European Property Cycle Monitor - RREEF Real Estate

September 2011
RREEF Research
European Property Cycle Monitor
Executive Summary
GDP growth forecasts for Europe revised downwards to 1.9 percent and 1.3 percent for 2011
and 2012 respectively are expected to climb to 2.4 percent per annum by 2015. Recent events
dictate that the risks to this are predominatly on the downside and specifically in the near term.
A number of global uncertainties make it difficult to assess Europe’s overall short-term
prospects. While Ireland and Spain seem to remain on track with policy measures to address
their budget problems, the fiscal trajectories of Greece and Italy appear less certain. The
ramifications of a Greek default perpetuate fears about the overall health of the European
banking industry.
Investment transaction volumes in the third quarter of 2011 indicate a significant slowdown in
investment levels in response to the renewed concerns over Eurozone debt issues and near
term growth prospects. As a result the well documented flight to safety that has driven down
yields in prime markets has widened the differential between prime, mature, liquid markets and
secondary more peripheral markets. As the wider economic environment remains uncertain
this relativity is likely to widen further as prime continues to be perceived as a safe haven for
capital preservation.
Offices: The performance of office rents varies widely across Europe. Rents in nearly half of
all European office markets remain at least stagnant, with a few still in decline. One upside is
that net additions to supply were unusually constrained in this cycle by a credit crunch that
brought many planned projects to a sudden halt. The staggered recovery of European office
markets has been led by London’s financial centre which responds rapidly to the pulse of the
global economy.
Shopping Centres: Given the constrained supply pipeline, prime shopping centre rental
growth profiles are predominantly determined by demand drivers. On an annualised basis the
strongest growth is anticipated in Sweden, France, Poland and Germany. The inability of
supply to respond quickly to changes in demand suggests that rental growth will shift from
recovery to growth towards the end of the forecast horizon across most markets
Industrial: Recent geographic divergence in European economic growth (solid in North
Central Europe and the Nordics, weaker in the southern peripheral countries) has created a
range of dynamics across the continent. After stabilising in 2010, the European industrial
sector appeared poised for recovery as 2011 began. Increasing levels of industrial production
in Eurozone countries like Germany and Sweden stimulated trade activity. Among all the
major European logistics markets, Paris is expected to provide the most steady rental growth
over the next five years.
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April 2011 Table of Contents:
Prepared by:
Simon Durkin
Director
Head of European Research
simon.durkin@rreef.com
Jaroslaw Morawski
Vice President
European Research
jaroslaw.morawski@rreef.com
Henry Stratton
Assistant Vice President
European Research
henry.stratton@rreef.com
Maren Vaeth
Vice President
European Research
maren.vaeth@rreef.com
1. Economic Context ................................................................. 3
2. European Investment...............................................................6
3. Office Market .......................................................................... 9
4. Shopping Centre Market ..................................................... 12
5. Industrial Market .................................................................. 16
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1. Economic Context
As 2011 began, a cautiously upbeat outlook prevailed for Europe as well as the broader global
economy. Germany’s vibrant, ongoing economic recovery appeared to be powering European
growth forward, overshadowing any potential trouble spots in the European periphery. While
most economists anticipated that Europe’s overall economic growth would encounter a mild
deceleration period in mid-2011, few expected a significant slowdown. The guarded optimism
began to unravel by the second quarter, however, as worries about the adequacy of Greece’s
2010 fiscal bailout percolated and finally began to spread outward to Portugal, Italy, and even
France. Financial markets became increasingly impatient with European policymakers to
resolve the crisis. As ratings agencies began downgrading sovereign debt 1 (most recently Italy
in mid September), an atmosphere of anxiety took hold.
Forecasters began incrementally downgrading their outlooks for economic growth throughout
the summer of 2011. Global Insight’s March forecast originally called for 2.0 percent growth in
Europe as a whole during 2011 and 2012 followed by a gradual acceleration to 2.4 percent by
2015. The near-term, however, feels less steady and forecasts for 2011 and 2012 have now
been scaled back to 1.9 percent and 1.3 percent, respectively (see Exhibit 1).
