9th April 213 Threats and opportunities in Dutch Office Investment Market Alphons Spaninks Local Head of Asset Management Benelux & Nordics Real Estate Investment Seminar 213
Dutch Real Estate: Office market Content Economy Office market What went wrong? Situation today Outlook What next? Opportunities..
2 21 22 23 24 25 26 27 28 29 21 211 212 213F 214F 215F 216F 217F 2 21 22 23 24 25 26 27 28 29 21 211 212 213F 214F 215F 216F 217F Dutch GDP and office employment % YoY 5 4 3 2 1-1 -2-3 -4-5 -6 Netherlands contributions to GDP growth Household consumption Government consumption Fixed investment Net Exports Change in inventories GDP Forecast % YoY 8 6 4 2-2 -4-6 Netherlands - office employment growth Forecast Financial services Business services Public administration Source: Datastream, AXA Real Estate Research Source: Experian, AXA Real Estate Research Declining household spending, lower net exports and reduced government expenditure put the Netherlands into recession Due to austerity measures and low confidence, household spending will continue to decrease in 213 Depressed growth will result in no private office employment growth and public sector office-jobs destruction Foreign demand will drive Dutch exports and will drive the recovery from 2nd half 213 but growth will remain below average 3
General real estate fundamentals in The Netherlands Economy Dutch economy is expected to contract by.6% according to the DNB in 213 Budget deficit expected to reach -3.5% (DNB) in 213, which could lead to a new round of austerity Overall rising unemployment (reached 7.7% in Feb 213 according to CBS) Forecasted decline in office employment in the short-term (213-214) Occupier markets-office Due to consolidation, centralization and workplace strategies like the New World of Work, take-up dynamics will remain modest Supply will further stabilise within the major important office locations, partly due to conversions of vacant office buildings into hotels and student apartments Supply mainly concentrates on secondary, mono-functional and less accessible locations (public transport) On a positive note, the current office development pipeline is relatively small and largely pre-let 4
What went wrong in offices? Commonly said a collective mistake was made in the industry the first years of this century: Municipalities offered great attractive office developments with relative low land prices in order to attract business to their cities (creating revenues: land and tax) Developers focussed on green field developments, motorway locations, satellite cities, not interested in brown field re development (too many challenges) Tenants were triggered by substantial incentives, compensation for moving costs etc from developers and new (first grade) quality: office hopping Investors were triggered by new grade stock and had pressure to invest, very competitive and pushing yields down. Wall of money, financiers were extremely competitive, LTV s up to 9%, why not? Overbuild, under demolished
But the real cause is in the last decade of the last century 199 2 13 million sqm of office space added Most if it in the periphery Office stock: 1992 3 million sqm 22 44 million sqm 212 49 million sqm Office employment growth and office stock growth 1995-22 employment + 31% stock + 36% 22-212 employment + 11% stock + 12% Office stock per segment source EIB, 21 Periphery Other Central Average sqm per office employee 2: 24 sqm 211: 16 sqm Trend: RGD is targeting 14 sqm
1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 Q4-1988 Q4-1989 Q4-199 Q4-1991 Q4-1992 Q4-1993 Q4-1994 Q4-1995 Q4-1996 Q4-1997 Q4-1998 Q4-1999 Q4-2 Q4-21 Q4-22 Q4-23 Q4-24 Q4-25 Q4-26 Q4-27 Q4-28 Q4-29 Q4-21 Q4-211 Q4-212 High overall vacancy will force conversions if not demolitions % 25 Office availability rate Amsterdam Rotterdam ' sq m 6 Office take-up, 12 months rolling Amsterdam Rotterdam 2 15 5 4 3 1 2 5 1 Source: DTZ, AXA Real Estate Research Source: DTZ, AXA Real Estate Research Vacancy is over 15% in the four major Dutch office markets With a lack of net absorption expected for the next two to three years, conversions and demolitions will be the only way reduce vacancy 7
