ipf / spr european real estate outlook spr ipf oroarty... · 2015. 4. 16. · 21 ipf / spr european...

Refocus on Fundamentals – Back to Risk and Return

Dr Brenna O’Roarty, Director, Head of European Strategic Research

+44 20 7545 6099 [email protected]

22 September 2008

IPF / SPR European Real Estate Outlook

2 IPF / SPR European Outlook Seminar, 22 September 2008

This document is issued in the United Kingdom by RREEF Limited, One Appold Street, London, EC2A 2UU. Authorised and regulated by the Financial Services Authority.

Key RREEF research personnel, including Asieh Mansour, Chief Economist and Strategist and Peter Hobbs, Head of Real Estate Research are voting members of the investment committee of certain of the RREEF Alternative Investment Funds. 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 and its affiliates.

This material is intended for information purposes only and does not constitute investment advice or a personal recommendation. This document should not be construed as an offer to sell any investment or service. Furthermore, this document does not constitute the solicitation of an offer to purchase or subscribe for any investment or service in any jurisdiction where, or from any person in respect of whom, such a solicitation of an offer is unlawful.

This document has been prepared for the sole and exclusive use of participants in the meeting in which it is delivered (the “recipient”). It is a confidential document and is provided to the recipient only. No other person should regard it as addressed to them for any purpose. No part of this document may be reproduced in any form or by any means or re-distributed, without our prior written consent.

This document is a “non-retail communication” within the meaning of the FSA’s Rules and is directed only at persons satisfying the FSA’s client categorisation criteria for an eligible counterparty or a professional client. This document is not intended for and should not be relied upon by a retail client.

The information in this document has been prepared in good faith, however, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by RREEF Limited or the Deutsche Bank Group or by any of their respective officers, employees or agents as to or in relation to the accuracy or completeness of this document. The information stated, opinions expressed and estimates given constitute best judgement at the time of publication and are subject to change without notice.

When making an investment decision, potential investors should rely solely on the final documentation relating to the investment or service and not the information contained herein. The investments or services mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with us you do so in reliance on your own judgment.

As a result of market fluctuations the capital value of such investments and the income from them may fall as well as rise. Investors may not get back the amount originally invested. Past performance is not a guide to the future.

RREEF is the brand name of the real estate and infrastructure, private equity and hedge fund division for the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; 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) Australian financial services license holder; in Hong Kong: Deutsche Asset Management (Hong Kong) Limited (“DeAMHK”); in Japan: Deutsche Securities Inc.; in Singapore, Deutsche Asset Management (Asia) Limited (Company Reg. No. 198701485N) and in the United Kingdom: RREEF Limited, RREEF Global Advisers Limited and Deutsche Asset Management (UK); in

addition to other regional entities in the Deutsche Bank Group.

Disclaimer


Agenda

Section

I Cyclical downturn across markets

II Deteriorating economy changes prospects

III Return Relativities: Risk premia and pricing

IV Summary


Section I

Cyclical Downturn Across Markets


Note: UK and European investment volumes converted to US$ based on constant (Sep 2008) exchange rates

Source: RREEF Research based on DTZ; REIS; RCA

Real Estate Investment Activity Across Global Regions

Quarterly investment volume

($bn)

Annual change in volume for quarter

(%)

There has been a sharp reduction of investment activity

0

50

100

150

200

250

05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08 Q2

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

US UK Europe ex UK Asia Pacific % change (rhs)


Investment Flow change by Country

Investment Volume (€mn) H1 2007 v H1 2008

Source: CBRE, Q2 2008

€mn

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

UK

Ge

rma

ny

Fra

nc

e

Sw

ed

en

Ita

ly

Ne

the

rla

nd

s

Sp

ain

Be

lgiu

m

Fin

lan

d

De

nm

ark

Cz

ec

hR

ep

ub

lic

Po

lan

d

Ire

lan

d

Hu

ng

ary

Po

rtu

ga

l

H1 2007 H1 2008


Financing costs exploded and remain high

Spread between 3 month interbank rate and base rate

Source: RREEF Research, Euribor; ECB

0%

20%

40%

60%

80%

100%

120%Ja

n-0

7

Feb

-07

Ma

r-0

7

Ma

y-0

7

Jun

-07

Au

g-0

7

Sep

-07

Oct-0

7

De

c-0

7

Jan

-08

Feb

-08

Ap

r-0

8

Ma

y-0

8

Jun

-08

Au

g-0

8

Sep

-08

3 m Euribor Spread


$tn

Source: RREEF Research; DTZ; ULI

… which is particularly important given the significance of “debt” for Real Estate

