Institutional Core Investors in CEE, Chairman RICS Europe Managing Director, RREEF Management GmbH Sofia, 17.03.2015 Client logo positioning
Modest downgrade in the outlook for Europe with notable divergence across the continent European GDP growth forecast 2015-19f Summary European GDP growth has been positive but weak. Outlook for 2015 modestly downgraded, but with marked differences amongst forecasters. 1.8% 2.3% 1.7% No coverage Notable short-term downgrades in Germany, France and Italy, with large upgrades in Ireland and Spain. 3.2% 2.5% 2.0% 1.5% 1.6% 1.6% 2.8% 3.5% 0.0% to 1.5% 1.5% to 2.0% 2.0% to 2.5% 2.5% + Eurozone inflation at just 0.3%. Deflation a risk but lower commodity prices supporting discretionary spending and providing room for monetary stimulus. ECB expected to provide additional stimulus in early 2015 although the form of asset purchases remains uncertain. 1.4% 0.8% 1.8% 2.1% Monetary policy and bond yield outlook diverging, with the BoE expected to start raising interest rates in 2015. 1.3% 2.3% 2.4% Monetary policy outlook expected to weaken the Euro. Unemployment is falling, although not in France and Italy. Jobs growth supporting demand for space in 2015/16. Note: f = forecast. There is no guarantee the forecast shown will materialise. Sources: Oxford Economics, and Wealth Management, December 2014 1
Investors continue to target European real estate European investment volumes By Region ( Billion, 12 month rolling average) By Sector ( Billion, 12 month rolling average) 350 UK Germany France Nordics Peripherals CE Others 350 Office Retail Industrial Hotel Apartment Other 300 300 250 250 200 200 150 150 100 100 50 50 0 0 Source: RCA, December 2014 2
Southern and CE Europe forecast to outperform the UK and Core Expected European Market Total Returns by Sector and Region (%) Core Europe UK CEE Periphery 30 Office High Street Logistics 25 25 20 15 10 5 0-5 20 15 10 5 0-5 -10-10 Note: f = forecast. There is no guarantee the forecast shown will materialise. Sources: PMA (historic data), Q3 2014,, December 2014 3
01 Strategic Implications
Investment Themes Mature Markets 1. Mature markets for specific long term investors Core office locations in London, Frankfurt, Munich, Hamburg, Paris CBD and Stockholm Long let major high street retail, supermarkets and residential Investor sentiment for core remains strong. Key locations for overseas capital seeking diversification from home (often low yielding) market. Strong economic fundamentals for long-term investors looking beyond cyclical volatility. Some markets looking expensive relative to bonds and historical spreads, however changes in bond rate pricing is not automatically transmitted through to real estate nor a primary focus of this type of investor. Emphasis on the major retail destinations with access to high footfall and large catchments. Less affected by the economic downturn; steady cash flow. Pricing already aggressive in a number of markets. Rise of discounters and convenience locations challenging established store strategies. Prime Office Yield Spread over 2014f 10y Bond Rate (%) Income Return (%) 4,50 4,00 6,5 IPD All Property IPD Retail 3,50 3,00 6 2,50 2,00 5,5 1,50 1,00 0,50 5 0,00 4,5 4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source:, IPD, December 2014 5
Investment Themes European Recovery 2. European Recovery Southern European Recovery Prime Total Returns (%) Investors remain bullish on the Periphery, sentiment across many sectors above that of Core Europe. Although prime yields have tightened in response, relative pricing supported by the sharp decline in bond yields during 2014. Prime yields tightening in Spain, expected improvement in occupier fundamentals and the wider economy is strengthening Italian returns expected to outperform the European average, but below that of Spain and Portugal. Greece moving back onto investor radar. Potential for substantial rebound but with very high risks. We anticipate that yield compression has almost played out in most markets and over the next five years, we expect prime yields will move towards their historical average. Rebound likely to be limited to a small subsection of prime assets and locations, location remains key. Madrid Milan European Average 30 Office High Street Retail Logistics 25 25 20 20 15 10 15 5 0 10-5 5-10 -15 0 Note: f = forecast. There is no guarantee the forecast shown will materialise. Source:, January 2015 6
