MIPIM 2010 Wrap up
Markets, investment activities and forecasts: a condensed view from the last 4 days A story of Optimism, new Thematic and Expectations Cannes 19th March, 2010
Dr. Thomas Beyerle Head of Global Research Aberdeen Property Investors
Prof. François Ortalo-MagnÊ, CRE, FRICS Chairman Real Estate Program Chairman, Wisconsin School of Business
Economical framework Key lessons learned?
Castle House , San Juan
Upside down house, Japan
2
Global recovery gaining strong momentum Industrial production (% annual change) / OECD leading indicator index 20 15 10 5 0 -5 -10 -15
OECD leading indicator
OECD industrial output
Nov-09
Nov-07
Nov-05
Nov-03
Nov-01
Nov-99
Nov-97
Nov-95
Nov-93
Nov-91
Nov-89
Nov-87
Nov-85
Nov-83
Nov-81
Nov-79
Nov-77
Nov-75
-20 20
Global industrial output
Source: Aberdeen Property Investors 3
Very loose policy in developed economies‌.. Excess liquidity is being deposited back at the Fed US Commercial Bank Free Reserves ($m)
700,000
600,000
500 000 500,000
400,000
300,000
200,000
100,000
0
-100,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Aberdeen Property Investors 4
‌.and exceptional policy stimulus in China China money supply growth China - M1 money supply grow th (yoy)
China M2 money supply grow th (yoy)
35
30
25
20
15
10
5 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: FactSet 5
Real estate pricing dictated by financial markets Prime office property and real corporate bond yields,% 9
8
7
6
5
4
3
2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
Eurozone (5.9%)
UK (6.0%)
Asia** (4.2%)
US BAA real corporate bond
Fi Figures iin b brackets k t representt llong-term t average prime i yield i ld * Forecast yields ** Asia includes Hong Kong, Singapore and Tokyo
Source: Aberdeen Property Investors, Reuters Ecowin
6
Public debt approaching 100% in many parts of Europe Gross government debt to GDP (%) 225
200
175
150
125
100
75
50
25
0
-25
J Japan U United States S Singapore C Canada India M Malaysia K Korea T Thailand Taiwan T A Australia C China Hong Kong H G Greece Ittaly B Belgium F France P Portugal UK U E Eurozone Ireland H Hungary Germany G A Austria N Netherlands S Spain P Poland Finland F N Norway C Czech Republic S Sweden Denmark D S Slovak Republic T Turkey S Switzerland L Luxembourg Russia R
Additional debt from 2009 to 2011 To 2008
Source: Aberdeen Property Investors, OECD, Oxford Economics
7
Private debt overhang an issue for Europe and USA Private sector credit (% of GDP) 250
200
150
100
50
0
Unite ed States Japan n Cana ada Austrralia South h Korea China a Malay ysia India Denm mark UK Irelan nd Spain n Nethe erlands Portu ugal Switz zerland Swed den Euro Zone Austrria Franc ce many Germ Italy Belgium Greec ce Finlan nd Hung gary Slova ak Republic
Polan nd
2008 2000
Source: Aberdeen Property Investors, Thomson Datastream, World Bank
8
Investment markets Pretty difficult years
Crooked house Windsor
Skinny house Boston
9
For the first time‌Transactions EMEA and Asia Pacific All property investment transactions, euros billions 350 300 250 200 150 100 50 0 2002
2003
2004
EMEA
2005
2006
2007
2008
2009
Asia Pacific
Source: RCA, Jan 2010 10
Shift to Asia - China overtakes US real estate activity in 2009 Commercial real estate investment, billions € 120 € 100 € 80 € 60 € 40 € 20 €0 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3
Americas
China
EMEA
AsiaPac ex China
Source: Aberdeen Property Investors, RCA 11
Take up falls 30%, average vacancy rates climb to >10% Q2
Q3
Q4
Average vacancy rate (RHS) 12
100
10
80
8 Forecast
60
6 F o r e c a s t
40
20
0
4
2
Averag ge vacancy rate in key Euro opean cities (% %)
Total take e up in key Eu uropean cities s (millions sqq q ft)
Q1 120
0 2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: PMA, Aberdeen Property Investors 12
Transactions in Europe (Mill. Euro) All property – 2009
All property 2010
United Kingdom
28.424
Germany
11.307
France
11.299
Russia
4.435
Spain
4.277
Italy
3.350
Netherlands
3.280
Sw eden
2.903
Austria
2.352
Belgium
1.520
Denmark
1.380
Finland
1.164
N Norw ay
1 081 1.081
Hungary
859
Turkey
684
Czech Republic
671
Portugal
622
Poland
561
Sw itzerland
512
Luxembourg
488
Greece
• Having seen a decline of approx. -42 % in 2009 we would expect having a bounce back by 30 % in 2010.
