Market Trends Seminar€¦ · Central London supply – September 2016 27.0m sq ft (%) sq ft (RHS)...
Transcript of Market Trends Seminar€¦ · Central London supply – September 2016 27.0m sq ft (%) sq ft (RHS)...
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Welcome……..
Market Trends Seminar Post-Brexit Prospects for Property
October 26th 2016
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Your Panel……..
Steve Mallen
– Principal, Steve Mallen Consulting (Geography)
Marcus Geddes
– Head of London Portfolio, Land Securities (Land Economy)
James Gulliford
– Joint Head of National Investments, Savills (Land Economy)
Andrew Hook
– Fund Manager, Aviva Investors Property Trust (Law, Real Estate Finance & Geography)
Dominic Smith
– Head of Real Estate Debt Analytics, CBRE (Geography)
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Agenda……...
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Moderator……..
Introduction Steve Mallen
Principal, SM Consulting
Steve Mallen
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Brexit – Does it matter ?
Steve Mallen
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Total Value of UK Mortgage Approvals
0
5,000
10,000
15,000
20,000
25,000
Steve Mallen
Jan10 Aug 16
Source: BSA
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Steve Mallen
Retail sales – UK Investment Funds……..
Source: Investment Association
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Marcus Geddes Head of Property, London Portfolio
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London Portfolio
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Take-up falling
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Million sq ft Central London quarterly take-up
Quarterly take-up
Source: CBRE
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-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0
2
4
6
8
10
12
14
16
18
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Grade A completions and vacancy
Central London supply – September 2016
Source: CBRE, Knight Frank, Land Securities
Va
ca
ncy ra
te (%
) M
illio
n s
q f
t
Completed Under construction
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-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
0
2
4
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10
12
14
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18
198
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1+
Grade A completions and vacancy
Central London supply – September 2016
27.0m
sq ft
Va
ca
ncy ra
te (%
) M
illio
n s
q f
t
(RHS) Vacancy rate (all grades)
Completed Under construction Proposed
Potential fringe London Average completions
Source: CBRE, Knight Frank, Land Securities
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Central London supply – March 16 and September 16
forecasts
8.1 7.1
10.4 10.0 8.8
23.9
0
5
10
15
20
25
30
Mar16
Mar16
Mar16
Mar16
Mar16
Mar16
Million sq
ft
Source: CBRE, Knight Frank, Land Securities
2016 2017 2018 2019 2020 2021+
Forecast Grade A completions
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Central London supply – March 16 and September 16
forecasts
8.1 7.1
10.4 10.0 8.8
23.9
0
5
10
15
20
25
30
Mar16
Sept16
Mar16
Sept16
Mar16
Sept16
Mar16
Sept16
Mar16
Sept16
Mar16
Sept16
Million sq
ft
2016 2017 2018 2019 2020 2021+
7.0
8.4
9.7
13.0
27.0
8.4
Source: CBRE, Knight Frank, Land Securities
Forecast Grade A completions Average completions
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Rents fall as occupiers release space
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
%
Source: CBRE and IPD
Central London rental value growth
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Rents fall as occupiers release space
-30.0
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
%
Mill
ion
s o
f sq ft
-28%
Net new supply of second hand space Central London rental value growth
-23%
Source: CBRE and IPD
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Volumes down 36% compared to Q3 2015*, slowing ahead to 23 June
Well let, high quality assets most resilient
Limited transactional evidence on higher risk properties
Investment Market
Nova South, SW1 * Rolling 4 quarters year-on-year
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Re-pricing of risk
Marginal movement of assumptions
Significant impact on land value
Investment Market - Land Pricing
Cushman Wakefield
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London Portfolio
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£3bn of disposals in London over the last six years
Crystallising early profit on developments
Disposal of non-core assets with limited look ahead returns after adding value
Sales – crystallising value
Empress State, SW6
110 Cannon Street, EC4
Thomas More Square, E1
Arundel Great Court, WC2
Holborn Gate, WC1
Times Square, EC4
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London
Portfolio
Key:
Size denotes
weighting by
value
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Portion of London Portfolio refurbished or developed since 2006
A modern relevant office portfolio
81% of the portfolio is less than 10 years old
Demolish
ed and
redevelop
ed
61%
Refurbish
ed
20%
Managed
19%
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Diverse customer base
16.4%
42.2%
13.8%
14.4%
2.2%
5.5%
2.1% 3.4%
Selected key occupiers Rental income by business sector
Standard Industrial Classification
Retail Trade
Public admin
Manufacturing
Transport and comms
Wholesale trade
Other
Financial services
Services
Source: Land Securities and IPD
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3.5m sq ft development programme
11.5 acres of new public realm
20,000 employed on construction sites
Community Employment Programme: trained 1,100 over last 5 years securing 826 jobs
Development
Nova, SW1
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20 Eastbourne Terrace, W2
Three lettings secured in August totalling 24,000 sq ft
10 year leases
90% let with two floors remaining
1 & 2 New Ludgate, EC4