Investment Themes Logistics 3. Prime logistics a strong performer Prime logistics in key transportation hubs including UK, Poland and Benelux Structural change impacting the sector, though speculative development remains light and the market is driven by build to suit. Forecast total returns among the highest for this sector over the next 5 years. High level of income return and less dependant on uncertain future value growth. The sector is more vulnerable to adverse economic developments and the associated risks however mitigated by the improving economic outlook. European Total Returns by Sector (%) Mega trends impacting future performance 25,0 Office High Street Retail Logistics 20,0 15,0 10,0 5,0 0,0-5,0-10,0-15,0 Export growth Consumer trends store to online & retailer strategy Margin pressure and globalisation Technology enabling supply chain efficiency 3PL consolidation and M&A Sustainability Infrastructure development Note: f = forecast. There is no guarantee the forecast shown will materialise. Source:, January 2015 7
Investment Themes Higher Risk UK Regional 4. Calculated risk Fundamentally strong locations in UK outside of London, also recommend moving up the risk curve. Already a well documented strategy, investors are comfortable in this space, and the window of opportunity to acquire stock is starting to close. Improving demand drivers, and little new supply, reducing the risk of taking on shorter leases and vacancy. Secondary assets now outperforming prime. Second tier cities still offering a substantial yield premium, although lot size and liquidity in markets such as Nottingham, Liverpool and Southampton is a risk. Selective approach and deep market knowledge on a regional/micro level necessary. Edinburgh - Home of devolved Scottish government - UK s second financial centre - Highly skilled population Glasgow - Largest city city in in Scotland - Second highest volume retail of spend retail spend - Hosting Commonwealth Commonwealth Games Games in 2014 in 2014 Leeds - Major financial centre - Rapid population growth projected - Major retail developments ongoing Investment Vol. (12 month Y-on-Y % change, Q4 2014) 200 150 Manchester - Excellent transport links - Host to many foreign firms - Growing media hub around BBC Birmingham - Second largest urban urban area area - High Destination banking presence of planned HS2 Line Major retail centre - Major retail centre Bristol - High tech aerospace hub hub - Highest employment employment rate rate in UKin UK Recent city centre redevelopment - Recent city centre redevelopment London - Major global financial centre - 20% of UK economy - Rapid population growth M25 West - Close proximity to Heathrow - Easy access to London - Large, bespoke buildings 100 50 0-50 104% Source:, RCA, January 2015 8
Investment Themes Germany 5. Germany Second tier German cities Due to the polycentric structure of the German economy, there are a range of investment opportunities beyond the Top 7 markets across all sectors. A selection of medium-sized cities continue to benefit from rising population growth due to regional migration and a dynamic labor market. Investors can benefit from a critical mass of investible stock, very healthy supply/demand ratios, sufficient liquidity, an attractive yield spread as well as high income security. Office vacancy rates (%) Prime office yields (%) 9 8 8 Spread (A/B) (RHS) A B C Spread (LTA) (RHS) 250 7 6 7 6 200 5 4 5 4 150 3 3 100 2 1 2 1 50 0 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: BulwienGesa,, December 2014 9
