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
Focused on the Future of Real Estate 22
I. MONETARY POLICY EXTENDS EXCESS SPREAD
II. MARKET FORECAST SCENARIOS
III.RELATIVE VALUE UPDATE
Focused on the Future of Real Estate 33
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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