European Property Cycle Monitor

Transcription

1 September 2011 European Property Cycle Monitor Executive Summary GDP growth forecasts for Europe revised downwards to 1.9 percent and 1.3 percent for 2011 and 2012 respectively are expected to climb to 2.4 percent per annum by Recent events dictate that the risks to this are predominatly on the downside and specifically in the near term. A number of global uncertainties make it difficult to assess Europe s overall short-term prospects. While Ireland and Spain seem to remain on track with policy measures to address their budget problems, the fiscal trajectories of Greece and Italy appear less certain. The ramifications of a Greek default perpetuate fears about the overall health of the European banking industry. Investment transaction volumes in the third quarter of 2011 indicate a significant slowdown in investment levels in response to the renewed concerns over Eurozone debt issues and near term growth prospects. As a result the well documented flight to safety that has driven down yields in prime markets has widened the differential between prime, mature, liquid markets and secondary more peripheral markets. As the wider economic environment remains uncertain this relativity is likely to widen further as prime continues to be perceived as a safe haven for capital preservation. Offices: The performance of office rents varies widely across Europe. Rents in nearly half of all European office markets remain at least stagnant, with a few still in decline. One upside is that net additions to supply were unusually constrained in this cycle by a credit crunch that brought many planned projects to a sudden halt. The staggered recovery of European office markets has been led by London s financial centre which responds rapidly to the pulse of the global economy. Shopping Centres: Given the constrained supply pipeline, prime shopping centre rental growth profiles are predominantly determined by demand drivers. On an annualised basis the strongest growth is anticipated in Sweden, France, Poland and Germany. The inability of supply to respond quickly to changes in demand suggests that rental growth will shift from recovery to growth towards the end of the forecast horizon across most markets Industrial: Recent geographic divergence in European economic growth (solid in North Central Europe and the Nordics, weaker in the southern peripheral countries) has created a range of dynamics across the continent. After stabilising in 2010, the European industrial sector appeared poised for recovery as 2011 began. Increasing levels of industrial production in Eurozone countries like Germany and Sweden stimulated trade activity. Among all the major European logistics markets, Paris is expected to provide the most steady rental growth over the next five years. 1 Page

2 April 2011 Table of Contents: Page Prepared by: Simon Durkin Director Head of European Research Jaroslaw Morawski Vice President European Research Henry Stratton Assistant Vice President European Research Maren Vaeth Vice President European Research 1. Economic Context European Investment Office Market Shopping Centre Market Industrial Market Page

3 1. Economic Context As 2011 began, a cautiously upbeat outlook prevailed for Europe as well as the broader global economy. Germany s vibrant, ongoing economic recovery appeared to be powering European growth forward, overshadowing any potential trouble spots in the European periphery. While most economists anticipated that Europe s overall economic growth would encounter a mild deceleration period in mid-2011, few expected a significant slowdown. The guarded optimism began to unravel by the second quarter, however, as worries about the adequacy of Greece s 2010 fiscal bailout percolated and finally began to spread outward to Portugal, Italy, and even France. Financial markets became increasingly impatient with European policymakers to resolve the crisis. As ratings agencies began downgrading sovereign debt 1 (most recently Italy in mid September), an atmosphere of anxiety took hold. Forecasters began incrementally downgrading their outlooks for economic growth throughout the summer of Global Insight s March forecast originally called for 2.0 percent growth in Europe as a whole during 2011 and 2012 followed by a gradual acceleration to 2.4 percent by The near-term, however, feels less steady and forecasts for 2011 and 2012 have now been scaled back to 1.9 percent and 1.3 percent, respectively (see Exhibit 1). Exhibit 1 Real GDP Growth for Europe, f % 4.0 Global Insight September 2011 Global Insight March f 2012f 2013f 2014f 2015f Source: Global Insight, f indicates forecast March and September 2011 As the German economy slows, Sweden is likely to be the top performing major economy in Western Europe in the near term, with 3.1 percent growth forecast in 2011 and 2012 (see Exhibit 2). 1 Darkening Clouds: Irish Debt Downgraded as Euro Worries Spread, Der Spiegel, 13 July Page