Investment Themes Central Europe and Recovery 6. Central Europe and Recovery Poland, to some extent also Czech Rep Strong fundamentals with good relative long-term growth perspectives, as they will continue to converge towards Western Europe High levels of new supply can pose a cyclical risk in some markets. Active Asset Management in prime locations Developments in supply constrained markets. Initially focusing upon major markets in the United Kingdom, France and Germany, where demand is consistent, rising and availability of quality space is low, Taking on leasing and void risk. Utilising specialist asset management and local knowledge to work the asset and improve the cash flow. Historical low levels of deliveries of new stock to many markets due to suppressed demand, falling rents and a challenging debt funding environment. As demand returns and debt markets loosen, opportunities for the delivery of new and refurbished stock. Property Yield (%, 2014) Net Change in European Office Stock (%) 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Offices HS Retail Logistics Core Europe UK Periphery CEE 5,00 4,50 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 0,00 Average Note: f = forecast. There is no guarantee the forecast shown will materialise. Source:, January 2015 10
02 Focus Central- and Eastern Europe
CEE in 2006 Strong demand across the region and even beyond Implications of a core investor: Polish yields in free fall Hungary still an option, while Czech Republic becomes first alternative to Warsaw Strong competition for rare opportunities in Romania and Bulgaria The Baltic states are too small to be considered Ukraine and Balkan states become the place for first movers - Investors gain confidence in Russia First group of investors start to monitor CIS countries like Kazakhstan. CEE Investment Volume (bn ) Target Markets Potential targets Monitored Avoid 10,0 7,5 5,0 2,5 0,0 2006 2007 2008 2009 2010 Source: JLL, Q3 2014, Deutsche AWM Research, 2014 2011 2012 2013 H1 2014 Bulgaria Croatia Czech Rep Hungary Poland Romania Slovakia Slovenia 12
CEE in 2014 Some still converge, other diverge Implications of a core investor: Poland and Czech Republic are left as core markets Hungary is loosing ground, Slovakia is too illiquid Romania and Bulgaria suffer from a lost decade The Baltic states are too small and too illiquid Geopolitical risks way too strong in Ukraine/Russia; Investors have lost confidence in Russia Balkan states are too intransparent Target Market Invested Market Not target market Avoid CEE: Sum of Investment Intentions (Balance, %, -1/1) 1,0 0,5 0,0-0,5-1,0 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 13 2009 Q3 2010 Q1 2010 Q2 2010 Q3 Source: PMA, Q3 2014, Deutsche AWM Research, 2014; Data availability differs: CE between 2004- Q2 2010, Eastern Europe (EE) since Q3 2008, HU, PL, CZ since Q3 2010) 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 PL CZ HU CE EE
Scenario: CEE in 2018 Back to full speed? Implications for a core investor: Target Market Investible Market Not target market Poland and Czech Republic are established as European prime markets Hungary has turned the political direction (?) Slovakia offers yield Romania is too big to ignore The Baltic economies keep on growing Ukraine conflict not a threat anymore but investors are still concerned about planning security The situation in Russia only gradually improves. Balkan states are gradually becoming more transparent Belarus remains the last white area on the map Not covered 14
Spanish market as a blueprint? After dire years market is kick-starting Spain Commercial Real Estate Investment ( billion) Spain: Investor Intentions (Balance) 14,0 12,0 10,0 8,0 6,0 4,0 2,0 Rolling 12-mo. Total Quarterly Vol. 0,8 0,6 0,4 0,2 0,0-0,2-0,4-0,6 0,0 Q4 '07 Q2 '08 Q4 '08 Q2 '09 Q4 '09 Q2 '10 Q4 '10 Q2 '11 Q4 '11 Q2 '12 Q4 '12 Q2 '13 Q4 '13 Q2 '14-0,8 2001 Q3 2003 Q3 2005 Q3 2007 Q3 2009 Q3 2010 Q2 2010 Q4 2011 Q2 2011 Q4 2012 Q3 2013 Q3 2014 Q3 Source: Real Capital Analytics, Sep 2014 Note: Office, retail and industrial real estate only Source: PMA, Q3 2014 15
Understanding Risks and Chances in CEE for a German core investor A. Market mechanics Is the local economy robust enough? Is the building quality good enough? When do investment windows open and close? Are those emerging markets really converging towards Western Europe? B. Transparency Do I really understand regional market cycles? Can I establish fair values? Do I have comparables? Against which benchmark do I measure my assumptions? Known unknowns vs. Unknown unknowns Professionalism (e.g. RICS) D. Politics Political risks have largely been ignored in Western Europe until recently Windfall taxes in Hungary Political instability in Romania and Bulgaria Ukraine vs. Russia conflict poses huge risks C. Accessibility How can I access the market? Will the exit work? Can I access local market knowledge? Do I need people on the ground? Should I open an office? 16
