Europe Economic & Commercial Real Estate Outlookcreknowledgecenter.com/.../02/Europe-Economic-CRE... · 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 Eurozone

Europe Economic & Commercial Real Estate Outlook

September 2018

The Euro area's economy is cooling but the expansion remains firmly intact.

Euro area: Cooling Off, But Still SolidGDP Trends & Forecasts

The euro area (EA 19) includes: Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland

• Prelim figures show the euro zone lost some momentum in the first half of 2018, but GDP growth still remains solid at ~2%.

• Tightening labour markets have not yet prompted strong wage growth. As inflation rises there is likely to be a squeeze on household income growth.

• Although GDP growth rates vary greatly from one country to the next, overall, the economic backdrop as it pertains to the property markets is expected to remain healthy at least for next couple of years.

Latest Trends Forecast

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Real GDP, y/y %chg.

Source: Eurostat Source: Oxford Economics

Slowdown is Mostly Broad-BasedReal GDP, % change

Source: Oxford Economics Forecasts updated 8-27-2018, Cushman & Wakefield Research & Insight & Insight

• Growth is slowing to more sustainable rates across the region.

• The Irish economy continues to stand out, fueled by strong exports, strengthening labourmarkets and tech growth.

• UK continues to be impacted by Brexit uncertainty depressing investment and slowing decision-making.

• Brexit negotiations are making progress in 2018 but there is little clarity over what the final outcome will look like.

• If a better Brexit outlook materialises, pent-up demand will be unleashed and the UK will surprise on the upside.

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France

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Germany

Switzerland

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2018F 2017

Strong Correlation Between GDP Growth & CREReal GDP vs. Demand for Office Space (SQ M, Millions)

Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight; *Net absorption forecast estimated from simple linear regression of GDP & EMEA absorption

As the economy goes, so goes CRE…

• Rule of thumb: every 1% GDP growth results in 2.8 million square metres of office space net absorption across the euro area annually.

• As the economy slows demand for office space across Europe is also expected to slow.

• Of course certain markets will outperform which we highlight later in this deck.

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Eurozone GDP

*Net Absorption (right scale)

Correlation = .80

Leading Indicators Mostly SolidEurozone & the UK

Source: OECD, Oxford Economics, UK Office for National Statistics, Trading Economics, Eurostat, The Conference Board (Data as at August 2018)

• The leading indicators that correlate well with the property markets continue to point to decelerating but still healthy demand for space.

• In the Eurozone, most recent economic data shows that confidence remains elevated, job growth solid, retail sales healthy, and the PMI’s still robust albeit slowing.

• UK data also holding up reasonably well but Brexit uncertainty clearly taking a toll on certain metrics (e.g. retail sales, job growth and PMI – all slowing in recent readings).

Confidence Index Retail Sales (y/y%)

Composite PMI’s Exports (y/y%) Leading Economic Index

100.6100.8101.0101.2101.4101.6101.8102.0102.2102.4

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Job Growth (y/y%)

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Job Growth Momentum TrackerTotal Nonfarm Employment Gains, 000’s

Source: Oxford Economics; *Forecast as of 8-2-2018

• As labour markets tighten, job growth is beginning to decelerate across most of Europe’s major cities (e.g. London, Paris, German markets – still creating jobs but at a slower rate.

• Cities that have lagged throughout this expansion now emerging as ones with the most momentum in terms of job creation (e.g. Istanbul, Sofia, and Helsinki)

Rank Metro AreaJob

Growth 2017

Job Growth 2018*

1 Madrid 89 822 Barcelona 71 593 London (Inner) 49 424 Budapest 36 405 Paris 42 376 Berlin 57 367 Lisbon 48 368 Stockholm 35 299 Milan 31 28

10 Rome 32 2711 Amsterdam 28 2412 Sofia 12 2213 Munich 20 2114 Vienna 22 2015 Hamburg 21 1916 Warsaw 31 1817 Helsinki 14 1618 Prague 22 1619 Rotterdam 18 1520 Zürich 12 1321 Luxembourg 14 1222 Copenhagen 10 1123 Frankfurt 13 1124 Birmingham 26 1025 Dublin 18 10

Rank Metro AreaJob

Growth 2017

Job Growth 2018*

26 The Hague 11 827 Oslo 8 828 Brussels 10 729 Bratislava 11 730 Edinburgh 14 731 Manchester 13 732 Glasgow 12 533 Tallinn 15 334 Bucharest 31 135 Riga 2 0

= Gaining Momentum

Macroeconomic ProjectionsEuro area

Source: European Central Bank

• Forecasters are reasonably aligned that Eurozone GDP will grow in the low 2’s in 2018, and remain near 2% in 2019

• We note that none of the forecasting groups are calling for a recession in the 3-year forecast period.

