Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management

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Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
Outlook
                                                            2018

Navigating the    Placemaking   Large, stable and liquid:   The state of the     Opportunities   Generating
Australian real   to enhance    the investment case for     global listed real   in Nordic       alpha
estate market     returns       the Japan office market     estate market        retail          returns
Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
OUTLOOK 2018

                                                             It was the best
GLOBAL CONTACTS

                                                                         OF TIMES…
        Kiran Patel
        Global Chief Investment Officer
        kiran.patel@savillsim.com

        Irfan Younus
        Head of Research, Europe
        irfan.younus@savillsim.com

        Nicole Bångstad                           It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of
        Regional focus: Nordics
        nicole.bangstad@savillsim.com             foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of
                                                  Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…1
        Judith Fischer
        Regional focus: Belgium, Luxembourg
        judith.fischer@savillsim.com

        Benedict Lai                                The 28-state European Union is enjoying its strongest               Against this backdrop, it is increasingly important to
        Regional focus: Asia-Pacific
        benedict.lai@savillsim.com                growth in a decade, yet the European Central Bank                  work with a real estate investment manager with the
                                                  remains concerned that tapering of its quantitative                local knowledge and expertise to help investors navigate
                                                  easing programme could derail the region’s economic                these best and worst of times. The Savills Investment
        Victoria Ormond
        Regional focus: Spain, United Kingdom     recovery. Average property yield spreads over 10-year              Management Outlook 2018 report features a collection of
        victoria.ormond@savillsim.com             government bond yields are close to record highs, yet              commentary from internal fund managers and research
                                                  investors are concerned about rising interest rates. The           analysts, highlighting the strategies they employ to
        Andreas Trumpp                            all-in cost to borrow money is close to record lows for            capitalise on current investment market opportunities.
        Regional focus: Germany, Poland           core assets, yet markets are sceptical of increasing
        andreas.trumpp@savillsim.com
                                                  leverage. We are living in the most peaceful times since
                                                  World War II, yet political risk is elevated. If the state of                           KIRAN PATEL
        Norbert Schley                                                                                                          Global Chief Investment Officer,
                                                  the world could be summarised in a few words, it is fair
        Regional focus: France, The Netherlands                                                                               Savills Investment Management LLP
        norbert.schley@savillsim.com              to say that these are uncertain times.

        Hilary Waterman
        Regional focus: Ireland
        hilary.waterman@savillsim.com

                                                  1 Dickens, Charles. A Tale of Two Cities. London: Chapman, 1859.
Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
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Contents
                                                                               22.
                                                                               European real estate
06.                                                                            market update
                                                                               ECONOMY TO TRUMP POLITICS

Key
recommendations

08.
Risks
by IRFAN YOUNUS,
Head of Research, Europe

                           NAVIGATING THE AUSTRALIAN REAL ESTATE MARKET
                           by Lee Tredwell,
                           Head of Investment, Australia

                                                                                                                                    42.
                            • Page 10-11

                           PLACEMAKING TO ENHANCE RETURNS
                           by Harry de Ferry Foster,
                           Fund Director, Charities Property Fund                                                                   Asia-Pacific real estate
                                                                                                                                    market update
                            • Page 12-13

                           LARGE, STABLE AND LIQUID:
                           THE INVESTMENT CASE FOR THE JAPAN OFFICE MARKET     24.                                                  GROWING OPTIMISM AMIDST UNCERTAINTY

                                                                               European total return
                           by Will Johnson,
                           Associate Director of Investment, Japan
                            • Page 14-15

                                                                               property market cycle
                                                                                                                                    44.
                           THE STATE OF THE GLOBAL LISTED REAL ESTATE MARKET
                           by Thomas Körfgen,
                           Global Head of Indirect Real Estate

                                                                                                                                    Asia-Pacific total return
                            • Page 16-17                                       AUSTRIA           GERMANY           NORWAY
                                                                                • Page 26         • Page 31         • Page 36

