Investment Property Forum UK Consensus Forecasts

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1 UK CONSENSUS FORECASTS SUMMARY Investment Property Forum UK Consensus Forecasts This research was commissioned by the IPF Research Programme FEBRUARY 2015

2 UK Consensus Forecasts This research was funded and commissioned through the IPF Research Programme This Programme supports the IPF s wider goals of enhancing the understanding and efficiency of property as an investment. The initiative provides the UK property investment market with the ability to deliver substantial, objective and high-quality analysis on a structured basis. It encourages the whole industry to engage with other financial markets, the wider business community and government on a range of complementary issues. The Programme is funded by a cross-section of businesses, representing key market participants. The IPF gratefully acknowledges the support of these contributing organisations:

3 UK Consensus Forecasts 1 Survey of Independent Forecasts for UK Commercial Property Investment February 2015 The 2014 IPF Consensus forecast total return prediction of 18.9% appears high when compared with the reported IPD Quarterly Index total return of 17.9% (Annual Index outcome pending). The rental value growth average projection of 3.1% matches the IPD Quarterly outturn, whilst All Property capital value growth of 11.9% is lower than the Consensus view (12.6%). With the exception of property equities (at 24.3%), the direct real estate market significantly outperformed equities and bonds over the last year (0.5% and 11.8% respectively) 1. Looking to the current year, market expectations are more subdued, as capital growth rates are expected to fall back across all sectors, whilst further weakening through the remainder of the survey period is reflected in a five-year average of just 2.1% and total returns at 7.2% per annum. Key points Prospect of double-digit total returns for all sectors in 2015 Whilst rental growth rates for the office and industrial sectors have improved slightly on the November 2014 forecast averages, expectations for the retail sector as a whole remain muted, resulting in the All Property forecast remaining static at 3.3%. Despite the anticipated decline in capital growth rates compared to the previous year, with little opportunity for further yield compression, sentiment has nonetheless improved across all sectors to produce an average forecast of 7.0% capital growth in Total return projections for the year range from 11.1% for Standard Retail and Retail Warehouses to 14.6% for Offices, leading to an All Property total return forecast of 12.4%. Subsequent years of forecast predict weakening in all performance indicators The relatively robust expectations for 2015 are not sustained through the remainder of the forecast period. In each of the ensuing survey years, rental and capital value growth rates are expected to continue their decline or, in the case of retail rents, plateau in the middle years to such an extent that, by 2019, the All Property averages are anticipated to be 1.8% and -0.1% respectively, with total returns in the order of 5.0%. As previously identified, the gap in performance expectations between individual sectors diminishover time, whilst the superior performance of Offices over other sectors is reversed in Five-year averages propped up by 2015 forecasts Five-year annualised rental and capital value growth rates have weakened. As the strong 2014 capital growth performance falls away, to be replaced by a much weaker 2019 projection, the current forecast now lies at 2.6% and 2.1% per annum from 3.6%. The All Property five-year total return average forecast has deteriorated to 7.2% (from 9.2% in November) and is exceeded only by the 2015 and 2016 average forecasts, with performance prospects dipping to below 6.0% in the remaining years of the survey, and, potentially, to 5.0% in Omitting 2015 data, the four-year average total return forecast for the period 2016/2019, at 6.0%, is only marginally above the implied income return. 1 IPD UK Quarterly Property Index Results for the quarter to 31 December 2014

