Amsterdam

European Investment Bulletin
Spring 2009
Prime yield decompression per sector (yoy)
Rents in decline in line with business sentiment
200
CBD offices Warehouses Shopping Centres
European average prime office rental growth
Business climate indicator (Euro area)
175
12%
4
150
125
100
75
50
25
0
Brussels
Paris
Frankfurt
Athens
Dublin
Milan
Amsterdam
Oslo
Warsaw
Lisbon
Madrid
Stockholm
Istanbul
London
9%
6%
3%
0%
-3%
-6%
-9%
-12%
2002 Q1
Q3
2003 Q1
Q3
2004 Q1
Q3
2005 Q1
Q3
2006 Q1
Q3
2007 Q1
Q3
2008 Q1
Q3
3
2
1
-1
-2
-3
-4
Source: Savills
Source: Savills
“Investors are looking for realistically priced deals, especially
through distressed sales. Normal investment activity can only
recover when the confidence in the banking sector is restored.
Under current market conditions good property fundamentals and
secure income are key.”
Giles Wilcox - European Investment Director
The Eurozone economy officially fell into recession
during the second half of 2008, and latest data and
business surveys since then indicate the economy
will continue to contract until the second half of
2009.
The interbank market remains nervous, reflected in
the lending rate margin above the Euribor rate. In
most markets the spread has more than doubled
and LTV rates have dropped compared to a year
ago keeping investment activity subdued.
Following the deterioration of economic
fundamentals we expect occupier demand to
weaken further. Rental growth should remain
negative and more incentives are expected to be
offered by landlords.
The risk premium for prime CBD offices over the
long term interest rates has risen compared to the
height of the capital markets in 2007. However, it is
overall still lower compared to the previous slump
of investor confidence in 2003.
Property is beginning to look better value especially
where re-pricing has been stronger such as in the
office markets of London, Paris, Madrid and Dublin.
London in particular, due to the exchange rate is
even more attractively priced in terms of Euro
currency.
Negative economic outlook and restricted lending
should lead to lower capital values especially for
secondary assets. The falling trend of base rates
and government bond yields, imply that at least
prime yield decompression may reach its bottom by
the end of 2009.

Overview and market fundamentals
European investment market overview
2008 was the year that signalled the end of the strong
yield compression trend that the commercial property
markets across Europe experienced over the past four
years. The economic and financial turmoil that followed
the credit crisis in the US has limited the liquidity in the
debt markets restricting leveraged investors, who were
the driving force in the investment market. The drop in
investment demand for commercial property coupled
with falling economic and business sentiment has led
to falling capital values.
The Eurozone economy officially fell into recession
during the second half of 2008, and latest data and
business surveys since then indicate the economy will
continue to contract until the second half of 2009. With
the recession deepening and inflation falling sharply
the European Central Bank (ECB) has significant
scope for large cuts in interest rates. The ECB has
already brought rates down to 2% from 4.25% in mid-
2008, but rates remain above those in other major
economies. The ECB has indicated that it would be
reluctant to cut rates too fast as it wants to retain some
room for manoeuvre, yet our economists expect them
to fall to 1% by mid-2009.
Although these policies aim to restore confidence in
the banking sector, the effect on lending activity has
been small until now. The interbank market remains
nervous, reflected in the lending rate margin above the
Euribor rate. In most markets margins have more than
doubled compared to a year ago and they are up to
200 basis points above the Euribor rate. The volume of
property investment dropped further in the final quarter
of 2008, with debt-backed buyers remaining
constrained by liquidity issues and equity buyers
looking for true market value. Banks are reluctant to
lend and if they do they focus on existing clients. Loan
to Value (LTV) rates have dropped from more than
80% last year to 60-65% with the maximum size of
loan in the region of €50-€70m. Investors have
reassessed their risk premiums upwards, reflecting the
economic uncertainty and the negative impact it has
on tenant strength and rental growth. Well located,
high quality properties with strong cash-flow, fully let
on a long lease to a financially strong tenant are now
key prerequisites.
Market fundamentals
The impact on the real economy is gradually reflected
in weakening occupational demand and higher tenant
default risk. On the other hand higher cost of debt has
restricted construction activity, therefore slowing down
the development cycle. However, consolidation and
rationalisation is leading to lower net absorption rates
and rising availability, which gives more negotiation
power to the tenants. Total office take up has dropped
by around 10% in our survey area (26 markets) in
2008, while the vacancy rate has increased slightly
from 7.9% to 8.0%.
