1bn. 400bps prime office yield spread over government bonds. Over. 300m. 318m. 164m. Magnify

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1 For investment professionals only Magnify European Office Market 2% The recovery in Europe is showing little sign of running out of steam. Economic sentiment is on an upwards trend, while the provision of financial stimulus continues, balancing out the remaining uncertainty around European elections. Monetary policy remains accommodative and there is little evidence of a sustained rise in inflation that would prompt the European Central Bank to increase interest rates, with the consensus only expecting the first rise in 21 months-time.1 This implies scope for further yield compression, with a spread of bps2 for selected European prime office yields over government bonds currently attractive. pa average rental growth for European offices over the next three years Source: M&G Real Estate. Over 1bn Invested in European offices Source: M&G Real Estate as at 30 June m Swedish office assets 00bps prime office yield spread over government bonds 318m Source: M&G Real Estate as at 30 June % 1 2 Source: Morgan Stanley, next interest rate hike consensus survey, August. Source: M&G Real Estate, Q Source: Consensus forecasts, August % 2.2% 3.1% 3.0 st s P foreca 2017 GD Netherlands Eurozone Spanish office assets Spain 16m Sweden German office assets.6% 7.5% 19.2% 12 l growth ce renta ffi o e im 2016 pr

2 Yield compression coupled with rental growth supporting capital values has boosted the performance of the European office sector. The economic cycle in Europe is behind the UK in its recovery, particularly London. In the UK capital, there are downside risks of demand vulnerability from Brexit, particularly in the office markets, while the rental cycle is further ahead, creating a susceptibility to weakness. Prime rents in London offices have declined 8.3% 3 since the EU referendum reflecting the uncertainty in the market, but this is from high levels and take-up as of Q2 has been resilient. Cities in the spotlight The weight of capital in Europe continues to be drawn by tight office occupier markets and the prospect of increasing office rents in Swedish, German and Spanish cities amongst others. Scope exists for further growth in prime rents, with the retail sector leading the recovery followed by offices and lastly industrials. However, prime headline retail rents are 30% above the pre-crisis peak, while offices are 10% higher and industrials % below. Compared to previous cycles, the current post Global Financial Crisis (GFC) recovery is likely to be longer, but sustainable, driven by consumer spending. Immediately following a crisis, governments usually increase spending to kickstart their economies as in recoveries prior to the GFC, but in recent times budgets have been tightened. Consumer spending could be suppressed as inflation comes through, but real wage growth is likely to grow more than 2% by the end of the year. EU unemployment is at a 9-year low, but still above pre-gfc levels with further room for improvement, particularly for those economies hardest hit by the crisis. The unemployment rate in Spain fell to an 8-year low of 17.2% in June. 5 This more natural economic recovery means that whilst yields continue to compress, the healthy spreads versus government bonds protects property from significant upward pressure on yields and dramatic movement is unlikely to be seen. Brexit impact While the outcome of the UK referendum has contributed to the positive outlook for the European office market, with select financial companies relocating some staff outside the UK, it is not necessarily a game-changer. However, it has reinforced existing attractive office markets on the continent. Particular markets that may benefit from this relocation trend are Paris,,, Dublin and Frankfurt. According to The City UK Report, 75,000 possible jobs will move to Paris, Frankfurt and Dublin, around 7% of London s financial sector. Eight of the largest investment banks in the UK have announced contingency plans to relocate to the EU. Currently the potential cost of Brexit to the UK financial sector is estimated to be in the region of 38bn. 3.75% 5/100 Improving employment Increase in take-up Strong rental growth prospects * PMA Q ** Source: M&G Real Estate All sources in the Cities in the spotlight are the same for each city. Calle Rios Rosa Substantially refurbished Established office location Capital value change (% pa) Europe ex UK Capital Growth Sentiment (RHS) Offices Retail Logistics Occupied by WPP Source: Haver. 3 Source: JLL. 5 Source: Bloomberg. 2