%
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Exhibit 1
Real GDP Growth for Europe, 2004-2015f
Global Insight September 2011 Global Insight March 2011
2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f 2015f
Source: Global Insight, f indicates forecast March and September 2011
As the German economy slows, Sweden is likely to be the top performing major economy in
Western Europe in the near term, with 3.1 percent growth forecast in 2011 and 2012 (see
Exhibit 2).
1 “Darkening Clouds: Irish Debt Downgraded as Euro Worries Spread,” Der Spiegel, 13 July 2011.
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Domestic, as well as external, demand has driven Sweden’s recent economic expansion, and
at least part of this can be pinned to a booming Swedish housing market. 2 With the US and
Europe - Sweden’s key export markets now facing slower growth, however, Sweden’s vibrant
economy is likely to lose some momentum. Near-term currency appreciation could compound
these challenges even more for Sweden’s exporters. After 2013, however, Sweden’s average
growth is likely to ease back in line with other Nordic countries, namely Finland and Norway,
which are expected to see average GDP growth of 2.8 percent and 2.4 percent, respectively,
in the 2013 to 2015 period.
With near-flat growth in the second quarter of 2011, the UK entered the latter half of the year
with tight credit conditions, elevated inflationary levels (relative to the rest of Europe), and
lagging indicators from the business and household sectors. 3 Yet some of these drags on the
economy are starting to ease, with less of a concern now over inflationary pressures. Solid,
back-loaded recoveries in the UK and also Ireland should also propel GDP growth into a
similar range to the Nordics over the next five years. Global Insight forecasts 2.5 percent
average economic growth in the UK by 2013 to 2015 and 2.7 percent in Ireland.
Two of Europe’s more troubled economies – Greece and Portugal – must still contend with
contracting economies in the near-term, but forecasts suggest that fiscal restructuring will
eventually pave the way for stronger growth by 2015. Central and Eastern European (CEE)
countries should experience faster growth than their Western European counterparts over the
next five years. Annual growth in the Czech Republic, Poland, and even Hungary should
average close to 4 percent between 2013 and 2015.
Greece
Portugal
Italy
Spain
Ireland
Denmark
United Kingdom
Netherlands
France
Norway
Belgium
Germany
Austria
Finland
Sweden
Hungary
Czech Republic
Poland
Exhibit 2
Average Annual Real GDP Growth (%)
Near term prospects (2011-2012f) vs. longer term (2013-2015f)
2011f-2012f 2013f-2015f
-4.0 -2.0 0.0 2.0 4.0 6.0 8.0
Average Annual Growth
Source: Global Insight, f indicates forecast September 2011
A number of global uncertainties make it difficult to assess Europe’s overall short-term
prospects. While Ireland and Spain seem to remain on track with policy measures to address
their budget problems, the fiscal trajectories of Greece and Italy appear less certain.
2 European Central Bank, Monthly Bulletin, 15 September 2011, pp. 12-13.
3 European Central Bank, Monthly Bulletin, 15 September 2011, p. 12.
PIIGS
Core-Europe
CEE
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The ramifications of a Greek default perpetuate fears about the overall health of the European
banking industry.
These fears are affirmed by Exhibit 3 which illustrates the LIBOR/OIS spread (overnight index
swap), and reflects the risk premiums banks place on lending to one another. Despite all of the
anxiety over the last couple of weeks, the US credit market appears to be in reasonably good
shape with both corporate and household balance sheets looking relatively healthy.
Furthermore, it would seem that the repairs to the banking and financial system in the US have
improved confidence amongst the banks. In Europe, however, the LIBOR/OIS spread
suggests banks in Europe have less confidence in one another and, as a result, are
demanding higher premiums for short term lending. This is an indicator that should be
monitored carefully as the political and financial situation in Europe evolves.
%
4
3.5
3
2.5
2
1.5
1
0.5
Exhibit 3
USD vs. EUR LIBOR OIS Spread
USD LIBOR - OIS Spread EUR LIBOR - OIS Spread
Market distress stemming from the U.S. financial crisis.