Global Real Estate Market Size, by 4-quadrants, 2007

0

1

2

3

4

5

6

Europe US Asia

Private equity Public equity Private debt Public debt


Section II

Economic deterioration changes prospects


The slowdown is evident throughout Europe …

GDP forecasts for 2008 and 2009

Source: Deutsche Bank Global Markets, September 2008

%

0

1

2

3

4

5

6

7

De

nm

ark

Ge

rma

ny

Fin

lan

d

Fra

nc

e

Ire

lan

d

Ita

ly

Ne

the

rla

nd

s

Po

rtu

ga

l

Sp

ain

Sw

ed

en

UK

Po

lan

d

Cze

ch

Re

p.

Hu

ng

ary

2007 2008 f 2009 f


.. and the outlook has worsened substantially since the beginning of 2008

Source: Deutsche Bank Global Markets Research

(%)

Evolution of GDP forecasts for 2009

0

0.5

1

1.5

2

2.5

3

04-Jan 01-Feb 07. Mar 04-Apr 02-May 06-Jun 04-Jul 01-Aug 05-Sep

Germany France Italy Spain UK


Real Estate Products with Key Risks during Current Market Correction

RETURN

RISK

Mezz; Hedge; Derivatives; etc

CORE

SECURITIES

NEW PRODUCTS

OPPORTUNISTIC

• High leverage on existing

and new assets• Lot size• Cashflow risk

• Emergent and small scale• Investor scepticism

• Volatility• Equity market exposure

• Market risk• Covenant• Less scope to drive• Open-ended

• Leverage• Cashflow risk• Timing

VALUE ADDED

Source: RREEF Research

The risks vary across different investment styles


Real Estate Products with Key Opportunities During 2008-10

RETURN

RISK

Mezz; Hedge; Derivatives; etc

CORE

SECURITIES

NEW PRODUCTS

OPPORTUNISTIC

• Distressed markets, owners, corporates

• Public to privates, development land and distressed debt

• Debt investing• Market dislocations support

growth of derivative and hedge

• Oversold markets that will benefit from structural growth

• Counter-cyclical investing in markets most impacted by current slowdown

• Ability to reposition assets• Mis-pricing• Counter-cyclical tenant engineering

VALUE ADDED

And give rise to distinct opportunity sets for different styles



MunichHamburg

Dublin

Warsaw

London/ City

Amsterdam/ FrankfurtMilan

Berlin

London/ West End

Stockholm

Paris

MadridBudapest

Prague

Lisbon

Post-growth Recovery GrowthContraction Post-growth

Impact of Debt Crisis varies with Position in Cycle and Supply at Onset

Position of Office Markets in Cycle at Q3 2007 against Anticipated Net Additions to Stock Lim

ited S

upply

Str

ong S

upply


Speculative development in recovery markets curtailed by credit crunch

Stock and Supply Risk

Speculative construction as % stock

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.00 5.00 10.00 15.00 20.00

Space Under Construction as % Stock

Budapest

Warsaw

Dublin

London DocklandsPrague

London City

BarcelonaLa Defense

Madrid

Amsterdam

LisbonMilan

Helsinki

Hamburg

Brussels

London West End

Stockholm

Paris CBD

FrankfurtMunich

Source: RREEF Research, PMA, CBRE

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

0.00 5.00 10.00 15.00 20.00

Space Under Construction as % Stock

Budapest

Warsaw

Dublin

London DocklandsPrague

London City

BarcelonaLa Defense

Madrid

Amsterdam

LisbonMilan

Helsinki

Hamburg

Brussels

London West End

Stockholm

Paris CBD

FrankfurtMunich

Source: RREEF Research, PMA, CBRE

16 IPF / SPR European Outlook Seminar, 22 September 2008Office rent growth (% pa)

Note: “f” indicates forecast


Office Rental Growth across Major Global Markets, 2005-07 and 2008-10f

Real estate fundamentals are slowing across all markets, but falling in only a few