3 Edge of Central Business Districts offer attractive fundamentals Spread of Prime Office yields above Government Bond yields 6 5 Spread Prime Office Yield Govt Bond Yield Yield (%) Singapore Hong Kong New York San Francisco Milan Source: PMA, Q Cardiff Los Angeles Washington DC Sydney Paris: CBD Seoul London: WE Melbourne Tokyo London: City Frankfurt Amsterdam Lyon Dublin Osaka Brussels Helsinki 3.25% 90/100 Prime office yields in Paris CBD and both stand at around 3.0%, with an increasing number of markets now approaching historical lows. Yields in Amsterdam, Brussels and Lyon fell by 20-25bps over Q2. 6 Given the weight of capital searching for yield, we expect further inward compression to continue, albeit at a much slower pace in the short to medium-term. Rental growth will therefore play an important role to returns going forward. With yields now at historical lows in some markets, it is more challenging to find value in prime assets in the best locations. As some assets in CBD districts are expensively priced, investors are looking further afield to find value, while limited supply and rent affordability constraints are also driving occupiers to cast their search wider for affordable space. For example, in, prime yields in the CBD at the end of 2016 stood at 3.75%, versus.5% for the Solna/Sundbyberg district at the end of Attractive pricing can be found at the edge of CBDs, where comparable fundamentals, including good transport connectivity, favourable business environments and low vacancy rates, are underpinning rental growth. Investment in infrastructure across Europe is improving the transport connectivity of cities, enabling edge of CBD locations to be as connected as CBD districts. For example, the development of a subway extension in from the city centre will boost the prospects for the Solna/Sundbyberg district. Equally, the Grand Paris project, with phased scheduled completions from 2019 to 2027, will see a number of edge of CBD submarkets including Saint Denis, benefitting from improved transport infrastructure, such as new metro lines 1, 15, 16 and 17 as well as the extension of RER C. One of the most sought-after markets in Europe Limited supply High take-up in peripheral submarkets Ridlerstraße 55,, Germany Multi-let to nine tenants Low vacancy in Westend submarket Robust rental growth in submarket anticipated 6 Source: PMA, Q

4 Asset management initiatives, such as redevelopment and refurbishment, are being used to increase the quality of assets in non-cbd locations, offering a solution for occupiers looking for value for money. The rental discounts to CBD in peripheral areas are attracting those who are being priced out of CBD locations, driving down vacancy rates in cities such as, and Amsterdam. In, 37% of the deals concluded in were outside the CBD, 10% above the long-term average. The prime rent in Innenstadt, a CBD district, stood at 32 psm pa at the end of Q2 2017, while the equivalent figure for Westend on the edge of the CBD was 26 psm pa. The rent differential is attractive for occupiers, driving a low vacancy rate of 1.% for the Westend district. 8 Tight supply supports rental growth As Europe has lagged the recovery in the US and the UK post GFC, this has limited new building starts in the office market. The lack of quality, modern space continues to be a problem in the majority of markets, pushing down vacancy rates. European office vacancy decreased by 20bps to 7.8% in Q2 2017, the lowest since On a broad basis, net additions of office stock and forecasted supply across European cities are below historic levels, with the exception of. However, Sweden s capital city benefits from particularly strong occupier demand, boosted by the country s thriving economy, which is expected to grow by another 3% in Despite a higher pipeline on a comparative basis, demand has outstripped new supply and delivered 19.2% y-o-y rental growth in 2016, as strong economic growth (the highest in Europe in 2016) alongside a healthy labour market continues to boost demand for modern office space. With vacancy in central parts of already tight, we expect rents to continue to push higher in For example, vacancy in the CBD city centre market was 2.8% at the end of 2016, the lowest since Therefore, more restricted options exist for occupiers in the CBD. A lack of Grade A supply coupled with increased demand for office space has increased development activity in Europe, particularly in peripheral areas where there is more available land. Even where the largest available stock and pipelines can be found in Northern cities such as Frankfurt, Brussels and, strong job creation is generating demand to absorb it. The strongest q-o-q rental growth in Q2 was seen in Brussels (9.1%) followed by (6.3%) and (.%). 8 Overall, a total of 11 out of 23 office markets we monitor saw positive rental growth in Q2. 3.5% 9/100 Strong economy High rent increases Infrastructure development Blekholmen 1, Six linked buildings 3,72 sq m Let to around 30 tenants Excellent transport links Net additions (% Office Stock).0 Below historic average pipeline 3.5 Historic average Forecast average Rome Milan Paris Vienna Net additions (% stock) Helsinki Cologne Hamburg Amsterdam Frankfurt Dussledorf Lyon Lisbon Stuttgart Brussels Source: PMA Spring Source: Consensus Economics (August 2017).