4 2 UK Consensus Forecasts Economic background The Office for National Statistics (ONS) reported a preliminary estimate of gross domestic product (GDP) growth of 0.5% in Q compared with Q3 2. GDP was 2.7% higher compared with the same quarter a year ago and was up 2.6% for 2014 as a whole. Output increased in two of the four main industrial groupings within the economy (by 0.8% in services and 1.3% in agriculture), contrasting with output decreases of 1.8% in construction and 0.1% in production over the quarter. In January 2015, public sector net borrowing was 8.8 billion in surplus, representing a decrease in borrowing of 2.3 billion compared with January Public sector net debt has continued to grow, being 1,464.0 billion, or 79.6% of GDP at the end of January 2015, compared to 1,449.2 billion, or 79.5% of GDP in October Turning to inflation, the Consumer Prices Index (CPI) 4 grew by 0.3% in the year to January 2015, down from 0.5% in December Major contributors to this slowing rate of increase were falling prices for motor fuels and food, although smaller price falls for clothing partially offset the slowdown. The Bank of England 5 noted that the inflation rate is well below its 2% target and that inflation is likely to fall further in the near term. Indeed, it could temporarily turn negative, as unusually low contributions from energy, food and other goods prices continue to bear down for the next year or so but inflation is likely to re-emerge towards the end of 2015 as these effects fall away. The Bank s Governor has stated that the UK is not experiencing deflation but indicated that, if low inflation persists, the Bank could cut interest rates further or expand the Bank s stimulus programme (quantitative easing). The Bank s current projection is that inflation will rise to the target rate of 2% by the middle of 2017 without it having to take any evasive action. If correct, interest rates will increase next year although, should inflation be greater than forecast (if the extra stimulus provided by low oil prices were to boost the economy more sharply than expected), the Bank could raise rates sooner than forecast. The latest ONS labour market release 5 records million people in work in the period October to December 2014, 103,000 more than for July to September and 608,000 more than for a year earlier. Conversely, 1.86 million people are recorded as unemployed (a rate of 5.7%, from 6.0%), 97,000 fewer than for the preceding three months and 486,000 fewer than for the same period of Pay including bonuses for employees was 2.1% higher than a year earlier (1.3% higher excluding bonuses). The ONS estimated a 5.4% increase in reports 7 retail sales in January 2015 compared with January 2014, the 22nd month of consecutive year-on-year growth, although compared with a month earlier, the quantity bought in the retail industry was estimated to have decreased by 0.3%. The value of internet sales decreased by 0.2% in January compared with December, accounting for 11.6% of all retail sales in January Online sales increased by 12.0% compared with January ONS: Gross Domestic Product: Preliminary Estimate, Q Release, 27 January ONS: Public Sector Finances, January 2015 Release, 20 February ONS: Consumer Price Inflation, January 2015, 17 February Bank of England Inflation Report, 12 February ONS: UK Labour Market, February 2015, 18 February ONS: Retail Sales, January 2015, 20 February 2015

5 UK Consensus Forecasts 3 All Property rental value growth forecasts % % 3.0% 2.6% 2.2% 1.8% 2.6% The pattern of annual rental growth projections, declining from a peak in 2015, is maintained in the current survey, although sentiment appears to be stronger in the middle years of the forecast than reported in November /19 Despite the optimism for growth in the current year, the five-year average has deteriorated slightly to reflect the expectation of a continued weakening of growth rates into All Property average capital value growth forecasts The expectation that the relative attractions of investment in real estate will decline, particularly as bond yields begin to rise, is demonstrated through falling capital value growth forecasts. The current projections show an improvement over the last quarter s forecasts, however. The 2015 average has risen in this period by 1.6% in 2016 (from 5.4%) and by 2.0% in 2016 (from 1.1%). % % 3.1% 0.6% 0.2% -0.1% 2.1% As a consequence of the 2019 forecast replacing 2014 s 12.6%, the five-year average has fallen (by almost 1.6%) /19 All Property total return forecasts % % 8.2% 8 7.2% 3.1% 5.6% % 6 5.2% 5.0% 2.1% 0.6% 0.2% % 5.1% 5.0% 5.1% 5.1% -0.1% 5.1% /19 Capital return Income return (implied) Total return Capital growth continues to be a major contributor to total returns and predictions for 2015 have strengthened since the last survey. The quarteron-quarter rise of 1.6% is wholly as a result of improved capital growth expectations. Each of the subsequent survey years to 2018 also record higher total returns than previously reported, although the implied income return continues to decline (having been almost 6.0% a year ago). The 2.0% fall in the five-year average reflects the loss of 2014 data and introduction of much weaker 2019 forecasts.