Market distress due to
European debt crisis.
0
05-2008 09-2008 01-2009 05-2009 09-2009 01-2010 05-2010 09-2010 01-2011 05-2011 09-2011
Source: Bloomberg 12 September 2011
Recent indicators, however, are suggesting further weakness in the US economy, particularly
with unemployment rates remaining elevated. The announcement of Operation Twist by the
Federal Reserve on September 21 was received by the markets with some scepticism.
Furthermore a continued slowdown in emerging markets, specifically China. suggests that it is
less certain that China and the US will significantly support the European and global recovery
in the near-term.
Finally, inflationary pressures appear to have eased as Europe’s economy has slowed,
prompting the European Central Bank (ECB) to hold back on further interest rate hikes.
Another rate increase in 2011 appears increasingly less likely, and a softening of ECB policy is
even possible if economic conditions deteriorate further. Within the current economic context,
investors have sought safety, thus pushing German bonds rates to record low levels. Interest
rates, therefore, should stay low in the near term, but over the longer term, rising interest rates
seem more likely.
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2. European Investment
The real estate investment market continued on its recovery path in the first half of 2011 with
transaction activity increasing over the same period in 2010. Total European Investment
volumes in this period were 30 percent higher than the corresponding period in 2010 4 . The
retail and office sectors have seen 40 percent and 32 percent growth in transaction volumes
with industrial dropping by 7 percent. However, data for the third quarter of 2011 to date, whilst
still incomplete, indicate a significant slowdown in investment levels in response to the
renewed concerns over Eurozone debt issues and near term growth prospects discussed in
the previous section.
Exhibit 4
European Investment Volumes
Source: European House Forecasts August 2011
Investor focus remains on well established core European markets like Germany, Sweden,
France and the UK, with London and Paris remaining the most active markets. Continued
appetite for prime assets is supported by long term investors looking for secure income from
high quality assets with strong covenants. North American investors accounted for more than
25 percent of the cross border investment in Europe in the first half of 2011 followed by
German and UK buyers. 5 The UK remained a major destination for capital accounting for more
than a third of European transactions during this period 6 .
This flight to safety has contributed to further downward pressure on prime cap rates.
Compression has been strongest in Europe’s largest, core liquid markets of France and
Germany, as well as the growth markets of CEE and Sweden. In some markets, prime cap
4 RCA, September 2011
5 CBRE, MarketView Q2 2011
By Region By Sector
€bn €bn
6 DTZ, Investment Market Update Q2 2011
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rates are approaching levels seen in the previous market cycle. However, non-prime yields
remained elevated and non-prime values remain depressed. Exhibit 5 below shows the relative
recovery in capital values in CBD locations versus the periphery and the widening pricing
differentials between the global cities of Paris and London versus peripheral cities in the UK
and France. As the wider economic environment remains uncertain, this relativity is likely to
widen further as prime continues to be perceived as a safe haven for capital preservation.
%
European Office Capital Values Change
Exhibit 5
Office Yields in Primary vs. Secondary Markets
Note: Estimates on the basis of the current prime rent and prime yield.
Source: CBRE August 2011
In our medium term outlook, we would expect the scale and timing of yield and capital pricing
movements to vary significantly from market to market, assuming the relatively uniform and
widespread effects of the financial crisis eventually recede and local economic, demographic
and property market factors become the primary drivers of pricing, especially in supply
constrained markets. However, global capital flows, which will inevitably continue their
increasing importance across Europe, may lead to a more uniform set of adjustments than
would otherwise appear rational. A decompression of yields is still expected in the medium
term as shown in the exhibit below. However, the risks to this gradual profile are very much on
the downside where the risk premium component to our yield forecast will become increasingly
sensitive to ongoing market uncertainty, compounded by a less positive outlook for rental
growth and fundamentals, despite an underlying environment of low interest rates. Increased
uncertainty could also result in a further widening of the spread between prime and secondary
products. While investors’ preference for security could lead to an increased pricing pressure
for the best properties in the most stable markets, lack of demand would likely have the
opposite effect on the less-prime assets.
