Transcript Paris EUROPLACE 2007

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Opportunities in
European Real Estate
Dr Paul Kennedy, MRICS
Head of European Research
INVESCO Real Estate
This presentation is for Investment Professionals only and is not for consumer use.
C191
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Our Autumn 2006 forecasts
01
3
GDP growth was expected to improve, but only
modestly…
IRE Prime Forecasting Model - Real GDP Growth (%)
5%
4%
3%
2%
Source: Consensus Economics (August 2006)
2011
Slovakia
Russia
2010
Czech
Republic
2009
Hungary
Denmark
2008
Poland
Finland
2007
Portugal
2006
Netherlands
Italy
Ireland
France
Spain
Germany
Belgium
EU - 12
0%
UK
1%
Sweden
Real GDP Growth (% per annum)
6%
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When combined with low and stable inflation forecasts
this suggested relatively flat 10 year bond yields.
IRE Prime Forecasting Model - 10 yr Government Bond Yields
14%
13%
12%
11%
10%
%
9%
8%
7%
6%
5%
4%
3%
Germany
Spain
France
Source: IRE calculations; Bloomberg. March 2007.
Ireland
Italy
Netherlands
Denmark
Sw eden
UK
2011
2011
2010
2009
2008
2008
2007
2006
2005
2005
2004
2003
2002
2002
2001
2000
1999
1999
1998
1997
1996
1996
1995
1994
1993
1993
1992
1991
1990
2%
0%
Source: IRE calculations (Fall 2006); DTZ Research
2005
2011
Moscow
Prague
Budapest
Warsaw
M25 West
Edinburgh
Glasgow
Manchester
Birmingham
London (Docklands)
London (Midtown)
London (WE)
London (City)
Copenhagen
Stockholm
Lisbon
Barcelona
Madrid
Dublin
Brussels
Rotterdam
Amsterdam
Milan
Rome
Marseille
Lille
Lyon
Paris (Rive Gauche)
Paris (WBD)
Paris (LD)
Paris (CBD)
Paris (IDF)
Frankfurt
Munich
Hamburg
Berlin
%
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Office vacancy was expected to remain under control…
IRE Prime Forecasting Model - Office vacancy (%)
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
6
…retail data suggested a similar pattern.
IRE Prime Forecasting Model - Modern Retail Stock Growth (%)
14%
12%
10%
%
8%
6%
4%
2%
Growth (90-05)
Source: PMA; IRE calculations (Fall 2006)
Growth (00-05)
Growth (05-10)
Frankfurt
Manchester
Brussels
London (WE)
Birmingham
Hamburg
Glasgow
Copenhagen
Amsterdam
Paris (CBD)
Stockholm
Marseille
Milan
Lyon
Budapest
Munich
Lille
Madrid
Barcelona
Warsaw
Dublin
Berlin
Rome
Prague
-2%
Lisbon
0%
-8%
Source: IRE calculations (Fall 2006)
Avg. 90-05
Avg. 06-10
Bratislava
St Petersberg
Moscow
Prague
Budapest
Warsaw
M25 West
Edinburgh
Glasgow
Manchester
Birmingham
London (Docklands)
London (Midtown)
London (WE)
London (City)
Copenhagen
Stockholm
Lisbon
Barcelona
Madrid
Dublin
Brussels
Rotterdam
Amsterdam
Milan
Rome
Marseille
Lille
Lyon
Paris (Rive Gauche)
Paris (WBD)
Paris (LD)
Paris (CBD)
Frankfurt
Munich
Hamburg
Berlin
%
We expected robust rental growth from offices in Paris,
London, Madrid, Barcelona, Stockholm and the M25
West…..
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IRE Forecasting Model - Prime Office Rental Growth (% pa)
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
…retail rental growth was expected to be positive, but
lower than the recent past (especially in the UK)….
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IRE Prime Forecasting Model - Retail Rental Growth (% pa)
10%
9%
8%
7%
%
6%
5%
4%
3%
2%
Avg. 90-05 (SSU)
Source: IRE calculations (Fall 2006); DTZ Research; CWHB
Avg. 06-10 (SSU)
Bratislava
St Petersburg
Moscow
Prague
Budapest
Warsaw
Manchester
Birmingham
London
Copenhagen
Stockholm
Barcelona
Madrid
Dublin
Brussels
Amsterdam
Milan
Rome
Marseille
Lille
Lyon
Paris
Frankfurt
Munich
Hamburg
0%
Berlin
1%
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...industrial / logistics rents were expected to keep
pace with inflation.
IRE Prime Forecasting Model - Industrial Rental Growth (% pa)
6%
5%
4%
3%
%
2%
1%
0%
-1%
-2%
Avg. 90-05
Source: IRE calculations (Fall 2006); DTZ Research
Avg. 06-10
Bratislava
St Petersberg
Moscow
Prague
Budapest
Warsaw
Edinburgh
Glasgow
Manchester
Birmingham
Gtr London
Stockholm
Barcelona
Madrid
Dublin
Brussels
Rotterdam
Amsterdam
Milan
Rome
Marseille
Lille
Lyon
Paris (IDF)
Frankfurt
Munich
Hamburg