• The consensus also expects inflation to remain tame with estimates ranging between 1.5-1.8% over the forecast horizon.

Annual percent change

Date of Release GDP Growth Inflation

2018 2019 2020 2018 2019 2020

European Central Bank Jun-18 2.1 1.9 1.7 1.7 1.7 1.7

European Commission May-18 2.3 2 - 1.5 1.6 -

Euro Zone Barometer May-18 2.3 1.9 1.6 1.5 1.5 1.8

Concensus Economics Forecasts May-18 2.3 1.9 1.4 1.5 1.5 1.7

Survey of Professional Forecasters Apr-18 2.4 2.0 1.6 1.5 1.6 1.7

Oxford Economics Aug-18 2.1 1.7 1.6 1.8 1.7 1.6

IMF Apr-18 2.4 2 1.7 1.5 1.6 1.8

Eurozone’s Expansionary Cycles

Source: Centre for Economic Policy Research, Euro Area Business Cycle Dating Committee *During 1993-2007 cycle, there was a period where GDP barely grew (2001-02) when tech bubble burst but technically was not a recession

• On July 1st of 2018, the Eurozone expansion turned 5 years old.

• So unlike the U.S., the economic expansion in the Eurozone is still fairly young and perhaps has more runway relative to other regions.

• The longest expansion on record was the 14 year-cycle that ran from *1993-2007

• Odds remain very high that the Eurozone expansion will continue at least for another 2-3 years.

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5 Years

Still very little inflation. Interest rates will remain low.

Central Bank Policy Slowing Shifting

Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight

• In August of 2018, the BoE raised rates for the second time in a decade, taking the base rate from 0.5% to 0.7%.

• The ECB announced it will end its QE purchases in December of 2018 but has indicated that short-term interest rates will remain unchanged “through the summer of 2019” .

• Central bank policy is slowly shifting but will remain extremely accommodative to growth at least for the next 2-3 years.0

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Inflation Remains TameConsumer Price Index, Y/Y % Change


• Headline inflation in the Eurozone rose to 2% y/y in June of 2018 – the highest reading in 16 months. But core inflation remains substantially lower at 1%.

• In the UK, much of the pound-sterling related increases in price growth has already been passed through to consumers. Price pressures have begun to decelerate which will give consumers more purchasing power.

• Low inflation = low interest rates, both at the short and long-ends of the curve.

Country 2017 2018E Trend

Eurozone 1.5 1.8

France 1.0 1.9

Germany 1.7 2.0

U.K. 2.7 2.4

Greece 1.1 1.4

Ireland 0.3 1.0

Italy 1.2 1.3

Netherlands 1.4 1.7

Norway 1.9 2.1

Poland 2.0 2.3

Portugal 1.4 1.2

Spain 2.0 1.8

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Labour Shortages Becoming a ChallengeUnemployment Rate

Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight; *Was = 2008, Is = 2018F

• One downside risk to the low interest rate forecast comes from the tightening labourmarkets.

• Unemployment rates have fallen to record lows in numerous cities across Europe and labour shortages are becoming a challenge.

• Will this create upward pressure on wages and ultimately drive inflation and interest rates higher?