%
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%
Exhibit 6
European Average Office Cap Rates 2004-2015f
Note: European Average weighted by stock, f indicates forecast
Source: RREEF Research, PMA August 2011
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3. Office Market
European office rents fell 10 percent in the recent cyclical downturn, but weighted averages
can mask significant variations in performance across geographies. Rents in nearly half of all
European office markets remain at least stagnant, with a few still in decline. By 2013, almost
all European office markets should have moved past their cyclical troughs, and by 2015, the
majority of markets should have recovered most of the rent levels lost since the last cyclical
peak (see Exhibit 7).
Index Level
120
110
100
90
80
70
60
50
Dublin
Last peak = 100
Exhibit 7
Office Rent Levels at Different Points of the Cycle
Last Peak to Expected Trough Expected Trough to 2015
London: West End
Madrid
London: City
Barcelona
Birmingham
Lisbon
London: M25 West
Paris: CBD
Warsaw
Stockholm
Milan
Rome
Paris: La Défense
Copenhagen
Edinburgh
Munich
Berlin
Glasgow
Frankfurt
Hamburg
Budapest
Manchester
Dusseldorf
Lyon
Brussels
Prague
Helsinki
Vienna
Amsterdam
Marseille
Lille
Source: RREEF Research August 2011
One upside for the European office market is lack of supply. Net additions over the past cycle
never reached levels as high as in previous cyclical peaks. New construction, which always
tightens during a cyclical downturn, was even more constrained this time as the credit crunch
brought many planned projects to a sudden halt. All of these factors have resulted in net
additions to office supply being squeezed to their lowest levels of the past two decades (see
Exhibit 8). The supply pipeline is unlikely to resume quickly. By 2015, annual net additions are
expected to be scarcely above three million square metres, or about the same as the cyclical
trough levels of the mid-1990s and mid-2000s.
120
110
100
90
80
70
60
50
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millions sqm
8
7
6
5
4
3
2
1
0
90
91
92
93
94
95
Exhibit 8
Net Additions of Office Space in Europe
Source: RREEF Research, PMA Spring 2011 Forecast
Note: Weighted average of the key markets. f indicates forecast August 2011
London has lead the staggered recovery of European office market. While the UK’s national
economic recovery has been mild, London’s financial centre remains closely aligned to the
health of the global economy and this has a direct impact on the local office market. London’s
office demand recovered well in late 2009 and 2010 as a result of pent up requirements
delayed during the financial crisis. Even as muted employment growth limits the potential for
positive net absorption, market churn in London’s City should boost the prospects for high
quality prime space at the expense of older properties, although this demand will remain
contingent on stability of global financial markets. The disruption of supply as a result of the
credit crunch has now begun to impact the market as the availability of high quality stock
depletes in the near term. With the development pipeline now inevitably picking up again,
rental growth should begin levelling off towards the second half of the forecast period. Nearby
in London’s West End, new supply remains constrained, and demand prospects for Grade A
space is supported by a more diverse occupier market that extends beyond the financial sector
to include broad-based services firms. Weaker than expected tenant demand remains a key
risk across London as there is significant precedent for global financial instability to disrupt the
occupier market.
The Paris office market was quick to follow London’s recovery. France’s economy turned in
mid-2009, and office employment growth followed in 2010, along with an upturn in rental
growth in Paris CBD and La Défense. Paris CBD is an international and liquid market that
benefits from broad-based tenant demand and restricted supply. Recent stock additions in La
Défense have made its fundamentals relatively less favourable than the CBD. Forecasts for
office-using employment growth show that the overall Paris market could pick up as many as
60,000 new jobs over the next five years, or about the same number as the combined growth
of French regional cities Lyon, Marseilles, and Lille during the same period. 7 Although the
office cycle in Paris is shaping up to be steadier and less volatile than London’s, it is not
without general downside risks. Rental growth slowed in 2011, with office demand in Paris
likely to be impacted by French austerity programmes as well as wavering business sentiment
and hesitant demand conditions that emerged in mid-2011. As economic conditions stabilise,
office rents in Paris are expected to rebuild their momentum over the next five years.
