A Look at Brexit - Mellott

CRE IN A COMPLEX WORLD
MAY 2, 2017

• State of the Market
• What’s influencing markets?
• Some perspective: What really matters?
• What’s next? CRE Outlook
CBRE CRE IN A COMPLEX WORLD2
WHAT’S THE PLAN?

• 2.5 million sq. ft. of take-up in Central London
• Prime rents unchanged in the city, but down 2% in West End
• 14.7 million sq. ft. of availability
• 6.6 million sq. ft. of completed construction expected
• Less than 3 million sq. ft. (new) expected in 2018
STATE OF THE MARKET - LONDON
Source: CBRE Research

• Demand began to taper off in 2016 (Q1 2017 19% below 10 year
average)
• Availability at 10-year average (14.7 million sq. ft.)
• Office rents outside of London doing better

• The value of real estate transactions in 2016 was down 25% YoY (most
since GFC)
• Central London investment down only 19%
• Not all attributed to referendum
• Volumes are down across the board

Figure 2: Capital ﬂows into global real estate (US$ billions)
Source: CBRE Research, Real Capital Analytics, 2016.
368
586
85
189
191
64
113
78
44
156
171
70
73
284
180 172
329
83
233
396
108
303
458
113
316
566
105
107
501
288
EMEAUS$bn Americas APAC
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1,200
1,000
800
600
400
200
0
CAPITAL FLOWS INTO GLOBAL REAL ESTATE
(US$ BILLIONS)
Source: CBRE Research, Real Capital Analytics 2016.

Figure 3: 2016 prime capital value growth (annual change)
Source: CBRE Research, NCREIF, 2016.
4.0%
5.4%
8.6%
8.7%
10.3%
6.6%
4.9%
2.7%
5.1%
Office Retail Industrial
AMERICAS EMEA ASIA PACIFIC
2016 PRIME CAPITAL VALUE GROWTH
(ANNUAL CHANGE)
Source: CBRE Research, NCREIF, 2016.

Figure 4: 2016 prime property rent growth (annual change)
Source: CBRE Research, 2016.
0.2%
2.3% 1.9%
-1.9%
6.6%
4.7%
1.8%
0.0%
0.9%
Office Retail Industrial
2016 PRIME PROPERTY RENT GROWTH
(ANNUAL CHANGE)
Source: CBRE Research, 2016.

6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
OFFICE MARKET*
VACANCY RATES (%)
*All major markets where vacancy data are available except Moscow

In the UK
In the rest of Europe
Very Significant Significant Neutral Insignificant Very Insignificant
40%
35%
30%
25%
20%
15%
10%
5%
0%
BREXIT
BIG DEAL OR RED HERRING?
Source: CBRE European Occupier Survey 2017.

Access to sufficiently large/skilled labor pool
Exchange rate fluctuations
General policy uncertainty
Ability to operate in European markets
Possible changes to trading
arrangements / tariff introductions
Other
32%
28%
27%
8%
2% 3%
BREXIT
WHAT’S THE CONCERN?
Source: CBRE European Occupier Survey 2017.

MARCH
29: Article 50
issued
APRIL
29: EU Summit
signs off
negotiating
guidelines to
Commission
MAY
7: French
elections
JUNE
Substantive
‘divorce’
negotiations on
money, EU
citizens and N
Ireland
JULY,
AUGUST
(Go on holiday)
SEPTEMBER
German
elections
ARTICLE 50
WHAT HAPPENS NEXT?

GREATEST CHALLENGES FOR ORGANIZATIONS FUTURE OPERATIONS
EMEA OCCUPIER SURVEY
KEY FINDINGS
Source: CBRE Research, 2017; EMEA Occupier Survey Report 2017.

- 100 200 300 400 500 600 700 800 900
UK
Germany
France
Sweden
Netherlands
Spain
Italy
Norway
Finland
Denmark
Belgium
Poland
Russia
Austria
Ireland
EUROPEAN CRE
INVESTMENT 2003-2016
Source: CBRE Research 2016.

