Malling & co market update april 2015

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MARKET UPDATE APRIL 2015 Borregård HQ, Sarpsborg Malling & Co Eiendomskapital arranged the acquisition of Borregård HQ, Sarpsborg. The transaction was structured as a club deal.

Latest figures – Norway

GDP: Mainland Norway vs. Eurozone

The central bank defied most analysts’ advice when it decided not to cut the policy rate from 1.25 % in March. The next policy meeting is in May.

The central bank’s regional network reported that the economic activity so far in 2015 has been lower than anticipated. This report was published in March.

According to Statistics Norway (SSB), mainland GDP growth was 2.3 % in 2014. As a result of the anticipated fall in oil investments, mainland GDP growth for 2015 is revised down from 2.1 % in September 2014 to 1.1 % in March 2015. SSB expects the downturn to be relatively short-lived, and estimates mainland GDP growth to 2.2 and 2.4 % in 2016 and 2017, respectively.

IMF agrees with SSB’s 2015 estimates. In the last (April) issue of World Economic Outlook, the IMF estimates that the Norway GDP will rise by 1 % in 2015. It should be noted that this is not a mainland figure.

Inflation is running close to the central bank’s target of 2.5 %. In March, the twelve-month growth in the CPI and the CPI-ATE indices were, 2.0 % and 2.3 %, respectively.

According to SSB, the unemployment rate (LFS) was 3.9 % in January – up 0.1 percentage point since October 2014. SSB expects that the unemployment will rise modestly in the near future, peaking at 4.1 % in 2016.

Despite the persistent low oil price, the OSEBX-index has risen by approximately 13 % so far in 2015.

Labour market

6,0 %

5,0 %

4,0 %

4,0 % 3,0 %

2,0 %

2,0 % 0,0 % 1,0 % -2,0 % 0,0 % -4,0 %

-1,0 %

-6,0 %

-2,0 %

Mainland-Norway

Eurozone

Unemployment rate

Employment growth

Source: Statistics Norway/IMF

Source: Statistic Norway

Nydalen/ Sandaker

SUPPLY* IN OFFICE CLUSTERS IN GREATER-OSLO Majorstuen

0-5%

Latest lease contracts

Økern/ Tenant Løren/ Risløkka

Skøyen

Address

Cluster

Size (m²)

Bydel Bjerke

Ulvenveien 88

Økern

~ 8 500

Plasitilin and others

Kongens gate 11

Kvadraturen

~ 2 500

Forskerforbundet

Tullins gate 2

Inner City

~ 1 550

SATS Elixia

Nydalsveien 28

Nydalen

~ 2 000

Questback

Bogstadveien 54

Majorstua

~ 1 700

5 - 10 % 10 - 15 %

Inner city

Lysaker > 15 %

Bryn/Helsfyr CBD Kvadraturen

Sandvika

Bjørvika Fornebu

Latest transactions

Billingstad

Price (NOK mill.)

Address/property

Buyer

Seller

75 % of Storebrand Eiendomsfond

Partners Group

Storebrand Eiendomsfond AS

3709

Ullevål Senter

Oslo Pensjonsforsikring

DNB Livsforsikring

Confidential

Aibel HQ, Bergen

Pareto PF

Ferd Eiendom

570

Colosseum Kino

Ragde Eiendom

DNB Markets

Confidential

Borregård HQ

Malling & Co Eiendomskapital

Fearnley Finans

Confidential

Asker

Source: FINN.no/Malling & Co *Advertised office space of the total office building mass in greater-Oslo. This includes potential advertised new projects.

Number formatting: SI style (English version)


Key facts real estate

Advertised office volume in Oslo (m²) 1 000 000

Commercial Real Estate PER APR. 2015

PER APR. 2014

Prime yield*

4.50 %

5.00 %

Normal yield*

6.25 %

6.75 %

5 yr swap rate (per April 16th)**

1.46 %

2.48 %

3 060 NOK/m²/yr.

3 290 NOK/m²/yr.

Office contracts signed (Oslo)*** (Q1)

134 540 m²

138 120 m²

Largest office contract (Oslo)*** (Q1)

8 869 m²

15 290 m²

4.9 yrs.

5.1 yrs.

900 000

Office letting market •

The office supply in the defined office clusters was 12.1 % in March, while the vacancy rate is 8.8 %.

The volume of signed lease agreements in Q1 2015 was approximately 135 000 m². This is about the same level as in Q1 2014, but the number of contracts (210) is 11 % higher.

Office rents have fallen somewhat recently, according to Arealstatistikk’s register. The average rent of lease contracts signed in Q1 2015 is approximately 6 % lower than in Q4 2014.

The number of tenants subletting parts of their areas is increasing: Aker Solutions is subletting 15 700 m² office in Hinna Park, Stavanger.

The office construction activity is high this year: Approximately 165 000 m² is expected to be finalized in the Oslo region in 2015.

