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European Economic CRE Outlook September 2018

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The European real estate outlook in the context of the current economic climate.
Preliminary 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.

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European Economic CRE Outlook September 2018

  1. 1. Europe Economic & Commercial Real Estate Outlook September 2018
  2. 2. The Euro area's economy is cooling but the expansion remains firmly intact.
  3. 3. Euro area: Cooling Off, But Still Solid GDP 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 2.1% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 Real GDP, y/y %chg. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 2017 2018 2019 2020 Real GDP, y/y %chg. Source: Eurostat Source: Oxford Economics
  4. 4. Slowdown is Mostly Broad-Based Real 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 labour markets 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. 0 1 2 3 4 5 6 7 8 Italy U.K. France Euro zone Germany Switzerland Spain Netherlands Poland Ireland 2018F 2017
  5. 5. Strong Correlation Between GDP Growth & CRE Real 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. 7.5 5.5 5.1 5.0 0 1 2 3 4 5 6 7 8 9 10 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Eurozone GDP *Net Absorption (right scale) Correlation = .80
  6. 6. Leading Indicators Mostly Solid Eurozone & 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 100.6 100.8 101.0 101.2 101.4 101.6 101.8 102.0 102.2 102.4 Jun2017 Aug2017 Oct2017 Dec2017 Feb2018 Apr2018 Jun2018 Eurozone UK 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Jun2017 Aug2017 Oct2017 Dec2017 Feb2018 Apr2018 Jun2018 Eurozone UK 48 50 52 54 56 58 60 62 August September October November December January February March April May June July Eurozone UK -20 -10 0 10 20 30 40 May2017 Jul2017 Sep2017 Nov2017 Jan2018 Mar2018 May2018 Euro area UK 0 0.5 1 1.5 2 2.5 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 Eurozone UK Job Growth (y/y%) 96.4 96.6 96.8 97 97.2 97.4 97.6 97.8 98 110 110.5 111 111.5 112 112.5 113 113.5 114 114.5 115 Jan2018 Feb2018 Mar2018 Apr2018 May2018 Jun2018 Euro Area UK
  7. 7. Job Growth Momentum Tracker Total 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 Area Job Growth 2017 Job Growth 2018* 1 Madrid 89 82 2 Barcelona 71 59 3 London (Inner) 49 42 4 Budapest 36 40 5 Paris 42 37 6 Berlin 57 36 7 Lisbon 48 36 8 Stockholm 35 29 9 Milan 31 28 10 Rome 32 27 11 Amsterdam 28 24 12 Sofia 12 22 13 Munich 20 21 14 Vienna 22 20 15 Hamburg 21 19 16 Warsaw 31 18 17 Helsinki 14 16 18 Prague 22 16 19 Rotterdam 18 15 20 Zürich 12 13 21 Luxembourg 14 12 22 Copenhagen 10 11 23 Frankfurt 13 11 24 Birmingham 26 10 25 Dublin 18 10 Rank Metro Area Job Growth 2017 Job Growth 2018* 26 The Hague 11 8 27 Oslo 8 8 28 Brussels 10 7 29 Bratislava 11 7 30 Edinburgh 14 7 31 Manchester 13 7 32 Glasgow 12 5 33 Tallinn 15 3 34 Bucharest 31 1 35 Riga 2 0 = Gaining Momentum
  8. 8. Macroeconomic Projections Euro 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
  9. 9. 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. 0 2 4 6 8 10 12 14 16 1975Q2-1979Q4 1982Q4 - 1992Q1 1993Q4-2007Q4 2010Q1-2011Q3 2013Q3-Current 9.5 Years – 2nd longest 14 Years - Longest 5 Years
  10. 10. Still very little inflation. Interest rates will remain low.