5 Stronger rental growth prospects exist in particular sub-markets Office employment growth and GDP in is likely to be one of the strongest in Europe over the next five years. 10 Reflecting this strength, office takeup in 2016 reached 215,000 sq m, 20% above its 5-year average. Falls in the vacancy rate pushed prime rents up by 12.5% in 2015, but these were flat in The vacancy rate crept up in 2016, as development activity increased, but remains one of the lowest in Europe at.9% as at the end of Q2. 11 Whilst the CBD is deemed to be one of the most expensive in Europe, there is some strong rental growth potential in the submarkets given the discounted rents on offer. % office stock Given s attraction as a suitable alternative for fund management/other finance roles post-brexit, PMA estimate c.5,000 to 7,000 London based jobs could relocate to the city in the next 5 years. Whilst Kirchberg and the CBD are more obvious submarkets, the Airport District could equally benefit from this. This could create an additional ,000 sq m of demand over five years. Vacancy in the Airport District is just 3.%, with rents increasing by % over Increased transport connectivity plays a key role in improving this submarket s potential, with a new tramline, which will connect Kirchberg with the CBD by end-2017, also due to be extended to the Airport by Also, those economies starting from a low base, hit hardest by the GFC, are likely to see more significant uplifts from improving fundamentals. For example, is seeing occupiers move back into the CBD in a market where there is diminishing office supply against a backdrop of unemployment falling in the wider Spanish economy. Office employment in grew 2.6% in This has underpinned strong rental growth, with prime rents growing 7.7% in 2016, although rents are still well below the previous peak in mid Current and planned office stock availability vs employment growth End 2016 vacancy Total net additions Employment growth % (RHS) Employment growth % 86/100 Expensive CBD market High construction activity Demand driven by financial sector Da Vinci (Findel), Close to Airport Let to four quality tenants Submarket prime rents at 0% discount to CBD 0 Warsaw Prague Dublin Milan Lisbon Helsinki Amsterdam Rome Lyon Frankfurt Brussels Dusseldorf Paris Marseille Cologne Hamburg Vienna Stuttgart 0 Source: PMA. 10 Source: PMA Source: PMA. 5

6 Assessing future potential: Urban Connectivity scores Total connectivity score map Oslo Helsinki Espoo Gothenburg Aberdeen Århus Edinburgh Malmo Glasgow Leeds Manchester Hamburg Hanover Cambridge Amsterdam Birmingham Dublin Rotterdam Urtrecht Oxford Bremen Leipzig London Eindhoven Dortmund Bristol Guildford The Brussels Hague Düsseldorf Dresden Antwerp Frankfurt Cologne Mannheim Lille Nürnberg Prague Paris Stuttgart Vienna Nantes Zurich Bordeaux Lyon Milan Bologna Toulouse Montpellier Nice Marseille Rome Naples Valencia Lisbon Sevilla Warsaw.15% 71/100 Source: M&G Real Estate, December Urbanisation decreases the land available on which to build, exacerbating the lack of Grade A office supply in Europe. Over 70% of Europeans live in cities and the urban areas around them, with that figure expected to reach 80% by Housing demand is outpacing supply while higher rates of employment increase demand for office space, boosted by a wave of migration as more people move into European cities to live and work. The challenge is to service densification by improving urban connectivity, or the digital and physical infrastructures of a city, and at the same time increase the output of the economy. Working in a city with better connectivity is an attraction for occupiers in facilitating a more productive environment. M&G Real Estate has launched the European Connectivity rankings 1 where we have graded 6 cities based on their capacity to improve urban connectivity. Measuring this involves tracking two metrics: enablers and effects. Enablers can be considered as inputs (eg city mobility strategy, wi-fi speed, the coverage of Real Time Passenger Information/ RTPI apps), while effects can be considered as outputs, such as network affordability, transport carbon emissions and safety. Increase in development activity Rising investment volumes Technological improvements Kalvebod Brygge 7 Modern specification with flexible floor layout Prime waterfront location Lower vacancy rate in city centre submarket than Greater One example of high urban connectivity is Big Data solutions used to reduce congestion through RTPI alongside greener travel methods and affordable public transport, driving an economy s efficiency. Applying data analytics to create intelligent transportation systems will play a key role in improving urban connectivity, in line with predictions that Big Data will boost European GDP by 1.9% in Those cities with high connectivity scores should support real estate fundamentals. Cities with the most visionary connectivity policies are more likely to continue to attract talented people despite rising density pressures such as traffic congestion and carbon emissions. 13 Source: United Nations, Source: Connectivity report. 15 Source: Inrix. 6