Was (Pre-crisis)* Is* Was (Pre-crisis) IsAmsterdam 3.9 3.9 Luxembourg 4.9 4.5Barcelona 8.6 11.6 Madrid 8.6 12.0Berlin 14.9 6.2 Manchester 10.8 5.0Birmingham 10.7 7.9 Milan 3.8 6.3Bratislava 3.6 3.7 Munich 4.7 2.7Brussels 15.9 13.4 Oslo 3.6 4.7Bucharest 2.9 4.0 Paris 6.8 7.2Budapest 4.2 2.6 Prague 1.9 1.4Copenhagen 5.0 5.8 Riga 7.9 7.2Dublin 6.3 5.3 Rome 7.0 9.2Düsseldorf 7.5 3.3 Rotterdam 4.5 4.7Edinburgh 4.5 2.9 Sofia 2.5 2.4Frankfurt 8.0 3.6 Stockholm 5.1 5.7Glasgow 6.2 5.0 Tallinn 4.6 4.3Hamburg 7.0 3.7 The Hague 4.2 5.4Helsinki 4.8 7.3 Utrecht 2.8 3.5Istanbul 10.3 12.4 Vienna 7.3 9.6Lisbon 9.6 8.1 Warsaw 1.6 2.2London (Inner) 8.3 5.2 Zürich 3.7 3.7

Putting Some Pressure on WagesWages, Weekly Earnings, Y/Y % Change


• Wage growth is already showing signs of acceleration in certain parts of Europe such as France, Germany and the UK albeit still modest by historical standards.

• However, some labour slack remains and given that the Eurozone economy is forecast to cool, wage pressures should be fairly modest.

• We conclude that it is therefore unlikely that wage pressures will lead to markedly higher inflation/interest rates.

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Germany UK France

Long-end of the Curve to Remain Low10-year Government Bond Rates

Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight*Average 1990 – 2017; forecasts updated 8-3-2018

• Despite some tick up in wage growth, broader inflation measures are expected to remain very low across Europe which will put little upward pressure on 10-year government bond yields.

• Long-term interest rates across Europe are 350 bps lower on average versus the historic norm.

• However, changes to nontraditional domestic and global monetary policy may put additional upward pressure on longer-term bond yields over the coming years.

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Stronger Growth = Higher CRE ValuesCRE values more correlated with GDP growth than bond rate movements

Source: MSCI, Oxford Economics

• CRE values, in the aggregate, are more highly correlated with GDP growth than they are interest rate movements, although both are important drivers.

• Government bonds increased in 2011 during the Eurozone crisis driven by fear over sovereign debt levels in the peripheral Eurozone economies.

• Subsequently, the Eurozone economy contracted for 6 successive quarters, while capital values in commercial property fell across the region, albeit with the worst declines focused on peripheral markets.

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Eurozone GDP, % pa, LHSEurozone Capital Growth, % pa, LHSEurozone 10y Bond Movement, Bps, Inverted, 2y lead, RHS

Correlation of CRE values to:GDP = 0.84Bonds = 0.65

Downside risks

Brexit Scenarios SlideUK: Brexit scenario probabilities (ultimate deal)

Source: Oxford Economics (Jul-18), Cushman & Wakefield Research & Insight

• There is an increased risk that the government’s proposed withdrawal agreement will not gain UK parliamentary approval (i.e. political deadlock).

• This could push the UK towards the two extremes: BINO (Brexit in name only) or WTO (no deal).

• No deal is the most concerning scenario to CRE as it is associated with a larger slowdown in economic growth.

• In July, the IMF estimated that the impact of a no deal would be a reduction in UK GDP of 4% and the EU of 1.5% over the long term.

BINO

Remain in EU

FTA

WTO

31% 31%

24% 15%

‘HARDER’ ‘SOFTER’

U.S. Yield Curve – Keep Your Eye On It10-Year Treasury Constant Maturity Minus 3-Month Yield

Source: Federal Reserve, Cushman & Wakefield Research & Insight

• The US & Eurozone are highly correlated at 0.9 over 1990-2017; thus, the yield curve in the U.S. bears watching.

• An inverted yield curve occurs when the short end of the curve is higher than the long-end, and that typically signals a recession is coming 6 to 24 months later.

• The yield curve has flattened out in recent weeks but still remains reasonably close to its historical average.

• An inverted yield curve does not guarantee a recession; however, there has only been one false positive—making it the single most reliable leading indicator.

