investment opportunities - where the clever money is going...where the clever money is going...

39 Offices in 19 Countries

Investment Opportunities -Where the Clever Moneyis Going

Thursday 2 May 2013


Welcome

Nick GreenPartner, Real Estate

3

5 key things you may not know about us

Supporting clients in the region and beyond,for over 140 years

One of the most global legal practices,with lawyers in 39 offices and 19 countries worldwide

Top-20 global legal practicebased on number of lawyers

In 19 countries, 9th broadest global footprint

Practicing law in more than 140 jurisdictions, in more

than 40 languages, but speaking with onevoice

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Commercial Property Investment – IsFunding Growth Back?

David Smith BA (Hons) FCIB, Director, Strata RealEstate

David will review recent trends in property lending, theimpact of regulatory changes such as Basel III and slotting,and consider whether a combination of traditional andemerging sources of finance will lead to any short termgrowth in the availability of debt.

Investment Opportunities – The Returnof Confidence to the Market

Allan Wilson, Director of Capital Markets, Jones LangLaSalle

Allan will explore the mood of the investment market andwhether the foundations for recovery are in place, and hasthis led to a more positive outlook both from London and theregions. Allan will also consider the specific sectors ofactivity.


Commercial Property Investment – IsFunding Growth Back?David Smith

DAVID [email protected]

07545 082825

COMMERCIAL PROPERTY INVESTMENT:IS FUNDING GROWTH BACK?

Rutland House, 148 Edmund Street, Birmingham

Thursday 2 May 2013

Les Miserables!

Source: Estates Gazette 22 September 2012

LENDING VOLUMES, RATIOS

AND PRICING

Total Debt Outstanding to UKProperty Companies 1970 to 2011

0

2

4

6

8

10

12

14

16

18

20

0

50

100

150

200

250

300

1970

71

72

73

74

75

76

77

78

79

1980

81

82

83

84

85

86

87

88

89

1990

91

92

93

94

95

96

97

98

99

2000

01

02

03

04

05

06

07

08

09

2010

2011

Source: DTZ Research and Bank of England

Total Debt £ bn Av Base Rate %

Aggregate Value of UK CommercialProperty Debt 1999 to H1 2012

49.8

65.378.5

87.8

117.4

138.1

159.1

176.2

207.7

225.5 228.3 228.1212.3

204.1

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0

50

100

150

200

250

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Source: De Montfort University / Bank of England

Av Base Rate %£ bn

Annual Value of LoanOriginations 1999 to H1 2012

15.019.5

22.625.2

34.1

44.9

67.9

81.383.7

22.615.1

19.927.5

11.3

26.6 29.2

10.9

6.8

1.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Extended loans

New deal originations

Originations (total)

Source: De Montfort University

£ bn

49.2

44.3

30.8

34.3

13.2

Average

Loans in Breach of Financial Covenants2005 to H1 2012

Year end No of loans inbreach

Value of loans inbreach £m

Value of loans as %of agg loan books

2005 689 1,225 < 1.0%

2006 1,928 4,234 2.5%

2007 1,051 1,597 <1.0%

2008 3,770 10,695 6.5%

2009 3,665 28,305 15.5%

2010 7,733 21,975 12.0%

2011 8,366 22,821 12.0%

2012 mid-year 7,719 22,043 12.3%


Primary Reason for Cause of Breach2010 to H1 2012 - Split of Lenders (%)

19

4

1716

9

12

44

40

34.5

21

45

34.5

0

5

10

15

20

25

30

35

40

45

50

2010 2011 H1 2012

Interest wholly/partly unpaid

Principal wholly/partly unpaid

LTV covenant breached

Combination

Other


%

Allocation of Outstanding Debtby Loan-to-Value 2011 to H1 2012


1319

3735

1616

1413

99

11 8

0

10

20

30

40

50

60

70

80

90

100

2011 H1 2012

121% +

101-120%

86-100%

71-85%

51-70%

Less than 50%

%

Average Maximum Loan to ValueRatios (Senior Debt) 1999 to H1 2012

55

60

65

70

75

80

85

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012

Prime office

Prime retail

Prime ind

Sec office

Sec retail

Sec ind

Resi inv

LTV%


Average Interest Rate Margins for InvestmentLending (Senior Debt) 1999 to H1 2012