7 Helsinki comes in at number 21 in our rankings, but has the potential to climb higher in the future, as by 2025 it hopes to make its centre car-free through building a transport system that renders them redundant. The city government is rewriting legislation to bring the laws covering different modes of transport into harmony in order to help roll-out an RTPI app. Whim has been developed by MaaS Global (short for Mobility as a Service) and mixes a variety of participating public and private transport services to help people in Helsinki travel easily and affordably across the city. This is precisely the type of technology that is changing the way we interact with the urban landscape, with implications for the real estate investment community. Helsinki Technology influences occupiers profile and preferences While the digital and physical infrastructure of a city that connects with real estate can influence its potential, technology is also driving occupiers preferences for workspace. There is demand for technologically advanced, open and collaborative workspace and co-working is a cost-effective way of leasing space for occupiers with all-inclusive membership costs. The social amenities on offer, digital connectivity and fit-out of a building have become more important for occupiers and therefore for investors and asset managers looking to boost potential rental growth. Buildings are not only expected to be smarter from a technological perspective to reduce operational costs, but also to facilitate the way employees work, improving their productivity and even their wellbeing. As urbanisation increases densification and the need to service this, the regeneration of areas and assets can create new opportunities for property investors. For example, in the Kreuzberg area of, where many start-ups occupy once dilapidated brick warehouses, the average annual rent in this submarket increased by 6% in the last three years, compared with 16% for prime office space, according to JLL figures..0% 68/100 Low space under construction Rising rental growth Connectivity improvement potential, the fastest growing location for IT start-up companies worldwide, has the highest proportion of total flexible office space listed as co-working space, followed by New York City. 16 Companies are attracted by the favourable business environment, lower housing costs and overall cost of living. As such attracts young, highly qualified workers and has one of the highest shares of foreign employees within start-ups across Europe (35%). The TMT sector is now the second largest driver of take-up in (behind the Professional and Business Services sector), accounting for 22% of demand over There are around 38,000 companies from the TMT and creative industries sectors operating in the city, with estimates of 1,000 jobs to be added to the TMT sector in by Source: Instant, April