800 000 700 000 600 000

Average of 15 % highest rents in Oslo*** (Q1)

500 000 400 000 300 000 200 000

Avg. contract length (Oslo)*** (Q1)

100 000 0 Q1 Q2 Q3 Q4 Q1 Q1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 < 5 000 m²

> 5 000 m²

Definition: Normal yield is defined as the net yield of a well maintained building situated in the fringe zone with strong tenants on a 5 – 8 year’s contract. *Source: Malling & Co **Source: Kommunalbanken ***Source: Arealstatistikk Q1 2015

Source: FINN.no/Malling & Co

Office rents in Oslo (NOK/m²/yr)

Transaction volume (>50 MNOK)

OFFICE CLUSTER

PER APR. 2015 Prime / normal*

PER APR. 2014 Prime / normal*

CBD (Vika/Aker Brygge/Tjuvholmen)

4800 / 2800-3200

4700 / 2700-3300

Skøyen

3000 / 2100-2400

3300 / 2100-2400

Central Oslo

3500 / 2000-2400

3500 / 2000-2400

80 70 60

3500 / 2700-3000

3500 / 2700-3000

Lysaker

2350 / 1600-1800

2350 / 1600-1800

Fornebu

2150 / 1500-1700

2150 / 1400-1600

Nydalen/Sandaker

2200 / 1500-1700

2300 / 1500-1700

Økern/Løren/Risløkka

2200 / 1000-1500

2100 / 1400-1600

Bryn/Helsfyr

2200 / 1550-1750

2100 / 1550-1750

Bill. NOK

Bjørvika

50 40 30

Transaction market •

So far in 2015, we have registered a transaction volume of approximately 24 billion NOK divided into 51 transactions.

We estimate the prime office yield to be 4.50 %. There are few completed transactions in this segment in recent time, but we know of buyers who are willing to accept a yield of 4.50 % for “trophy assets”.

As the expectations for economic growth are revised down, the development in the letting market is more or less constantly being questioned. We wish to shed light on important factors:

The labour market: The lower oil price will impact the labour market in two ways. First, the direct effect is already evident in the oil-related industry. Second, the weakened economic state will affect the employment more broadly. Some analysts claim that the west axis of the Oslo region is exposed. Our mapping of the tenants in the axis shows that 18 % of the tenants are in the oil/gas sector. Furthermore, these tenants are highly adaptive, so an increase in the vacancy rate could be quite short-lived.

The normal yield is estimated to be 6.25 %. It is noteworthy that the gap between prime and normal seems quite robust. This differs much from the situation prior to financial crisis in 2008.

Foreign investors have been present in the Norwegian market so far in 2015. Partners Group acquired 75 % of Storebrand Eiendomsfond, while Hemfosa Fastigheter have acquired 8 properties in Norway. Foreign investors now account for approximately 40 % of the transaction volume this year, and we know that international investors are involved in larger ongoing transactions.

As we have stressed in earlier updates, there seems to be a mismatch between supply and demand in the prime segment of the investment market. The low supply of prime properties is likely to increase the demand for secondary assets.

Folketrygdfondet, the biggest institutional investor on the Oslo Stock Exchange, has announced that it, conditional on approval from the Ministry of Finance, will invest in domestic property.

20 10 0

*Definitions: Prime rents are consistently achievable headline rental figure that relates to a new, well located, high specification unit of a standard size commensurate demand within the predefined market area. The prime rent reflects the tone of the market at the top end, even if no new leases have been signed within the reporting period. One-off deals that do not represent the market are discarded. Normal rents should reflect the interval where most contracts are signed in the specified market area. Source: Malling & Co

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Registered

Estimate Source: Malling & Co

Topic of the month: How will the office letting market evolve?

The construction activity: Following a weak construction volume in 2014, 2015 is expected to be characterized by a larger volume. Thus, the supply is likely to increase in the short term, but the low construction volumes in 2016 and 2017 provide a possibility for rental growth in the long term. Subletting: Subletting is a threat to rental prices since the tenant in general is more inclined to accept lower rents. As evident from the table below, there has been some cases of subletting. However, we do believe that companies which are in the process of re-organizing will reduce the workforce before they sublet. DNB Markets claims that about 15 000 workers have been dismissed in Norway’s oil-related companies since 2013, and several companies have signaled that they will reduce the workforces further. Thus, we expect subletting to be an increasingly important part of the supply ahead. Significant subletting

New build projects

Property

Tenant

Size

Property

Size (office)

Cluster

Finalized

Lysaker Polaris

Technip

5 000 m²

Verkstedveien 1

26 000 m²

Skøyen

Q2 2015

Aibel, Asker

Aibel

7 500 m²

Ullernschausseen 56

20 000 m²

Other

Q2 2015

Aibel, Bergen

Aibel

8 000 m²

Lysaker Polaris

18 500 m²

Lysaker

Q2 2015

Aker, Stavanger

Aker Solutions

15 700 m²

Fridtjof Nansens vei 16

9 600 m²

Majorstua

Q4 2015

Aker, Tr.heim

Aker Solutions

8 000 m²

Schweigaards gate 16

15 300 m²

Inner City

Q2 2015

Eiendomshuset Malling & Co Dronning Mauds gate 10, Postboks 1883 Vika, NO-0124 Oslo, Norway T: +47 24 02 80 00 – E: post@malling.no – www.malling.no


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