6 4 UK Consensus Forecasts All Property survey results by contributor type (Forecasts in brackets are November 2014 comparisons) Property Advisors and research consultancies 12 (12) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 5.4 (6.0) 5.1 (5.0) 4.0 (n/a) 9.0 (7.6) 6.4 (5.0) 4.4 (n/a) 14.1 (13.3) 11.3 (10.4) 9.3 (n/a) Minimum 2.9 (2.3) 2.3 (2.1) 2.3 (n/a) 3.0 (2.5) 1.3 (-1.0) 0.0 (n/a) 8.4 ( 8.0) 6.5 ( 4.7) 6.0 (n/a) Range 2.5 (3.7) 2.8 (2.9) 1.7 (n/a) 5.9 (5.1) 5.1 (6.0) 4.4 (n/a) 5.7 ( 5.3) 4.8 ( 5.7) 3.3 (n/a) Median 3.4 (3.3) 3.3 (3.1) 2.9 (n/a) 6.8 (4.9) 2.7 (2.2) 3.0 (n/a) 11.9 (10.4) 7.7 ( 7.3) 8.1 (n/a) Mean 3.6 (3.5) 3.2 (3.0) 2.9 (n/a) 6.6 (5.2) 3.1 (1.6) 2.6 (n/a) 12.0 (10.7) 8.3 ( 6.9) 7.8 (n/a) Fund Managers 15 (16) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 3.8 (4.7) 4.4 (4.3) 3.7 (n/a) 13.7 (11.9) 10.0 (3.4) 3.9 (n/a) 18.8 (17.7) 17.0 (17.7) 9.0 (n/a) Minimum 1.5 (2.0) 1.1 (1.3) 1.3 (n/a) 2.5 ( 1.0) -2.4 (-5.7) -0.7 (n/a) 8.2 ( 6.3) 2.2 ( 6.3) 4.2 (n/a) Range 2.3 (2.7) 3.3 (3.0) 2.4 (n/a) 11.2 (10.9) 12.4 (9.1) 4.6 (n/a) 10.6 (11.4) 14.8 (11.4) 4.8 (n/a) Median 3.2 (3.2) 2.6 (2.8) 2.5 (n/a) 6.8 ( 5.8) 2.7 (1.2) 1.7 (n/a) 12.2 (10.9) 7.8 (10.9) 6.6 (n/a) Mean 3.1 (3.2) 2.7 (2.8) 2.3 (n/a) 7.2 ( 5.4) 3.0 (0.5) 1.6 (n/a) 12.6 (10.7) 8.0 (10.7) 6.6 (n/a) All Forecasters 28 (30) contributors Rental value growth (%) Capital value growth (%) Total return (%) / / /19 Maximum 5.4 (6.0) 5.1 (5.0) 4.0 (n/a) 13.7 (11.9) 10.0 ( 5.0) 4.4 (n/a) 18.8 (17.7) 17.0 (10.4) 10.1 (n/a) Minimum 1.5 (2.0) 1.1 (1.3) 1.3 (n/a) 2.5 ( 1.0) -2.4 (-5.7) -0.7 (n/a) 8.2 ( 6.3) 2.2 (-0.7) 4.2 (n/a) Range 3.9 (4.0) 4.0 (3.7) 2.7 (n/a) 11.2 (10.9) 12.4 (10.7) 5.1 (n/a) 10.6 (11.4) 14.8 (11.1) 5.9 (n/a) Std. Dev. 0.7 (0.8) 0.8 (0.8) 0.7 (n/a) 2.4 ( 2.7) 2.6 ( 2.3) 1.5 (n/a) 2.4 (2.6) 2.8 ( 2.4) 1.5 (n/a) Median 3.4 (3.3) 3.0 (3.0) 2.6 (n/a) 6.8 ( 5.7) 2.8 ( 2.0) 2.0 (n/a) 12.2 (10.9) 7.8 ( 7.0) 7.2 (n/a) Mean 3.3 (3.3) 3.0 (2.9) 2.6 (n/a) 7.0 ( 5.4) 3.1 ( 1.1) 2.1 (n/a) 12.4 (10.8) 8.2 ( 6.6) 7.2 (n/a) Survey results by sector Sector summary means (no. contributors) Rental value growth (%) Capital value growth (%) Total return (%) /19* /19* /19* Office (25) Industrial (25) Standard Retail (24) Shopping Centre (24) Retail Warehouse (24) All Property (28) Notes: 1. Figures are subject to rounding and are forecasts of All Property or relevant segment Annual Index measures published by the Investment Property Databank. These measures relate to standing investments only, meaning that the effects of transaction activity, developments and certain active management initiatives are specifically excluded. 2. To qualify, all forecasts were produced no more than 12 weeks prior to the survey date. 3. Maximum: The strongest growth or return forecast in the survey under each heading. 4. Minimum: The weakest growth or return forecast in the survey under each heading. 5. Range: The difference between the maximum and minimum figures in the survey. 6. Median: The middle forecast when all observations are ranked in order. The average of the middle two forecasts is taken where there is an even number of observations. 7. Mean: The arithmetic mean of all forecasts in the survey under each heading. All views carry equal weight. 8. Standard deviation: A statistical measure of the spread of forecasts around the mean. Calculated at the All forecaster level only. 9. The sector figures are not analysed by contributor type; all figures are shown at the All forecaster level. 10. In the charts and tables, All Property figures are for 28 contributors, while the sector forecasts are for reduced samples (24/25) of contributors.