4 Domestic, as well as external, demand has driven Sweden s recent economic expansion, and at least part of this can be pinned to a booming Swedish housing market. 2 With the US and Europe - Sweden s key export markets now facing slower growth, however, Sweden s vibrant economy is likely to lose some momentum. Near-term currency appreciation could compound these challenges even more for Sweden s exporters. After 2013, however, Sweden s average growth is likely to ease back in line with other Nordic countries, namely Finland and Norway, which are expected to see average GDP growth of 2.8 percent and 2.4 percent, respectively, in the 2013 to 2015 period. With near-flat growth in the second quarter of 2011, the UK entered the latter half of the year with tight credit conditions, elevated inflationary levels (relative to the rest of Europe), and lagging indicators from the business and household sectors. 3 Yet some of these drags on the economy are starting to ease, with less of a concern now over inflationary pressures. Solid, back-loaded recoveries in the UK and also Ireland should also propel GDP growth into a similar range to the Nordics over the next five years. Global Insight forecasts 2.5 percent average economic growth in the UK by 2013 to 2015 and 2.7 percent in Ireland. Two of Europe s more troubled economies Greece and Portugal must still contend with contracting economies in the near-term, but forecasts suggest that fiscal restructuring will eventually pave the way for stronger growth by Central and Eastern European (CEE) countries should experience faster growth than their Western European counterparts over the next five years. Annual growth in the Czech Republic, Poland, and even Hungary should average close to 4 percent between 2013 and Exhibit 2 Average Annual Real GDP Growth (%) Near term prospects ( f) vs. longer term ( f) 2011f-2012f 2013f-2015f Greece Portugal Italy Spain Ireland PIIGS Denmark United Kingdom Netherlands France Norway Belgium Germany Austria Finland Sweden Hungary Czech Republic Poland Average Annual Growth Core-Europe CEE Source: Global Insight, f indicates forecast September 2011 A number of global uncertainties make it difficult to assess Europe s overall short-term prospects. While Ireland and Spain seem to remain on track with policy measures to address their budget problems, the fiscal trajectories of Greece and Italy appear less certain. 2 3 European Central Bank, Monthly Bulletin, 15 September 2011, pp European Central Bank, Monthly Bulletin, 15 September 2011, p Page

5 The ramifications of a Greek default perpetuate fears about the overall health of the European banking industry. These fears are affirmed by Exhibit 3 which illustrates the LIBOR/OIS spread (overnight index swap), and reflects the risk premiums banks place on lending to one another. Despite all of the anxiety over the last couple of weeks, the US credit market appears to be in reasonably good shape with both corporate and household balance sheets looking relatively healthy. Furthermore, it would seem that the repairs to the banking and financial system in the US have improved confidence amongst the banks. In Europe, however, the LIBOR/OIS spread suggests banks in Europe have less confidence in one another and, as a result, are demanding higher premiums for short term lending. This is an indicator that should be monitored carefully as the political and financial situation in Europe evolves. Exhibit 3 USD vs. EUR LIBOR OIS Spread % 4 USD LIBOR - OIS Spread EUR LIBOR - OIS Spread Market distress stemming from the U.S. financial crisis Market distress due to European debt crisis Source: Bloomberg 12 September 2011 Recent indicators, however, are suggesting further weakness in the US economy, particularly with unemployment rates remaining elevated. The announcement of Operation Twist by the Federal Reserve on September 21 was received by the markets with some scepticism. Furthermore a continued slowdown in emerging markets, specifically China. suggests that it is less certain that China and the US will significantly support the European and global recovery in the near-term. Finally, inflationary pressures appear to have eased as Europe s economy has slowed, prompting the European Central Bank (ECB) to hold back on further interest rate hikes. Another rate increase in 2011 appears increasingly less likely, and a softening of ECB policy is even possible if economic conditions deteriorate further. Within the current economic context, investors have sought safety, thus pushing German bonds rates to record low levels. Interest rates, therefore, should stay low in the near term, but over the longer term, rising interest rates seem more likely. 5 Page

