HALF IMAGE PLACEMENT HOLDER (HORIZONTAL) Resize image to cover grey box Australian capital is it really safer at home? November 2015 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Contents 8:28 Global liquidity Too late to the party? Strategy what strategy? Is it really safer to stay at home? Being paid to take risk Why Europe, why now? Illusive rental growth Where is capital scarce Exit liquidity Summary 1 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
8:28 2 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Europe investment transaction activity Debt versus equity 300bn 250bn 200bn 150bn 100bn 50bn 0bn 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (f) 2016 (f) 2017 (f) CURRENCY WARS ($BN 2015) Acquisitions Dispositions Net investment US 10.1 5.5 4.6 Middle East 2.1 0.9 1.2 Asia 2 0.5 1.5 Total 14.2 6.9 7.3 Increasing diversity of capital active in market Post QE flows from low yielding, fixed income products to real estate Financial deregulation in Asia The role of domestic institutional capital A new credit cycle increased availability and use of debt Competitive currency wars Source: RCA and Bloomberg, March 2015 3 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Sources of real estate capital in Europe ( bn, 2007 14) Investor group Acquisitions Dispositions Net investment European institutions 279 219 60 Rationalisation Non-European institutions Strategy 108 69 39 Deregulation of financial services Global funds 96 58 38 REITS 131 147 (17) Rationalisation High net worth individuals 14 7 7 Increased wealth High rate of capital raising & large number of funds exiting market Sovereign wealth funds 40 6 34 Long term acquisition mode Implications for market Key in terms of exit liquidity net investors in the UK Competition in Tier I markets will intensify further. Some investors will be tempted into Tier II markets More capital will be raised into this sector and managers/investors will then be forced to take additional risk Dispositions may well fall due to booming equity market Liberalisation of personal savings market in China? Additional capital from new SWF s counterbalanced by falling/low oil prices. Little impact on the sector Source: RCA, 2014 4 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Capital flows into Europe CAPITAL FLOWS INTO EUROPE China $9.1 24% Singapore $8.1 22% Hong Kong $4.0 11% South Korea $4.0 11% Malaysia $3.4 9% Taiwan $2.4 6% India $2.1 6% Australia $1.4 4% Thailand $1.4 4% Japan $0.9 2% Other $0.8 3% Total $37.7bn 100% 8:28 Source: RCA 2015 (Direct transactions over last 2 years) 5 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Capital flows into Europe CAPITAL FLOWS INTO EUROPE China $9.1 24% Singapore $8.1 22% Hong Kong $4.0 11% South Korea $4.0 11% Malaysia $3.4 9% Taiwan $2.4 6% India $2.1 6% Australia $1.4 4% Thailand $1.4 4% Japan $0.9 2% Other $0.8 3% Total $37.7bn 100% 8:28 8 Australian investors acquired 28 assets Over the last 3 years. Source: RCA 2015 (Direct transactions over last 2 years) 6 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Australian economy and interest rates CONTINUED GDP GROWTH INTEREST RATES TO INCREASE RAPIDLY IMPORTING INFLATION (Annual GDP growth) 6% Australia Eurozone UK (Base interest rates in Australia, UK and Eurozone) 8% Australia Eurozone UK 4% 2% 7% 6% 5% Forecast Assuming no further currency depreciation!! 0% 4% (2)% (4)% (6)% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Forecast 3% 2% 1% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: J.P. Morgan Asset Management, Oxford Economics as of October 2015 7 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Strategy what strategy? 8 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Everyone s got a strategy that works until they get punched in the face Mike Tyson 9 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Invest where capital is scarce LARGE CAPITAL INFLOWS SHARP INCREASE IN SUPERANNUATION MONEY CAPITAL VERSUS INVESTMENT UNIVERSE (Foreign real estate investment in Australia) (AUM of superannuation funds and allocation to real estate) Dry fire power ($bn) Size of investment universe ($bn) Capital/ universe ratio Europe 57.2 9,366 0.6 Australia 7.5 650 1.2 Source: J.P. Morgan Asset Management, JLL as of September 2015, IPE August 2015 War chest of Superannuation funds increasing by AUD100bn p.a. AUD100bn chasing domestic real estate market of AUD400bn. 4th largest superannuation pool in the world - IPE 2015 10 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
