The case for Continental European long- lease strategies Gil Bar – Managing Director, Head of Real Estate Germany October 2017
Long lease real estate in pension fund portfolios A useful addition to diversified portfolios De-risking property exposure Supplementing fixed income holdings Long lease real estate Challenges for defined benefit pension schemes: ‒ A comparatively low risk form of property exposure ‒ Underfunding ‒ Focus on lease term and quality of tenants ‒ Low interest rates and QE ‒ Imperfect correlation with traditional real estate ‒ Short supply of index-linked government bonds ‒ Liabilities linked to Irish inflation Low correlation between long income and traditional assets classes Bond Equity Real Estate Long Income 1.00 -0.20 -0.21 -0.19 Bond -0.20 1.00 0.40 0.42 Equity -0.21 0.40 1.00 0.92 Real Estate -0.19 0.42 0.92 1.00 Long Income Source: Aviva Investors, IPD, Macrobond, as at April 2017
Ireland vs Europe Volatility of returns – Real Estate markets Offices Retail Industrial 40 60 100 30 80 40 20 60 20 10 40 0 20 0 0 -10 -20 -20 -20 SD: 27.0 SD: 21.9 -40 SD: 19.3 -40 -30 SD: 10.1 SD: 12.8 SD: 8.0 SD: 13.5 SD: 6.0 SD: 6.0 -60 -60 -40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2001 2003 2005 2007 2009 2011 2013 2015 Ireland France Germany Ireland France Germany Ireland France Germany Higher volatility for Irish Returns in major real estate sectors Source: Aviva Investors, PMA
Ireland vs Europe Low Correlation Austria Belgium France Germany Italy Netherlands Spain Denmark Poland Sweden Ireland Ireland 1 1.0 Austria 0.5 Belgium 0.7 1.0 0.4 0.5 0.3 1.0 France 0.5 0.6 0.7 0.3 1.0 Germany 0.4 Italy 0.5 0.6 0.2 0.4 1.0 0.4 0.6 0.6 0.4 0.4 0.6 1.0 Netherlands 0.6 Spain 0.7 0.7 0.4 0.6 0.7 0.8 1.0 0.8 0.5 0.4 0.5 0.1 0.5 0.5 0.7 1.0 Denmark 0.5 Poland 0.1 0.0 0.5 0.1 0.0 0.1 0.0 0.2 1.0 0.0 0.3 0.4 0.4 0.2 0.4 0.6 0.5 0.4 -0.2 1.0 Sweden 0.4 Low correlation with other European Office markets Source: Aviva Investors, PMA, 2017
Traditional and long-lease property Comparison of different strategies Traditional property Long-lease property • Majority of value in building • Majority of value in contracted income • Generate returns through: • Generate secure income streams through: • Riskier active asset management – Quality counterparties with strong covenants – Shorter leases – Long leases – Subject to open market reviews – Index-linked income Uncertain sale Uncertain sale proceeds proceeds Cash flow Cash flow Pre-set uplifts Uncertain uplifts Rent level Rent level New rent level? ? ? ? ? ? ? Void period? CapEx? Time Time For illustrative purposes only
Aviva Investors Real Estate Experienced in real estate secure income investing • Investing in long lease strategies since mid 1990s • Managing over €4.5 billion in secure income property assets • Multi-award winning UK long lease fund – one of the first secure income, long-lease fund Market leaders in secure income, long lease strategies Source: Aviva Investors as at 30 September 2017
Highly diversified universe of opportunities Large Asset Pipeline Geographic overview Benelux 37% Scandinavia 20% Austria 10% Germany 33% Sector overview Logistics 8% Office 78% Retail 8% Others 6% €5.6bn in deal pipeline over last 12 months Source: Aviva Investors as at 30 September 2017. Geographic and sector breakdown of reviewed long lease pipeline over the last 12 months. Other includes mixed use and social infrastructure.
Public occupiers Germany and Austria 16,563 sq.m. Size Germany Location Office and Laboratory Use Environmental Agency of NRW Tenant 20 years Lease length 5/80% Indexation 5.0% NIY €95m Estimated Price 3,733 sq.m. Size Austria Location Office Use Employment Agency of 22nd district Tenant 15 years Lease length 100% of CPI p.a. Indexation 4.2% NIY €18m Estimated Price Source: Aviva Investors as at 30 September 2017
Alternative use Benelux and Scandinavia 16,400 sq.m. Size Norway Location Social Infrastructure Use Regional Municipality Tenant 20 years Lease length 100% of CPI p.a. Indexation 4.00 – 4.25% NIY €50m Estimated Price 10,700 sq.m Size Netherlands Location Car dealerships Use 18 years Lease length 100% of CPI p.a. Indexation 6.83% GIY €16m Estimated Price Source: Aviva Investors as at 30 September 2017
Creating opportunities Amortising Lease in Prime Vienna • Prime Core Location in Vienna • 6,920m² of office premises • Unexpired lease of 47 years (triple net) • Single tenant is the Constitutional Court of Austria • Amortising lease on government tenanted asset • No terminal value risk. Lease value equals purchase price CBD • 100% Indexation, annually adjusted based on CPI • AA (S&P; covered by the Republic of Austria) • Estimated Investment Volume - €45m Secure Income - Estimated net spread to the equivalent Bond: 200 – 300bps Source: Aviva Investors as at 30 September 2017
The solution Continental European Long Lease Diverse exposure Secure long-term cash flows Sectors : Office, Retail, Alternative Lease length: At least 15 years to expiry Countries : Continental Europe; focus on Germany, Austria, Tenants: Public and private with Benelux and Scandinavia strong covenants Consistent and predictable returns Assets: Core/core+, stable, income producing assets Rent reviews: I ndexation of rental income Source: Aviva Investors as at 30 September 2017
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