6 2. European Investment The real estate investment market continued on its recovery path in the first half of 2011 with transaction activity increasing over the same period in Total European Investment volumes in this period were 30 percent higher than the corresponding period in The retail and office sectors have seen 40 percent and 32 percent growth in transaction volumes with industrial dropping by 7 percent. However, data for the third quarter of 2011 to date, whilst still incomplete, indicate a significant slowdown in investment levels in response to the renewed concerns over Eurozone debt issues and near term growth prospects discussed in the previous section. Exhibit 4 European Investment Volumes By Region By Sector bn bn Source: European House Forecasts August 2011 Investor focus remains on well established core European markets like Germany, Sweden, France and the UK, with London and Paris remaining the most active markets. Continued appetite for prime assets is supported by long term investors looking for secure income from high quality assets with strong covenants. North American investors accounted for more than 25 percent of the cross border investment in Europe in the first half of 2011 followed by German and UK buyers. 5 The UK remained a major destination for capital accounting for more than a third of European transactions during this period 6. This flight to safety has contributed to further downward pressure on prime cap rates. Compression has been strongest in Europe s largest, core liquid markets of France and Germany, as well as the growth markets of CEE and Sweden. In some markets, prime cap 4 RCA, September CBRE, MarketView Q DTZ, Investment Market Update Q Page

7 rates are approaching levels seen in the previous market cycle. However, non-prime yields remained elevated and non-prime values remain depressed. Exhibit 5 below shows the relative recovery in capital values in CBD locations versus the periphery and the widening pricing differentials between the global cities of Paris and London versus peripheral cities in the UK and France. As the wider economic environment remains uncertain, this relativity is likely to widen further as prime continues to be perceived as a safe haven for capital preservation. Exhibit 5 European Office Capital Values Change Office Yields in Primary vs. Secondary Markets % % Note: Estimates on the basis of the current prime rent and prime yield. Source: CBRE August 2011 In our medium term outlook, we would expect the scale and timing of yield and capital pricing movements to vary significantly from market to market, assuming the relatively uniform and widespread effects of the financial crisis eventually recede and local economic, demographic and property market factors become the primary drivers of pricing, especially in supply constrained markets. However, global capital flows, which will inevitably continue their increasing importance across Europe, may lead to a more uniform set of adjustments than would otherwise appear rational. A decompression of yields is still expected in the medium term as shown in the exhibit below. However, the risks to this gradual profile are very much on the downside where the risk premium component to our yield forecast will become increasingly sensitive to ongoing market uncertainty, compounded by a less positive outlook for rental growth and fundamentals, despite an underlying environment of low interest rates. Increased uncertainty could also result in a further widening of the spread between prime and secondary products. While investors preference for security could lead to an increased pricing pressure for the best properties in the most stable markets, lack of demand would likely have the opposite effect on the less-prime assets. 7 Page

8 Exhibit 6 European Average Office Cap Rates f % Note: European Average weighted by stock, f indicates forecast Source: RREEF Research, PMA August Page