• 2010 expected to see a transaction volume of 110 bn EUR all across Europe.
• Focus is expected to be on mature markets.
160
Slovakia
52
Ireland
22
-100
4.900
9.900
14.900
19.900
24.900
29.900
Source: RCA, Jan 2010 13
Net additions in the European key centres Net additions to office stock per annum, % 45 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 05 0.5 0.0 87
89
91
93
95
97
99
01
03
05
07
09
11
13
Source: PMA, Aberdeen Property Investors 14
0 Fran nkfurt: City
Mu unich: City
Warsaw
Long term average
Pariis: Central
Budapest
Milan
Am msterdam
Difference
Prague
Stockholm S
Berlin
Copenhagen
Barcelona B
Madrid
Dublin
Helsinki
Rome
Londo on: Central
Annuall net additions (00 00s sq m)
Development levels back below long term averages 2010-2011 average
250
200
150
100
50
Source: PMA, Aberdeen Property Investors 15
Prime rental value growth - office • Historically Europe: Rental declines have been most pronounced in London and Ireland, falling by nearly 40% since the peak. Sharp deterioration in rental levels has also been seen in Spain, which has also suffered from oversupply.
Office forecast 5 years Southern Europe
Central Europe
North America
Nordics
Core Europe
Global
United Kingdom
Asia Pacific
• Europe Forecast: Over performer UK within Europe Only moderate growth in Central and Southern Europe
5 years
• Globally Asia Pacific has highest rental growth forecast driven in the first 3 years from Developed and Semideveloped Asia
0
1
Source: Aberdeen Property Investors
rental 2 growth in3 %
4
5
16
Prime yields up since 2007 in most major markets Prime office yields (%) 14 12 10 8 6 4 2 0
Moscow
India : Tier 1
Dublin
Toronto
China: Tier 1
New York
Sydney
Olso
Warsaw
Helsinki
Amsterdam
Madrid
n Copenhagen
Milan
Stockholm
Frankfurt
Paris
London: West End
Singapore
Hong Kong SAR
Japan - Tok kyo
Q4 2007
Q4 09
Source: Aberdeen • But yields are subsequently falling in a growing number of markets, led by UK. Property Investors • Across all sectors, sectors prime units let on long leases to financially robust tenants are the main targets for investors, with competition placing pressure on prime yields. While secondary property is more risky, the divergence in yields between secondary and prime has increased its attractiveness for the less risk-averse investor.
17
Strategic implications Capital markets at the door
18
UK is leading the global property recovery Slowing
Deteriorating
Accelerating
Stabilising
GCC Russia Spain CEE Latin America Emerging Asia Italy Developed Asia Benelux US Germany
Semi-developed p Asia
Nordics, Australia
UK
France
Source: Aberdeen Property Investors, Feb.2010 Note: Schematic representation – not to scale 19
Estimated prime capital value recovery* timing points Global Prime All Property
Denmark
UK HK
Australia France N Norway
Q3 09
Q4 09
Finland
Czech Rep.
Belgium
Germany
Hungary
Canada
Italy
Emerging Asia Poland
Singapore
Luxembourg
J Japan** **
Netherlands
Sweden
USA
Semi-dvlp Asia
Q1 10
Q2 10
Russia**
Slovakia Spain
Q3 10
Q4 10
* ‘Recovery’ Recovery relates to the point in time when capital values are expected to bottom out ** Refers to offices *** The UK and HK have already bottomed out.