7 PMA, Spring Forecast 2011.
96
97
98
99
00
01
02
03
04
05
06
07
08
Net additions
… in % of stock
09
10
11F
12F
13F
14F
15F
%
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
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Office markets tend to be relatively less volatile in Germany than in much of the rest of Europe.
The recent cycle has been no exception. Germany’s strong economic fundamentals in 2010
and early 2011 fuelled tenant demand during this period and kept vacancy under control amid
muted supply. While these fundamentals have led to an earlier rental recovery in German
markets than in most of Europe, they have still not produced frothy market conditions. Rents
should grow at a moderate pace of 2.0 to 2.5 percent per annum through 2015. This pace
could even be a bit stronger in Berlin as it shakes off a decade of tepid underperformance.
After years of limited construction and flat rents, the Berlin market this time seems poised for
renaissance. Frankfurt is the market most likely to be Germany’s laggard. The city’s office
demand is plagued by uncertainty about a second wave of saving plans in the banking
industry as well as concern about the general health and stability of the European financial
markets. The performance of the Munich and Hamburg office markets will fall somewhere in
the middle between Berlin and Frankfurt. The early and relatively strong growth of office rents
in Munich and Hamburg should taper in the latter years of the forecast.
Even as Europe struggles with sovereign debt issues, the Nordic economies continue to
demonstrate resilience. Sweden’s economic stability through the recent recession and strong
recovery in 2010 and 2011 has led to tightening property fundamentals across Stockholm. This
has resulted in a modest rise in office rents. The market’s front-loaded recovery is likely to be
muted in comparison to previous cycles, with better prospects for the Stockholm CBD and
Inner City than for other sub-markets. Office recoveries in Helsinki and Copenhagen are likely
to be more back-loaded as the supply overhang continues to be absorbed.
Given the fundamental distress, Southern European markets, as well as Ireland, are likely to
see a backloaded recovery. Office rents in these markets are still seeking their trough levels
but are set to turn in 2013 or 2014. Prime locations in Iberian markets have stabilised during
2011, but in peripheral locations, rents still face downward pressure. The excessive rental
declines in this cycle are likely to experience strong reversal as the markets begin to turn,
especially in Madrid and Dublin. Barcelona and the Italian markets, particularly Milan and
Rome, should see a more moderate recovery with growth rates of 3 percent to 4 percent in the
outer years of the forecasting period. The laggard in this group is Lisbon, where economic
conditions are generally weaker and hence a later and slower recovery is expected.
The major office markets of the CEE region - Warsaw, Prague, and Budapest - are
experiencing unsynchronised cyclical dynamics. Warsaw is poised for a powerful front-loaded
recovery. Solid economic conditions, a low vacancy rate, and limited supply provide the basis
for 5.0 to 6.0 percent per annum rental growth in 2011 and 2012, followed by a sharp
deceleration in rental gains by 2015. Prague’s cyclical timing is similar to Warsaw but the
shape of Prague’s office cycle will likely be flatter, with 2.0 to 3.0 percent per annum rental
growth in 2011 and 2012, tapering only modestly in the following years. The Budapest office
market still grapples with a surplus of office supply, and the Hungarian economic outlook -
solid by Western European standards - still lags the performance of its CEE neighbours in the
near-term.
This pushes back prospects for the Budapest office market’s recovery until 2013 to 2015 when
rental growth could average up to 4.0 percent per annum.
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4. Shopping Centre Market
In the most indebted markets three factors are simultaneously reducing consumption. Firstly,
declining disposable incomes in real terms as wages freeze while the cost of living inflates.
Secondly, structural reform is reducing spending and/or employment in the public sector,
decreasing demand directly and indirectly. Thirdly, private households are increasing savings
to reduce debt, while the availability of consumer credit has reduced sharply.
