Southern Europe Investment Briefing Eri Mitsostergiou - European - PowerPoint PPT Presentation

Southern Europe Investment Briefing Eri Mitsostergiou - European Research Director September 2016 savills.com

Agenda  Southern European (SE) markets overview  Economy  CRE Investment activity  Sectors  Players  Opportunities and risks  Spain  Italy  Greece  Portugal

Economy – Spain stands out Consumption annual % variation GDP annual variation % 2016 2016 5.0 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 -1.0 -1.0 Italy Germany Italy Germany Greece Finland Portugal Belgium France Austria Netherlands Estonia Slovenia Cyprus Latvia Lithuania Spain Slovakia Luxembourg Malta Ireland Greece Belgium Finland Austria Netherlands Slovenia France Cyprus Portugal Luxembourg Slovakia Spain Latvia Ireland Estonia Malta Lithuania  Strongest growth in Spain despite political uncertainty – improving labour market and consumer sentiment  Weak growth in Italy due to political risk and fragile banking sector  Austerity prolongs recession in Greece  Slow growth and consumption in Portugal Focus Economics

SE CRE investment activity - holds good  Generally correlated with rest of Europe S Europe investment vs Total 25,000 250,000 18% -18%  Investors avoided PIGS after the GFC  But CRE investment in SE picked up fast 20,000 200,000 since 2013 27% -2%  In 2015 was almost € 18bn up 27% yoy 15,000 150,000 € million  In H1 2016 was almost € 7bn and expected to match last year’s level 10,000 100,000 5,000 50,000 - - SE H1 SE H2 Total EU15 Savills

Spain is the largest market  Spain is the largest market S Europe investment by country 2015 € 0.5  In H1 16 activity was 20% € 8.3 € 6.8 above the LTA in Spain and 40% in Italy € 2.4  However in the European context, SE still accounts for Greece Italy Portugal Spain only 7% of the total activity Share of S Europe commercial investment 100% 10% 19% 20% 21% 22% 24% 23% 26% 27% 29% 80% 60% 86% 75% 74% 74% 71% 72% 40% 73% 69% 65% 65% 20% 7% 6% 6% 6% 6% 6% 6% 6% 4% 3% 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 S Europe Core Europe Rest of Europe Savills

Higher allocations in retail driven by Xborder players  Prime regional shopping Investment by sector 2016 100% centres and prime high 13% 20% 22% 80% 15% street units in strong 6% 11% 60% 26% demand (40% yoy in IT) 22% 43% 40%  Logistics is rising (34% yoy 46% 46% 20% 29% in ES) 0% EU Italy Spain  Prime offices in the capitals Offices Retail Industrial Other always in demand but hard to find Grand Total S Europe  Xborder investors dominate the scene directly or through 30% 47% REITs in Spain (Socimi). 49%  Importance of national 66% investors in Italy is rising Domestic Investment % Cross border Investment % Savills

EU and US players dominate, slowdown from Asia/ME SE investment by investor origin 2015  EU players account for 80% of the activity in Italy, US 4% 7% and ME 10% 10% 42%  US money leads the activity 10% in Spain, drop from ME/Asia 31%  Demand is there for the right type of product – lack of supply EU US AsiaPac Middle Eastern Other/Unknown SE investment by investor origin 2016 4% 3% 7% 30% 56% EU US AsiaPac Middle Eastern Other/Unknown Savills

Why SE? Economic recovery GDP % annual variation 10-year bond yield 8 40 6 35 4 30 2 25 0 20 -2 15 -4 10 -6 5 -8 -10 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Greece Italy Portugal Spain Greece Italy Portugal Spain  Bail outs, austerity and reforms started paying off, slowdown of recession in 2013 return to positive growth in 2014  Significant reduction of country risk reflected in low bond yields Savills

Why SE? Attractive yield gap Periphery vs Core yields Prime CBD office yields 10.0% Core vs Periphery SC yield gap Core vs Periphery CBD office yield gap 9.0% 300 8.0% 250 7.0% 200 6.0% 150 5.0% 4.0% 100 3.0% 50 01 01 02 03 04 04 05 06 07 07 08 09 10 10 11 12 13 13 14 15 16 0 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Athens Barcelona Lisbon Madrid Milan  Core vs periphery yield gap widened IPD/MSCI Total return 25.0 dramatically by 2012 to over 200 bps 20.0 compared to a 114 LTA. Back to LTA 15.0 now. 10.0 5.0  Positive yield gap with previous peak 0.0 -5.0 yield compression prospects. -10.0 -15.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Italy Spain Germany France Savills