9 3. Office Market European office rents fell 10 percent in the recent cyclical downturn, but weighted averages can mask significant variations in performance across geographies. Rents in nearly half of all European office markets remain at least stagnant, with a few still in decline. By 2013, almost all European office markets should have moved past their cyclical troughs, and by 2015, the majority of markets should have recovered most of the rent levels lost since the last cyclical peak (see Exhibit 7). Exhibit 7 Office Rent Levels at Different Points of the Cycle Last peak = 100 Last Peak to Expected Trough Expected Trough to Index Level Dublin London: West End Madrid London: City Barcelona Birmingham Lisbon London: M25 West Paris: CBD Warsaw Stockholm Milan Rome Paris: La Défense Copenhagen Edinburgh Munich Berlin Glasgow Frankfurt Hamburg Budapest Manchester Dusseldorf Lyon Brussels Prague Helsinki Vienna Amsterdam Marseille Lille 50 Source: RREEF Research August 2011 One upside for the European office market is lack of supply. Net additions over the past cycle never reached levels as high as in previous cyclical peaks. New construction, which always tightens during a cyclical downturn, was even more constrained this time as the credit crunch brought many planned projects to a sudden halt. All of these factors have resulted in net additions to office supply being squeezed to their lowest levels of the past two decades (see Exhibit 8). The supply pipeline is unlikely to resume quickly. By 2015, annual net additions are expected to be scarcely above three million square metres, or about the same as the cyclical trough levels of the mid-1990s and mid-2000s. 9 Page

10 Exhibit 8 Net Additions of Office Space in Europe % millions sqm 8 7 Net additions in % of stock F 12F 13F 14F 15F Source: RREEF Research, PMA Spring 2011 Forecast Note: Weighted average of the key markets. f indicates forecast August 2011 London has lead the staggered recovery of European office market. While the UK s national economic recovery has been mild, London s financial centre remains closely aligned to the health of the global economy and this has a direct impact on the local office market. London s office demand recovered well in late 2009 and 2010 as a result of pent up requirements delayed during the financial crisis. Even as muted employment growth limits the potential for positive net absorption, market churn in London s City should boost the prospects for high quality prime space at the expense of older properties, although this demand will remain contingent on stability of global financial markets. The disruption of supply as a result of the credit crunch has now begun to impact the market as the availability of high quality stock depletes in the near term. With the development pipeline now inevitably picking up again, rental growth should begin levelling off towards the second half of the forecast period. Nearby in London s West End, new supply remains constrained, and demand prospects for Grade A space is supported by a more diverse occupier market that extends beyond the financial sector to include broad-based services firms. Weaker than expected tenant demand remains a key risk across London as there is significant precedent for global financial instability to disrupt the occupier market. The Paris office market was quick to follow London s recovery. France s economy turned in mid-2009, and office employment growth followed in 2010, along with an upturn in rental growth in Paris CBD and La Défense. Paris CBD is an international and liquid market that benefits from broad-based tenant demand and restricted supply. Recent stock additions in La Défense have made its fundamentals relatively less favourable than the CBD. Forecasts for office-using employment growth show that the overall Paris market could pick up as many as 60,000 new jobs over the next five years, or about the same number as the combined growth of French regional cities Lyon, Marseilles, and Lille during the same period. 7 Although the office cycle in Paris is shaping up to be steadier and less volatile than London s, it is not without general downside risks. Rental growth slowed in 2011, with office demand in Paris likely to be impacted by French austerity programmes as well as wavering business sentiment and hesitant demand conditions that emerged in mid As economic conditions stabilise, office rents in Paris are expected to rebuild their momentum over the next five years. 7 PMA, Spring Forecast Page