Eurozone GDP growth and ECB interest rates
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
Sources: European Commission, Oxford Economics
European prime property yield curve
9%
8%
7%
6%
5%
4%
Source: Savills
2008 vs 2007 office take-up (selected markets)
2,800
2,400
2,000
1,600
1,200
800
400
0
Source: Savills
Eurozone GDP growth (% pa) ECB key interest rates (%)
2002 Q1
Q2
Q3
Q4
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
Prime office yields Prime warehousing yields Prime shopping centre yields
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
Brussels
2007 office take-up 2008 office take-up ('000 sqm)
Paris
Berlin
Frankfurt
Athens
Amsterdam
Warsaw
Madrid
London WE
European Investment Bulletin - Spring 2009 2

Yields
In the final quarter of 2008 we saw the first signs of
falling rents in the office markets in the countries that
were hit more by the economic crisis, such as the UK,
Spain and Ireland. The average annual prime office
rental growth was -2.6% in Q4 2008 compared to
11.2% in Q4 2007. The average prime warehousing
rental growth for last year was almost 0.0% because
some markets (eg Poland) still show some positive
growth.
Consumer and retail trade sentiment indicators
Consumer sentiment Retail trade sentiment
10.0
5.0
0.0
-5.0
-10.0
-15.0
Rental growth still remains positive for prime retail
properties. However the retail markets are exposed to
declining consumer confidence and retail sales,
caused by the fear of rising unemployment and falling
housing markets. Therefore we expect rents to come
under pressure in 2009, especially in markets with
higher development pipelines, such as Italy, Portugal,
Spain and Istanbul.
-20.0
-25.0
-30.0
01/01/1999
01/01/2000
01/01/2001
01/01/2002
01/01/2003
Source: European Commission
01/01/2004
01/01/2005
01/01/2006
01/01/2007
01/01/2008
01/01/2009
Following the deterioration of economic fundamentals
in recent months and the forecasts for negative
economic growth in the major European economies
we expect occupier demand to weaken further. Rental
growth should remain negative and more incentives
are expected to be offered by landlords.
Yields
The yield decompression that started at the end of
2007 continued in 2008 and yields across all sectors
were on average 95 to 115 basis points (bp) higher in
Q4 2008 compared to a year before. Yield correction
was steeper in the office sector with the achievable
average prime yield for our survey area at 6.5% and
the average secondary yield at 7.2%. Currently the
average prime cap rates for offices are 440 basis
points higher than the Euribor rate. This gap had
narrowed down to less than 100 bp in 2007, during the
time of the strongest yield compression. Historically
(since 2000) this spread has been on average around
320 basis points. Currently the Euribor rates are
trending downward and we believe that the spread
with property rates could narrow again; as long as the
confidence in the banking system is restored in order
to provide the liquidity that will enable a more active
investment market.
Euribor rate - Prime office yield gap
Euribor (12M) Average prime office yield (%)
8.0
6.0
4.0
2.0
0.0
01/01/2001
20/06/2001
05/12/2001
31/05/2002
15/11/2002
10/05/2003
19/10/2003
16/04/2004
27/09/2004
20/03/2005
31/08/2005
21/02/2006
15/08/2006
30/01/2007
19/07/2007
08/01/2008
27/06/2008
12/12/2008
Sources: Euribor, Savills
Prime office yield convergence (selected markets)
Paris CBD Milan CBD Amsterdam CBD Warsaw CBD
Madrid CBD London WE Dublin CBD Frankfurt CBD
9%
8%
7%
Over the course of 2008 we have noticed a
convergence in European yields. In Q3 2007 the yield
gap between the lowest and the highest achievable
prime yield across all sectors and markets of our
survey area was ranging between 300 and 500 basis
points, as the yield compression in some markets was
very strong (eg London, Paris, Dublin, Madrid) while
now it does not exceed 300 bp. Prime achievable
yields (Q4 2008) are above 5.0% across all sectors,
with the German markets being the most expensive
and Istanbul the cheapest market across all sectors in
our survey area. The UK has been one of the first
markets to experience a fast and significant yield
decompression, being a highly leveraged and
transparent market.
6%
5%
4%
3%
2004 Q1
Q2
Q3
Source: Savills
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
European Investment Bulletin - Spring 2009 3

Outlook
Currently the risk premium for prime CBD offices over
the long term interest rates in the office markets shown
in the table on the right has risen to 150bp compared
to 50bp at the height of the capital markets in 2007.
