to be accurate and have taken reasonable care to confirm this but cannot offer a guarantee that this is the case. Details of these sources are available on written request AXA Real Estate Investment Managers and its Affiliated Companies. All rights reserved.

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