-4%
Berlin
-3%
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We expected capitalisation rates to remain broadly
stable….
IRE Prime Forecasting Model - Expected Yield Shift (%)
14%
Prime Yield (Q2 2011)
12%
10%
8%
6%
4%
2%
0%
0%
2%
4%
6%
8%
Prime Yield (Q2 2006)
Offices
Source: DTZ Research; IRE (Fall 2006)
Retail SSU
Industrial
10%
12%
14%
...as a result, of the 143 markets covered by our
forecasts, over 50% were expected to “out-perform”
for total return investors…
IRE Prime Forecasting Model - Expected and Required Total Returns (all sectors)
Required Return (Q2 2006-Q2 2010)
20%
18%
Unattractive
16%
14%
12%
10%
8%
6%
Attractive
4%
2%
0%
0%
4%
8%
13%
17%
Expected Return (Q2 2006-Q2 2010)
Offices
Source: IRE calculations (Fall 2006)
Retail SSU
Retail ShC
Retail Parks
Industrial
11
0%
Source: IRE calculations (Fall 2006)
Ungeared IRR (Q2 2006 - Q2 2010)
Required return (now)
Bratislava
St Petersberg
Moscow
Prague
Budapest
Warsaw
M25 West
Edinburgh
Glasgow
Manchester
Birmingham
London (Docklands)
London (Midtown)
London (WE)
London (City)
Copenhagen
Stockholm
Lisbon
Barcelona
Madrid
Dublin
Brussels
Rotterdam
Amsterdam
Milan
Rome
Marseille
Lille
Lyon
Paris (Rive Gauche)
Paris (WBD)
Paris (LD)
Paris (CBD)
Frankfurt
Munich
Hamburg
Berlin
%
Office opportunities were particularly clear, with
Paris, regional France, London and Spain leading.
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IRE Prime Forecasting Model - Prime office total returns Q2 2006 - Q2 2010
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
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Key changes over the last 6 months
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Our GDP growth forecasts have improved…
Figure 1 - Average GDP Growth (2007-2011)
5.0%
4.5%
4.0%
%
3.5%
3.0%
2.5%
2.0%
Spring 2007
Autumn 2006
Source: INVESCO Real Estate; Experian Business Strategies (June 2006 and December 2006)
Czech Republic
Hungary
Poland
UK
Sweden
Denmark
Portugal
Netherlands
Italy
Ireland
France
Spain
Germany
Belgium
EU - 12
1.0%
Finland
1.5%
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...particularly for Germany.
Figure 2 - German GDP (Autumn 2006 vs Spring 2007)
2.8%
2.6%
% Real GDP Growth
2.4%
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
2006
2007
2008
2009
Autumn 2006
2010
2011
Spring 2007
Source: INVESCO Real Estate; Experian Business Strategies (June 2006 and December 2006)
2012
Office take-up and rental values have recovered faster
than we expected…
Figure 3 - Selected Prime Office Nominal Rental Values (1998=100)
230
210
190
1998=100
170
150
130
110
90
70
1998
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
50
Frankfurt
London (City)
Paris (LD)
London (WE)
Source: INVESCO Real Estate; DTZ Research (February 2007)
Dublin
Glasgow
Madrid
Warsaw
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…as expected yields have continued to fall, reflecting
improving rental growth prospects and weight of
money.
Figure 4 - Prime Office Yields
12%
% Yield (Market Definition)
11%
10%
9%
8%
7%
6%
5%
4%
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
3%
Paris (CBD)
Stockholm
Warsaw
Lyon
Copenhagen
Budapest
Amsterdam
London (City)
Prague
Source: INVESCO Real Estate; DTZ Research (February 2007)
Dublin
London (WE)
Madrid
Birmingham
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Strong rental growth forecasts mean that investors
could force prime office yields lower, while still achieving
“appropriate” total returns.
Figure 5 - Current and "correct" prime office yields (%)
11%
10%
9%
% Yield (Market Definition)
8%
7%
6%
5%
4%
3%
2%
1%
0%
Current market yield
'Correct' yield
Source: INVESCO Real Estate (Spring 2007); DTZ Research (February 2007)
Prague
Budapest
Warsaw
M25 West
Edinburgh
Glasgow
Birmingham
Manchester
London (Docklands)
London (WE)
London (Midtown)
London (City)
Copenhagen
Lisbon
Stockholm
Barcelona
Dublin
Madrid
Brussels
Rotterdam
Milan
Amsterdam
Rome
Lille
Marseille
Lyon
Paris (Rive Gauche)
Paris (LD)
Paris (WBD)
Paris (CBD)
Munich
Frankfurt
Berlin
-2%
Hamburg
-1%
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Other sectors