0% 10% 20% 30% 40% 50% 60% 70% 80%
Czech Republic
Russia
Norway
Sweden
Poland
Ireland
Italy
Netherlands
Spain
France
Germany
UK London
0% 10% 20% 30% 40% 50% 60% 70% 80%
Czech Republic
Switzerland
Portugal
Russia
Denmark
Netherlands
Italy
Belgium
Spain
France
Germany
UK
Total investment from North America, % of total
KEY DESTINATIONS IN EUROPE
TOP COUNTRIES 2013-2016
Source: CBRE Research 2016.
London
Total investment from Asia, % of total

WHAT REALLY MATTERS?
SOME PERSPECTIVE

• London most connected city*
• Hosts 40% of European HQ for world’s top companies**
SOME PERSPECTIVE
*Source: Global and World Cities Network
**Source: Deloitte

• 65,000 people EU-facing financial services
• 3% of UK office stock (6 million sq. ft.)
• About the level of space leased in Central London every 6 months
SOME PERSPECTIVE

• Top 10 global investment banks 52,000 in London
• Could see 27% of those jobs moved
• Equal to 5 weeks of leasing in London
SOME PERSPECTIVE

• In 2006 financial services accounted for 41% of Central London leasing
(sq. ft.)
• In 2016 only 23%
• London has diversified
• Tech and media (immigration key)
SOME PERSPECTIVE

• London boasts a lot of advantages
• Housing, schools, infrastructure and culture
• Legal and regulatory environment
• Alternatives aren’t clear
• Impacts will be over the long term
SOME PERSPECTIVE

SOME PERSPECTIVE
TRANSPARENCY FX ADVANTAGE
SIZELIQUIDITY

-6%
-4%
-2%
0%
2%
4%
6%
Y-o-Y % Change Recession Nonfarm Emp.
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2017
2016
REAGAN
SHOT
FALKLANDS WAR
US EMBASSY IN
BEIRUT BOMBED
CHERNOBYL
DISASTER
GLASTNOST
IN USSR
BERLIN WALL
FALLS US INVADES
KUWAIT
GULF WAR
STARTS FALL OF THE
SOVIET UNION
EUROPEAN UNION
BEGINS
BOSNIAN
WAR ENDS
EUROZONE
CREATED
9/11
US INVASION
OF IRAQ
RUSSO-GEORGIAN
WAR
OBAMA ELECTED
SYRIAN WAR
JAPANESE
TSUNAMI
ISIS
EMERGES
CRIMEA
ANNEXED
PARIS
ATTACKS
BREXIT
VOTE
NAFTA
SIGNED
HURRICANE
KATRINA
BUSH I ELECTED
CLINTON ELECTED
BUSH II ELECTED
TRUMP
ELECTED
PERSONAL
COMPUTER
INTRODUCED
GEOPOLITICS MATTER BUT NOT LIKE YOU THINK
Source: CBRE Research; U.S. BLS, Q4 2016.

UNEMPLOYMENT
THE CYCLE MATTERS
Source: CBRE Research, Macrobond, IMF, WEO.
G7 UNEMPLOYMENT RATE (%)
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

OUTLOOK
EMPLOYMENT AND INTEREST RATES
Source: CBRE Research, Macrobond.

Figure 7: Purchasing activity relative to 2016, global and regional
Source: CBRE 2017 Global Investor Intentions Survey.
Global EMEA Americas Asia Pacific
More than
20% lower
Between
10% - 20% lower
Between
10% - 20% higher
More than
20% higher
Up to 10%
lower
About the
same
Up to 10%
higher
%
50
45
40
35
30
25
20
15
10
5
0
PURCHASING ACTIVITY RELATIVE TO 2016
GLOBAL AND REGIONAL

