CORONAVIRUS SPECIAL UPDATE KEEP CALM, STAY HOME & CARRY ON 19 MARCH 2020 RESEARCH & STRATEGY Hans Vrensen CFA, CRE Dennis Schoenmaker Ph.D. MANAGING DIRECTOR ASSOCIATE DIRECTOR Tel +44 (0)20 7016 4860 Tel +44 (0)20 7016 4753 dennis.schoenmaker@eu.aew.com hans.vrensen@eu.aew.com FOCUSED ON THE FUTURE OF REAL ESTATE
WEAKENING GLOBAL GROWTH MIGHT TRIGGER 2020 RECESSION IN EUROPE ECONOMIC FUNDAMENTALS COULD SIGNAL V-SHAPED RECOVERY 3 2.5 2 Global GDP growth (%) 1.5 1 0.5 0 -0.5 2020 Jan 2020 Mar Pandemic Scenario Oxford Economics Moody's OECD *Not based on Pandemic Sources: Oxford Economics, Moody’s, OECD & AEW 5 Focused on the Future of Real Estate
STOCK MARKET CORRECTION COMBINED WITH OIL PRICE DECLINE IMPACT OF MASSIVE MONETARY & FISCAL POLICIES NOT YET IN STOCKS 180 110 100 160 90 140 80 European Stock Market (Index 2006=100) 70 Corp Real Real Real Real Corp Oil Price ( € ) 120 Bonds Estate Estate Estate Estate Equity 60 Bonds Debt Equity Equity 100 50 LCE 40 LCB LREB PRED PREE LREE 80 30 60 20 2006 2008 2010 2012 2014 2016 2018 Q1 2020 European Stock Market Index (LHS) Oil Price (RHS) Sources: Bloomberg & AEW 6 Focused on the Future of Real Estate
RISK-OFF MENTALITY TRIGGERS GOVERNMENT BOND YIELDS DIVERGENCE PREVIOUS SAFE HAVENS HAVE WIDENED OUT IN SHORT TERM 2.2 2.0 1.8 1.7 1.6 Government Bond Yield (%) Government Bond Yield (%) 1.4 1.2 1.2 0.7 1.0 0.8 0.2 0.6 0.4 -0.3 0.2 -0.8 0.0 09/2019 10/2019 11/2019 12/2019 01/2020 02/2020 03/2020 Q3 2019 Q4 2019 Q1 2020 Diff (RHS) DE & FR ES & IT Sources: Bloomberg & AEW 4 Focused on the Future of Real Estate
CORPORATE CREDIT YIELD SPIKES LINKED TO DECLINES IN MARKET RENTS LEASES, NEED FOR SPACE & STABILITY IN TENANT CREDIT OFFER SHORT TERM PROTECTION 25 25% CRE Rental Growth (y-o-y, %) 20% High Yield Corporate Bond (%) 20 15% 10% 15 5% 0% 10 -5% -10% 5 -15% 0 -20% ICE BofA Euro High Yield Index Effective Yield CBRE EU 15 rent growth index Sources: Bloomberg, CBRE & AEW 5 Focused on the Future of Real Estate
STOCK MARKET MOVES ASSOCIATED WITH DELAYED CHANGES IN VOLUMES NO CAUSALITY , BUT CURRENT PRACTICAL ISSUES LIKELY TO TRIGGER PAUSE 50% R² = 0.2462 40% 30% 20% Stock Market Performance (y-o-y, %) Q2 2019 10% Q3 2010 0% Q1 2019 -10% Q2 2016 -20% -30% Q3 2009 -40% Q4 2009 -50% -80% -60% -40% -20% 0% 20% 40% 60% 80% Commercial Real Estate Volumes (y-o-y, %) Sources: RCA, Bloomberg & AEW 6 Focused on the Future of Real Estate
STOCK MARKET CORRELATES WITH PRIME VALUES OVER THE LONG-RUN BROADENING RANGE OF POLICIES COULD TRIGGER STOCK MARKET REBOUND 50% Annual Percentage Change (q-o-q, %) 25% 0% -25% -50% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 17th March CRE Price Stock-Market Performance Sources: CBRE, Bloomberg & AEW 7 Focused on the Future of Real Estate
KEY VIEWS NEGATIVE SHORT TERM IMPACT , BUT UNCERTAIN LONG TERM REPERCUSSIONS Prime market rents have declined when corporate bond yields have moved out, but investors are protected in the short term due to existing lease contracts In the short term, we expect practical issues with site visits and underwriting to temporarily slow down investment activity. If stock markets remain where they are now, we expect capital values to come down - albeit more slowly than equities. Uncertain long term repercussions as many new protective fiscal and monetary policies are not yet fully implemented and priced into the financial markets. In contrast to the GFC, the current health crisis could be temporary as fundamentals were strong at its outset, possibly signalling a V-shaped recovery. 19 Focused on the Future of Real Estate
Q & A BOSTON LONDON PARIS DÜSSELDORF HONG KONG AEW.COM Focused on the Future of Real Estate RESEARCH & STRATEGY Hans Vrensen CFA, CRE Dennis Schoenmaker Ph.D. MANAGING DIRECTOR ASSOCIATE DIRECTOR Tel +44 (0)20 7016 4860 Tel +44 (0)20 7016 4753 dennis.schoenmaker@eu.aew.com hans.vrensen@eu.aew.com
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