21 22 23 24 25 26 27 28 29 21 211 212 213F 214F 215F 216F 217F 213 214 215 216 217 Scarcity of prime office space to drive rental value growth EUR / sq m/ pa 4 Prime rents Rotterdam Amsterdam Forecast % pa 12 IPD - total return forecasts Netherlands Europe 35 3 25 1 8 2 15 1 6 4 5 2 Source: JLL, DTZ, AXA Real Estate Research Source: AXA Real Estate Research Occupier s interest is focused on more centrally located modern office space But negative growth will limit prime rental value growth in 213 Secondary assets are undergoing a significant repricing that will continue into 213 However, due to IPD universe asset quality, Dutch IPD equivalent office total return will outperform the European average although it will be impacted by yield rises in 213 8
22 23 24 25 26 27 28 29 21 211 212 213F 214F 215F 216F 217F Very weak outlook for secondary office property / sq m pa 4 Prime office rents versus average rents Average rent Prime rent Forecast 35 3 25 2 15 Source: JLL, PMA, AXA Real Estate Research Average/ secondary rents are forecasted to see a further fall in values reflecting the on-going obsolescence in this segment The prime end of the market is projected to see some, but very little rental growth at the end of the forecast period due to demand recovery from 215 onwards (more effective growth than headline rental growth) A recovery for the secondary segment of the Dutch office market is not expected within the next five years 9
2 21 22 23 24 25 26 27 28 29 21 211 212 213F 214F 215F 216F 217F Prime Yields: Slight adjustment and stabilisation % 7. 6.5 6. 5.5 5. 4.5 Prime net yields Amsterdam Rotterdam Forecast 4. Source: PMA (historic data), AXA Real Estate Research (forecast) Yields will adjust further into 213-214 Stabilisation is expected from 215 216 onwards
Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 212 213 214 215 216 217 Secondary Yields: Further downward pressure expected % 1 Secondary yields Netherlands Offices Shopping Centres % 12 Secondary yield forecast office retail 9 8 7 11 1 6 9 5 8 4 7 Source: CBRE, AXA Real Estate Research Source: AXA Real Estate Research Average/ secondary yields have already seen some major adjustments, in particular on the retail side Office yields have also increased, but to a lesser extent than retail In line with more distressed properties entering the market, we expect secondary yields to move out further, in particular in 213 We expect yields to move out until 214 and to remain flat between 215-217 11
1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 Very little liquidity in recent years EUR bn 12 Netherlands investment volumes Office Retail Industrial Mixed Use Other/Unknown 1 8 6 4 2 Source: DTZ, AXA Real Estate Research Investment volumes in 212 were almost 8% below their long term trend (22-211) Remaining investors are focussing on prime assets with long lease profiles (1y+) There is still a large gap between sellers and buyers expectations, at the same time there is a lot more property to come onto the market 12
Germany France Netherlands Italy UK Belgium Spain Luxemburg 213 214 215 216 217 213 214 215 216 217 213 214 215 216 217 213 214 215 216 217 213 214 215 216 217 213 214 215 216 217 213 214 215 216 217 Poland German-open-ended fund disposals Assets within GOEF's in liquidation by EUR bn country 8 7 Office Retail Others 6 5 4 3 2 1 % of LTA total transactions 8 7 6 5 4 3 2 1 Netherlands Expected GOEF office sales Germany Italy Belgium France Spain UK Annual average GOEF office sales 213-217 relative to LTA transaction volume Source: AXA Real Estate Research Source: DTZ, AXA Real Estate Research, *23-212 annual transaction volumes excluding exceptional years of 26/27 German open-ended funds under liquidation still have an asset value of over EUR25 billion (12 funds) Around 2.7 billion are located in The Netherlands (96% office) The majority of the GOEF s under liquidation have to sell their properties by the end of 214 However, as the largest funds have their liquidation date by end 217( SEB ImmoInvest, CS Euroreal), only 31% of the assets have to be liquidated by 214 (EUR8 bn) The average annual amount of office assets to be sold in the Netherlands is almost 3% of the average annual office investment volumes over the last 1 years (excluding exceptional years of 26/27) 13