on
ORTH
C
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
EMEA ASIA PACIFIC
TOP TARGET CITIES
BY REGION
Figure 12: Top target cities by region
#1 LOS ANGELES
#2 DALLAS/FORT WORTH
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
ASIA PACIFIC
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
n
RTH
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
EMEA ASIA PACIFIC
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDNEY
#2 TOKYO
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#1 LOS ANGELES
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#1 SYDN
#2 TOK
#3 SHAN
#4 MELB
#5 BRISB
#6 HON
#1 LONDON
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
AMERICAS EMEA ASIA PAC
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#2 TOKYO
#3 SHANG
#4 MELBO
#5 BRISBA
#6 HONG
#2 BERLIN
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#3 MADR
#4 AMST
#5 PARIS
#6 WARS
#3 NEW YORK
#4 WASHINGTON DC
#5 ATLANTA
#6 SAN FRANCISCO
#7 SEATTLE
#3 SHANGHAI
#4 MELBOURNE
#5 BRISBANE
#6 HONG KONG
#3 MADRID
#4 AMSTERDAM
#5 PARIS
#6 WARSAW
AMERICAS
EMEA
ASIA PACIFIC

79%
DIRECT
26%
DEVELOPMENT
FUNDING
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
PREFERED INVESTOR VEHICLES
2016 VERSUS 2017
Figure 15: Preferred investor vehicles
79%
DIRECT
26%
PROPERTY
FUND
26%
DEVELOPMENT
FUNDING
16%
PRIVATE
DEBT
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
5%
CMBS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
79%
DIRECT
26%
PROPERTY
FUND
26%
DEVELOPMENT
FUNDING
16%
PRIVATE
DEBT
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
5%
CMBS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
26%
PROPERTY
FUND
16%
PRIVATE
DEBT
7%
OTHER
DEBTS
5%
CMBS
79%
DIRECT
26%
PROPERTY
FUND
26%
DEVELOPMENT
FUNDING
16%
PRIVATE
DEBT
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
5%
CMBS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
79%
DIRECT
26%
PROPERTY
FUND
26%
DEVELOPMENT
FUNDING
16%
PRIVATE
DEBT
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
5%
CMBS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
79%
DIRECT
26%
PROPERTY
FUND
26%
DEVELOPMENT
FUNDING
16%
PRIVATE
DEBT
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
5%
CMBS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)
79%
DIRECT
26%
DEVELOPMENT
FUNDING
8%
CORPORATE
AQUISITIONS
7%
OTHER
EQUITY
7%
OTHER
DEBTS
49%
PARTNERSHIP /
JOINT VENTURE /
PARTIAL INTERESTS
22%
LISTED REAL ESTATE
(INCLUDING
LISTED REITS)

Figure 16: Investors main motivation for investing in real estate
2017
Yield relative to
other asset classes
Higher income return
than other assets classes
Expectation of better
capital value growth than
asset classes
Other
Hedge against inflation
Asset class diversification
Steady income
stream from rents
%
0 5 10 15 20 25 30 35
30
20
15
Geographic
diversification 7
2
0
0
20
Yield relative to cost of debt
(positive leverage advantage) 6
INVESTOR MOTIVATION
WHY INVEST IN REAL ESTATE?

Figure 17: Investor main obstacles to purchase
2017
Asset pricing
Availability of assets
Competition from
other investors
Low market transparency
Other
Currency risk
Tax
Deflation
%
0 6010 3020 40 50
48
25
16
3
2
2
1
1
1
0
Availability and/
or cost of debt
Lack of investment
partners
INVESTOR CHALLENGES
MAIN OBSTACLES TO PURCHASE

Figure 18: Investor main concerns
2017
A global economic shock
undermining occupier demand
Faster than expected,
a bubble waiting to burst
Overbuilding leading
to excess supply
Property is overpriced,
a bubble waiting to burst
A local economic shock
undermiming occupier demand
Local politcal instability
Some other property
market related shock
Higher than
expected owners
Other
Distressed sales by
existing owners
Deflation
%
0 5 10 15 20 25
Global political instability
(conflict and or terrorism)
A change of government policy
that makes property less attractive
22
6
2
1
1
1
6
4
21
10
10
15
0
INVESTOR CHALLENGES
MAIN CONCERNS

• Europe currently well-positioned cyclically
• Late cycle
• Some room to run
• Politics increasingly important, but not how you think
• Watch interest rates and FX
CONCLUSION

THE WORLD AT AN INFLECTION POINT

THANK YOU
DARIN MELLOTT
Director, Research and Analysis
CBRE

A Look at Brexit - Mellott

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