                                                                                                                                    property market cycle
                           OPPORTUNITIES IN NORDIC RETAIL
                                                                               BELGIUM           IRELAND           POLAND
                           by Peter Broström,                                   • Page 27         • Page 32         • Page 37
                           Nordic III Fund Manager
                            • Page 18-19
                                                                               DENMARK           ITALY             SPAIN
                                                                                • Page 28         • Page 33         • Page 38
                                                                                                                                    AUSTRALIA                   JAPAN
                           GENERATING ALPHA RETURNS                                                                                  • Page 46                   • Page 48
                           by Jamie Pearson,                                   FINLAND           LUXEMBOURG        SWEDEN
                           Fund Manager, UK Income and Growth Fund              • Page 29         • Page 34         • Page 39
                            • Page 20-21
                                                                                                                                    CHINA                       SINGAPORE
                                                                                                                                     • Page 47                   • Page 49
                                                                               FRANCE            THE NETHERLANDS   UNITED KINGDOM
                                                                                • Page 30         • Page 35         • Page 40
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Key recommendations

EUROPE                                                                                                                                             ASIA-PACIFIC

Austria                                        Italy                                               Poland                                          Australia
„„   Focus on Grade A offices with long-       „„      Grade A office buildings located in         „„   Focus on Grade A offices with              „„   Invest selectively in CBD offices in Sydney
     term rental agreements in prime                   Milan CBD, which is benefitting from             long-term rental agreements in                  and Melbourne given the generally
     Vienna locations close to or integrated           improving employment. We also see                prime Warsaw locations close to or              limited risk premium between prime and
     with metro line stations in the central           selected opportunities in the fringe             integrated with metro line stations in          secondary assets. Target assets with
     business district (CBD) and city centre           of the Milan high street, particularly           the CBD and city centre submarkets.             lower passing rents that will benefit from
     submarkets.                                       those high streets benefitting from                                                              strong demand-supply fundamentals and
                                                       rising tourism. Our top pick is Italian     „„   Look for investment opportunities               improved infrastructure, including fringe/
                                                       logistics space around major transport           in centrally located submarkets                 suburban locations.
Benelux                                                corridors, which is attractively priced          in Kraków, Wrocław, TriCity (a
„„   Target high quality office space in               compared to other segments.                      metropolitan area consisting               „„   Target defensive, income-producing
     Brussels CBD and Luxembourg city                                                                   of Gdańsk, Gdynia and Sopot),                   retail and logistics assets in Sydney and
     central as well as central locations in                                                            Katowice and Łódz.                              Melbourne, such as convenience-based
     the Netherlands, which are attractively   The Nordics                                                                                              property with fixed rental growth at
     priced compared to core European          „„      Seek retail opportunities in prime          „„   Consider build-to-suit fulfilment and           above-inflation levels.
                                                                                                        distribution centres on 10+ year                                                              BE CAUTIOUS OF…
     markets and offer further potential for           locations in Tier 2 cities, preferably in
     rental growth.                                    Aarhus, Denmark’s second largest city.           leases with good quality covenants
                                                                                                                                                                                                      „„   Mispricing risk in strongly competitive markets, where choice of
                                                                                                        and significant tenant capital             China                                                   asset is increasingly key, and local expertise recommended;
„„   Look for high street opportunities in     „„      Target food-anchored, medium-sized               expenditure investment that can be
                                                                                                                                                   „„   Target offices in new Shanghai CBDs that
     selected top 20 Dutch provincial cities           neighbourhood schemes and regional               used by third parties in the top five                                                         „„   All-time-high rents on the Copenhagen high street and signs of
                                                                                                                                                        are supported by infrastructure.
     such as Eindhoven and Maastricht,                 centres in Sweden.                               locations: Warsaw, Katowice, Poznan,                                                               weaker letting activity, which could indicate that Copenhagen high
     which are more attractively priced.                                                                Wrocław and Central Poland (Łódz).         „„   Consider Tier 1 city opportunistic                 street retail is approaching a market cycle peak;
                                               „„      Target urban, last-mile logistics                                                                strategies (e.g., funding gaps, distress      „„   Paris CBD, one of the most expensive office markets in Europe,
                                                       facilities in Oslo and Copenhagen                                                                situations) for logistics assets or retail
                                                                                                   Spain                                                                                                   except for refurbishment opportunities. Furthermore, developing
France                                                 and modern premises in the major                                                                 podiums in view of current asset pricing.          areas such as the northern fringe of Paris have yet to achieve a
„„   Consider modern distribution centres              cities of Sweden, with a focus not          „„   Focus on well-located retail                                                                       critical size and to establish themselves;
     in established logistics locations with           only on last-mile solutions but also on          warehouses that can take advantage