0.75

1.25

1.75

2.25

2.75

3.25

3.75

4.25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012

Prime office

Prime retail

Prime ind

Sec office

Sec retail

Sec ind

Resi inv

Ma

rgin

%


Average Arrangement Fees forInvestment Lending 1999 to H1 2012

30

50

70

90

110

130

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012

Prime office

Prime retail

Prime ind

Sec office

Sec retail

Sec ind

Resi inv

bp


Average Income to Interest Cover(Senior Debt) 1999 to H1 2012

1.00

1.20

1.40

1.60

1.80

2.00

2.20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012

Prime office

Prime retail

Prime ind

Sec office

Sec retail

Sec ind

Resi inv

Tim

es

Co

ver


IPD UK Property Total Returns Index1981 to 2012

-25

-15

-5

5

15

25

35

19

80

81

82

83

84

85

86

87

88

89

19

90

91

92

93

94

95

96

97

98

99

20

00

01

02

03

04

05

06

07

08

09

20

10

11

12

All Property

Retail

Office

Industrial

Other

IPD UK Property Total Returns Index1981 to 2012 (align to security value pattern)

Bankers reactions to theIPD capital value trends

REGULATION

FSA abolition and new BoE entities

Basel I, II and III

Slotting

FSA Out – FPC & PRA In

Financial Services Authority (FSA)

Financial Services Bill 2012 – announcement that the FSA is tobe dismantled in April 2013.

Regulatory roles to be split between two new Bank of Englandentities – FPC and PRA.

Financial Policy Committee (FPC)FPC will have a macro prudential role established to identify

and address potential risks to stability in the financial system.FPC will have the power to set the ‘counter cyclical capital

buffer’ requiring banks to hold more capital.Could impose tougher capital requirements on certain sectors,

such as property.Image: Financial World

Prudential Regulation Authority (PRA)

PRA will have the micro supervisory role and address issues at specific organisations.

Has the power to regulate the day-to-day running of individual lenders.

Financial services organisations expect their regulatory costs to increase by up to 20% as aresult of the FSA splitting in two (Source : Protiviti).

Financial Policy Committee

Source: Estates Gazette 30 March 2013

The FPC’s first piece of business..............

Basel I and II Accords

Basel Accord IRegulatory framework for capital adequacy of banks - introduced in 1988.

Risk weighting of assets classified: i.e. 0% (Govt bonds), 50% (residentialmortgages, lending to RSLs) and 100% (standard corporate lending).

Banks set aside capital equivalent to 8% of the Risk Weighted Asset.

Basel Accord IIEffective from 2007. Adopted by >100 countries worldwide.More complex and demanding on capital than Basel I.Loan specific – matrix of risk issues i.e. LTV, type of loan, security

and period to maturity.Higher LTV / longer term = more capital. Hence LTVs lower for

senior debt and mezzanine lending reduced considerably.More capital required for historic lending where LTVs increased as

a function of lower property values.Capital for certain risks = 12% or higher.Aim was that banks held capital relative to risks, preserved future

solvency, and in turn economic stability. Image: Financial World

Basel III

Basel III Accord agreed at South Korea G20Summit in Nov 2010.

Phased implementation between 2013 and2019.

Main changes:

The quality, consistency, and transparency ofthe capital base will be raised.

Introduce a leverage ratio.

Strengthen the risk management ofcounterparty credit exposures.

A global minimum liquidity standard for internationally active banks that isunderpinned by a longer-term structural liquidity ratio. Rules relaxed Jan ‘13.

Image: Financial World

Introduce a series of measures to promote the build up of capital buffers in goodtimes that can be drawn upon in periods of stress (“reducing procyclicality andpromoting countercyclical buffers").

Slotting

Source: FSA

Remaining time to maturity Category 1Strong

Category 2Good

Category 3Satisfactory

Category 4Weak

Category 5Default

Less than 2.5 years 50% 70% 115% 250% 0%

Equal or more than 2.5 years 70% 90% 115% 250% 0%

Introduced by the FSA in 2012. Only applies to UK banks, not overseas banks andother lending institutions. Created an uneven playing field.

Lenders have to allocate loans into ‘slots’ depending on risk category and maturity.

Risk weighting determines capital allocation to loans.

Criteria for slotting includes:

LTV and debt service cover ratios

Asset quality

Cashflow predictability

Borrower covenant

Stress analysis

Slotting

Source: Estates Gazette 19 January 2013

FUNDING SOURCES

UK and Overseas Banks

Mezzanine Funds

CMBS

Syndications

Debt Funds

Insurance Companies

Equity Funds

UK and Overseas Banks

Availability of debt from UK banks has contracted, but most of the major banksare active. Some have increased capital allocation to property this year and giventheir front line lenders higher targets.

With competition from other categories of lenders, and a shortage of prime dealsto go around, certain banks are now considering secondary property morefavourably for their best clients. Expect banks to be picky. Borrowers need tohave a solid covenant. Deals need an adequate portfolio hedge or long reliableincome profile.

Some of the high profile overseas banks have packed up and gone home inrecent years (i.e. Eurohypo) but others stayed and continue to lend.