In less indebted markets, economies recovered earlier and more sharply, supporting
employment growth and wages. Even where public spending cuts are required, they are less
austere, resulting in a more solvent and confident consumer. However, economic growth
prospects in even the strongest markets are hampered by weak demand for exports elsewhere
in Europe. This is exacerbated by the fact that many of the weakest markets have traditionally
been Europe’s largest and most consumerist economies, including the UK and Spain, as well
as Portugal, Ireland and Greece.
Against this background it is perhaps unsurprising that real retail sales growth for Western
Europe is expected to remain in negative territory at the end of 2011, at negative 0.8 percent. 8
While it is expected to recover in 2012, strengthening over the forecast horizon until the end of
2015, it will remain low relative to its long-term historical performance. Of course, underlying
the aggregate is considerable diversity in both the timing and magnitude of retail sales growth
across markets (Exhibit 9). To some extent this mirrors the timing of economic recovery and
growth, but it also reflects the prevailing consumption culture of markets. For example, the
sustained recovery in Germany in the first half of 2011 revived retail sales which saw German
retail sales move above the European average for the first time this century. Yet, relative to
Europe’s aggregate historical performance, at 2.3 percent for the first half of 2011, 9 the
magnitude of retail sales growth in Germany remains modest. Moreover, consumer confidence
is fragile and the impact of the austerity package and environmental taxes to be implemented
in the medium term have been long expected to erode growth by 2013. The more recent
stalling of the German economy, coupled with the renewed turbulence in financial markets as
the soveriegn debt crisis lingers, may cut short the revival in retail sales.
8 Global Insight, September 2011
9 PMA, August 2011
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Poland
Czech Rep
UK
Hungary
Sweden
France
Ireland
Finland
Germany
Netherlands
Austria
Belgium
Denmark
Spain
Italy
Greece
Portugal
Exhibit 9
Retail sales growth (real) across Europe
2011f 2012f 2013f
-20 -15 -10 -5 0 5 10 15 20
Source: Global Insight. f indicates forecast September 2011
In contrast, the sustained recovery in the highly consumerist economies of Sweden and CEE
has translated into stronger growth. This is anticipated to endure throughout the forecast
horizon. Mirroring the interaction of consumer culture with economic buying power,
consumption growth in France is stronger than what might otherwise be expected. This reflects
the relative un-indebtedness of households cushioning the impact of necessary fiscal cuts on
spending. While off a low base, the late recovery of the consumerist peripheral markets is
expected to generate strong retail sales growth by 2014 or 2015. Indeed, the anticipated
bounce in Spain’s consumption at the back end of the period outweighs the steady, modest
growth of Germany on an annualised basis.
However, the drivers of retailer demand are more complex than simply following trends in retail
sales growth. Retailers have exercised much greater caution, but have continued to pursue a
more limited and uncompromising store expansion programme. Discount retailers have
pursued the most aggressive expansion of stores since the downturn, taking the opportunity to
benefit from an increased market share as well as the greater availability of good quality space
in prime locations, at a lower cost. A number of US operators have expanded their European
presence since the downturn, focusing on flagship stores and super prime locations in
Europe’s principle retail locations.
Retailers with large, existing portfolios have focused on optimising store portfolios. This
includes rationalising space into a smaller number of larger, better located stores as well as
the closure of non performing stores. Such retailers are taking the opportunity to trade up
portfolios, acquiring space in the best performing centres and High Streets at a lower marginal
cost. This portfolio strategy is resulting in an even greater bifurcation of prime and secondary
locations. This is evident in vacancy rate levels and in rental profiles, with prime rents
stabilised while secondary centre rents decline further.
%
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While retailers have pursued this portfolio optimisation across all markets, expansion has been
prioritised in early recovery markets such as Sweden, Germany and CEE countries. Of these,
Germany and Poland have benefited from the strongest demand. In Germany, although retail
sales are low per cap and growth is marginal, this remains one of Europe's largest and most
affluent markets. The strong growth in Poland, combined with the scale of its population, make
it a natural focus for retailers seeking a presence in the region. This has assisted in reducing
the impact of a number of highly leveraged national retail chains during the downturn.
