OCTOBER 2019EUROPE WATCH

Source: Federal Statistical Office of Germany, Eurostat

‘Order’ seems to have returned to the British Parliament. A law preventing a ‘no deal’ Brexit has been passed, and the Supreme Court has ruled that the Prime Minister’s suspension of Parliament was unlawful. The Prime Minister has had to resume talks with the EU to discuss an orderly Brexit; at the time of writing the direction of travel is anything but predictable. Nevertheless, a Brexit by the end of October – orderly or not – seems unlikely to happen, with the exit date likely to be postponed by another three months according to law. Some ‘order’ should also be brought back to Italy as a new coalition government between the centre-left Democratic party and the anti-establishment Five Star Movement was sworn in last month. This newly formed government is expected to have a more pro-European stance towards Italy’s fiscal and foreign policy. Although Germany is directly impacted by the decisions of populist governments due to its export-driven economy, it can still count on strong property market fundamentals. And so it is the focus of this month’s EuropeWatch.

Data points through end of September 2019.Change represents month-over-month change.

PRINCIPAL CONTRIBUTORS:

Esat Güler Christian Müller

19:002-10

3,569.45Euro Stoxx 50

0.00%ECB Policy Rate

-0.570%10-yr.

German Bond

$59.20Brent Crude

13 bps

4.2%

2.0%

WEAKER EXPORTS BUT SOUND MARKET FUNDAMENTALSWhile German domestic demand continued to grow in the first half of 2019, slumping exports has driven real GDP growth into a modest growth rate of 0.4% in Q2 (y/y). Weak global trade due to the US-China trade conflict as well as the Brexit uncertainty continue to weigh notably on manufacturing and the automotive sector. Consequently, we expect weaker economic growth in 2019/2020, although we predict domestic demand to partially compensate due to sound labour market fundamentals, stable wage growth and low inflation. Despite current economic challenges, occupier markets should remain resilient. Key cities are driven by supply constraints and structural demand drivers, while capital values still appear attractive relative to their European peers.

CORRELATION AND TEMPORARY BREAKDOWNBETWEEN (SOFT) SENTIMENT DATA AND (HARD) GDP DATA

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Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

Copyright © 2019, CBRE Global Investors, LLC. All rights reserved.

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Germany - Big 5 Offices* - Prime Rents & Vacancy Rate. Source: CBRE

Prime Rent (LHS) Vacancy Rate % (RHS)

2.602.90

4.203.80

2.62.9

4.03.8

2.62.9

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2.702.90

3.804.00

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High Street Office Logistics Shopping Centre

Germany Prime Initial Yields In %.

Q3 2018 Q4 2018 Q1 2019 Q2 2019

Source: BulwienGesa

GERMANY - BIG 5 OFFICES - PRIME RENTS & VACANCY RATE

STANDARD APARTMENT - EXISTING RENTAL STOCK GROWTH 2009-2018 P.A.

OFFICE RENT REVERSION POTENTIAL HIGHThe office market has outperformed in recent years. The combination of undersupply and moderate construction has driven vacancy rates downwards in the major markets. The CBD vacancy rate is at historic lows in Munich (0.4%) and close to historic lows in Hamburg (2.1%). The sharp decrease in the vacancy rate has created a substantial rent reversion potential for well-located offices. On a five-year basis - the typical length of a lease - prime rents have increased by 56% in Berlin, 25% in Hamburg and 17% in Munich. Construction activity across key markets is vivid but balanced, as over half the pipeline until 2021 is pre-let. Looking ahead, there is little supply threat in the near term and rents should continue to rise.

UPWARD PRESSURE ON RESIDENTIAL RENTS UNCHANGED, WHILE REGULATIONS INCREASEThe prosperous growth regions are driven by strong urban densification trends and supply constraints. As a result, the vacancy rates in key residential markets are sub 1%. While rents have increased by 3-5% pa on average over the past decade, further rental growth is predicted. To mitigate gentrification, regulations have been put in place. Whilst so far these have had limited impact, the federal governments announced they would adjust measures accordingly. Recently, the Berlin Senate agreed on a new regulation, the so-called “rent freeze”. While initial discussions banned rent increases for existing lease contracts for five years, recent announcements indicate that in future landlords may be able to link rent increases to inflation. Regardless of the outcome, regulations remain in favour of the tenant.

GERMANY INVESTOR DESTINATION #1, BUT SELECTIVE FOR RETAILGermany was named Europe’s top investment destination in the latest INREV survey. Market size, liquidity and sound occupier markets are driving investor sentiment. Solid income projections backed by structural drivers in key office, industrial and residential markets are attracting investor demand despite the low yield environment. The picture is different in the retail sector, however, due to current market consolidation. The rise of E-commerce and changing consumer habits will drive the transformation of the sector in the longer-term. In order to remain competitive, retailers are changing their expansion strategies to focus on selected stores. Prime high-street pitches in main cities have shown resilience relative to shopping centres, where market rents have declined and yields moved out over the past few quarters.

GERMANY PRIME INITIAL YIELDS

Source: CBRE

Source: CBRE

Note: Big 5 Offices: Berlin, Düsseldorf, Frankfurt, Hamburg, MunichSource: CBRE

FURTHER MODEST YIELD COMPRESSION FOR OFFICES AND INDUSTRIAL Given the U-turn of the ECB’s monetary policy, we expect interest rates to remain lower for longer and capital to continue chasing real estate. This should put further downward pressure on market yields. Despite the already low yields in Germany, the spread to alternative assets will remain substantial in the current environment. Due to structural drivers, office, logistics and residential yields should compress moderately in the short term, backed by sound rental uplift projections. Market yields for offices and retail high street stand at sub 3% in key markets. Prime logistics yields have shifted below the 4% hurdle and fallen below shopping centres, where investors have become selective and the investment market has become dry in the current consolidation phase.

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kMost Preferred Locations By Country Of Investor Origin - 2019.

Asia Pacific Europe North America

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MOST PREFERRED LOCATIONS BY COUNTRY OF INVESTOR ORIGIN - 2019.