-10 -5 0 5 10 15 20 25

Stockholm

Frankfurt

Warsaw

Paris: CBD

Amsterdam

Prague

Munich

Milan

Birmingham

Budapest

London: West End

Madrid

Dublin

London: City

2008-10f

2005-7


Difference in speed of correction across Europe results in mis-pricing, relatively

Prime Yield Shift across Europe since Q2 07

Source: RREEF Research, CBRE

%

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

London: W

est E

nd

Paris: C

BD

Dublin

Madrid

Barc

elo

na

Sto

ckholm

London: C

ity

Paris: La D

efe

nse

Zurich

Gla

sgow

Edin

burg

h

Vie

nna

Birm

ingham

Munic

h

Mancheste

r

Berlin

Ham

burg

Copenhagen

Hels

inki

Fra

nkfu

rt

Am

ste

rdam

Oslo

Pra

gue

Mila

n

Rom

e

Rotterd

am

Bru

ssels

Wars

aw

Lis

bon

Ath

ens

Budapest

Cap Rate Movement H1 08Cap Rate Movement H2 07Yield Q2 07


Source: CBRE

European office cap rates, 1990- 08

% year end

Recent cap rate moves were unusually strong

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1H

2008

London Central Paris Madrid Frankfurt


Source: RREEF Research;

Prime Total Returns1997-2012

Sharp decline in Total Returns expected, with recovery from end 2010

F=forecast

-30

-20

-10

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008f 2009f 2010f 2011f 2012f

Frankfurt London: City Madrid Paris CBD

%


Section III

Return Relativities: Risk premia and pricing


Average Risk Premia over Risk Free Rate

Source: RREEF Research; Deutsche Bank Capital Markets; PMA

Average Target Rate for Real Estate 1998-2007

%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Wars

aw

Budapest

Madrid

Paris L

a

Defe

nse

Milan

Paris C

BD

Barc

elo

na

Dublin

Sto

ckholm

London

West E

nd

London

M25W

est

Lis

bon

Fra

nkfu

rt

Bru

ssels

Am

ste

rdam

London C

ity

Hels

inki

Mancheste

r

Copenhagen

Pra

gue

Ham

burg

Munic

h

Risk Free Rate Volatility Liquidity Transparency Currency


Ten Year Average Indicates Under-pricing

Over / Under Pricing: Risk Adjusted Total Returns (10 year Average)


%

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Du

blin

Ba

rce

lon

a

La

De

fen

se

Mila

n

Lo

nd

on

We

st

En

d

Ma

dri

d

Pa

ris

: C

BD

Ro

me

Wa

rsa

w

Pra

gu

e

Lis

bo

n

Bru

ss

els

Am

ste

rda

m

Sto

ck

ho

lm

He

lsin

ki

Co

pe

nh

ag

en

Lo

nd

on

Cit

y

Lo

nd

on

M2

5W

es

t

Fra

nk

furt

Mu

nic

h

Ha

mb

urg

Bu

da

pe

st


Forecasting Risk Premia

• Risk free rate

• Volatility


Remember the differences in supply?

Comparison of Historic and Expected Volatility (Rental)


%

0

1

2

3

4

Am

ste

rda

m

Ba

rce

lon

a

Du

blin

Fra

nk

furt

Ha

mb

urg

He

lsin

ki

Lo

nd

on

Cit

y

Ma

dri

d

Mu

nic

h

Pa

ris

CB

D

Pa

ris

La

De

fen

se

Pra

gu

e

Sto

ck

ho

lm

Vie

nn

a

Wa

rsa

w

10 Yr Historic 5 Year Forecast


Forecasting Risk Premia

• Risk free rate

• Volatility

• Liquidity

• Transparency

• Currency

• Leverage Exposure


Source: ITD, 2008

Debt as a % of Total Capital Flows

Market Exposure to Leverage is a Major Risk to Pricing

%

0

25

50

75

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

France Germany Netherlands

Poland Spain UK


Required Risk Premia 2008-2012

Source: RREEF Research, 2008; Deutsche Bank Capital Markets, Aug 2008; PMA; JLL

Target Hurdle Rates for 2008-2012

%

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Wars

aw

Budapest

Madrid

Pra

gue

London C

ity

Dublin

London:

West E

nd

London

M25W

est

Lis

bon

Barc

elo

na

Manch

este

r

Paris L

a

Defe

nse

Milan

Fra

nkfu

rt

Am

ste

rdam

Ham

burg

Munic

h

Paris C

BD

Bru

ssels

Sto

ckholm

Copenhagen

Risk Free Rate Volatility Liquidity Transparency Gearing Currency


Over and Under-pricing: Average Risk Adjusted Return Forecast End 07 to 12, Net of Target

Source: RREEF Research, 2008;

Where should I be buying?