Pressure of sales not yet reflected in valuations Normal cycle Peaking at a lower level Valuation perspective Market in denial Recovery slower than usual caused by slow economic recovery Market accepting Current position in cycle Source: AXA Real Estate Research In a normal cycle, a substantial proportion of the assets are not valued to reflect the reality of the market in the down-phase. Investors hope to bridge the trough so that they never acknowledge the real depth In this cycle, however, such a strategy is far less effective because The recovery phases will be slow and extended The banks are coming under increased pressure to reveal their true losses We believe that investors/valuers will be forced to switch from being in denial to accepting of the reality 14
Summary Threats: Refinancing and fund liquidations Continuing uncertainty and lack of confidence Shrinking office employment More efficient use of sqm (RGD 14sqm / office user) Municipalities reducing land costs for new office developments But: Is 15% vacancy really dangerous or is it acceptable overcapacity? Will trends continue? Office employment & efficiency? Will trends be compensated by other trends? Good news, opportunities: Asset selection in each sector Office occupiers in general have survived the crisis so far and became leaner and meaner Office: Prime, core, value add New entrepreneurial business models, investors will become entrepreneurs in real estate, customer focus Sustainability by re using existing offices Development pipeline has dried up
Is it all that bad in The Netherlands? A brief European comparison CBRE, February 213
26 27 28 29 21 211 212 Amsterdam Zuid-As (CBD) vacancy rate much lower than market average % 3 Amsterdam vacancy rates by subarea Zuidoost West Zuid-As (CBD) Total 25 2 15 1 5 Frictional level Source: DTZ, CBRE, AXA Real Estate Research Amsterdam has one of the highest vacancy rates (18.8%) amongst the European cities Much lower vacancy rate in Zuid-As (CBD) with strong improvements over the last three years (from 16% to 7%) Zuid-As has a high attraction for national and international occupiers 17
26 27 28 29 21 211 212 213 214...and vacancy is expected to remain low ' sq m 14 12 1 8 6 4 2 Zuid-As (CBD) office demand and supply Net absorption Forecasts Net addition Vacancy rate (RHS) % 2 15 1 5 % 6 5 4 3 2 1-1 -2 Zuid-As (CBD) headline and effective rental growth Effective rental growth Headline rents growth Vacancy (RHS) 26 27 28 29 21 211 212 % 18 16 14 12 1 8 6 4 2-2 -4-6 Source: JLL, AXA Real Estate Research Source: JLL, DTZ, AXA Real Estate Research Zero net additions in the last two years have supported the fall in vacancy rates No further additions to the market until 214 in Zuid-As (CBD) Vacancy rates in Zuid-As (CBD) expected to decline further even with low demand Employment growth forecast for Amsterdam is very weak Zuid-As (CBD) is expected to see positive net absorption due to continuing relocations of companies from other parts of the market Prime rents have remained stable since 28 Headline office rent still insulated by incentives 18
Q4 21 Q4 22 Q4 23 Q4 24 Q4 25 Q4 26 Q4 27 Q4 28 Q4 29 Q4 21 Q4 211 Q4 212 Proposition: Taking re-leasing risk in 214 % 7. 6.5 6. 5.5 5. 4.5 4. 3.5 3. Prime net office yields Munich Amsterdam Madrid Central London Paris Source: PMA, AXA Real Estate Research Yields in Amsterdam are expected to adjust further - Current mispricing of Amsterdam Moderate effective rental growth can be expected from 215 onwards Investment strategy: Buy office building with single tenant and remaining short lease term 19
Conclusion The Dutch office market will on a macro level continue to face challenging times On a micro level prime / central office locations will continue to perform Pricing for prime might slip a bit further before stabilising or even some growth is expected In-depth local knowledge will be key when investing in value add or core
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