11 Office markets tend to be relatively less volatile in Germany than in much of the rest of Europe. The recent cycle has been no exception. Germany s strong economic fundamentals in 2010 and early 2011 fuelled tenant demand during this period and kept vacancy under control amid muted supply. While these fundamentals have led to an earlier rental recovery in German markets than in most of Europe, they have still not produced frothy market conditions. Rents should grow at a moderate pace of 2.0 to 2.5 percent per annum through This pace could even be a bit stronger in Berlin as it shakes off a decade of tepid underperformance. After years of limited construction and flat rents, the Berlin market this time seems poised for renaissance. Frankfurt is the market most likely to be Germany s laggard. The city s office demand is plagued by uncertainty about a second wave of saving plans in the banking industry as well as concern about the general health and stability of the European financial markets. The performance of the Munich and Hamburg office markets will fall somewhere in the middle between Berlin and Frankfurt. The early and relatively strong growth of office rents in Munich and Hamburg should taper in the latter years of the forecast. Even as Europe struggles with sovereign debt issues, the Nordic economies continue to demonstrate resilience. Sweden s economic stability through the recent recession and strong recovery in 2010 and 2011 has led to tightening property fundamentals across Stockholm. This has resulted in a modest rise in office rents. The market s front-loaded recovery is likely to be muted in comparison to previous cycles, with better prospects for the Stockholm CBD and Inner City than for other sub-markets. Office recoveries in Helsinki and Copenhagen are likely to be more back-loaded as the supply overhang continues to be absorbed. Given the fundamental distress, Southern European markets, as well as Ireland, are likely to see a backloaded recovery. Office rents in these markets are still seeking their trough levels but are set to turn in 2013 or Prime locations in Iberian markets have stabilised during 2011, but in peripheral locations, rents still face downward pressure. The excessive rental declines in this cycle are likely to experience strong reversal as the markets begin to turn, especially in Madrid and Dublin. Barcelona and the Italian markets, particularly Milan and Rome, should see a more moderate recovery with growth rates of 3 percent to 4 percent in the outer years of the forecasting period. The laggard in this group is Lisbon, where economic conditions are generally weaker and hence a later and slower recovery is expected. The major office markets of the CEE region - Warsaw, Prague, and Budapest - are experiencing unsynchronised cyclical dynamics. Warsaw is poised for a powerful front-loaded recovery. Solid economic conditions, a low vacancy rate, and limited supply provide the basis for 5.0 to 6.0 percent per annum rental growth in 2011 and 2012, followed by a sharp deceleration in rental gains by Prague s cyclical timing is similar to Warsaw but the shape of Prague s office cycle will likely be flatter, with 2.0 to 3.0 percent per annum rental growth in 2011 and 2012, tapering only modestly in the following years. The Budapest office market still grapples with a surplus of office supply, and the Hungarian economic outlook - solid by Western European standards - still lags the performance of its CEE neighbours in the near-term. This pushes back prospects for the Budapest office market s recovery until 2013 to 2015 when rental growth could average up to 4.0 percent per annum. 11 Page

12 4. Shopping Centre Market In the most indebted markets three factors are simultaneously reducing consumption. Firstly, declining disposable incomes in real terms as wages freeze while the cost of living inflates. Secondly, structural reform is reducing spending and/or employment in the public sector, decreasing demand directly and indirectly. Thirdly, private households are increasing savings to reduce debt, while the availability of consumer credit has reduced sharply. In less indebted markets, economies recovered earlier and more sharply, supporting employment growth and wages. Even where public spending cuts are required, they are less austere, resulting in a more solvent and confident consumer. However, economic growth prospects in even the strongest markets are hampered by weak demand for exports elsewhere in Europe. This is exacerbated by the fact that many of the weakest markets have traditionally been Europe s largest and most consumerist economies, including the UK and Spain, as well as Portugal, Ireland and Greece. Against this background it is perhaps unsurprising that real retail sales growth for Western Europe is expected to remain in negative territory at the end of 2011, at negative 0.8 percent. 8 While it is expected to recover in 2012, strengthening over the forecast horizon until the end of 2015, it will remain low relative to its long-term historical performance. Of course, underlying the aggregate is considerable diversity in both the timing and magnitude of retail sales growth across markets (Exhibit 9). To some extent this mirrors the timing of economic recovery and growth, but it also reflects the prevailing consumption culture of markets. For example, the sustained recovery in Germany in the first half of 2011 revived retail sales which saw German retail sales move above the European average for the first time this century. Yet, relative to Europe s aggregate historical performance, at 2.3 percent for the first half of 2011, 9 the magnitude of retail sales growth in Germany remains modest. Moreover, consumer confidence is fragile and the impact of the austerity package and environmental taxes to be implemented in the medium term have been long expected to erode growth by The more recent stalling of the German economy, coupled with the renewed turbulence in financial markets as the soveriegn debt crisis lingers, may cut short the revival in retail sales. 8 Global Insight, September PMA, August Page

