UK & European Markets

1

UK & European Markets

Robin N Goodchild PhD FRICSHead of European Strategy

Islamic Real Estate Finance 2004 London, 29th June

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22

Agenda – Real Estate in UK, EuroZone and Central Europe

European Economy & Capital Markets

Offices

Retail

Warehouse

Investment Markets

Best Picks

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33

A Good 2004 But With Rising Risks

2004 set to see global economic growth rise at its fastest level since boom of 2000

US elections means highly simulative fiscal policy… for this year

Global growth further buoyed by Japan, China and South East Asia

Eurozone remains depressed, strong euro dampens prospects for export led recovery

Terrorism, oil prices, US hangover ~ anything to look forward to in 2005?

Stronger growth to resume 2006/71

2

3

4

1997 2000 2003 2006

Forecast

Global Real GDP %

Source: EIU

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44

The Europe and especially the EuroZone will Lag

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

US UK Euro-Zone Asia Pacific excl.Japan

Japan

2003 2004 2005

Source: EIU, March 2004

GDP %

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55

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Germany

Netherlands

Italy

Belgium

France

EU

Portugal

Sweden

UK

Spain

Czech Rep

Hungary

Ireland

Poland

GDP growth % per annum end 03 -08

The Fringes Continue To Grow Faster

Source: LaSalle Investment ManagementSource: PMA

Core Europe are the laggards

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66

Business Confidence Indicators Improving

-40

-30

-20

-10

0

10

20

1998 1999 2000 2001 2002 2003 2004

Germany Spain France Italy Sweden UK

Balance

Source: DataStream

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77

Consumer Confidence Index – Moving Sideways

-40

-30

-20

-10

0

10

20

30

1998 1999 2000 2001 2002 2003

Germany Spain France

Italy Sweden UK

Balance

Source: DataStream

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88

UK House Price to Earnings Ratio – well into uncharted water

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

Source: LaSalle Investment Management

3.64

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99

The Shape of the Recovery: The Economy

UK at heart of global recovery – key risk its housing market

Europe will take several years to get back to trend

In a low inflation world low cost providers will do well - the fringe

But there are still some sweet spots :– provision of modern space : logistics, multi-anchored retail, big box– local 'monopolies' : Brussels as EU capital (particularly CBD)– corporate sale and leaseback : provincial markets - growth + yield– capacity constrained markets

bounce back in 2005/06 : Barcelona, Paris, Stockholm, Madrid?

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1010

5 Year Swap Rate – 2002 to date

2

3

4

5

6

Jan-02

Apr-02

Jul-0

2

Oct-02

Jan-03

Apr-03

Jul-0

3

Oct-03

Jan-04

Apr-04

UK

EUROZONE

5.63

3.67

4.93

3.14

5.22

3.91

5.68

5.09

Source: Thomson DataStream

11

Office Markets

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1212

Summary of Q1 2004 : the Roller Coaster Reaches Bottom

Prime rents down just 0.4% in most Western markets

European vacancy rate has increased from 9.1% to 9.4%

JLL “showings” index has turned up in London Office investment totalled at €36 billion, down by 17% on 2002. Cross-border deals

accounted for 50% of the market.

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1313

Prime Office Rents Bottom, Incentives will Reduce Before Growth Recovers

Source: Jones Lang LaSalle

0100200300400500600700800900

1000110012001300

Q1 2003 Q4 2003 Q1 2004

€

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1414

Vacancy Rates Peaking


0

5

10

15

20 Q1 2003 Q4 2003 Q1 2004

%

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Office Take-Up Trends : a Patchy Recovery


0

100

200

300

400

500Q1 2003 Q4 2003 Q1 2004

(‘000 sqm)

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Years to Absorb Office Space Coming Available in 2004/05

0

1

2

3

4

5

6

Years of Take-Up*

* Based on average gross take-up 1998/2003


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New Supply Set To Fall

Source: PMA European Office Stock Completions - 18 largest markets

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1818

Jones Lang LaSalle Short Term Rental Cycle Q1 2004

Rentalgrowthslowing

Rentsfalling

Rentalgrowth

accelerating

Rentsbottoming

out

Antwerp, Copenhagen

Dublin, Milan, Rome

Amsterdam, Düsseldorf

Brussels

Prague, BudapestStockholm

OFFICES

Edinburgh, Lyon, Helsinki

Lisbon

Oslo, London, Luxembourg, Warsaw

Note:

• This diagram illustrates where Jones Lang LaSalle estimate each prime office market is within its individual rental cycle as at end March 2004.

• Markets can move around the clock at different speeds and directions.

• The diagram is a convenient method of comparing the relative position of markets in their rental cycle.

• Their position is not necessarily representative of investment or development market prospects.

• Their position refers to Prime Face Rental Values

Frankfurt, Munich

Paris, Berlin, Hamburg

Moscow

Athens

Barcelona, Madrid

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1919

Office Yields Still Resisting Upward Pressure but for how Long?

0

1

2

3

4

5

6

7

8

9

Lyon

Lisbon

Bruss

elsPari

s

Madrid

Barcelo

na

London

MunichBerl

in

Dusseld

orf

Rome

Hamburg

Milan

Frankfu

rt

2000

2003

%


20

Retail Markets

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Cross Border Investment in European Shopping Centres

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High Street Retail Yields Are Falling Except in Germany – is Value Emerging in German Retail?