5,160 sq ft let since March
96% let with one floor remaining
Development letting – maintaining momentum
New Ludgate, EC4
20 Eastbourne Terrace, W2
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83,000 sq ft let since March 2016 on 15 year leases
Now 35% pre-let
360,000 sq ft to let
Retailers and office occupiers fitting out
Nova – good interest as we approach completion
Nova North, SW1
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Rigorous asset management
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Located next to Tottenham Court Road Crossrail station
Trip Advisor has taken an additional 8,500 sq ft of space
Leases extended to 2023
Pre-agreed 2018 rent reviews
Rent increased by 38%
7 Soho Square – growing customer, lengthening income
Tottenham Court
Road - East
Soho
Square
Tottenham Court Road
- West
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Creating opportunities
Piccadilly Lights
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Obtained planning consent to replace existing 6 screens with a single state of the art screen
Flexibility over how space is used
Interactive screen technology responding to public, environment and social media
Creating opportunities – harnessing new technology
Piccadilly Lights, consented screen
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Geography – well-connected locations across the whole of London
Capitalise on development and refurbishment skills
Pure yield / asset management opportunities to capture rental and capital value growth
Restocking the portfolio
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Development programme funded by judicious sales
Created building and income resilience
Creating and seizing opportunities to drive value
Ready to restock…but patient
Replacing risk with resilience
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“Post Brexit Prospects for Property” 26th October 2016
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Where were we before the Brexit?
• Comparatively strong economic outlook, with some concerns about austerity
• Investment cycle slowing both in terms of volume and pricing (“depth” in bidding
evaporated in Summer 15)
• Occupational markets robust:
Lower vacancies than previous cycles
Some questions about expanding development pipeline particularly in C London
Slowing investment volumes and prime yields not being met for 12 months +
Weakening (but positive) rental growth prospects
• Bank lending restrained and at low LTVs
• Property firmly in the “least worst asset” box
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The sentiment-based investment market has slowed to similar levels that we saw in 2008 and 2009
0
100
200
300
400
02,0004,0006,0008,000
10,00012,000
Jan
-14
Feb
-14
Ma
r-14
Apr-
14
Ma
y-1
4
Jun
-14
Jul-
14
Aug-1
4
Sep-1
4
Oct-
14
No
v-1
4
De
c-1
4
Jan
-15
Feb
-15
Ma
r-15
Apr-
15
Ma
y-1
5
Jun
-15
Jul-
15
Aug-1
5
Sep-1
5
Oct-
15
No
v-1
5
De
c-1
5
Jan
-16
Feb
-16
Ma
r-16
Apr-
16
Ma
y-1
6
Jun
-16
Jul-
16
Aug-1
6 Num
ber
of de
als
£m
Volume £m No of deals
0
100
200
300
400
0
2,000
4,000
6,000
8,000
10,000
12,000
Num
ber
of de
als
£m
Volume £m No of deals
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UK RE market performance since the vote
• Initial turmoil created a perception of deep discounting (mainly from open ended daily
dealt funds), but this was not supported two weeks later
• Over the last month clear signs have emerged from buyers that while secondary or short
term income assets have seen declines, long term income and annuity type investments
with fixed uplifts are maintaining their value
• The devaluation of sterling and some price discounts mean that entry prices are nearly
20% cheaper than prior to the referendum for some investors
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Biggest questions for 2016 and beyond are around the occupational markets
Retail
• Stable 2H 2016, then all eyes on consumer confidence, saving ratios and Christmas
• Weak pound, and minimum wage will drag on retailer profitability
Logistics
• Consumer caution may result in an uptick in online sales and support logistics demand
• Stable occupational outlook
Offices
• Needs-based occupational demand to be unaffected, though a rise in lease extensions likely as
businesses evaluate the new world. Leasing volumes lower than original forecast of reversion to
trend levels in 2017
• Regional office markets and outer London supported by lower supply and comparative cost savings
for occupiers
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Conclusions and outlook
• Remember we started 2016, 6 years into an “upcycle”, with capital values up 35%, commercial
RE having outperformed all other asset classes and some yields were back to 2007 levels
• We are in a property boom and historically they have ended badly
• Investors don’t have confidence in the valuation system hence the discounts to NAV in public
markets
• Declining lease lengths increase income and pricing volatility (question relevance of risk
premium to gilt rate)
• Bull case revolved around low rates, the need for income plus increased allocations to RE
• IPD benchmarking is stifling creativity and dictating strategy
• Remember income makes up the vast majority of property’s long term performance and rental
growth always underwhelms
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CULS – MARKET TRENDS 2016
The Post Brexit Prospects for Property
26th October 2016
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AGENDA ECONOMIC OVERVIEW
OCCUPIER MARKET BACKGROUND
CAPITAL MARKET PERSPECTIVE
OUTLOOK
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For the investor
42
European Economic Outlook
Eurozone economic sentiment recovers after the initial dip post Brexit vote
– GDP in the Eurozone is likely to continue to grow at a modest pace
– Economic confidence in the Eurozone and EU overall recovered in September from a dip seen after the UK’s EU referendum. For the
Eurozone, it is now above the May 2016 levels.