Why SE? Attractive returns  S European prime yields still more attractive compared to core  Despite the rapid yield compression yield differential of prime assets with risk-free rate (10y bonds) remains attractive  Yield gap with previous peak mostly closed. Yields to stabilise this year. Savills

Risks – Slow economic recovery GDP % annual variation Unemployment % active population 2016 30.0 8.0 6.0 25.0 4.0 20.0 2.0 15.0 0.0 -2.0 10.0 -4.0 5.0 -6.0 0.0 -8.0 Malta Austria Germany Estonia Luxembourg France Italy Portugal Greece Netherlands Ireland Belgium Lithuania Slovenia Finland Latvia Slovakia Cyprus Spain -10.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Greece Italy Portugal Spain  Weak economic growth  High youth unemployment  Ageing population KPMG

Risks – The burden of NPLs on banks  Spain the only country where NPL ratio is NPL ratios down, first to create bad bank – SAREB 40.00% 35.00% 30.00%  New institutional framework in Greece 25.00% attracts demand from international loan 20.00% management industry 15.00% 10.00%  In Italy Atlante 2 private equity fund set up 5.00% 0.00% to buy exclusively NPL’s. The recovery of Greece Italy Portugal Spain the real estate market will boost NPL 2013 2015 volumes in Italy.  Three of Italy’s largest banks, UniCredit, Intesa Sanpaolo, and MPS, have established internal bad loan divisions to house non-core assets and have set out deleveraging strategies, which include NPL sales KPMG

Risks – Politics Savills

Outlook / Opportunities - Retail  Consumer spending growth – highest in ES, positive in PT and IT, slow in GR  Retail parks – evolution of the concept – redevelopment opportunities, rental growth prospects  Shopping centres - Undersupplied regions – new/re developments ES, IT, PT, GR Consumption annual variation  High streets – secondary cities – 3.5 3.0 strong tourist destinations in IT, ES 2.5 2.0 (Venice, Florence, Bologna, Turin), 8 1.5 0% yoy rise 1.0 0.5 0.0 -0.5 -1.0 Greece Italy Portugal Spain Average Europe 2016 2017 2018

Outlook / Opportunities - Offices  Improving fundamentals – rising take Prime office rental growth 2016-2018 up, low supply, falling vacancies Madrid Barcelona  30% yoy rise in Madrid Dublin Stockholm Berlin  Good rental growth potential (Madrid Munich London and Barcelona top performers) Hamburg Frankfurt  4% yoy rental growth in Madrid Paris Milan  30-40% below peak Lisbon Axis Title Budapest  Refurbishments in CBD Amsterdam Lyon Luxembourg Copenhagen Vienna Rome Brussels Helsinki Prague Athens Zurich Oslo Moscow Warsaw -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% average pa

Outlook / Opportunities - Other  Tourism Tourist numbers growth  Hotels and second homes in 8 tourist destinations (ES, GR) 7  Logistics 6  Ecommerce creates new 5 opportunities in the sector  In H1 16 34% rise yoy in Spain 4 ( € 450m), 80% in Italy ( € 200m) 3  Privatisation of public assets 2 1 0 2014 2015 2016 2017 2018 Europe Northern Europe Southern Med Europe Western Europe European Travel Commission

Conclusions  Economic recovery in SE steady but slow. Spain outperforms  More reforms needed to drive economic growth and reduce public debt. Politics pivotal to economic recovery  Measures to speed up the deleveraging of the banking sector, improving investor sentiment  CRE investment is strong driven by Xborder investors and retail  Most of yield compression is done, spread with bonds remains attractive  Opportunities through asset management and rental growth  offices and retail parks,  refurbishments/redevelopment of offices and shopping centres,  ecommerce/logistics synergies,  high street in tourist destinations,  tourism facilities

Thank you!