  11. 11. 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 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 ECB Interest Rate UK 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 UK Interest Rate Eurozone
  12. 12. Inflation Remains Tame Consumer Price Index, Y/Y % Change Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight • 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 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Eurozone UK
  13. 13. Labour Shortages Becoming a Challenge Unemployment 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 labour markets. • 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) Is Amsterdam 3.9 3.9 Luxembourg 4.9 4.5 Barcelona 8.6 11.6 Madrid 8.6 12.0 Berlin 14.9 6.2 Manchester 10.8 5.0 Birmingham 10.7 7.9 Milan 3.8 6.3 Bratislava 3.6 3.7 Munich 4.7 2.7 Brussels 15.9 13.4 Oslo 3.6 4.7 Bucharest 2.9 4.0 Paris 6.8 7.2 Budapest 4.2 2.6 Prague 1.9 1.4 Copenhagen 5.0 5.8 Riga 7.9 7.2 Dublin 6.3 5.3 Rome 7.0 9.2 Düsseldorf 7.5 3.3 Rotterdam 4.5 4.7 Edinburgh 4.5 2.9 Sofia 2.5 2.4 Frankfurt 8.0 3.6 Stockholm 5.1 5.7 Glasgow 6.2 5.0 Tallinn 4.6 4.3 Hamburg 7.0 3.7 The Hague 4.2 5.4 Helsinki 4.8 7.3 Utrecht 2.8 3.5 Istanbul 10.3 12.4 Vienna 7.3 9.6 Lisbon 9.6 8.1 Warsaw 1.6 2.2 London (Inner) 8.3 5.2 Zürich 3.7 3.7
  14. 14. Putting Some Pressure on Wages Wages, Weekly Earnings, Y/Y % Change Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight • 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. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2014 2015 2016 2017 2018 2019 2020 Germany UK France
  15. 15. Long-end of the Curve to Remain Low 10-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. 0.6% 0.9% 1.1% 1.1% 1.3% 1.6% 1.5% 1.9% 1.8% 2.5% 2.4% 3.2% 4.6% -1.0% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 2018 2019 Historical Average
  16. 16. Stronger Growth = Higher CRE Values CRE 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. -100 -80 -60 -40 -20 0 20 40 60 80 100 120 -8 -6 -4 -2 0 2 4 6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Eurozone GDP, % pa, LHS Eurozone Capital Growth, % pa, LHS Eurozone 10y Bond Movement, Bps, Inverted, 2y lead, RHS Correlation of CRE values to: GDP = 0.84 Bonds = 0.65
  17. 17. Downside risks
  18. 18. Brexit Scenarios Slide UK: 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’
  19. 19. U.S. Yield Curve – Keep Your Eye On It 10-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. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 -4 -3 -2 -1 0 1 2 3 4 5 Jan1980 Jan1987 Jan1994 Jan2001 Jan2008 Jan2015 Aug2018 Recession Yield Curve Historical Average = 163 bps
  20. 20. Trade War Scenarios Impact of Scenarios on GDP Growth Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight • 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
  21. 21. Tariff Timeline President 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 2017 May 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
  22. 22. Who Is Most Exposed to Trade Wars Exports as a % of GDP, 2017 Source: Oxford Economics, Cushman & Wakefield Research & Insight & Insight • 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 States Brazil Japan Australia Indonesia China Russia United Kingdom France Canada Italy Spain Mexico Germany South Korea Switzerland Malaysia Taiwan Thailand Belgium Hong Kong, China Singapore 22
  23. 23. 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. 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 USD per GBP 23/6/16: Brexit vote
  24. 24. Eurozone: Exchange Rate Trends USD 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. 1 1.1 1.2 1.3 1.4 1.5 1.6
  25. 25. Supply/Demand Fundamentals
  26. 26. 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. 0 2 4 6 8 10 12 14 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 6% 7% 8% 9% 10% 11% 12% 13% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 0 1 2 3 4 5 6 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 -15% -10% -5% 0% 5% 10% 15% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
  27. 27. Office Take-up: 2018H1 Top 30 Office Markets Ranked by Office Take-up as a % of Stock Europe = 7.5 Million Square Meters Rank Market % Stock 1 Warsaw 7.8 2 Budapest 7.2 3 Prague 6.8 4 Bucharest 5.7 5 Bratislava 4.6 6 Glasgow 4.2 7 Sofia 3.8 8 Barcelona 3.5 9 Manchester 3.5 10 Copenhagen 3.2 11 London 2.9 12 Dublin 2.9 13 Luxembourg 2.8 14 Leeds 2.7 15 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 2.3 17 Istanbul 2.2 18 Frankfurt 2.2 19 Dusseldorf 2.1 20 Berlin 2.1 21 Bristol 2.0 22 Amsterdam 2.0 23 Edinburgh 1.9 24 Stockholm 1.9 25 Lisbon 1.8 26 Madrid 1.8 27 Rotterdam 1.7 28 Birmingham 1.7 29 Hamburg 1.7 30 Milan 1.6 Source: Cushman & Wakefield Research & Insight
  28. 28. Europe’s Office Market Prime 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% Rome Dublin Helsinki Milan Warsaw Madrid Amsterdam Brussels Bucharest Frankfurt Athens Lisbon Oslo Stockholm Prague Paris London Hamburg Munich Berlin Q2 2017 Q2 2018 Avg. Q2 2018 (7.2%) Avg. Q2 2017 (8.7%)
  29. 29. Who’s Hot, Who’s Not Office Prime Rents, Q2 2018 over Q2 2017, Yr/Yr% Source: Cushman & Wakefield Research & Insight • 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. 29% 19% 14% 11% 11% 10% 9% 8% 8% 8% 4% 0% 0% 0% 0% 0% 0% -1% -3% -4% -22% -30% -20% -10% 0% 10% 20% 30% 40% Hot Not
  30. 30. New Office Construction As 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.