The world of the brave 10 year cycles, 5 year memories Focus on the domestic market and wait for the end of the commodity super cycle? Think about investing overseas only when domestic growth slows down and investment returns erode? Be forced to go up the risk curve when the domestic market slows down and, in so doing compound the level of risk by taking asset, currency and country risk all at the same time? Wait for competition to intensify from foreigner investors with substantially lower costs of capital? Wait patiently on the side-lines until all vestiges of value evaporate from US and European markets? NET REAL ESTATE CAPITAL FLOWS ($BN) 15 Incoming foreign capital Outgoing Australian capital 5 (5) (15) (25) (35) 2008 2009 2010 2011 2012 2013 2014 2014 FOREIGN INVESTMENT INTO EUROPE Other foreign capital Australian capital 120 80 40 0 2008 2009 2010 2011 2012 2013 2014 2015 Source: J.P. Morgan Asset Management, RCA 2015 11 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Why Europe, why now? 12 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Economic recovery is gaining traction in Europe A DELAYED ECONOMIC RECOVERY PROPPED UP BY QUANTITATIVE EASING Real GDP growth, YoY 6% 4% 2% 0% US Eurozone UK Size of QE programmes as % of net bond issuances 1 250% 200% 150% 100% 50% 0% Fed BoE ECB BoJ EXPECTED MONTHS TO FIRST INTEREST RATE HIKE EUROZONE (2)% (4)% (6)% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: J.P.Morgan Asset Management, Oxford Economics as of September 2015 1 Over the period from September 2008 to October 2014 for the Fed, March 2009 to June 2012 for the BoE, March 2015 to September 2016 for ECB, April 2013 to October 2015 for BoJ 13 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
The search for rental growth EUROPEAN AVERAGE VACANCY RATES 10% 9% 8% 7% 6% 2003 2004 2005 2006 2007 2008 2009 EUROPEAN GDP AND OFFICE TAKE-UP 2010 2011 2012 2013 Quarterly take-up (000s sqm) GDP growth (RHS) 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2014 2015 5.0% 0.0% -5.0% -10.0% OUTLOOK FOR RENTAL GROWTH (% P.A. 2015 19) Antwerp Warsaw Prague Oslo Rome Milan Rotterdam Brussels Budapest Vienna Amsterdam Helsinki Copenhagen Lyon Hamburg Paris Lisbon Munich Stockholm Berlin Frankfurt Spain Madrid Dublin 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Source: CBRE 2015 14 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
European investment opportunity Prime markets Institutional markets Other Capital overhang vs. scarcity of capital? Leasing vs. capital markets Trophy Assets in suspended animation Pricing Liquidity Exit Investment universe Global liquidity vs. domestic capital Exit liquidity The importance of timing Other Source: J.P. Morgan Asset Management, 2015 15 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Fully priced markets? Trophy Prime markets Intense competition Scarce product Fully priced Institutional markets Other EUROPEAN PROPERTY VALUES STILL WELL BELOW THEIR PEAK 110 100 United States Europe 90 80 70 60 2007 2008 2009 2010 2011 2012 2013 2014 Assets in suspended animation OUTWARD SHIFT IN YIELDS IMPACT ON CAPITAL VALUES Prime Capital values (pa) Prime yield constant +50bps +100 bps +150 bps London-West End 7.3% 5.0% 2.9% 0.4% London City 4.6% 2.6% 0.9% (1.4)% Other Paris 2.7% 0.4% (3.9)% Frankfurt 9% 1.5% Madrid 9.0% 7.0% 3.0% Source: J.P. Morgan Asset Management, 2015 16 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Assets in suspended animation Prime markets Institutional markets Other CAPITAL VALUES BELOW PREVIOUS PEAK 110 Prime (AA stock) 100 Average Trophy 90 80 70 2008 2009 2010 2011 2012 2013 2014 2015 Assets in suspended animation Mispriced core Domestic liquidity Scarcity of capital YIELD PREMIUMS REVERTING TO LT AVERAGE 4.0% 3.0% 2.0% Other 1.0% 0.0% 2008 2009 2010 2011 2012 2013 2014 2015 Source: J.P. Morgan Asset Management, 2015 17 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Late cycle recovery markets Trophy Prime markets Institutional markets Lagging recovery Domestic liquidity Markets yet to re-price Other LOW FINANCING COSTS (PROPERTY NET INITIAL YIELDS VS. 5 YEAR SWAP RATES IN THE EUROZONE) 9% 7% 5% 3% 1% (1)% Property yields Swap rates 450bps Assets in suspended animation 2000 2001 2002 2003 2004 2005 2006 2007 ACCRETIVE LEVERAGE (LEVERED INCOME RETURNS BEFORE TAX IN THE EUROZONE) 2008 2009 2010 2011 2012 2013 2014 2015 LTV NIY 4.0% 5.0% 6.0% 7.0% 8.0% Other 20% 4.1% 5.4% 6.6% 7.9% 9.1% 30% 4.5% 5.9% 7.4% 8.8% 10.2% 40% 5.0% 6.7% 8.3% 10.0% 11.7% Source: J.P. Morgan Asset Management, 2015 18 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Defensive real estate markets what if? DOWNSIDE PROTECTION AGAINST AN INCREASE IN YIELDS 250bps 200bps 150bps 100bps 50bps 0bps Budapest Madrid Barcelona Brussels Birmingham Manchester Milan Rome Prague Lyon Lisbon La Defense The Hague Amsterdam Warsaw Copenhagen Berlin Dusseldorf Oslo Frankfurt Stockholm London - West End Hamburg Munich Helsinki Vienna Paris London - City Dublin Source: JP Morgan Asset Management, 2015 Note: Outward movement of yields over next 5 years equal to the amount of capital accumulated plus income during the period 19 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
Summary IT'S ALL ABOUT TIMING ($BN) Acquisitions 15 10 5 Sales Despite increased liquidity in Europe, there are entire institutional markets that have been starved of capital post-lehman No investor will be rewarded for taking macro risk. Focus in the short term on core Europe Capital appreciation strategy focusing on assets with minor blemishes in institutional markets 0 (5) (10) (15) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Income strategy in late cycle recovery markets taking advantage of accretive financing Capital deployment in smaller institutional markets can be challenging. How long is the window of opportunity? Source: J.P. Morgan Asset Management, JLL as of September 2015 20 FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION
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