There are some new entrants and ‘returners’ mainly from North America andEurope.

Mezzanine

In 2005/06: 30+ banks provided mezzanine against prime and secondaryproperty. Less than 10 now provide mezz, predominantly against prime assets.

Pramerica set up a £150m Mezz Fund June 2010 for investment deals £20-100m.They raised £492m in May 2011 - largest mezz fund established since the CreditCrunch started. Pramerica continues to raise funds from the institutions.

Duet Private Equity was the first listed real estate mezz fund in 2011, raisingabout £100m.

Mezzanine Funds are generally increasing in scale and activity.

Govt of Singapore Investment Corporation (GIC) announced Jan 2013 that it is tounderwrite £1 billion in senior and junior debt. Target deals will include Britishshops, offices and warehouses. Laxfield Capital will front the venture. Loan sizesto range £40-185m over 5-7 years with max LTV at 75%. Senior will besyndicated with GIC retaining the mezz.

Others include ICG-Longbow, LaSalle, M&G, Henderson, BlackRock

Typical Investment Funding Structures2006 v 2013

100

77.570

42

15

10.5

7.5

17.5

0

10

20

30

40

50

60

70

80

90

100

Property Value2006

Funding LTV2006

Property Value2013

Funding LTV2013

Equity

Mezz

Debt

£

Source: Strata Real Estate Consulting / IPD / DMU

----------2006---------- ----------2013----------

25.0%

15.0%

75.0%

60.0%

Mezzanine


Source: Estates Gazette 12 May 2012

Securitisation (CMBS)

The largest UK single client / portfolio issue was £850m (+£105m mezz).

LTVs reached 85-90%+, hence Prop Cos could stretch their equity and scaleup. ‘Investment grade’ tenants (BBB or better) and long-ish leases.

CMBS market halted in the UK mid 2007 (apart from ‘synthetic’ issuances).

Various ongoing issues with maturities, defaults, extensions, workouts etc.

CMBS has returned in the past 2 years at a low level. ‘CMBS 2’ will haveless complex tranches / pricing, be more transparent, and simpler asset mix.

Emerged in the UK in the late 90s. Advantagefor lenders – recycle use of capital – achievegrowth with balance sheet efficiency.

By 2006 Barclays, Soc Gen, Credit Suisse,Deutsche Bank, Lehman Bros and RBScollectively had 78% of the total Euroland CMBSmarket. Image: Financial World

Securitisation (CMBS) – Annual Issuances2000 – H1 2012

1.80

6.70

3.70

5.90

4.30

12.60

18.20

8.95

0.00 0.00 0.00 0.29 0.21

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1 2012

Source: FitchRatings / DMU

£ bn

Syndications

14.86

13.43

5.98

1.13 0.74

2.62

0.56

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2006 2007 2008 2009 2010 2011 H1 2012


•About 20 lenders wereinvolved in syndicated loansin 2006 – this fell to 13 in2011 and 8 in 2012.

•Currently difficult to findsyndication partners.

•Lenders are having to agreekey terms prior to originating.

•Syndicated debt availabilitylimited in the short-mediumterm.

•In H1 2012 club deals had avalue of £1.990 bn (£4.289bn in 2011).

£ bn

Debt Funds

Debt Funds have emerged over the past couple of years in the UK.

Some high profile senior bankers have been recruited.

Renshaw Bay team assembled H1 2012. Intend to provide senior and stretcheddebt, and participate in club deals. May look to CMBS eventually for churn.

Ag Fe targeting £1bn UK Real Estate Fund. Prime and good secondary, 5-7 yearterm, 70% LTV max, margin range currently 300-450 bps.

Starwood Capital raised £229m Dec 2012 for its London listed Starwood CapitalEuropean Real Estate Finance Fund. Mixed debt strategy.

ICG Longbow raised £105m Feb 2013 for its Senior Secured UK Property DebtInvestments debt fund (also London listed).

Others (active and evolving) include Fortress, Cheyne Capital, Cordea Savills,AEW Europe, CBRE Global Investors, Pricoa, Henderson and Aeriance (resi).

Capital A Finance set up by Pears Q3 ‘12 – target £250m senior debt on mixedassets inc secondary.

Debt Funds

Source: Estates Gazette 9 March 2013

Source: Estates Gazette 27 April 2013


Insurance Companies

Insurance companies have been in the UK debt market for over 30 years, but,new entrants more noticeable in the past few years.

Canada Life (1980) - £5m to £50m range, all sectors.

Aviva (1983) – generally big ticket and15-25 year terms.

MetLife (2000) – up to £200m, one of the largest big ticket lenders in the UK,focus on prime borrower/prime property in London/SE (apart from B8).