The supply pipeline remains very constrained and is continuing to contract as further schemes
in planning or under construction are withdrawn or postponed. This reflects the dearth of
available finance capital and high pre-leasing thresholds required to attain the funding which is
available. A large proportion of new development activity is focused on the largest, most stable
core markets, for example, France and Germany as well as the stronger growth markets,
including Sweden and CEE countries, notably Poland. The market dynamics of lower
availability of finance and more constrained retailer demand means that new activity is
primarily focused on the expansion and refurbishment of existing schemes rather than
brownfield development.
Given the long lead in times for shopping centre development, the ability of supply to respond
to changes in demand is weak. As a consequence, a significant amount of space continues to
be delivered in the Spanish market with 400,000 square metres expected in 2011, mainly in
large schemes. Changes in stock per capita are strongest in Poland and Finland. In the former,
stronger retail sales growth assists in supporting retail sales per square metre, but the scale of
development in second and third tier cities and towns is resulting in an oversupply of space in
regional markets. Although declining in all other markets, forecast national retail sales per
square metre actually increases over the period in the UK, reflecting an absence of new
supply. However, the UK is also experiencing strong sales leakage on-line and to non-food
supermarket retail, reducing sales captured in traditional retail locations.
Given a more constrained supply pipeline, prime shopping centre rental growth profiles are
predominantly determined by demand drivers. On an annualised basis the strongest growth is
anticipated in Sweden, France, Poland and Germany (Exhibit 10). The inability of supply to
respond quickly to changes in demand suggests that rental growth will shift from recovery to
growth towards the end of the forecast horizon across most markets. With a long lead time
from inception to completion, improving fundamentals are likely to accelerate into the next
cycle, with a limited risk of erosion from new supply. The bounce in retail sales growth coupled
with the rental decline experienced in the consumerist economies of the UK, Spain, Ireland
and Portugal point towards a rental rebound from 2014.
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Exhibit 10
Annualised Prime Shopping Centre Rental Growth 2011-2015f
Source: Global Insight. f indicates forecast September 2011
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5. Industrial Market
European industrial construction remains limited in 2011 with speculative schemes yet to
significantly materialise. Despite a disciplined supply pipeline, industrial rents look set for a
modest cycle since near-term demand conditions remain weak across many markets. In
Europe as a whole, market fundamentals should gradually improve over the next five years,
but with nuanced differences across urban markets and property grades. In Europe, as in
Japan, occupiers are driving a structural realignment of the industrial stock. This shift in tenant
needs creates solid demand for modern properties, but can leave older properties technically
obsolete and beyond retrofit. This dichotomy in the industrial property stock can create niche
opportunities in key markets which can be masked by overall statistics that span multiple
property grades.
Recent geographic divergence in European economic growth (solid in northern Central Europe
and the Nordics, weaker in the southern peripheral countries) has created a range of dynamics
across the continent. After stabilising in 2010, the European industrial sector appeared poised
for recovery as 2011 began. Increasing levels of industrial production in Eurozone countries
like Germany and Sweden stimulated trade activity. Year-over-year industrial production
surged at double-digit rates during the winter and early spring of 2011 in both Germany and
Sweden. 10 As of July 2011, overall industrial production in the Eurozone was up less than 2
percent above the base year index in 2005, but in Germany, production had grown 15 percent
over the same period. 11 Amid the more optimistic economic forecasts in the first half of 2011,
this context created a more upbeat outlook for industrial property demand. In Germany in
particular, the outlook for consumer spending in most industrial markets is still expected to be
two to three times larger over the next five years than it was in the past five. 12
With the European economy slowing in mid-2011, the recovery in the major industrial markets
now appears a bit more fragile in terms of their rental growth prospects. Industrial properties in
the primary submarkets of Sweden, Germany and Poland are still likely to experience rental
growth of more than 2.0 percent in 2011 and 2012, but the pace of growth will fall below this
level during 2013 to 2015. In Germany, improved demand and a short supply of high quality
industrial space has already led to a degree of rental growth which is expected to continue
through 2012. Limited availability of modern, Grade A options will continue to constrain the
upper end of the Polish market even though the stock of unoccupied secondary properties
remains ample. In Sweden, strong economic growth is underpinning the recovery but reduced
growth in its key trading partners and a relatively strong Krona remain key risks.