  31. 31. Tenant Incentives Falling as Market Tightens Typical number of months rent free on a 10 year lease Source: Cushman & Wakefield Research & Insight • 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 average Sample of Cities: Grade A Space - 2018 (10-year deal) 9.4 9.6 9.8 10.0 10.2 10.4 10.6 10.8 11.0 11.2 2016 2017 H1 2018 European average Market Free Rent (months) London (WE) 21 Paris 16 Brussels 15 Milan 15 Frankfurt 12 Madrid 10 Amsterdam 6 Stockholm 3
  32. 32. Where Are We in the Leasing Cycle? European Office Market Wave, Q2 2018 Source: Cushman & Wakefield Research & Insight • 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.
  33. 33. -3% -2% -1% 0% 1% 2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118 Europe Logistics Sector Dynamics As of Q2 2018 Source: Cushman & Wakefield Research & Insight • 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. 0 5 10 15 20 25 30 35 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118 5% 7% 9% 11% 13% 15% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118 0 5 10 15 20 25 30 35 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118
  34. 34. Logistics Take-up: Mid-year 2018 Top 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 m 1 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 m 13 Dublin 164,659 14 Budapest 163,529 15 Amsterdam 160,546 16 Berlin 139,000 17 Rotterdam 130,720 18 Marseille 116,088 19 Brussels 104,309 20 Munich 103,000 21 Sofia 87,265 22 Bratislava 64,608 23 Bucharest 63,140 24 Antwerp 59,542
  35. 35. Logistics Market Q2 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%)
  36. 36. Who’s Hot, Who’s Not Logistic Prime Rent (local currency), Q2 2018 over Q2 2017, Yr/Yr% Source: Cushman & Wakefield Research & Insight • 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%
  37. 37. Europe Retail Sector Dynamics European 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. -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118 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 H118 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 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H118 Shopping Centre Prime Rental Growth, p.a. 0 1 2 3 4 5 6 7 8 9 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018est. Millions Shopping Centre Completions, sq m
  38. 38. Capital Markets
  39. 39. Fundraising for CRE Remains Spectacular Dry 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. $0 $50 $100 $150 $200 $250 $300 $350 2012 2013 2014 2015 2016 2017 Aug-18 Rest of the world Asia Europe North America
  40. 40. Europe Sales Market Active Sales 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 50 100 150 200 250 300 350 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%)
  41. 41. Cross-border Capital Flows US, Billions Source: Real Capital Analytics, Cushman & Wakefield Research & Insight • 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 $20 $40 $60 $80 $100 $120 $140 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 U.S. All Property Types Cross-Border Volume ($) Europe All Property Types Cross-Border Volume ($) Asia All Property Types Cross-Border Volume ($) Europe Asia U.S. Chinese capital controls go into effect
  42. 42. Cross-Border Capital Near All-Time Highs in Europe Source: Real Capital Analytics, Cushman & Wakefield Research & Insight • 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 Volume Dollars in billions; percent (%) 0% 10% 20% 30% 40% 50% 60% 0.0 50.0 100.0 150.0 200.0 250.0 Continental Global Cross-border (% of total)
  43. 43. Non-European Investment Into Europe What the Foreign Capital Is Buying Source: Real Capital Analytics, Cushman & Wakefield Research & Insight • 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 Office 55.0% Industrial 12.6% Retail 14.3% Apartment 9.1% Hotel 4.7% Other 4.2% Office Industrial Retail Apartment Hotel Other (niche) Office 36.1% Industrial 24.5% Retail 15.9% Apartment 12.5% Hotel 6.7% Other 4.2% Office Industrial Retail Apartment Hotel Other (niche)
  44. 44. Most Active Markets Across Europe Sales Volume, All Product Types Source: Real Capital Analytics, Cushman & Wakefield Research & Insight • 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.
  45. 45. 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.
  46. 46. Europe Economic & Commercial Real Estate Outlook September 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 Troni Head of EMEA Research & Insight elisabeth.troni@cushwake.com Mark Unsworth Head of EMEA Forecasting mark.unsworth@cushwake.com Kevin Thorpe Chief Economist, Global Head of Research kevin.thorpe@cushwake.com Presented by:

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