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Recession Yield Curve

Historical Average = 163 bps

Trade War ScenariosImpact of Scenarios on GDP Growth


• Trade war: in this scenario, U.S. President Trump pushes through highly-protectionist measures, initiating a trade war with Asia and pulling the U.S. out of NAFTA.

• The recovery in world trade grinds to a halt and the rate of global economic growth slows.

• This would hit major export oriented economies, such as Germany and the Nordics, the hardest.

• However, the EU-U.S. trade relationship has improved recently following a preliminary deal that aims for free trade in non-auto industrial goods. There was a commitment not to impose new tariffs while negotiations are underway.

Eurozone UK

Tariff TimelinePresident Trump withdraws the U.S. from Trans-Pacific

Partnership.Trump administration seeks to renegotiate the North American Free Trade Agreement; negotiations ongoing.

President Trump approves tariffs on imported washing machines and solar panels.

• Trump administration approves tariffs on imported steel and aluminum; Canada and Mexico exempted.

• China imposes tariffs of 15-25% on 128 products that account for US $3b, including pork, cherries, and scrap metal.

• Trump proposed introducing tariffs of up to 25% on 1,300 Chinese goods, primarily high-tech; representing $50 billion in goods.

• China’s Ministry of Commerce announced plans to target $50b in U.S. goods per year. China plans to put a 25% tariff on imported U.S. soybeans, cars, aircraft.

• Trump hints at $150 billion of new tariffs on Chinese goods.

• EU-U.S. trade relationship has improved recently, following European Commission President Jean-Claude Juncker’s visit to Washington.

• The preliminary deal aims for free trade between the EU and U.S. in non-auto industrial goods which seems an ambitious goal at this stage, but perhaps more significantly there was a commitment not to impose new tariffs while negotiations are underway.

January 2017May 2017

January 2018

March/April 2018

Trump met with Xi Jinping: they didn’t set a timetable for the end of the trade war.

August 2018

July2018

Who Is Most Exposed to Trade WarsExports as a % of GDP, 2017


• Experts place the odds of a full-blown global trade war between 10-25% probability, but risks are rising.

• Here we highlight European countries that are most exposed, led by Belgium, Switzerland, and Germany where exports as a percentage of GDP are 50% or greater.

0% 50% 100% 150% 200% 250%

United StatesBrazilJapan

AustraliaIndonesia

ChinaRussia

United KingdomFrance

CanadaItaly

SpainMexico

GermanySouth KoreaSwitzerland

MalaysiaTaiwan

ThailandBelgium

Hong Kong, ChinaSingapore

22

Pound Sterling Trends

Source: Macrobond, Cushman & Wakefield Research & Insight

• Sterling depreciated by 20% following the UK’s decision to leave the EU, in a referendum in mid-2016, on the assumption that the UK economy would suffer a sudden correction.

• This did not materialize, although growth has been weaker over recent years. As such, the Pound had regained much of its value by early 2018.

• However, by mid-2018 fears of a ‘no deal’ Brexit (the scenario thought to have the most severe economic cost) had increased, causing the Pound to fall once again.

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USD per GBP

23/6/16:Brexit vote

Eurozone: Exchange Rate TrendsUSD per EUR

Source: Macrobond

• The Euro rapidly appreciated in 2017 on the back of stronger economic growth and reduced political risk.

• The Euro exchange rate versus the US dollar peaked in January 2018 at 1.25 (USD per EUR). This is a 20% increase compared with January 2017 (1.04 USD per EUR).

• Euro had lost momentum early this year due to global trade war uncertainty and an accelerating US economy.

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Supply/DemandFundamentals

Europe (exc. UK) Office Sector Dynamics

Source: Cushman & Wakefield Research & Insight

• Following a record-setting year in 2017, take up of office space remains hot across most parts of Europe. 2018 take-up expected to be slightly slower, but still robust.

• Development pipeline to pick up this year with over 5m sq m delivered. Overall more than 12m sq m are expected between 2018-20.

• Of the 123 markets tracked across Europe, 66 are expected to see positive rental growth this year.

• Vacancy rate bottomed at 8.5% in 2017 and expected to gradually trend up as the new supply comes online.

Take-up, million sq m Vacancy Rate

New Completions, million sq m Prime Rental Growth, p.a.