     excellent transport links along the               mega-distribution centres suitable for           of e-commerce trends, and Spanish                                                             „„   The impact of Dublin’s housing shortage on the city’s office sector;
                                                                                                                                                   Japan
     north-south logistics corridor.                   large online retailers and third-party           logistics hubs along the so-called                                                            „„   German high street retail in secondary and tertiary cities due to
                                                       logistics providers.                             Golden Banana logistics corridor           „„   Target risk-adjusted office and residential
                                                                                                                                                        opportunities in sub-core districts of             weaker letting activities, the structural shift towards e-commerce
„„   Target urban logistics in or on the                                                                stretching from Spain to Northern Italy.                                                           and prime rents having already peaked in most cases;
                                               „„      Target prime office locations in                                                                 Greater Tokyo and selected established
     fringes of Paris as well as other major
                                                       Helsinki CBD, as yields are slightly                                                             regional submarkets.                          „„   Increasingly challenging pricing for core properties and core
     urban areas.
                                                       higher than those of Scandinavian           UK                                                                                                      locations across Germany;
                                                       counterparts, and Finland’s                 „„   Seek well-located retail warehouses
                                                                                                                                                   Singapore                                          „„   Prime retail in Singapore, as leasing demand will be tempered
Germany                                                economy is showing strong recovery.              close to transport links, which                                                                    by stagnant consumption growth, structural challenges from
„„   Focus on core office, retail and                                                                   are positioned to take advantage           „„   Target high quality CBD offices that have          e-commerce and supply risks through 2019;
                                               „„      Look for opportunities in the Oslo               of trends in e-commerce.                        leases marked to current rental levels that
     logistics properties in and close to
                                                       office market, whose economic                                                                    are in the trough of the cycle.               „„   Prime offices in traditional Shanghai CBDs where prices are at
     Germany’s biggest conurbations,
                                                       fundamentals are positive for rental        „„   Target logistics properties near cities                                                            historical highs and capitalisation rates are likely to remain under
     such as Berlin, Frankfurt, Hamburg,
                                                       growth.                                          such as Greater London, the Big            „„   Target modern logistics facilities with            pressure for the foreseeable future; and
     Munich and the Ruhr area.
                                                                                                        6 (Birmingham, Bristol, Edinburgh,              strong tenants and long leases that have      „„   Tokyo’s prime high street retail market where rents appear to have
                                               „„      In Stockholm, we see potential office            Glasgow, Leeds and Manchester)                  recently started.
„„   Look for investment opportunities in                                                                                                                                                                  limited upside despite the strong fundamentals supporting the
                                                       space investment opportunities in                as well as Oxford and Cambridge.
     selected growing secondary cities                                                                                                                                                                     sector. Rising affordability concerns and a scheduled consumption
                                                       the fringe-of-CBD or best suburban
     such as Augsburg, Freiburg, Münster                                                                                                                                                                   tax hike in 2019 are likely to have an impact on retail sales.
                                                       locations that offer better availability
     and Nuremberg.
                                                       and affordability.
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                                                                                                                                               Central banks stuck in ‘Hotel California’?                                           As figure 2 illustrates, the Congressional Budget Office (CBO)
                                                                                                                                                                                                                               projects that at some point in the next five years, the US will cross the
                                                                                                                                                   Central bank behaviour will continue to be one of the main themes
                                                                                                                                                                                                                               85% ratio of debt to gross domestic product. Empirical studies suggest
                                                                                                                                               of 2018, as the drawback from extremely loose monetary policies is
                                                                                                                                                                                                                               that at this level, a meaningful slowdown in economic activity is likely.
                                                                                                                                               cause for concern. The world has taken on increased debt levels and
                                                                                                                                                                                                                               Consequently, we suggest investors be mindful of this possibility and
                                                                                                                                               unprecedented stimulus in order to recover from the global financial
                                                                                                                                                                                                                               its impact on European real estate markets.
                                                                                                                                               crisis and thwart deflationary pressures (figure 1) – now the question is