Axa (2005) - £20m to £100m.

M&G (2009) – funded by the Pru, lending at a rate of c. £1bn p.a. at present,senior and mezz, acquisition and refinance. Lot sizes £50m to £400m.

Allianz (2010) – expanding out of Germany into other countries. £50m to £150mrange.

Legal & General (2012) - £20m to £100m. Initial loan to Unite £121m Q2 ’12 (60%LTV, 10 year fixed rate 5.05%). Targeting several billion loan book.

Equity Funds

A limited number of Equity Funds will arrange JVs / third party investments.

Many Funds have their own in-house asset management teams and don’t wantinvestments in Prop Co’s.

Equity Funds tend to co-invest in the 80/20 to 70/30 range via a combination ofcore equity, B notes, mezz.

Secondary assets often considered – better growth / returns potential.

‘All cash’ deals are possible where assets would struggle to obtain debt gearing.With a portfolio accumulation strategy Funds and Prop Co’s will want to gearwhen assets are performing to improve IRRs and increase scalability.

IRRs around 20%

Performance returns possible for Prop Co’s after initial IRR hurdle achieved.

SHORT TO MEDIUM TERM

OUTLOOK

Future Lending Intentions by % of LendingOrganisations 2000 to H1 2012

8579

76

88

9589

80

63

24

4946

3842

89 89

55

23

56 57

44 42

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H12012

Intention toincrease loanbook size

Intention toincrease loanoriginations


%

Short to Medium Term Outlook

42% of banks want to increase lending to the propertysector. Some will not hit their targets. Not enough dealsto go around that fit with lending criteria.

Ongoing issues to sort out with legacy loan books, butprogress is being made.

Focus remains on prime and good secondary.

Ongoing introduction of regulation will impact on capitalavailable for property lending i.e. Basel III and slotting.

Unlikely to see any improvement in lending terms. Image: Financial World

New sources of debt are emerging i.e. debt funds and insurancecompanies, but they will not plug the gap.

More debt will be available – its a case of working out who wants tolend, where, and against what.


Investment Opportunities – TheReturn of Confidence to the MarketAllan Wilson

Property InvestmentReasons to be cheerful

Allan WilsonDirector - Capital Markets2nd May 2013

cheerful

45

Industrial Sector

• In 2012 the West Midlands experienced higher take up than any other single UKregion with 19% of the UK total.

• Add the East Midlands and this increases to 33%.

• 2007 – 21 new distribution warehouses available.Today only 3 available in the region over 100,000 sq ft.

• Shift of emphasis to design and build.

• Similar positive story in the small unit market.

46

Office Sector

• 2012 take up was circa 550,000 sq ft against an average of 650,000 sq ft.

• Positive shift thus far in 2013 however.

• Light at the end of the tunnel.

- Paradise Circus

- Arena Central

- Natwest Tower

47

Economic Background

• Avoided triple dip recession, Q1 growth of 0.3%.

- The service sector grew by 0.6%.

- The industrial sector grew by 0.2%.

- Construction contracted by a further 0.25%

• Retail sales down 0.2% in February – Weather effect.

• Inflation remains unchanged at 2.8%.

• Anticipated to exceed to 3% plus later this year.

• Labour market shrinking with unemployment forecast to 8.2% next year.

48

Source: Jones Lang LaSalle, 2013

IPD Returns

• Retail returned 0.8%.

• Offices returned 1.2%.

• Industrial returned 1.5%

• Overall, fragile recovery but reasons for cautious optimism.

All property returnsincreased to 1.1% for Q1

49

So what about Birmingham?

• Second City.

• GDP of £94 million.

• Largest financial and professional services sector in the UK regions.

• Largest labour force in the UK regions.

• Think big and at European level.

• Key infrastructure projects:

- New Street Station

- Birmingham Airport extension

- HS2

- Metro extension

We need to play to our strengths

Who are the Investors?


33%UK

67%Global 2012 (£m)

Overseas Equity

Relative PricingGood value in the regions


LondonWest End Paris CBD Moscow Frankfurt UK Regional

Average

£1,900

£1,289

£730 £621

£427

£ per sq ft

53

Confidence

54

Opportunities

• Speculative Development and Land.

• Core Plus Assets.

• Secondary and Tertiary Property.

• Increased liquidity

55

Final Thought

56

Final Final Thought

There is light at the end of the tunnel.

This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent ofJones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of theaccuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damagesuffered by any party resulting from reliance on this publication.

Contacts

Allan WilsonDirector - Capital MarketsJones Lang LaSalle45 Church Street | Birmingham B3 2RT+44 (0)121 214 [email protected]


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investment opportunities - where the clever money is going...where the clever money is going...

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