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Office Take-up: 2018H1Top 30 Office Markets Ranked by Office Take-up as a % of Stock

Europe = 7.5 Million Square MetersRank Market % Stock

1 Warsaw 7.82 Budapest 7.23 Prague 6.84 Bucharest 5.75 Bratislava 4.66 Glasgow 4.27 Sofia 3.88 Barcelona 3.59 Manchester 3.5

10 Copenhagen 3.211 London 2.912 Dublin 2.913 Luxembourg 2.814 Leeds 2.715 Paris 2.5

• At the midpoint of 2018, Central and Eastern European office markets lead the way for take-up as a percentage of stock, claiming the top 5 places.

• UK regional markets continued to perform well, aided by healthy public sector and coworking take-up.

• London’s office sector continues to defy expectations of a Brexit-driven slowdown with take-up 7% higher in H1 2018 versus H1 2017.

• In terms of momentum, Rotterdam, Glasgow, Copenhagen, Budapest and Manchester all posted strong increases in take up in the first half of 2018 compared to a year ago.

Rank Market % Stock

16 Munich 2.317 Istanbul 2.218 Frankfurt 2.219 Dusseldorf 2.120 Berlin 2.121 Bristol 2.022 Amsterdam 2.023 Edinburgh 1.924 Stockholm 1.925 Lisbon 1.826 Madrid 1.827 Rotterdam 1.728 Birmingham 1.729 Hamburg 1.730 Milan 1.6


Europe’s Office MarketPrime Office Vacancy Trends

Source: Cushman & Wakefield Research & Insight*Chart visual from FTI Consulting

• Generally, vacancy rates are tightening across the major office markets in Europe, down an average of 150 bps from a year-ago. Limited development activity in core locations coupled with healthy demand and the continued prevalence of ‘change of use’ has fueled the trend.

• The German markets, London and Paris all remain the tightest, led by Berlin with a vacancy rate of just over 2%.

• The biggest decline in vacancy has occurred in Amsterdam where the conversion of office stock to alternative uses, particularly residential and hospitality, have resulted in a rapid reduction in vacant space.

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

RomeDublin

HelsinkiMilan

WarsawMadrid

AmsterdamBrussels

BucharestFrankfurt

AthensLisbon

OsloStockholm

PragueParis

LondonHamburg

MunichBerlin

Q2 2017 Q2 2018

Avg. Q2 2018

(7.2%)

Avg. Q2 2017

(8.7%)

Who’s Hot, Who’s NotOffice Prime Rents, Q2 2018 over Q2 2017, Yr/Yr%


• The hottest markets in terms of rent growth include Utrecht, Berlin and Bristol where new development has helped set new headline rents. Many of the better performing cites have a vibrant tech sector which is helping to support the positive demand dynamics.

• The markets that saw substantial declines in rental rates include Istanbul where a currency crisis is providing great uncertainty. London has seen above-average construction activity while space rationalization by major occupiers in Geneva reduced demand.

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New Office ConstructionAs of 2018Q2

Rank City Country U/C Sq. M % of Inv.

1 *Istanbul Turkey 2,290,920 38.2%

2 Paris France 2,145,656 3.9%

3 London UK 1,363,232 5.5%

4 Moscow Russia 1,164,562 6.9%

5 Berlin Germany 1,038,908 5.6%

6 Munich Germany 928,440 4.5%

7 Warsaw Poland 676,540 12.5%

8 Brussels Belgium 529,961 3.9%

9 Milan Italy 499,004 4.1%

10 Stockholm Sweden 454,374 3.9%

11 Bucharest Romania 451,800 16.7%

12 Luxembourg Luxembourg 419,642 10.8%

13 Dublin Ireland 390,510 10.8%

14 Hamburg Germany 326,503 2.2%

15 Prague Czech Republic 313,860 9.2%

16 Sofia Bulgaria 306,674 17.4%

17 Dusseldorf Germany 290,043 3.2%

Source: Cushman & Wakefield Research & Insight*Given Turkey’s current economic challenges it is unlikely that all of the new construction will be developed in the forecast horizon.

Rank City Country U/C Sq. M % of Inv.