RISKS
                                                                                                                                               if markets can handle the stimulus being withdrawn.                             FIGURE 2:
                                                                                                                                                                                                                               Estimated debt as a percentage of GDP
                                                                                                                                               FIGURE 1:
                                                                                                                                               Selected countries’ net central bank asset purchases
                                                                                                                                               (USD billion, 2009-18f)                                                                CBO's June 2017 baseline
                                                                                                                                                                                                                                      Debt held by public with tax cuts
                                                                                                                                               250
                                                                                                                                                                                                                               100%

                                                                                                                                               150
                                                                                                                                                                                                                                95%

                                                                                                                                                50
                                                                                                                                                                                                                                90%

                                                                                                                                               -50
                                                                                                                                                     2009   2010   2011   2012   2013   2014   2015     2016   2017f   2018f    85%

                                                                                                                                                       EA     JP    UK    US     SE      5 Economy Aggregate
                                                                                                                                                                                                                                80%
                                                                                                                                               Source: Citi Research
                                                China’s deleveraging is too big to ignore                                                      Note: ‘f’ denotes forecast; 3 million rolling sum of change in domestic          75%
by IRFAN YOUNUS,                                                                                                                               currency securities holdings expressed in USD at market exchange
Head of Research, Europe                            One of the key reforms proposed by President Xi Jinping is to reduce financial leverage.
                                                                                                                                               rates; EA = euro area and SE = Sweden.
Savills Investment Management LLP               Policies to tighten liquidity slowed credit growth in 2016, causing a financing contraction                                                                                     70%
                                                through 2017 that has driven a steady rise in government bond yields and credit spreads.                                                                                              2018   2019   2020   2021   2022    2023   2024   2025   2026   2027
                                                However, looking at the bigger picture, the deleveraging and reform that is driving China’s        The Federal Reserve is the first leading economy to have begun
                                                near-term slowdown are positive for its long-term growth outlook. China is committing          scaling back QE and raising interest rates. While the US economy has            Source: CBO (as of 30 November 2017)

