Emerging Trends in Real Estate® Europe 2006 - Urban Land Institute

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Further yield compression will likely occur in most property sectors Exhibit 4-1 Real Estate Sector Performance Prospects for 2006 Retail Parks Shopping Centres Hotels Mixed-Use Property Warehousing/ Distribution Street Retail Residential City Centre Office Business Park/ Out-of-Town Office Manufacturing ■ Total Returns ■ Capital Growth ■ Rent Increases 0% 1 5% 5 10% 9 Abysmal Fair Excellent Source: Emerging Trends in Real Estate Europe 2006 survey. 5.94 5.92 5.53 5.94 5.91 5.43 5.92 5.80 5.67 5.85 5.83 5.56 5.68 5.71 5.06 5.58 5.57 5.26 5.57 5.65 5.61 5.55 5.57 5.25 4.90 4.87 4.49 4.82 4.77 4.38 ting relocation arguments to corporates still operating in lean times. Manufacturing is largely in decline in much of Europe and out of favour with most investors. While yields are now quite low, further yield compression will likely occur in most property sectors in 2006, most notably hotels, city centre offices, shopping centres, retail 50 Emerging Trends in Real Estate ® Europe 2006 Exhibit 4-2 Development and Market Balance Prospects for 2006 Retail Parks Mixed-Use Property Residential Hotels Warehousing/ Distribution Shopping Centres City Centre Office Street Retail Business Park/ Out-of-Town Office Manufacturing ■ Development ■ Property Supply/Demand Balance 5.83 5.3 5.8 5.59 5.78 5.48 5.78 5.32 5.7 5.17 5.51 5.42 5.27 4.98 5.26 5.34 4.72 4.41 4.65 4.78 0 1 5 10 9 Abysmal Fair Excellent Source: Emerging Trends in Real Estate Europe 2006 survey. parks, and warehousing. The only sector where yields are not expected to compress further is residential. From a buy/sell/hold perspective, which tends to be driven by a longer-term outlook, the picture changes a bit. From this perspective, the prospects for warehousing/distribution and city centre offices stand out. Most notably, city centre offices rise up the rankings from sixth place last year to second place this year; 47 percent recommend buying in this sector while only 16 percent recommend selling. This is supported by our interviewees who believe that office performance is at a low point and is likely to improve in many cities across Europe over the next several years. On the development front, the favourites are retail parks, mixed use, residential, and hotels, all with modestly good development prospects. Warehouses and shopping centres
in 2006. Exhibit 4-3 100% 80% 60% 40% 20% 0% also show some promise, but office, street retail, and manufacturing offer only fair prospects. It is no surprise that, while the prospects for the office market may improve, the sector certainly does not need any new development, especially in the business park/out-of-town segment. Retail European Direct Real Estate Investment, by Property Type Office Retail Industrial Hotel Mixed-Use/ Other 2000 2001 2002 2003 2004 1H 2005 Source: Jones Lang LaSalle European Research. Note: Figures exclude Portugal and Denmark. There is much less consistency of views about the retail sector this year from our survey. Retail parks and shopping centres have remained the top-rated sectors for total returns, with slightly higher ratings than last year, but beneath this headline the survey ratings show creeping concerns over rental growth and development prospects. Continuing weak consumer spending across Europe is now causing concern among investors as well as economists. Spain and the U.K. face a somewhat weaker 2006. Germany continues to be somewhat weaker but is set to get a temporary boost with the staging of the World Cup in summer 2006. Meanwhile, bucking the trend, at least temporarily, is France, which is outpacing economic forecasts for its consumer spending. Despite this, retail remains the sector of choice for many. “Retail has been very attractive, and because of the more stable performance, many investors are looking at it. The outlook for Germany, France, southern Europe, and the Nordic region is very attractive, while the prices in the U.K. and central Europe are not.” Yields are quite low, but survey results Exhibit 4-4 IPD Retail Property Total Returns for Selected Countries 30% 25% 20% 15% 10% 5% 0% Ireland France Sweden United Kingdom Netherlands Finland Germany Portugal Spain 1999 2000 2001 2002 2003 2004 Source: Investment Property Databank (IPD). Note: For Ireland, 2004 figure was not available; figure shown is for the 12 months ending in third-quarter 2005. suggest that some further downward pressure can be expected on retail property yields in 2006. Out-of-town is still a preference for most investors— shopping centres and retail parks—although a general acknowledgement that city centre regeneration will become key could shift some interest back into town. Best Prospects Germany provides a restructuring opportunity, and with domestic investors failing to see even long-term value in their own market, international investors will continue to take the lead in 2006. Entrepreneurial U.K. investors have been very active, but now this has been followed by North American capital such as Canadian investor Ivanhoe and LaSalle Investment Management linking up with Merrill Lynch. Respondents say that growing interest has already meant that supply is a problem. These investors are looking for high-yielding retail investments, which means the sector is not an option for all. “Opportunities exist in Germany, but risks are higher than markets such as France,” says one. Emerging Trends in Real Estate ® Europe 2006 51
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