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
-6
-4
-2
0
2
4
6
EU28 and Euro Area GDP Growth Rates (y/y)
EA 19 EU 28
%
60
70
80
90
100
110
120
130
Economic Sentiment Indicator
EA 19 EU 28
Index
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For the investor
43
European Economic Outlook Unemployment and low inflation point to continued weakness in the European
economy
– Unemployment in the Eurozone remained stable at 10.1% in August 2016 - the lowest point since mid-2011.
– Eurozone consumer prices rose 0.4% in August (y/y) – the fastest rate since mid-2014. Inflation is still uncomfortably low, well below the ECB’s
inflation target close to 2%.
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
0
5
10
15
20
25
30
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Unemployment rate
Eurozone Spain Germany France Ireland
%
-1
0
1
2
3
4
5
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Eurozone inflation (y/y)
Headline CPI Rate Core CPI rate
%
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For the investor
44
Prime rents increased by 3.8% y/y in Q3 following a 3.5% rise in H1 2016. Retail continues to outperform.
Source: CBRE
Positive indicators for European property markets
Improving occupier market fundamentals
Source: CBRE
80
90
100
110
120
130
140
150
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Eurozone Prime Rent Index (2007Q1=100)
Retail Industrial Office All property
Index
80
90
100
110
120
130
140
150
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EU-15 Office Vacancy Index (2007Q1=100) Index
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For the investor
45
Supply response remains modest
New supply remains limited in most markets
Significant levels of development in CEE markets, Dublin and Luxembourg.
Source: PMA
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Office Development Pipeline (Net Addition as % Stock)
2017-18 2019-21 2017-2021
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For the investor
46
Investment demand remains high
Sweden, CEE, Denmark, Finland and Netherlands recorded double-digit y/y increases in investment volumes in Q1-Q3
2016
* France, Germany, Benelux
** Austria, Ireland, Portugal, Spain, Czech Republic, Hungary, Poland, Romania, Slovakia
Investment volumes lower than in 2015 due to supply shortages, still above average
Source: CBRE
0
10
20
30
40
50
60
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
Q2
2016
Q3
2016
European ex UK Investment Volumes
Core Periphery Nordics 4Q rolling average
€ billion
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For the investor
47
Market pricing suggests that bond yields will remain in negative territory until 2019.
Source: Thomson Reuters Datastream Source: Bloomberg, as at 20/10/2016
Higher uncertainty to drive government bond yields lower for longer
Government bond yield movements
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
Jan-16 Mar-16 May-16 Jul-16
5Y Government Bond Yields
France Germany Sweden Belgium
%
-1
-0.5
0
0.5
1
1.5
2
01/02/2017 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021
5Y German Gov’t Bond Forward Curve
Today -3M -6M -9M
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For the investor
48
A higher spread between property and bond yields is expected in 2016 and 2017 as government bond yields remain close
to zero.
Source: Bloomberg, Aviva Investors.
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
% Europe (ex UK) All Property vs. 10y German Bund
Spread Q3 2016 All Property (ex UK) Yield Q3 2016 All Property (ex UK) Yield Q2 2016
10Y Government Bund Yield Q3 2016 10Y Government Bund Yield Q2 2016 Spread Q2 2016
Forecasts
Property risk premium over bonds to remain substantial
Lower bond yields for longer will drive the spread in next 5 years
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OUTLOOK FOR EUROPEAN REAL
ESTATE
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For the investor
50
Office markets, more advanced in the rental and yield cycles, will underperform.