Pre-crisis: Economic growth as a reward for investors But different picture since 2008 GDP growth pa. (%) 10 8 6 4 2 0-2 -4 Central- and Eastern Europe Advanced economies Pre crisis (2001-2007) post crisis (2008-2014) Source: Oxford Economics, Dec 2014 17
And mind further blind spots: Demographics Urgency to address low fertility and ongoing emigration Population growth (Index 2000=100) 140 130 120 110 100 90 80 70 60 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 Germany United Kingdom Russia Bulgaria Croatia Czech Republic Estonia Georgia Hungary Latvia Lithuania Poland Romania Serbia Slovakia Slovenia European Union Source: Oxford Economics, Sep 2014 18
European office markets: CEE markets seem to have found their respective peer groups Initial yield, Q4 2014 (%) 15 14 13 12 11 10 9 8 Basket II: (7.5-8.5%) EE capitals, Baltic states, Budapest, Greece Basket III: (7.5-6.5%) Polish regions, Second-tier periphery Basket IV (5.5-6.5%) Warsaw, Prague, Weaker Second tier markets (UK, FR, GER), Basket V(5.0-5.5%) Spain First-tier, Second-tier Nordics, FR, UK Basket VI(<5.0%) German Top7, Prime Nordics, Swiss, Paris London 7 6 5 4 3 Basket I: (> 9%) "Second tier Debt", EX-EU periphery", Ukraine, Russia 2 1 0 Source: CBRE, Q4 2014 19 Kyiv St Petersburg Oporto Moscow Belgrade Thessaloniki Athens Sofia Bucharest Riga Vilnius Tallinn Budapest Tampere Bratislava Liverpool Valencia Jersey Katowice Krakow Lublin Poznan Szczecin TriCity Wroclaw Istanbul Southampton Lisbon Cardiff Rome Utrecht Brussels Prague Marseille Warsaw The Hague Schiphol Area Aberdeen Glasgow Leeds Rotterdam Milan Birmingham Bristol Edinburgh Lyon Amsterdam Lille Barcelona Malmo Aarhus Manchester Madrid Copenhagen Dublin Vienna Helsinki German Top-7 Oslo Gothenburg London - City Stockholm Paris CBD Geneva London - West Zurich
Investment markets have become more efficient CEE markets seem fairly priced in European context Office prime initial yield vs. risk (Score, %) Risk 5,0 4,5 4,0 3,5 3,0 2,5 e.g. French Regions Prague Talinn Bucharest Sofia Budapest Vilnius Belgrade Katowice Moscow Riga Warsaw Krakow St.Petersburg Kyiv 2,0 1,5 1,0 e.g. UK Regions 0,5 0,0 London, German speaking, Prime Nordics 0 2 4 6 8 10 12 14 16 18 Initial Yield Notes: Risk contains equal weighted market indicators: market risk, supply, economics (based on qualitative data and quantitative judgment) Source: CBRE, 2014; JLL, 2014; Deutsche AWM Research, 2014 20
Balancing Chances against Risks in CEE Poland and Czech Republic remain strategic targets for core investors Office Market Scoring (Markets ranked against own peer group) Rank Market Score Macro Transparency 1 Warsaw 3,53 4,0 4,0 4,0 4,5 2,0 3,0 3,5 2 Prague 3,14 3,5 4,0 3,5 4,0 2,0 2,5 2,8 3 Poland Regional 3,05 4,0 3,0 4,0 2,0 2,0 2,5 3,0 4 Bratislava 2,68 3,0 2,5 3,0 2,0 2,5 2,5 3,0 5 Bucarest 2,58 3,0 2,0 2,0 2,5 3,0 2,5 3,0 6 Riga/Tallin/Vilnius 2,50 4,0 1,5 3,0 1,0 2,5 2,0 3,0 7 Budapest 2,49 1,5 3,0 2,0 3,5 2,5 2,5 2,8 8 Moscow 2,45 2,0 2,0 1,0 5,0 2,5 2,5 3,0 9 Sofia 2,18 2,5 1,5 2,0 1,5 2,0 2,5 3,0 10 Belgrade 2,13 1,5 1,5 2,0 1,0 3,5 2,0 3,0 11 Lubiljana 2,05 2,0 1,5 3,5 1,0 1,5 1,5 3,0 12 Zagreb 1,90 1,5 1,5 2,5 1,0 1,5 2,0 3,0 13 Kyiv 1,30 1,0 1,0 1,0 1,0 1,0 1,0 3,0 Political risk RE Market size Supply Demand Relative Pricing 5,0 Chance 3,0 Balanced 1,0 Risk Notes: Risk contains equal weighted market indicators: market risk, supply, economics (based on qualitative data and quantitative judgment) Source: CBRE, 2014; JLL, 2014; Oxford Economics, 2014; Deutsche AWM Research, 2014 21
Deutsche AWM Recent Transaction Office building Rondo 1" (Warsaw CBD) Landmark office building in Warsaw ( Best in class since 2006) Despite short-term challenges on the market level, confidence in quality of asset and underlying strength of the economy Benefitting from strong Asset-Management capabilities on the ground Rondo 1 Floor area 65.332 m² Ground area 5.832 m² Number of floors 40 Year of construction 2006 Height 192 metres Date of purchase Q1 2014 Purchase price (49%) 145,6 Mio. EUR Initial yield 7,0 % Fund grundbesitz europa 22
Thank you for your attention Managing Director RREEF Management GmbH Mainzer Landstraße 178-190 60327 Frankfurt am Main Phone: +49(69)910-16120 Fax: +49(69)910-16991 joern.stobbe@db.com www.rreef.com 23