18 Oslo Norway 273,040 2.9%

19 Frankfurt Germany 260,863 2.2%

20 Barcelona Spain 247,268 4.2%

21 Helsinki Finland 202,422 2.3%

22 Amsterdam Netherlands 185,220 3.2%

23 Madrid Spain 179,320 1.4%

24 Manchester UK 130,723 7.0%

25 Birmingham UK 127,835 7.4%

26 Riga Latvia 105,301 12.8%

27 Vilnius Lithuania 100,167 16.5%

28 Rome Italy 94,501 0.9%

29 Edinburgh UK 51,902 4.8%

30 Lisbon Portugal 43,503 0.9%

31 Glasgow UK 36,349 2.8%

32 Athens Greece 17,500 0.3%

• With vacancy tightening to pre-crisis levels, new construction is ramping up.

• New development is particularly robust in *Istanbul, Paris, London, Moscow, and Berlin. These 5 markets account for over 50% of all the new construction currently taking place across Europe.

• For the most part strong space demand should be able to digest the new supply without significant disruption but the older, lower grade office product will come under pressure as the flight to quality continues.

Tenant Incentives Falling as Market TightensTypical number of months rent free on a 10 year lease


• Across Europe, tenant incentives are falling as availability reduces allowing landlords to dictate less generous terms.

• On average across 30 European office markets, tenant incentives have decreased by 6% during H1 2018.

• Based on a 10-year lease, London and the UK regional office markets are offering some of the highest concessions for Grade A space in major office markets across Europe.

Months Rent Free – 30 market averageSample of Cities: Grade A Space - 2018 (10-year deal)

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European average

Market Free Rent (months)

London (WE) 21

Paris 16

Brussels 15

Milan 15

Frankfurt 12

Madrid 10

Amsterdam 6

Stockholm 3

Where Are We in the Leasing Cycle?European Office Market Wave, Q2 2018


• The office market wave illustrates current market position in the cycle determined by its current and historic rental growth based off prime headline rents.

• It does not indicate the path of future market performance. Markets may move at different rates and directions and will not automatically move along the line from recovery to expansion to slowdown and downturn.

• Full details available on request.

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Europe Logistics Sector DynamicsAs of Q2 2018


• Europe’s logistics sector is booming. Take-up reached a record level of 31.3 million sq m in 2017. H1 2018 levels already at 14.4 million sq m.

• Availability is falling. Vacancy rate was 8.1% at the of 2017 and was 6.7% at end H1 2018.

• Developer’s are savvy to the hot trends. Construction activity is picking up with almost 17 million sq m delivering in 2017 and another 9.8 million sq m delivering in H1 2018.

• Rental growth among top cities is moderate at 1.2% y/y in 2018, but is expected to accelerate.

Europe Take Up, million sq m Europe Vacancy Rate

Europe New Completions, million sq m Top Cities Prime Rental Growth, p.a.

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2012

2013

2014

2015

2016

2017

H1

185%

7%

9%

11%

13%

15%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

H1

18

05

101520253035

2007

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H1

18

Logistics Take-up: Mid-year 2018Top Logistics Locations Ranked by Take-up

Source: Cushman & Wakefield Research & Insight; online sales stats from text bullets sourced to Statistica

• Take-up continues to be positively impacted by the rise of ecommerce fueling business-to-consumer distribution across Europe.

• Online sales as proportion of total retail sales has increased from c.7% in 2015 to c.9% in 2017, on average for the EU.

• Countries such as the UK are ahead of the average with a c.18% share of online sales, above Germany at c.15%, France at c.10%, Spain at c.5% and Italy at c.3%.

Europe = 14.4 million sq m

Rank Location Sq m1 Moscow 608,574

2 Milan 567,258

3 Madrid 452,231

4 London South East and East 446,681

5 Greater Prague 407,558

6 Warsaw 389,377

7 Barcelona 389,000

8 East Midlands 329,296

9 Frankfurt 295,000

10 Copenhagen 275,000

11 Paris (Ile-de-France) 248,515

12 Hamburg 246,000

Rank Location Sq m13 Dublin 164,65914 Budapest 163,529

15 Amsterdam 160,54616 Berlin 139,000

17 Rotterdam 130,72018 Marseille 116,088

19 Brussels 104,309

20 Munich 103,00021 Sofia 87,265

22 Bratislava 64,60823 Bucharest 63,140

24 Antwerp 59,542

Logistics MarketQ2 2018 Vacancy Rates

Source: Cushman & Wakefield Research & Insight*Chart visual from FTI Consulting

• As vacancy rates fall across Europe the opportunity for developers to undertake speculative construction has increased.