However, it is still lower compared to the previous
slump of investor confidence in 2003, when the risk
premium had risen to an average of 210bp for these
markets. The current economic outlook is worse than
in 2003, when the major economies of the world
avoided recession and recovered quite quickly. Under
the current conditions investors may continue to apply
a higher risk premium until the first signs of economic
recovery become apparent. The only markets where
the risk premium for prime offices has exceeded the
last high level are London West End, Dublin and
Madrid implying that yield decompression in these
markets may be closer to an end.
When we compare current achievable prime office
yields with the 10 year historic averages, we notice
that Amsterdam and Brussels CBD yields are still
below the historic average, which could imply that
these markets may still experience some further yield
softening, while London WE, Madrid and Paris are
above their respective long term averages, which
reflects investor concerns for the exposure of these
markets to the financial crisis.
Outlook
The outlook for the real economy and the impact on
the fundamentals of the property market on the one
hand and the future of the banking sector and the
impact on lending activity and market liquidity on the
other will be the main determinants for the European
property investment market for 2009. Following a
difficult second half of 2008, our economists expect all
major European economies to continue to contract
significantly until the second half of 2009. UK,
Germany, Italy and Spain are likely to see GDP fall by
2%, with France only a little better, contracting by
1.6%. Job losses will be widespread, pushing
Eurozone unemployment towards 10%. Central and
Eastern European economies are also going to
experience subdued growth.
Risk premium over long term interest rates for
prime office properties
(in basis points)
Sources: Savills, European Commission
*2003 for most markets
**for 3/6/9 year leases
Current and long term average prime office yield
7.0%
10 year
average
risk
premium
Current prime office CBD yield
Last
highest
risk
premium*
10 year average prime office yield
Current
risk
premium
London West End 0 100 120
Paris CBD 90 190 160
Madrid CBD 80 160 180
Frankfurt CBD 80 200 120
Brussels CBD** 180 260 170
Milan CBD 110 220 140
Amsterdam CBD 220 310 160
Stockholm CBD 90 200 160
Dublin CBD 30 130 170
These conditions are expected to have a negative
impact on the occupational markets, which should be
led by consolidation and rationalisation, thus leading to
lower net absorption rates. Although new
developments are being put on hold, the development
pipeline in the office and retail sectors in particular,
should put some further pressure on rents. Following
the decompression of yields during the course of 2008,
property is beginning to look better value relative to
the peak of the capital markets cycle, especially where
re-pricing has been stronger such as in the office
markets of London, Paris, Madrid and Dublin. London
in particular, due to the exchange rate is even more
attractively priced in terms of Euro currency.
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
London WE
Source: Savills
Paris
Madrid
Frankfurt
Brussels
Milan
Amsterdam
Stockholm
Dublin
European Investment Bulletin - Spring-2009 4

Outlook
In order to assess the current pricing levels we should
also take into consideration the local market
fundamentals, as these cities’ economies are likely to
suffer more during the downturn. According to Oxford
Economics economic activity in the international financial
centres is driven by a mixture of domestic demand and
the impact of world credit and investment cycles on
financial services activity. As both are expected to
contract sharply in 2009, most major cities, including
Frankfurt, London, Madrid and Stockholm, are expected
to see sharper than average contractions in GDP.
However, experience of past recessions suggests
Europe’s largest cities should recover strongly over the
medium to long term, supported by a favourable
industrial mix, highly skilled workforce and strong
connectivity to global markets.
The other major driver of the property investment market
is the cost and availability of capital. The latest ECB
survey shows that credit conditions have been tightened
by euro-zone lenders during the course of 2008 and the
majority expects to tighten them further. Less available
debt should keep the investment markets subdued and
lead to lower capital values as potential buyers will have
to use higher levels of equity. Opportunities may arise
from distressed or highly leveraged investors and
developers who acquired assets at the top of the market.
Tighter financing conditions may also lead to some sale
and leaseback deals. Although some forced sales may
be inevitable under the current circumstances, it is
apparent that in many cases the banks are renegotiating
the terms of their loans with property owners, especially
those clients with a good track record. By doing this they
avoid taking back properties they have no desire to
manage and forced sales are thereby avoided. This is
especially the case with large unwieldy portfolios.