0
2
4
6
8
Europe (ex UK) Total Return Forecasts, 2016H2-2021H1( p.a.) %
Source: Aviva Investors.
European prime total return forecasts – 2016H2-2021H1
Retail markets in CEE, Ireland and Spain expected to deliver the highest returns
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For the investor
Political Risk remains elevated Plenty of political hurdles to jump
DATE
COUNTRY POLITICAL EVENT
23rd November 2016 USA US presidential election
4th December 2016 Italy Constitutional referendum
4th December 2016 Austria Presidential election (re-run)
15th March 2017 Netherlands Dutch parliamentary election
end-March 2017 UK / Wider EU Article 50 likely to be triggered
April / May 2017 France French presidential election
May 2017 Germany German regional elections
September 2017 Germany German parliamentary elections
Potential for contagion remains high
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CBRE DEBT ANALYTICS
DEBT OUTLOOK AFTER THE VOTE
OCTOBER 2016
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0.0
1.0
2.0
3.0
4.0
5.0
Five year swap All property senior lending margin All-in cost of lending
Q4 2015 Q1 2016 Q2 2016 Q3 2016
Source: CBRE, Macrobond.
Note: Assumes 65% LTV.
KEY COMPONENTS OF LENDING PRICING FOR Q4 2015 TO Q3 2016 SENIOR LENDING
CHANGING LENDING TERMS OVER THE LAST NINE MONTHS
% c106
bps
c6
bps
c68
bps
c6
bps c39
bps
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0
20
40
60
80
100
200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
LTV at origination in % and end value in £
Q4 2015 Q1 2016 Q2 2016 Q3 2016
0%
14%
12%
CHANGING DEFAULT RISK OVER THE LAST NINE MONTHS
Assumed LTV of 65%
at origination
ALL ASSETS START AT 100
3%
Source: CBRE.
PROBABILITY DISTRIBUTIONS FOR Q4 2015 TO Q3 2016 SENIOR LENDING
Pro
ba
bili
ty o
f d
efa
ult, %
PD = 0.1% PD = 0.5% PD = 2.2% PD = 2.1%
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3.1
2.8
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Interest rate Margin Arr. Fee Gross return Expected Loss Risk adj return
CURRENT LENDING RETURNS
Source: CBRE, Macrobond.
Note: Assumes 65% LTV.
GROSS AND RISK-ADJUSTED RETURN FOR Q3 2016 SENIOR LENDING
%
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0
20
40
60
80
100
200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
LTV at origination in % and end value in £
Q3 2016
MITIGATING DEFAULT RISK THROUGH LOWER LTV
PROBABILITY DISTRIBUTIONS FOR Q3 2016 SENIOR LENDING
Source: CBRE.
Pro
ba
bili
ty o
f d
efa
ult, %
3%
Assumed LTV of 65%
at origination
PD = 2.1% PD = 0.7%
Assumed LTV of 55%
at origination
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ABSOLUTE AND RELATIVE RETURNS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Q4 2015 Q1 2016 Q2 2016 Q3 2016
Risk-adjusted return Gross return
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Q4 2015 Q1 2016 Q2 2016 Q3 2016
Risk-adjusted return Gross return
GROSS AND RISK-ADJUSTED RETURN FOR Q4 2015 TO Q3 2016 SENIOR LENDING
Source: CBRE.
Note: Assumes 65% LTV.
Se
nio
r le
nd
ing r
etu
rn, %
Se
nio
r le
nd
ing p
rem
ium
ve
rsus G
ilts,
%
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-2
-1
0
1
2
3
4
5 year Gilts iTraxx Main iTraxxCrossover
UK REITCrp Bonds
UK AAACMBS
UK AACMBS
UK ACMBS
UK BBBCMBS
Q3 2015 Q2 2016 Q3 2016
CRE DEBT IN A MULTI-ASSET CONTEXT
PREMIUM ON CRE DEBT VERSUS OTHER FORMS OF FIXED INCOME, Q3 2015 TO Q3 2016
Source: CBRE, Macrobond.