       W
                   hile 2018 will present       to reforms that will impose international standards on its capital markets, open its bond      held firm amidst this slow policy shift, it clearly has not accelerated,
                   various opportunities for    market to foreign investors and create vital sources of capital for Chinese companies.         either. As such, questions remain about possible repercussions if key
                   real estate investment,                                                                                                     central banks — not just the Fed — start to reduce stimulus faster than         Brexit
                                                                                                                                               originally intended.
                   multiple widespread                                                                                                                                                                                             The UK and European Commission have completed the first
                                                Mispricing risk
                   economic as well as                                                                                                             The biggest risk of this appears to be in Europe, where many
                                                                                                                                                                                                                               stage of Brexit negotiations, which focuses on three areas: the rights
     country-specific trends may present            A combination of forces has fundamentally altered income demand and supply:                                                                                                of EU and UK nationals in their respective territories, the financial
                                                                                                                                               countries have negative real interest rates. If negative real interest
     market risks. For one, we believe          ageing populations, technological advancements, mandatory requirements for financial                                                                                           settlement the UK will pay to the EU and arrangements for the Irish
                                                                                                                                               rates have played a role in pushing up asset prices to this point, what
                                                institutions to hold bonds, the ‘hangover’ from QE and a decade of rock-bottom base                                                                                            border. A transition period of 21 months will follow the UK’s exit from
     that the retreat from monetary                                                                                                            will happen when the stimulus is taken away? Do central banks remain
                                                rates. Against this backdrop, investors in pursuit of income in 2018 and beyond will face                                                                                      the EU.
     policy stimulus will pick up pace                                                                                                         stuck in a ‘Hotel California’ stimulus situation?
                                                substantial challenges and, in some cases, a difficult choice between re-adjusting income
     where there is a ‘hangover’ from           requirements in the face of low yields or accepting a higher degree of risk.                                                                                                       While it is still too early to tell what the trading relationship
     quantitative easing (QE), presenting                                                                                                                                                                                      between the UK and the EU will look like after the transition period,
                                                                                                                                               US fiscal changes
     challenges for investors’ pursuit              Lower yields may tempt some investors to move further up the risk curve and outside of                                                                                     there are three broad options: 1) extend the transition period, 2) exit
     of income. While rising interest           their defined fund style. Historically, this has resulted in underperformance, as downsides        Looking at regions more specifically, the United States will soon           without an extension of transition period but with an agreed trade
     rates pose a challenge to property         are most acute for those markets and assets that do not have the support of fundamental        begin to see the effects of a significant corporate tax cut. Most domestic      deal or 3) exit the transition period with no deal. There is potential for
                                                demand drivers. While we do advise making selective calls on emerging micro-locations          sectors – such as retail, telecommunications and utilities, which have          option 1 to become a no-exit outcome, particularly if there is a near-
     pricing, central banks will likely tread
                                                and occupier trends, such recommendations are not entirely based on attractive entry           seen relatively high marginal tax rates – will benefit disproportionately       term change of government.
     cautiously to avoid negative effects                                                                                                      from the tax change.
                                                yields but rather on the underlying growth story, which weaker locations and segments
     on growth rates and consumption.
                                                often lack.                                                                                                                                                                        There are currently close to even odds of a Labour or Conservative
                                                                                                                                                   It is unsurprising, then, that we have recently seen a rotation in          majority in the next general election. In our view, such political
     In the geopolitical realm, we advise                                                                                                      US equity market performance away from high tech, fast-growing                  conditions will have potentially more significant impact on the
     keeping a close eye on both Brexit         Housing market slowdowns                                                                       companies and those with significant exports (which already enjoy               economy in the short to medium term than Brexit. The PMA forecasts
     negotiations and the effects of                                                                                                           relatively low tax rates) towards more domestic sectors. Beyond                 on which we base our prime real estate numbers assume a ‘stable’
                                                    Following 20 years of rising house prices in Sweden, price growth is showing signs of
     the US administration’s corporate                                                                                                         the near-term stimulus effect of tax cuts, one ought to also consider           Brexit with a transition period, continuation of trade deals and largely
                                                moderation. The neighbouring Norwegian housing market is also experiencing a similar
     tax reform. Additionally, China’s                                                                                                         their longer-term impact on debt levels and the sustainability of               electronic Irish border; however, they assume no single market after
                                                trend, as well as the London residential market. This cooling shows in sentiment surveys
                                                                                                                                               accumulated debt.                                                               transition.
     credit cycle is starting to turn, with     as well as hard data. A sustained downturn may impact on GDP growth rates, which in
     significant implications across            turn could impact on consumer spending and the construction sector. This would have
     Asian markets and beyond.                  negative repercussions for commercial real estate. However, sharp declines are unlikely
                                                given low interest rates, limited new housing supply and income and population growth.
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  NAVIGATING the
  AUSTRALIAN
  REAL ESTATE MARKET
                                                                                                                                                Office                                              Retail                                               Industrial