Retail



Rental growth has been in line with expectations.
Improving employment growth prospects should provide support despite
indebted consumers (particularly in the UK) and tight margins.

Supply growth may be becoming more important.

Yield pressure appears to be easing.
Logistics

Rental growth has been lower than our forecasts.

Margin pressure combined with investment led development.

Demand for income has driven yields to unsustainable levels in some
markets.
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Is there still time for one last dance?

Yes…

GDP growth appears to be strengthening.

Inflationary pressures are likely to remain low.


Long-term interest rates should remain under 4.25% in the Eurozone and
5.25% in the UK.

Supply appears to be under control.

Rental growth is likely to accelerate, particularly in the office sector.

Yields can fall further in some markets without damaging return prospects.
But….

Economic conditions could deteriorate (US, global equity markets etc.)

Some markets present clear challenges (e.g., parts of central Europe)

Supply might exceed our projections (e.g., in the City of London)
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French acquisitions
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Retail – Le Printemps
Le Printemps – Paris 9
Purchased in Q1 2007 for a US pension fund advisory mandate
Prime retail building located in the heart of Paris CBD
13,300sqm department store
Risk profile = Prime
Purchase price = €184,600,000
Net initial yield: 4.00%

For illustrative purposes only
Expected Unlevered Global Return: 5.46%
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Office - Le Directoire
Le Directoire - St Cloud (92)
Purchased in Q1 2007 for a listed company
Office building located in the WBD
12,549 sqm multi-let
100% let
Risk profile = Core
Purchase price: €47,400,000
Net initial yield: 5.40%
For illustrative purposes only
 Expected Unlevered Global Return: 8.35%
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Office
- Le Diapason
Le Diapason – Paris 19
Purchased in Q1 2007 for a listed company
Office building located in the 19th district of Paris
6,548 sqm multi-let
100% let
Risk profile = Core
Purchase price = €23,600,000
Net initial yield: 6.54%
For illustrative purposes only
 Expected Unlevered Global Return: 9.49%
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Office - Le Verdun
Le Verdun – Gentilly (94)
Purchased in Q1 2007 for a listed company
Office building located in the peripheric market
2,524 sqm multi-let
100% let
Risk profile = Core
Purchase price = €14,000,000
Net initial Yield: 4.71%
For illustrative purposes only
 Expected Unlevered Global Return: 7.66%
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Important information
INVESCO Real Estate invests in property and land. This can be difficult to sell, so you may not be able to sell
your investment when you want to. The value of the property is generally a matter of a valuer’s opinion. The
value of investments and the income from them can fluctuate (this may partly be the result of exchange rate
fluctuations) and investors may not get back the full amount invested.
Past performance is not a guide to future. INVESCO Real Estate has expressed its own views and opinions in
this presentation and these may change. The information in this document is selective and does not constitute
an offer or an invitation to subscribe for, or purchase, any securities. Current tax levels and reliefs may change.
Depending on individual circumstances, this may affect investment returns.
This presentation is issued by INVESCO Real Estate for Investment Professionals only and should not be issued
to, or relied upon by, other parties. No representation, express or implied, is made as to the fairness, accuracy
or completeness of the information contained in this presentation and no reliance should be placed upon it. For
your protection, telephone calls may be recorded.
Contact London:
INVESCO Real Estate
10 Mount Row
London W1K 3SD
United Kingdom
Phone: +44 20 75 43 35 00
www.invescorealestate.co.uk
A Division of INVESCO Asset Management Limited
Authorised and regulated by the Financial Services Authority
Registered Address: 30 Finsbury Square, London EC2A 1AG
A Member of the AMVESCAP Group
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