• Vacancy rates declined significantly in Paris, Barcelona, Budapest and Amsterdam where strong occupier demand has outweighed new supply.

• The rate of obsolescence remains stable but higher than other sectors as logistics warehousing stock adjusts to tenant demand for higher floor-to-ceiling heights, greater yard sizes and access to power for greater automation. However, formerly obsolete stock that is advantageously located has been reinvigorated with demand for urban logistics depots.

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Slovakia

Moscow

Rotterdam

Marseille

Paris (Ile-de-France)

Warsaw

Milan

Lyon

Barcelona

Budapest

Amsterdam

Greater Prague

Bucharest

Copenhagen

Q2 2017 Q2 2018

Avg. Q2 2018 (4.9%)

Avg. Q2 2017 (6.3%)

Who’s Hot, Who’s NotLogistic Prime Rent (local currency), Q2 2018 over Q2 2017, Yr/Yr%


• The logistics sector has been one of the best performing sectors over recent years, although there are still large differences between locations.

• Cities where ecommerce is expanding with greater online sales penetration combined with an expanding economy or where there is a large wealthy consumer-base have tended to do well.

• However, the supply of land is very important to logistics given the relatively short construction time and thus the supply responsiveness.

16%

11%10%

8% 8%7%

5% 4% 4% 3% 3% 2% 2% 2% 1%0% 0% 0%

-2%-3%

-4%

-7%

-2%

3%

8%

13%

18%

Europe Retail Sector DynamicsEuropean Top Cities, As of Q2 2018

Source: Cushman & Wakefield Research & Insight, Oxford Economics

• Secular shift continues for retail brought on by ecommerce taking an increasing share of overall sales.

• Top cities standard shops prime rental growth has been losing momentum since the peak of 2015 (4.3% y/y).

• At the end of June 2018 standard shops rental growth was just 0.7% y/y compared with 0.86% y/y of end 2017.

• Shopping centre rental growth has also weakened to below 0.5% per annum. This is despite continued low levels of completions relative to the pre-GFC period.

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5.0%

2005

2006

2007

2008

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2010

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2016

2017

H1

18

High Street Prime Rental Growth, p.a.

95

97

99

101

103

105

107

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

H1

18

Europe Retail Sales Volume Index 2005=100

-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%

2005

2006

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2010

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H1

18

Shopping Centre Prime Rental Growth, p.a.

0123456789

1020

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st.

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ons

Shopping Centre Completions, sq m

Capital Markets

Fundraising for CRE Remains SpectacularDry Powder Targeted at Real Estate Globally ($ bn)

Source: Preqin, Cushman & Wakefield Research & Insight

• Tremendous capital in the system with fundraising at an all-time record high as of August 2018; an increasing weight focused on opportunistic and debt strategies.

• Dry powder targeting European commercial real estate is at an all-time high and has increased 15% since the beginning of the year.

• The record level of dry powder also reflects the increasing difficulty in deploying funds.

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2012 2013 2014 2015 2016 2017 Aug-18

Rest of the worldAsia

Europe

North America

Europe Sales Market ActiveSales Volume, All Product Types

Source: Real Capital Analytics, Cushman & Wakefield Research & Insight

• Following a blistering sales pace in 2017Q4 which was a record, activity is taking a breather in the first half of 2018.

• The first half slowdown was broad-based with all major sectors down double-digits compared to a year ago.

• There are pockets of growth, however, which we show on the following slides.

• Pending deals also indicate a very robust second half to the year.

0

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Sales Volume, € bil.

+13%

-19%

H1’ 18

Office -22%

Industrial -24%

Retail -21%

Hotel -18%

Apartment -14%

Senior Housing -15%

Land +3%

By Product Type (Y/Y%)

Cross-border Capital FlowsUS, Billions


• Cross-border capital flows into commercial real estate continue to be extremely robust.