Opportunity funds, national institutional investors, private
investors for small lot sizes and selective german open
ended and spezial funds, are expected to be the main
types of buyers in 2009. National investors account for
an increasing share of transactions over cross-border
investors. High quality assets, in terms of location, tenant
covenant and lease terms, at attractive pricing are the
main targets, at the expense of secondary properties
and locations. Secure, long term defensive income is
key in the current market conditions. According to the
IPD data even for the past five years that the markets
experienced a strong yield compression, the main
component of total returns in the European markets was
income return.
The negative economic outlook and the uncertainty in
the interbank market keep the investment market
inactive indicting that yields can soften further in 2009
especially for secondary assets with shorter leases.
Based on the falling trend of base rates and government
bond yields, which can be used as the main indicators of
the direction that property yields can go, we can
anticipate at least prime yield decompression to reach its
bottom by the end of 2009, especially in markets that are
ahead in the cycle, such as the office markets in the UK
and France.
Eurozone GDP growth and employment growth
3%
2%
1%
0%
-1%
-2%
Source: European Commission
Forecasts for selected European cities 2012 - 2020
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2004
2005
Source: Oxford Economics
IPD average annual office returns (5 year)
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
London WE
Brussels
Paris CBD
Paris
Sources: Experian, IPD
GDP growth
2006
GDP growth City
Madrid
Frankfurt
2007
Capital value growth
Frankfurt
Berlin
Dublin
Employment growth
Brussels
2008
GDP growth National
Milan
Income return
Milan
Amsterdam
2009
Madrid
Amsterdam
Stockholm
2010
Stockholm
London WE
European Investment Bulletin - Spring 2009 5

Summary table (Q4 2008)
City Prime CBD offices Prime warehouses Prime shopping centres
Yield Rental growth Yield Rental growth Yield Rental growth
Amsterdam 5.75% -1.3% 7.5% 0.0% 6.5% 0.0%
Athens 7.0% 0.0% 8.25% 0.0% 6.75% -12.0%
Barcelona 6.0% -5.6% 7.25% -2.9% 6.5% 0.0%
Brussels 6.0% -3.4% 6.5% 0.0% 6.0% 0.0%
Dublin 6.0% -19.7% 7.0% 0.0% N/A N/A
Frankfurt 5.3% 5.5% 6.8% 0.0% 5.6% N/A
Istanbul 7.75% 0.0% 8.25% -2.7% 7.5% -25.0%
Lisbon 6.5% 0.0% 7.75% -0.8% 6.0% 0.0%
London, City 6.75% -27.6% N/A N/A 7.0% 0.0%
London, West End 5.75% -27.8% N/A N/A 7.0% 0.0%
Madrid 6.0% -9.5% 7.25% N/A 6.5% 0.0%
Milan 5.85% 8.7% 6.7% 3.3% 6.0% 0.0%
Munich 4.5% 3.6% N/A N/A 5.0% N/A
Oslo 6.75% -8.8% 7.6% 0.0% 7.2% -11.2%
Paris 5.75% -6.4% 8.0% -1.9% 5.25% 0.0%
Rome 6.0% 0.0% 7.25% -20.0% 6.75% 0.0%
Stockholm 5.5% 0.0% 7.0% 0.0% 5.5% 2.2%
Warsaw 5.75% -14.3% 7.5% 6.5% 6.75% -14.3%
Note 1: All costs are in €/sqm/year
Note 2: Prime offices refer to modern, minimum 1,000sqm, fully let, standard leased building
Note 3: Prime warehouses refer to modern properties, minimum 10,000sqm
Note 4: Prime shopping centre rental growth refers to a standard unit in a prime regional shopping centre
Note 5: Athens, Dublin, London and Stockholm yields are quoted ‘Net’
For further information please contact
Giles Wilcox
European Investment
+44 20 7409 8864
gwilcox@savills.com
Lydia Brissy
European Research
+44 20 7016 3776
lbrissy@savills.com
Eri Mitsostergiou
European Research
+30 210 6996311
emitso@savills.com
Savills plc is a leading international property services company with a full listing on the London Stock Exchange. The company has undergone
dynamic growth in recent years establishing itself as a powerful player on the international stage with offices and associates throughout the UK,
Europe, Asia Pacific and Africa. In addition, Savills is the trading name for the property service subsidiaries of Savills plc which advise on commercial,
rural, residential and leisure property. Other services include corporate finance advice, property and venture capital funding and a range of property
related financial services.
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prohibited without written permission from Savills Research. (c) Savills Ltd February 2009