Sources: Aberdeen Property Investors, Feb 2010 20
Europe: strong returns expected in 2010! European prime all property returns (local currencies, %) Income returns
Capital growth
20 12,0
9,2
8,7
7,9
11,6
12,2
16,8
6,4
-9,8
0.8
9.0
3.5
10.3
8.8
8.9
2013
2014
15 10 5 0 -5 -10 Forecast
-15 15 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
• Yield compression returns in 2010, but re-adjustment in 2011 expected • Active asset management to be more crucial in driving performance rather than leverage in future Source: Aberdeen Property Investors, Jan 2010 21
Global Paradigm change in the cycle
Expected yield
Opportunistic
Value Added Reits REITs
Core
Risk Source: Aberdeen Property Investors, Mar 2009 22
Strategic themes Conclusions • Global economic recovery continues, continues but unemployment will increase further and letting markets will be under pressure for some time • Debt remains a problem: de-leveraging to continue in the coming years • Cap Capital a values a ues will sstabilise ab se a ahead ead o of letting e g markets a es • Rental growth should resume from 2011 and indexation will provide some support • Development activity has slowed sharply and this will support future rental growth • Returns to be driven essentially by income growth • Asset management capabilities will become more important in generating additional performance rather than leverage • UK and Nordics ((ex-Denmark)) p predicted to outperform p in Europe p • Central and eastern Europe and Southern Europe have poor prospects • Important to focus on long-term fundamentals
Source: Aberdeen Property Investors, Mar 2009 23
Heard at MIPIM
Remember last year’s wrap-up • Trying to survive in the fog - Markets - Governments G t interventions i t ti • Two strategies - Survival: wait and see - Opportunistic: wait and get ready to buy • Expected return to market activity: mid 2010 • Trying to find positive news - Green – Sustainability 2.0 - Real estate remains an asset class
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And now … • We have made it, the sun is rising (at least in the East) • L Leasing i markets k t - Weak fundamentals - Except the B_ICs? • Missing debt markets - Non-core assets - Large deals • Club deals • CMBS deals • Plenty of uncertainty remains - Government G t and d central t l banks b k b behaviors h i - Debt refinancing and deleveraging 26
This crisis is different • A demand crisis with a credit market shut-down • N No over-supply l - No over-building during the boom - Lack of debt for development • Expectations of strong demand in the medium term - Accelerated functional obsolescence due to g green requirements q - Expected labor force participation
• New capital ready to flow into the sector - Some big losers have to save more - Good G d timing ti i ffor newcomers
27
Two survival strategies • Let’s just pretend the world is wrong - Extend the pre-crisis status quo - Build B ild on our relationships l ti hi - In the future, things will get better, we just need to wait… • Focus on the real estate and the source of cash - Work with the end-user • The work space p itself • The surrounding environment - Moving financiers to asset management - Transparency toward investors
28
Two proactive strategies • Yield now - Focus on core assets with secure tenants to ride out the slump Note: No interest in opportunistic deals • Aversion to potential negative hit • Weak space market expectations • Growth later - Planning for property development - But there is no debt financing for development - The market solution: corporate debt financing • Corporate end-users on the owner occupier market • Large corporate developers
29
The B_ICs • There are deals to be made - Strong demand and good prospects • Easier E i growth th from f urbanization b i ti - Interventionist governments • Infrastructure • Social programs • But it’s not g getting g easier - Toughening domestic competition - Interventionist governments • Active management of foreign capital flows • And beyond • Still: Still tough t h competition titi to t be b noticed ti d on capital it l markets k t (MIPIM Horizon participants) 30
Proactive cities (metro areas) • The local public authorities have taken notice - Sustainability is more than low CO2 emissions - Strong St aspirations i ti off the th voters t for f a more pleasant l t urban b environment • The response: maybe a shift - Public Private Partnership: “It’s no longer a dirty word” - An opportunity pp y to create value and leverage g this value - An opportunity to learn about demand (and not needs) - Innovative policy instruments • Strategic zoning in targeted areas • Strategic fiscal policies
31
The challenge facing the proactive cities • Attracting activity - Jobs - And A d more: • The right mix of jobs • Cultural activities,… • Achieving coordination - Across the multiple p layers y of g government - Across the multiple local jurisdictions • Political geography versus economic geography - Across the multiple dimensions relevant to the urban environment • Zoning • Fiscal incentives and taxes • Public P bli ttransportt
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MIPIM in this context • The Wisconsin School of Business metrics - Tough: Smaller parties, fewer invitations - But: B t More M champagne h th than llastt year ((+200%) 200%) - Leaders with more time to spare with us • And beyond,…
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Has MIPIM changed your outlook?