13 Exhibit 9 Retail sales growth (real) across Europe Poland Czech Rep UK Hungary Sweden France Ireland Finland Germany Netherlands Austria Belgium Denmark Spain Italy Greece Portugal 2011f 2012f 2013f Source: Global Insight. f indicates forecast September 2011 % In contrast, the sustained recovery in the highly consumerist economies of Sweden and CEE has translated into stronger growth. This is anticipated to endure throughout the forecast horizon. Mirroring the interaction of consumer culture with economic buying power, consumption growth in France is stronger than what might otherwise be expected. This reflects the relative un-indebtedness of households cushioning the impact of necessary fiscal cuts on spending. While off a low base, the late recovery of the consumerist peripheral markets is expected to generate strong retail sales growth by 2014 or Indeed, the anticipated bounce in Spain s consumption at the back end of the period outweighs the steady, modest growth of Germany on an annualised basis. However, the drivers of retailer demand are more complex than simply following trends in retail sales growth. Retailers have exercised much greater caution, but have continued to pursue a more limited and uncompromising store expansion programme. Discount retailers have pursued the most aggressive expansion of stores since the downturn, taking the opportunity to benefit from an increased market share as well as the greater availability of good quality space in prime locations, at a lower cost. A number of US operators have expanded their European presence since the downturn, focusing on flagship stores and super prime locations in Europe s principle retail locations. Retailers with large, existing portfolios have focused on optimising store portfolios. This includes rationalising space into a smaller number of larger, better located stores as well as the closure of non performing stores. Such retailers are taking the opportunity to trade up portfolios, acquiring space in the best performing centres and High Streets at a lower marginal cost. This portfolio strategy is resulting in an even greater bifurcation of prime and secondary locations. This is evident in vacancy rate levels and in rental profiles, with prime rents stabilised while secondary centre rents decline further. 13 Page

14 While retailers have pursued this portfolio optimisation across all markets, expansion has been prioritised in early recovery markets such as Sweden, Germany and CEE countries. Of these, Germany and Poland have benefited from the strongest demand. In Germany, although retail sales are low per cap and growth is marginal, this remains one of Europe's largest and most affluent markets. The strong growth in Poland, combined with the scale of its population, make it a natural focus for retailers seeking a presence in the region. This has assisted in reducing the impact of a number of highly leveraged national retail chains during the downturn. The supply pipeline remains very constrained and is continuing to contract as further schemes in planning or under construction are withdrawn or postponed. This reflects the dearth of available finance capital and high pre-leasing thresholds required to attain the funding which is available. A large proportion of new development activity is focused on the largest, most stable core markets, for example, France and Germany as well as the stronger growth markets, including Sweden and CEE countries, notably Poland. The market dynamics of lower availability of finance and more constrained retailer demand means that new activity is primarily focused on the expansion and refurbishment of existing schemes rather than brownfield development. Given the long lead in times for shopping centre development, the ability of supply to respond to changes in demand is weak. As a consequence, a significant amount of space continues to be delivered in the Spanish market with 400,000 square metres expected in 2011, mainly in large schemes. Changes in stock per capita are strongest in Poland and Finland. In the former, stronger retail sales growth assists in supporting retail sales per square metre, but the scale of development in second and third tier cities and towns is resulting in an oversupply of space in regional markets. Although declining in all other markets, forecast national retail sales per square metre actually increases over the period in the UK, reflecting an absence of new supply. However, the UK is also experiencing strong sales leakage on-line and to non-food supermarket retail, reducing sales captured in traditional retail locations. Given a more constrained supply pipeline, prime shopping centre rental growth profiles are predominantly determined by demand drivers. On an annualised basis the strongest growth is anticipated in Sweden, France, Poland and Germany (Exhibit 10). The inability of supply to respond quickly to changes in demand suggests that rental growth will shift from recovery to growth towards the end of the forecast horizon across most markets. With a long lead time from inception to completion, improving fundamentals are likely to accelerate into the next cycle, with a limited risk of erosion from new supply. The bounce in retail sales growth coupled with the rental decline experienced in the consumerist economies of the UK, Spain, Ireland and Portugal point towards a rental rebound from Page