0

2

4

6

8

10

12

Warsaw

Prague

Lyon

Bruss

ells

Berlin

Dusseld

orf

Hamburg

Frankfu

rt

Munich

Amsterd

am

Stockholm

Paris

Madrid

Barcelo

na

LondonMila

n

Dublin

2000

2003

%


except in Germany

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2323

Development Activity Strong in Southern Europe

Source: PMA

SC completions 2004

By size band (m²)

40 k

10 to 40 k

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Retail Provision: Still Below Par

0.00 0.10 0.20 0.30 0.40 0.50

Madrid

Valencia

Alicante

Zaragoza

Sevilla

Barcelona

Tarragona

Retail Floorspace (m 2) per capita

2008

2003

Spain Italy

Source: PMA

Euro Average Euro Average

0.00 0.10 0.20 0.30 0.40 0.50

Pescara

Torino

Milano

Roma

Genova

Pisa

Bari

Retail Floorspace (m 2) per capita

2008

2003

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2525

Shopping Centres: Rental Growth

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Netherlands

Germany

Sweden

Spain

France

Belgium

Italy

“focus on Southern Europe, with possible exception of Sweden”


Rental Growth 2004/07Prime Yield (%)

6.3

6.3

6.0

6.3

6.3

5.8

6.3

Expected Inflation

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Emerging Trends

Aging Core : Experiential retail : mixed usePopulation

Increasing : Multifunctional trips : mixed use or out Congestion of town

Collapse of the : Growth of new : flexible space big brands - C&A, formats - Inditex provisionM&S…..Carrefour?

Slower Growth Core : increased focus on : out of townvalue for money

Faster growth fringe : main demand for : logistics manufactures relocation?

27

Warehouse Markets

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2828

European Comparison: Rental Levels and “Growth”


161

58 48 4970

84

5070

9573 79

3757 63

0

50

100

150London

Par

is

Antw

erp

Bru

ssel

s

Rott

erdam

Fra

nkf

urt

Lyo

n

Mila

n

Am

ster

dam

Mad

rid

Bar

celo

na

War

saw

Budap

est

Pra

gue

€/sq

m/p

a

-13

0 0

-1

72 3

03

-14

-3

-33

-19

-5

-35

-30

-25

-20

-15

-10

-5

0

5

10

% c

hang

e pr

ime

rent

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2929

Warehouse Yields : Yields Still Falling

0

2

4

6

8

10

12

14

Prague

Warsa

wBer

lin

Stockho

lmLyo

n

Dusseld

orf

Paris

Bruss

ells

Munich

Milan

Frankfu

rt

Barce

lona

Madrid

Hambur

g

Amsterd

amDubli

n

Londo

n

20002003

%


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Forecast Prime Warehousing Rents 2004-2007

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Amsterdam*

Madrid

Barcelona

Rome

Milan*

Lyon

Paris

“focus on markets that have not yet started to outsource to specialist operators”


Nominal Rental Change Prime Yield (%)

8.75

8.9

8.1

8.5

8.4

8.1

7.1

* Rental growth does not match inflation over the forecast period% pa

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The Pull to the East

Source: King Sturge

Main Markets

Significant Markets

GDP2004

Pop. (m)

Poland 3.7 39

Czech Republic

3.7 10.3

Hungary 3.2 10.1

Source: Eurostat

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France: Main markets

LONDON ROTTERDAM RUHR

BARCA

LOMBARDY

Current Stock

Principal Distribution Hubs

Secondary Road Hubs

Secondary Maritime Ports

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3333

Ile-de-France: Investment Yields ~ Stability & Still a Significant Yield Gap


0

2

4

6

8

10

12

1419

94

1995

1996

1997

1998

1999

2000

2001

2002

Q1

03

Q2

03

Q3

03

Q4

03

Q1

04

%

Warehouse 8.50-8.75%

OAT 4.38%21.05.04

34

Investment & Future Prospects

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3535

Source: IPD Monthly

Quarterly trend pa

UK Property: Capital & Rental Value Movements

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1997 1998 1999 2000 2001 2002 2003 2004

Rental Values

Capital Growth

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3636

Capital Flows into German Open-Ended Funds

-4,000

0

4,000

8,000

12,000

16,000

20,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004est

Euro

mill

ions

Source: BVI, LaSalle Investment Management

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3737

Drivers of Property Yields

Inflation/Inflationary Expectations

Real Risk Free Rate – Index Linked Gilts

Property Yield / 5 Year Swap Rate Spread

Acceleration in Rental Growth

(+ ve )

- ve

+ ve

- ve

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3838

UK Long Run Yield Comparison

0

2

4

6

8

10

12

14

16

1977 1980 1983 1986 1989 1992 1995 1998 2001

Property Yield Gilt Yield Stock Dividend Yield

Source : Thomson Financial, IPD

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Conclusions on Yields

2004 UK returns 12 - 15%

Property Yields shouldn’t go lower – IPD Monthly 6% initial yield key threshold

Number of Signals Pointing to Higher Yields:

– Rise in Index Linkers Yields in 2004

– Narrowing of 5 Year Swap spread over Equivalent Yield

Strong Momentum could well take the Market to Irrational Levels

– Continuing Track Record

– Improving Fundamentals

– New Forms of Vehicle: PIFs, New Authorised PUTs

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UK Total Returns Forecasts - Risks

0

2

4

6

8

10

12

14

2002 2003 2004 2005 2006 2007 2008

Tota

l Ret

urn

pa %


Source: IPD, LaSalle Investment Management

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European Property 2004 – Best Opportunities

Exploit office market recovery

– London, Madrid, Paris

– But avoid Germany

Retail for core stable returns

Warehouses for a leveraged income play

– especially in France

Key Property Risks

– scale of new spec development

– attitude of the banks on new lending

– housing market correction

UK & European Markets

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