Pre
miu
m o
ffe
red
by s
en
ior
CR
E le
nd
ing
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0
1.00
2.00
3.00
4.00
Grossreturn
Risk-adjusted
return
Grossreturn
Risk-adjusted
return
Grossreturn
Risk-adjusted
return
Q4 2015 Q1 2016 Q2 2016 Q3 2016
CHANGING LENDING RETURNS OVER THE LAST NINE MONTHS
‘GOOD’ SLOT ‘SATISFACTORY’
SLOT
GROSS AND RISK-ADJUSTED RETURN ON RWA FOR Q4 2015 TO Q3 2016 SENIOR LENDING
Source: CBRE, Macrobond.
Note: Assumes 65% LTV.
Re
turn
on
RW
A
‘STRONG’ SLOT
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0
10
20
30
40
50
60
70
80
90
100
200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0
Standard Shops Shopping Centres Retail Warehouses
Central London offices South Eastern offices Rest of UK offices
All Industrial
THE OUTLOOK FOR DIFFERENT SECTORS
0.3% – Shopping Centres
3.5% – SE Offices
0.1% – All Industrial
0.0% – Retail Warehouse
1.0% – Rest UK Offices
0.6% – Standard Shops
5.4% – Central London Offices
Probability of Default, Segments
Pro
ba
bili
ty o
f d
efa
ult, %
PROBABILITY DISTRIBUTIONS FOR Q3 2016 SENIOR LENDING
Source: CBRE.
2% -2% 9% -5% -3% 2% 9%
LTV at origination in % and end value in £
Assumed LTV of 65%
at origination Retail
Warehouse
All Industrial
Rest of UK
Offices
Standard
Shops
Shopping
Centres
Central
London
Offices SE Offices
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RETURNS TO EQUITY AND DEBT
0
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
All Property Standard ShopsShopping CentresRetail WarehousesAll RetailCentral London officesSouth Eastern officesRest of UK officesAll Offices All Industrial
Senior debt, risk-adjusted return Ungeared equity, total return Senior debt, gross return
COMPARISON OF RETURNS, EQUITY INVESTMENT AND Q3 2016 SENIOR LENDING
Retu
rn, %
pa
Source: CBRE.
2.8% 2.1%
2.4%
4.8% 3.4%
0.5%
1.8%
2.8%
1.0%
3.9%
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COMPARISON OF RISK AND RETURN
Shops
Sh.Cen
R.W’house
London off
SE off
RUK off
Industrial
All property
Shops
Sh.Centre
R.W’house
London off
SE off
RUK off
Industrial
All property
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8
Historic standard deviation in five year total return, 1999-2015
Senior debt, risk-adjusted return Ungeared equity, total return
Source: CBRE.
EXPECTED RETURN VERSUS HISTORIC STANDARD DEVIATION IN RETURN
Fore
ca
st to
tal re
turn
, %
pa
, Q
3 2
01
6-Q
3 2
01
21
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2.8
2.1 1.9 1.9
1.6
1.2 1.1 1.0 0.9 0.9 0.9
0.8 0.7 0.7 0.7
0.3
0
0.50
1.00
1.50
2.00
2.50
3.00
Sh
ops
Ind
ustr
ial
R.W
'ho
use
All
pro
pert
y
Lo
nd
on
off
Sh
.Ce
n
Ind
ustr
ial
R.W
'ho
use
RU
K o
ff
All
pro
pert
y
Sh
ops
RU
K o
ff
SE
off
Sh
.Ce
n
SE
off
Lo
nd
on
off
SHARPE RATIO
SHARPE RATIO FOR CRE DEBT AND CRE EQUITY
Sh
arp
e r
atio
Source: CBRE.
Senior debt, risk-adjusted return Ungeared equity, total return
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CONCLUSIONS
SENIOR
LENDING
RETURNS
c.3%
MARGINS UP
25BPS
POST-BREXIT
VOTE
LOW CAPITAL
GROWTH
OUTLOOK DRIVES
PD UP TO 2% AT
65% LTV –
STILL MODEST,
AND SUB-1%
AT 55% LTV
PREMIUM TO
GILTS 2.5-2.8%
AND RISING
PREMIUM TO
CORPORATE
DEBT
1.8%
AND RISING
EQUITY
PREMIUM
FAIR, BUT NO
MORE
LOW VOLATILITY
OF CRE DEBT
MAKES
IT A CLEAR
RISK-ADJUSTED
WINNER
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FOR FURTHER INFORMATION
CONTACT US
VISIT OUR MICROSITE FOR QUARTERLY
PUBLICATIONS AND TOPICAL THOUGHT
LEADERSHIP ITEMS –
www.valuedinsights.cbre.co.uk/debt-analytics
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DTZ Investors
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Questions……...?
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Thank you…...