7 UK Consensus Forecasts 5 Acknowledgements The Investment Property Forum (IPF) thanks all those organisations who contributed to the IPF UK Consensus Forecasts for Q1 2015, including the following: Property advisors (including research consultancies): BNP Paribas Real Estate, Capital Economics, CBRE, Cluttons LLP, Colliers International, DTZ, Fletcher King, GVA, JLL, Paul Mitchell Real Estate Consultancy Limited, Real Estate Forecasting Limited, The Lazarus Partnership. Fund managers: Aberdeen Asset Management, Aviva Investors, AXA Real Estate Investment Management, CBRE Global Investors, Cordea Savills, Cornerstone Real Estate Advisors, Deutsche Asset & Wealth Management, F&C REIT Asset Management, HSBC Global Investors, Keills, Knight Frank Investment Management, LaSalle Investment Management, Legal & General Property, M&G Real Estate, Standard Life Investments. Note Consensus forecasts further the objective of the IPF to enhance the efficiency of the real estate investment market. The IPF is extremely grateful for the continuing support of the contributors as noted above. This publication is only possible thanks to the provision of these individual forecasts. If your organisation wishes to contribute to future surveys, please contact the IPF Research Director at pcraddock@ipf.org.uk. Disclaimer The IPF Survey of Independent Forecasts for UK Property Investment is for information purposes only. The information therein is believed to be correct, but cannot be guaranteed, and the opinions expressed in it constitute our judgment as of the date of publication but are subject to change. Reliance should not be placed on the information and opinions set out therein for the purposes of any particular transaction or advice. The IPF cannot accept any liability arising from any use of the publication. Copyright The IPF makes Consensus Forecasts available to IPF members, those organisations that supply data to the forecasts and those that subscribe to them. The copyright of Consensus Forecasts belongs to, and remains with, the IPF. You are entitled to use reasonable limited extracts and/or quotes from the publication in your work, reports and publications, with an appropriate acknowledgement of the source. It is a breach of copyright for any member or organisation to reproduce and/or republish in any printed or electronic form the whole Consensus Forecasts document, or substantive parts thereof, without the prior approval of the IPF. Such approval shall be on terms at the discretion of the IPF and may be subject to the payment of a fee.. Electronic copies of Consensus Forecasts may not be placed on an organisation s website, internal intranet or any other systems that widely disseminate the publication within a subscriber s organisation without the prior approval of the IPF. Such approval shall be on terms at the discretion of the IPF and may be subject to the payment of a fee. If you or your organisation wishes to use more than a reasonable extract from Consensus Forecasts or reproduce the publication, contact the IPF in the first instance. Address enquiries to the IPF Research Director at pcraddock@ipf.org.uk.

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