• That said, it has cooled off somewhat in the U.S. from record levels, and capital is now flowing more aggressively into Europe and Asia Pacific.

• Europe continues to offer an attractive investment proposition given that the economy is back on track and many CRE markets still offer pricing that offers higher returns relative to bonds and the stability / liquidity of markets in core cities often compares favorably to elsewhere around the world.

$0

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Mar

-08

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08

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-11

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U.S. All Property Types Cross-Border Volume ($) Europe All Property Types Cross-Border Volume ($)

Asia All Property Types Cross-Border Volume ($)

Europe

Asia

U.S.

Chinese capital controls go into effect

Cross-Border Capital Near All-Time Highs in Europe


• Global capital continues to pour into Europe.

• Cross-border transactions have accounted for more than half of volume in the last twelve months.

Rolling 12-Month European Investment Sales VolumeDollars in billions; percent (%)

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Continental Global Cross-border (% of total)

Non-European Investment Into EuropeWhat the Foreign Capital Is Buying


• Office is still the preferred asset class, accounting for 55% of all foreign capital transactions in Q2 and 36% over the last year.

• But increasingly we are seeing foreign capital target the industrial sector, accounting for nearly a quarter of transactions over the last 12 months.

• Retail investment volumes are falling, accounting for 14% in Q2, slightly below the annual share of 16%.

• Alternative sectors such as residential and hotels have been important over recent years although the share in Q2 was slightly lower than the over the last 12 months.

Q2 2018 Last 12 months

Office55.0%

Industrial 12.6%

Retail 14.3%

Apartment9.1%

Hotel 4.7%

Other4.2%

Office Industrial RetailApartment Hotel Other (niche)

Office36.1%

Industrial 24.5%

Retail 15.9%

Apartment12.5%

Hotel 6.7%

Other 4.2%

Office Industrial RetailApartment Hotel Other (niche)

Most Active Markets Across EuropeSales Volume, All Product Types


• London continues to be the dominate market in terms of sales volume, easily holding it’s #1 ranking through H1 2018. Asian capital in particular continues to target trophy assets.

• Paris along with the German markets round out the top 5; sales remain robust but are cooling from last year’s blistering pace.

• Dublin, Brussels and Lisbon remain on investor’s radars, with all three posting much stronger gains in sales activity compared to a year-ago.

Takeaways European economy has slowed in H1 2018 from an exceptional rate of expansion

last year. Growth is expected to continue into 2019 at near 2% pa.

Given correlation between the economy and the property markets, values will continue to climb in most markets/product types as the expansion continues.

However, as unemployment reaches near all time lows in certain markets, the rate of employment growth will slow which will reduce the net demand for office space.

Investing in later stages of the cycle – if that’s where we are – is always difficult. Real estate remains intensely local. But in the general, odds are good that the leasing fundamentals will remain solid and Europe will continue to attract an increasing share of the world’s capital.

To help identify attractive opportunities please visit our European Fair Value Index.

http://www.cushmanwakefield.co.uk/en-gb/research-and-insight/2018/fair-value-index-q1-2018

Europe Economic & Commercial Real Estate OutlookSeptember 2018

2018 Cushman & Wakefield. The material in this presentation has been prepared solely for information purposes, and is strictly confidential. Any disclosure, use, copying or circulation of this presentation (or the information contained within it) is strictly prohibited, unless you have obtained Cushman & Wakefield’s prior written consent. The views expressed in this presentation are the views of the author and do not necessarily reflect the views of Cushman & Wakefield. Neither this presentation nor any part of it shall form the basis of, or be relied upon in connection with any offer, or act as an inducement to enter into any contract or commitment whatsoever. no representation or warranty is given, express or implied, as to the accuracy of the information contained within THIS PRESENTATION, and Cushman & Wakefield is under no obligation to subsequently correct it in the event of errors.

Elisabeth TroniHead of EMEA Research & [email protected]

Mark Unsworth Head of EMEA [email protected]

Kevin ThorpeChief Economist, Global Head of [email protected]

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