Part of the M&G Group Outlook 215: Europe & Germany Research presentation 27 th November 214
European Economic Fundamentals Update & Outlook 2
Economic recovery broadening GDP growth by country Q3 214 GDP growth (%) 3.5 3. 2.5 2. 1.5 1..5. -.5-1. Year-on-year GDP growth Quarter-on-quarter GDP growth Unexpected slowdown in Eurozone 3 biggest economies 3 Source: Bloomberg, Sept 14
Private sector confidence losing some momentum European Purchasing Managers Index 6 55 5 45 4 35 3 4 1.5 1.5 -.5-1 -1.5-2 -2.5-3 -3.5 Nov-8 Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Composite PMI Indicator Eurozone Composite PMI Output Level consistent with % GDP growth Eurozone GDP But still above level consistent with % GDP growth Source: Bloomberg
German ZEW Survey German ZEW Survey 15 1 5-5 -1-15 -2-25 5 3 2 1-1 -2-3 -4-5 ZEW Economic Sentiment Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 German ZEW Index ZEW Long Term Average Germany GDP ZEW economic sentiment points to renewed, slow recovery Source: Bloomberg
3. 25. 2. 15. 1. 5.. 6 Mar-14 Sep-1 Mar-2 Sep-2 Mar-3 Sep-3 Mar-4 Sep-4 Mar-5 Sep-5 Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Sep-14 Unemployment rates edging down Unemployment Rates Across Europe Unemployment rate (%) Eurozone Germany Spain Italy France Portugal Netherlands Belgium Greece Sweden Labour markets showing signs of improvement Source: Bloomberg, October 214
European Economic Growth Forecasts GDP Growth Forecasts by Country, 213-215 5 4 Real GDP Growth (% p.a.) 3 2 1-1 -2-3 -4-5 213 214 215 Economic recovery to strengthen in short to medium term 7 Source: Consensus Economics, Nov 14
Inflation slowing down 6 5 4 3 2 1-1 -2 Consumer Price Index France Sweden Spain Eurozone Germany Italy Netherlands Belgium Portugal Finland Poland 8 Source: Bloomberg
European Property Market Update & Outlook 9
Prime Rental Change YTD (%) Office 3 2 1-1 -5-5 -4-4 2 3 3 3 4 4 11 29 1 8 Industrial 5-4 2 3-5 Retail Shops 15 1 5-5 -1-7 -5-2 2 3 3 4 4 5 6 9 1 1 Source: JLL, Q3 214
European Transaction Volumes (ex. UK) Transaction Volumes ( bn) 35. 3. 25. 2. 15. 1. 5.. Investment activity reached 68bn in the year to Q3 214, + 8bn compared to the same period in Q3. Throughout 214, the share of investment in the core markets of Germany and France slowed down from 63% in Q1 to 5% in Q3. At 4.6bn, European investment volumes targeting the peripheral markets in Q3, was greater than in France and the Nordics. Other CEE Netherlands France Peripheral countries Nordics Belgium Germany 11 Source: DTZ, Oct 14
Government Bond Yields 8 1 Year Government Bond Yields 1 Year Government Bond Yield (%) 7 6 5 4 3 2 1 Australia USA France Germany Japan UK Spain Canada Yields for many European bonds now at record lows; Spanish bond yields below those on US treasuries 12 Source: Bloomberg (Nov 214)
Prime Yield Movements to Q3 214 Office Industrials Retail Shops Oslo Stockholm Warsaw Rome Vienna Amsterdam Frankfurt Brussels Munich Dusseldorf Berlin Helsinki Lyon Hamburg Lux. Paris Prague Milan Madrid Dublin Barcelona Lisbon -15-1 -5 Q1 Q2 Q3 Stockholm Barcelona Rome Paris Milan Brussels Lyon Munich Hamburg Frankfurt Dusseldorf Amsterdam Warsaw Lux. Dublin Helsinki Berlin Prague Lisbon Madrid -15-1 -5 Q1 Q2 Q3 Munich Hamburg Dusseldorf Paris Helsinki Rome Milan Frankfurt Amsterdam Stockholm Warsaw Brussels Berlin Lyon Prague Madrid Barcelona Lisbon Dublin -2-15 -1-5 Q1 Q2 Q3 Prime yields compressing in recovering peripheral markets 13 Source: JLL, Q3 214
Secondary yields compressing in core markets 7 6 Secondary Yields in Germany (%) 5 4 3 2 1 High street Shopping centres Retail warehouses Offices Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 14 Source: CBRE
15 Industrial values remain the furthest from their peak 14 13 12 11 1 9 8 7 6 5 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Prime Capital Values in Europel ex-uk & Russia (Base: June 27 = 1) Retail shops Offices Industrials Source: JLL
Retail Shops 3 25 2 15 1 5-5 Spread between current yields and yields achieved in 27-1 Hamburg Berlin Dusseldorf Frankfurt Munich 27 214 16 Source: JLL, Bloomberg
Offices 35 3 25 2 15 1 5 Spread between current yields and yields achieved in 27-5 Hamburg Dusseldorf Frankfurt Berlin Munich 27 214 17 Source: JLL, Bloomberg
Industrials Spread between current yields and yields achieved in 27 5 4 3 2 1 Dusseldorf Frankfurt Hamburg Munich Berlin 27 214 18 Source: JLL, Bloomberg
Summary Modest economic forecasts but positive business sentiment Relative to government bonds, prime real estate seen as good value Industrial capital values furthest from previous peak Prime yields compressing in recovering markets Secondary yields compressing in core markets Capital markets to support total returns in the short term Occupational markets to support total returns in the medium term 19
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