8 This level of activity pushed office take-up in 2016 to a record year (86,000 sq m), around 0% above its 10-year historic average. 17 This ranked first against all other German cities and second in Europe overall. Given this level of demand and the record low vacancy rates, prime rents in increased by 12.6% 18 in 2016 (the second largest increase behind ). Technology is radically changing the make-up of office tenants, their business models and consequently their requirements for space. Property that can meet these needs, we believe can offer the best potential for rental growth and occupier attraction and retention. Conclusion Brightening prospects in Europe, as the cycle catches up with the US and UK, is boosting demand for office space. However, urbanisation puts further pressure on land-constrained areas, adding to the demand and supply imbalance of Grade A office space. This is driving down vacancy rates, particularly in countries where the economy is improving or accelerating. Such dynamics are pushing up prime rents in many European markets, lending support to capital values. Expectations of rental growth provide support to investors targeting European real estate assets, adding to pressure on pricing; with yields in many markets approaching historical lows, attractive value can be uncovered by looking outside of the CBD. In a restricted supply market, considering edge of CBD locations is an option for investors and occupiers in finding value. Rental discounts compared with the CBD are part of this attraction, alongside improving prospects for submarkets with strong transport connectivity. Investing in this way can increase the total returns prospects for property investors, as a healthier yield spread provides more scope for yield compression coupled with stronger rental growth in particular submarkets. The continuing economic recovery is likely to see increased development activity. Such a pick-up has already been seen, but as the recovery continues, we expect strong leasing activity driven by high occupier demand for modern space to offset this. Demand from occupiers will not only be for well-connected locations with affordable space, but also for assets that meet their requirements as these evolve and new and innovative working practices and environments centered around digital connectivity develop. 3.1% 98/100 Tech hotspot Limited supply Low vacancy Badensche Straße 23/2 Excellent transport links Low vacancy in submarket Wilmersdorf Submarket prime rents at 0% discount to CBD 17 Source: PMA. 18 8

9 M&G Real Estate continental European office exposure Office City Country 1 Kalvebod Brygge 7 Denmark 2 Avenue Hoche Paris France 3 Le Val St Quentin 1/2 Paris France Badensche Straße 23/2 Germany 5 Mainzer Landstraße 61 Frankfurt Germany 6 Oval Frankfurt Germany 7 Ridlerstraße 55 Germany 8 Von-Gablenz-straße Cologne Germany 9 Databankweg Amersfoort The Netherlands 10 Jupiter House Amsterdam The Netherlands 11 Calle Rios Rosas 26 Spain 12 Naõ Building Spain 13 Blekholmen 1 Sweden 1 Paradiset Sweden 15 Woluwe Atrium Brussels Belgium 16 Da Vinci (Findel) 17 Via Lodovico Il Moro 18 Milan Italy

10 Contacts Richard Gwilliam Head of Property Research + (0) richard.gwilliam@mandg.com Christopher Andrews, CFA Head of Client Relationships and Marketing, Real Estate +(65) chris.j.andrews@mandg.com Lucy Williams Director, Institutional Business: UK and Europe, Real Estate + (0) lucy.williams@mandg.com Stefan Cornelissen Director of Institutional Business: Benelux, Nordics and Switzerland +31 (0) stefan.cornelissen@mandg.co.uk Vanessa Muscarà Associate Director: Property Research + (0) vanessa.muscara@mandg.com Alex Lund Associate: Property Research + (0) alex.lund@mandg.com For investment professionals only. This document is for investment professionals only and should not be passed to anyone else as further distribution might be restricted or illegal in certain jurisdictions. The distribution of this document does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you should ensure you understand the risk profile of the products or services you plan to purchase. This document is issued by M&G Investment Management Limited (except if noted otherwise below). The services and products provided by M&G Investment Management Limited are available only to investors who come within the category of the Professional Client as defined in the Financial Conduct Authority s Handbook. They are not available to individual investors, who should not rely on this communication. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Opinions are subject to change without notice. In Australia, M&G Investment Management Limited does not hold an Australian financial services licence and is exempt from the requirement to hold one for the financial services it provides. M&G Investment Management Limited is regulated by the Financial Conduct Authority under the laws of the UK which differ from Australian laws. In Singapore, this document is issued by M&G Real Estate Asia Pte Ltd. This document may not be circulated or distributed, whether directly or indirectly, to persons in Singapore other than (i) an institutional investor pursuant to Section 30 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ) or (ii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. M&G Investments and M&G Real Estate are business names of M&G Investment Management Limited and are used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under numbers with its registered office at Laurence Pountney Hill, London ECR 0HH. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is registered in England and Wales under number with its registered office at Laurence Pountney Hill, London ECR 0HH. M&G Real Estate Limited forms part of the M&G Group of companies. M&G Investment Management Limited and M&G Real Estate Limited are indirect subsidiaries of Prudential plc of the United Kingdom. Prudential plc and its affiliated companies constitute one of the world s leading financial services groups and is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America. DEC 17 / W251810