FOCUSED ON THE FUTURE OF REAL ESTATE

2020 OUTLOOK: CALM BEFORE THE STORM

LOWER FOR LONGER OFFERS EXTRA TIME

21 JANUARY 2020

RESEARCH & STRATEGY

Hans Vrensen CFA, CRE

MANAGING DIRECTOR

Tel +44 (0)20 7016 4753

hans.vrensen@eu.aew.com

Focused on the Future of Real Estate 22

I. MONETARY POLICY EXTENDS EXCESS SPREAD

II. MARKET FORECAST SCENARIOS

III.RELATIVE VALUE UPDATE

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96

97

98

99

100

101

102

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sources: OECD Business Confidence Index & AEW

?

HOW WILL EUROPEAN REAL ESTATE FARE IN 2020?

POLITICAL EVENTS PUSH BUSINESS CONFIDENCE TO LOWEST POINT SINCE 2012/2013

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-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-8

-6

-4

-2

0

2

4

6

8

2016 2017 2018 2019

(%)

Index of Global Easing or Tightening (LHS) German Bond Yield

Japanese Bond Yield US Bond Yield

(%)

Sources: AEW, CFR & OECD

4

MONETARY POLICIES COME TO THE RESCUE… AGAIN

GOVERNMENT BOND YIELDS MOVE DOWN TO HISTORICAL LOWS

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0

2

4

6

8

10

12

(%)

Prime Yield – Base Case

Bond Yield – Base Case

Sources: CBRE, Natixis & AEW Research 2019

EXCESS YIELD STAYS NEAR HISTORIC HIGH IN BASE CASE

BUT SETS NEW RECORD IN LFL SCENARIO

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0

50

100

150

200

250

300

350

400

450

0

2

4

6

8

10

12

(%)

Prime Yield – Base Case

Bond Yield – Base Case

Excess Spread – Base Case [RHS]

Sources: CBRE, Natixis & AEW Research 2019

bps

EXCESS YIELD STAYS NEAR HISTORIC HIGH IN BASE CASE

BUT SETS NEW RECORD IN LFL SCENARIO

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0

50

100

150

200

250

300

350

400

450

0

2

4

6

8

10

12

(%)

Prime Yield – Base Case

Bond Yield – Base Case

Bond Yield – LFL

Excess Spread – Base Case [RHS]

Excess Spread – LFL [RHS]

5-yr Rolling Excess Spread – Base Case [RHS]

5-yr Rolling Excess Spread – LFL [RHS]

Sources: CBRE, Natixis & AEW Research 2019

bps

EXCESS YIELD STAYS NEAR HISTORIC HIGH IN BASE CASE

BUT SETS NEW RECORD IN LFL SCENARIO

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MARKET FORECAST SCENARIOS

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Source: CBRE, Natixis, Bloomberg & AEW Research 2019

4.0

4.5

5.0

5.5

6.0

6.5

7.0

(%)

Previous Base Case Current Base Case Lower for Longer Scenario

LOWER-FOR-LONGER BOND YIELDS PUSH DOWN PROPERTY YIELDS

AVERAGE ALL PRIME PROPERTY YIELDS

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Sources: CBRE, Natixis, Bloomberg & AEW Research 2019

3.0

3.5

4.0

4.5

5.0

5.5

Logistics (35) Shopping centres (30) All Property (159) Offices (59) High-street (35)

(%)

Actual 5 Yr forward Base Case 5 Yr forward LFL Scenario

BASE CASE PROPERTY YIELD SHIFT BY ONLY 20 BPS

LFL SCENARIO SHOWS FURTHER TIGHTENING

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Sources: CBRE, Natixis, Bloomberg & AEW Research 2019

0.0

0.5

1.0

1.5

2.0

2.5

Offices (59) Logistics (35) All Property (159) Shopping Centres (30) High-street (35)

(%)

Previous 5YR forward Current 5YR forward LFL Scenario 5YR forward

LOWER RENT GROWTH AS ECONOMIC GROWTH SLOWS

LOGISTICS ONLY SECTORS LEFT UNCHANGED IN BASE CASE

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0

1

2

3

4

5

6

7

Logistics (35) Offices (59) All Property (159) Shopping Centres (30) High-street (35)

(%)

Previous 5YR forward Current 5YR forward LFL Scenario 5YR forward

Sources: CBRE, Natixis, Bloomberg & AEW Research 2019

FUTURE YIELDS STILL DRIVE BETTER OVERALL RETURNS

TOTAL RETURN FORECAST

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RELATIVE VALUE UPDATE

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Source: AEW

Required rate of return (RRR)Expected rate of return (ERR)

Volatility premium

Risk-free rate

Gross depreciation

Liquidity premium

Income return

Capital return

> Attractive

Or

< Less attractive

RISK-ADJUSTED RETURN METHODOLOGY

FOCUS ON MINIMUM ACCEPTABLE LEVEL OF RETURN GIVEN EACH SEGMENT’S RISK PREMIA

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Sources: CBRE, RCA, MSCI, Oxford Economics, Natixis & AEW

LOGISTICS COMES OUT AHEAD

PRAGUE IS ONLY EXCEPTION

Less

attractiveNeutral Attractive Total

Offices 6 11 22 39

Retail 14 14 11 39

Logistics 1 3 18 22

Total 21 28 51 100

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Sources: CBRE, RCA, MSCI, Oxford Economics, Natixis & AEW

Less

attractiveNeutral Attractive Total

Offices 3 9 27 39

Retail 7 9 23 39

Logistics 0 2 20 22

Total 10 20 70 100

LFL SCENARIO SHOWS 90 OF 100 RATED ATTRACTIVE OR NEUTRAL

RETAIL REMAINS CHALLENGING

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0.0

0.3

0.5

0.8

1.0

2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 2018Q1 2019Q1

Previous Base case Base case LFL

Sources: CBRE, RCA, MSCI, Oxford Economics, Natixis & AEW

CYCLE EXTENSION CONFIRMED BY RISK-ADJUSTED RETURN INDEX

BASE CASE VS LOWER-FOR-LONGER SCENARIO

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Sources: CBRE, RCA, MSCI, Oxford Economics, Natixis & AEW

CYCLE EXTENSION CONFIRMED BY RISK-ADJUSTED RETURN INDEX

BASE CASE VS LOWER-FOR-LONGER SCENARIO

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▪ Lower-for-longer bond & property yields

▪ Stable Values despite slower rent growth

▪ Most Markets are Attractive

Opportunities

▪ Impact of Tech

− E-commerce

(Logistics vs Retail)

− Flex office

▪ ESG Integration

− GRESB Expansion

− Building-level

Certification

Threats

▪ Excessive Debt

− Stable LTVs

− Low Rates

▪ Supply of Space

matched to Demand

Big Ideas

2020 ANNUAL OUTLOOK – KEY VIEWS

19

▪ Value Add: UK Retail Re-development

▪ Core +: Urban Logistics Development

▪ Core: Senior Debt

Best Ideas

Focused on the Future of Real Estate

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