Rental prospects in the southern European markets of Madrid, Barcelona and Milan are mostly
back-loaded. Rents in these markets, especially in Spain, are still struggling in 2011, but rental
growth should average near 2.0 percent per annum from 2013 to 2015. The supply pipeline in
Spain has run dry, and at this point in the cycle, a rebound in industrial rents depends on the
timing of the recovery in tenant demand. In Milan, the movement of tenants towards better
quality industrial space on more favourable terms could be disrupted in the near term by
waning confidence in the Italian economy.
10 Eurostat, “Industrial production, July 2011 compared with June 2011,” Euroindicators (press release), 14 September
2011 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14092011-AP/EN/4-14092011-AP-EN.PDF)
11 Eurostat, “Industrial production, July 2011 compared with June 2011,” Euroindicators (press release), 14 September
2011 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-14092011-AP/EN/4-14092011-AP-EN.PDF)
12 PMA, Spring Forecast, 2011
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Among all the major European logistics markets, Paris is expected to provide the most steady
rental growth over the next five years. In the near term, market fundamentals are expected to
benefit from a recovery in demand in what is expected to be a relatively soft two-year period.
Unlike the front-loaded rental performance anticipated for Germany, Sweden, and Poland,
rents in Paris should maintain a gradual acceleration, with average growth rising above 3.0
percent per annum from 2013 and 2015.
Exhibit 11
Industrial Average Rental Growth by Country 2011 – 2015f p.a.
1,6%
1,1%
2,3%
1,8%
1,7%
1,2%
1,6%
1,6%
2,5%
2,1%
1,2%
No coverage
1 – 2 % growth p.a.
2 – 3 % growth p.a.
Source: RREEF Research. f indicates forecast August 2011
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Important Notes
Copyright © 2011. Deutsche Bank AG, Frankfurt am Main. All rights reserved. RREEF Real Estate, part
of RREEF Alternatives, the alternative investments business of Deutsche Asset Management, the asset
management division of Deutsche Bank AG offers a range of real estate investment strategies, including:
core and value-added and opportunistic real estate, real estate debt, and real estate and infrastructure
securities.
In the United States RREEF Real Estate relates to the asset management activities of RREEF America
L.L.C., and Deutsche Investment Management Americas Inc.; in Germany: RREEF Investment GmbH,
RREEF Management GmbH and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management
(Australia) Limited (ABN 63 116 232 154) an Australian financial services license holder; in Japan:
Deutsche Securities Inc. (For DSI, financial advisory (not investment advisory) and distribution services
only); in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for RREEF Real Estate’s
direct real estate business), and Deutsche Asset Management (Hong Kong) Limited (for RREEF Real
Estate’s real estate securities business); in Singapore: Deutsche Asset Management (Asia) Limited
(Company Reg. No. 198701485N); in the United Kingdom: Deutsche Alternative Asset Management (UK)
Limited, Deutsche Alternative Asset Management (Global) Limited and Deutsche Asset Management (UK)
Limited; in Italy: RREEF Fondimmobiliari SGR S.p.A.; and in Denmark, Finland, Norway and Sweden:
Deutsche Alternative Asset Management (UK) Limited and Deutsche Alternative Asset Management
(Global) Limited; in addition to other regional entities in the Deutsche Bank Group.
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investment committees. Members of the investment committees vote with respect to underlying
investments and/or transactions and certain other matters subjected to a vote of such investment
committee. Additionally, research personnel receive, and may in the future receive incentive compensation
based on the performance of a certain investment accounts and investment vehicles managed by RREEF
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This material was prepared without regard to the specific objectives, financial situation or needs of any
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Issued in the United Kingdom by Deutsche Alternative Asset Management (UK) Limited, Deutsche
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client. This document is not intended for and should not be relied upon by a retail client.
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RREEF Research
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I-023657-1.0
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