16% M More Pessimistic P i i ti 3%
47% Same 40%
37% More Optimistic 57%
0%
20%
40%
Attendees
60%
80%
100%
Booths 34
What is your outlook for your market in 2010?
16% P Pessimistic i i ti 7%
23% Same 18%
61% Optimistic 76%
0%
20%
40%
Attendees
60%
80%
100%
Booths 35
Sentiments into action Attendees: Does your firm plan to hire ? Booths: Do you expect to see new development activity?
36% No 15%
64% es Yes 85%
0%
20%
40%
60%
Attendees
Booths
80%
100%
36
What have we learned? • 2009: Green is sustainability 2010: Sustainability is everywhere 2010: 2010 Sustainability S t i bilit iis accelerating l ti obsolescence b l • 2009: Real estate remains an asset class 2010: Portfolio allocations still drives capital flows 2010: Is the pricing driven by portfolio allocations? - Minimizing g risk vs. mispricing p g risk? • Premium to limited down-side • “The silliness is back” • By the way: low cap rate implies high price sensitivity to NOI - Mark to market or the Japan way? • UK lead the way down, now leading the way up • Plenty Pl t off zombies bi everywhere h else l (or ( att least l t in i the th US!)
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A story of Optimism: The sun is finally rising Anyway‌.
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Disclaimer Thomas Beyerley, slides 1 to 29 FOR PROFESSIONAL USE ONLY This document is strictly for information purposes only and should not under any circumstances be considered as an offer or solicitation to deal in the p property p y market. Accordingly, g y no warranty y whatsoever is g given and no liability y whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader acting on any information, opinion or estimate contained in this document. The information contained herein, including any expressions of opinion or forecast has been obtained from or based upon sources believed by us to be reliable, but is not guaranteed as to accuracy, adequacy or completeness. Some of the information in this document may contain projections or other forward looking statements regarding future performance of countries,, markets or companies p and actual events or results may y differ events or future financial p materially. Any research or analysis used in the preparation of this document has been procured by the company for its own use and may have been acted on for its own purpose. Aberdeen Property Investors does not accept responsibility for any loss arising from the use hereof. The value of investments and any income from them may go down as well as up; they can be affected by exchange rate movements between currencies and it is possible that investors may not get back the full amount invested. y property p p y assets are illiquid q in nature and,, under adverse market conditions,, the sale of such assets may y take Physical a considerable time. Delays in selling underlying assets may lead to similarly lengthy constraints being placed on the sale of shares by investors in a fund. Past performance is no guarantee of future performance. No part of this document may be copied or duplicated in any form or by any means or redistributed without the written consent of Aberdeen Property Investors. © 2010 Aberdeen Property Investors. All rights reserved. UK INVESTOR INFORMATION Issued and approved by Aberdeen Property Investors UK Limited which is authorised and regulated in the UK by the Financial Services Authority. François Ortalo-Magné, slides 30 to 46 The students who helped me prepare this presentation are looking for internship and employment. More information at http://www bus wisc edu/realestate/degrees/mba/profiles firstyrs asp http://www.bus.wisc.edu/realestate/degrees/mba/profiles-firstyrs.asp
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