15 Exhibit 10 Annualised Prime Shopping Centre Rental Growth f Source: Global Insight. f indicates forecast September Page

16 5. Industrial Market European industrial construction remains limited in 2011 with speculative schemes yet to significantly materialise. Despite a disciplined supply pipeline, industrial rents look set for a modest cycle since near-term demand conditions remain weak across many markets. In Europe as a whole, market fundamentals should gradually improve over the next five years, but with nuanced differences across urban markets and property grades. In Europe, as in Japan, occupiers are driving a structural realignment of the industrial stock. This shift in tenant needs creates solid demand for modern properties, but can leave older properties technically obsolete and beyond retrofit. This dichotomy in the industrial property stock can create niche opportunities in key markets which can be masked by overall statistics that span multiple property grades. Recent geographic divergence in European economic growth (solid in northern Central Europe and the Nordics, weaker in the southern peripheral countries) has created a range of dynamics across the continent. After stabilising in 2010, the European industrial sector appeared poised for recovery as 2011 began. Increasing levels of industrial production in Eurozone countries like Germany and Sweden stimulated trade activity. Year-over-year industrial production surged at double-digit rates during the winter and early spring of 2011 in both Germany and Sweden. 10 As of July 2011, overall industrial production in the Eurozone was up less than 2 percent above the base year index in 2005, but in Germany, production had grown 15 percent over the same period. 11 Amid the more optimistic economic forecasts in the first half of 2011, this context created a more upbeat outlook for industrial property demand. In Germany in particular, the outlook for consumer spending in most industrial markets is still expected to be two to three times larger over the next five years than it was in the past five. 12 With the European economy slowing in mid-2011, the recovery in the major industrial markets now appears a bit more fragile in terms of their rental growth prospects. Industrial properties in the primary submarkets of Sweden, Germany and Poland are still likely to experience rental growth of more than 2.0 percent in 2011 and 2012, but the pace of growth will fall below this level during 2013 to In Germany, improved demand and a short supply of high quality industrial space has already led to a degree of rental growth which is expected to continue through Limited availability of modern, Grade A options will continue to constrain the upper end of the Polish market even though the stock of unoccupied secondary properties remains ample. In Sweden, strong economic growth is underpinning the recovery but reduced growth in its key trading partners and a relatively strong Krona remain key risks. Rental prospects in the southern European markets of Madrid, Barcelona and Milan are mostly back-loaded. Rents in these markets, especially in Spain, are still struggling in 2011, but rental growth should average near 2.0 percent per annum from 2013 to The supply pipeline in Spain has run dry, and at this point in the cycle, a rebound in industrial rents depends on the timing of the recovery in tenant demand. In Milan, the movement of tenants towards better quality industrial space on more favourable terms could be disrupted in the near term by waning confidence in the Italian economy Eurostat, Industrial production, July 2011 compared with June 2011, Euroindicators (press release), 14 September 2011 ( Eurostat, Industrial production, July 2011 compared with June 2011, Euroindicators (press release), 14 September 2011 ( PMA, Spring Forecast, Page

17 Among all the major European logistics markets, Paris is expected to provide the most steady rental growth over the next five years. In the near term, market fundamentals are expected to benefit from a recovery in demand in what is expected to be a relatively soft two-year period. Unlike the front-loaded rental performance anticipated for Germany, Sweden, and Poland, rents in Paris should maintain a gradual acceleration, with average growth rising above 3.0 percent per annum from 2013 and Exhibit 11 Industrial Average Rental Growth by Country f p.a. No coverage 1 2 % growth p.a. 1,7% 2 3 % growth p.a. 1,8% 1,6% 1,2% 1,6% 1,6% 2,5% 2,1% 2,3% 1,1% 1,2% Source: RREEF Research. f indicates forecast August Page

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