-14.00

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

Lo

nd

on

M25

We

st

Ma

nch

este

r

Fra

nkfu

rt

Ed

inb

urg

h

Bru

ss

els

Lyo

n

Am

ste

rdam

Sto

ck

ho

lm

He

lsin

ki

Mu

nic

h

Mila

n

Ha

mb

urg

Pa

ris

La

Defe

ns

e

Co

pe

nh

ag

en

Lo

nd

on

We

st

En

d

Pa

ris

CB

D

Ba

rce

lon

a

Pra

gu

e

Lo

nd

on

Cit

y

Wa

rsaw

Bu

dap

est

Ma

dri

d

Du

blin

%

-14.00

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

Lo

nd

on

M25

We

st

Ma

nch

este

r

Fra

nkfu

rt

Ed

inb

urg

h

Bru

ss

els

Lyo

n

Am

ste

rdam

Sto

ck

ho

lm

He

lsin

ki

Mu

nic

h

Mila

n

Ha

mb

urg

Pa

ris

La

Defe

ns

e

Co

pe

nh

ag

en

Lo

nd

on

We

st

En

d

Pa

ris

CB

D

Ba

rce

lon

a

Pra

gu

e

Lo

nd

on

Cit

y

Wa

rsaw

Bu

dap

est

Ma

dri

d

Du

blin

%


Over and Under-pricing: Average Risk Adjusted Return Forecast End 08 to 12, Net of Target Rate


And Next Year?

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

Ma

nc

he

ste

r

Lo

nd

on

M2

5W

es

t

Ed

inb

urg

h

Ly

on

Ba

rce

lon

a

Am

ste

rda

m

Bru

ss

els

Lo

nd

on

We

st

En

dP

ari

s L

a

De

fen

se

Sto

ck

ho

lm

He

lsin

ki

Mila

n

Fra

nk

furt

Pa

ris

CB

D

Lo

nd

on

Cit

y

Co

pe

nh

ag

en

Mu

nic

h

Ha

mb

urg

Ma

dri

d

Pra

gu

e

Bu

da

pe

st

Du

blin

Wa

rsa

w

%


Over and Under-pricing: Average Risk Adjusted Return Forecast End 09 to 12, Net of Target


And Where is Worth Waiting For?

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

Ma

nc

he

ste

r

Ed

inb

urg

h

Ly

on

Ba

rce

lon

a

Lo

nd

on

M2

5W

es

t

Bru

ss

els

Lo

nd

on

Cit

y

Lo

nd

on

We

st

En

dP

ari

s L

a

De

fen

se

Am

ste

rda

m

Sto

ck

ho

lm

Pa

ris

: C

BD

He

lsin

ki

Ma

dri

d

Mila

n

Mu

nic

h

Co

pe

nh

ag

en

Ha

mb

urg

Fra

nk

furt

Du

blin

Pra

gu

e

Bu

da

pe

st

Wa

rsa

w

%

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

Ma

nc

he

ste

r

Ed

inb

urg

h

Ly

on

Ba

rce

lon

a

Lo

nd

on

M2

5W

es

t

Bru

ss

els

Lo

nd

on

Cit

y

Lo

nd

on

We

st

En

dP

ari

s L

a

De

fen

se

Am

ste

rda

m

Sto

ck

ho

lm

Pa

ris

: C

BD

He

lsin

ki

Ma

dri

d

Mila

n

Mu

nic

h

Co

pe

nh

ag

en

Ha

mb

urg

Fra

nk

furt

Du

blin

Pra

gu

e

Bu

da

pe

st

Wa

rsa

w

%


IV Summary

• The long awaited cyclical downturn for real estate is here

• Economic outlook has deteriorated sharply, deepening and pro-longing real estate cycle

• For many markets, credit crunch has resulted in a less volatile rental cycle as development funding halts

• A return to fundamentals must include a reassessment of relativerisks between markets

• Market timing will be fundamental to risk adjusted returns and optimal market selection will shift rapidly with timing

ipf / spr european real estate outlook spr ipf oroarty... · 2015. 4. 16. · 21 ipf / spr european...

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