                                                                                                                                                JLL ranks Sydney and Melbourne as the               The retail trading environment remains               In contrast to retail, the logistics sector
                                                                                                                                                number 1 and 2 global cities, respectively, as      challenging, with increasing competition –           remains in favour, with the dynamics that are
                                                                                                                                                they have over the past 12 months recorded          from overseas retailers and e-commerce,              hurting the retail sector having the opposite
                                                                                                                                                respective net effective growth of 30.1 % and       including the recent launch of Amazon in             effect on the logistics market. Reduced local
                                                                                                                                                17.3%. This growth should continue in the           Australia – reducing growth expectations             manufacturing and increased reliance on
                                                                                                                                                short term, with current vacancy rates of 5.9%      in what has traditionally been somewhat of           imports are also leading to increased demand
                                                                                                                                                and 6.5%, respectively, and new supply not          a sheltered local market. Previously strong          for quality logistics facilities. Competing land
                                                                                                                                                forecast to be delivered until 2021 and 2020,       department store or discount department store        uses, largely from residential on the back of
                                                                                                                                                respectively.                                       anchors, together with discretionary retailers,      increasing population growth, is reducing
                                                                                                                                                                                                    are likely to continue to rationalise their store    supply of industrial land and pushing rents and
                                                                                                                                                Sydney has benefitted from large stock              footprints, closing unprofitable stores and          land values upwards in Sydney.
                                                                                                                                                withdrawals. This has forced tenants to             revamping others, allowing for smaller trade
                                                                                                                                                relocate, increasing competition for space          area with a focus on online sales.                   Melbourne, which is the largest logistics
                                                                                                                                                and pushing effective rents up, particularly for                                                         market in Australia, still has a large potential
                                                                                                                                                secondary space.                                    Australia’s stringent planning system will           pipeline of serviced land; however, available
                                                                                                                                                                                                    still see this sector remain a good defensive        supply is reducing – and it, too, is coming
                                                                                                                                                Melbourne, on the other hand, has led on the        investment; however, many shopping centre            under pressure from competing residential
                                                                                                                                                demand side, recording nearly 70% of national       owners are having to undertake significant           uses in some markets. Low interest rates and
                                                                                                                                                CBD net absorption over the past five years.        capital investments to maintain occupancy            subsequently low capitalisation rates are
                                                                                                                                                Its once seemingly infinite supply of sites has     and competitiveness, which will reduce returns       still making new developments feasible for
                                                                                                                                                now gone with completion pending for the last       in the short term. Given the low inflation           developers, and this will likely serve to keep
                                                                                                                                                developments in Docklands.                          environment, we expect rental growth to be           effective rental growth limited in the short term.
                                                                                                                                                                                                    subdued and incentives to remain high. The
                                                                                                                                                Yields, as with other gateway cities, are at        exception is CBD retail that continues to be         For the first time, there has been significant
                                                                                                                                                record lows; however, the spread over interest      strongly sought after, particularly by global        offshore investment in the Australian logistics
                                                                                                                                                rates remains higher than that for other major      retailers seeking flagship stores in Sydney and      market, and this has pushed yields to lows not
                                                                                                                                                cities within the Asia-Pacific region. With         Melbourne. We expect yields to remain low            seen since before the GFC. Long leases with
                                                                                                                                                forecast rental growth in the short term, the       until there is significant upwards movement in       fixed annual percentage increases (at well
                                                                                                                                                potential total returns are still very attractive   interest rates.                                      above projected near-term inflation) are still
                                    2017 saw Australia reach the longest-ever           Sydney (with a population of about 5 million)           for investors.                                                                                           providing attractive total returns.
                                    period of economic expansion globally: 26 years     and Melbourne (with a population of about
                                    and counting of uninterrupted growth without a      4.7 million) account for approximately 40% of
                                    technical recession. Interest rates have remained   Australia’s population and two-thirds of its GDP.
                                    unchanged for 16 consecutive months – at an all-    These are the global cities most favoured by
                                    time low of 1.5% – and inflation and wage growth    local and global investors.
                                    remain low. As a result, we expect interest rates
                                    to remain unchanged during 2018, in contrast        Sydney is undergoing a city-wide infrastructure
                                    with other developed economies that are in a        boom, with new major roads improving access                RECOMMENDATIONS
by LEE TREDWELL,                    tightening cycle.                                   around the city, a new central business district
Head of Investment, Australia                                                           (CBD) light rail, a new inner-city metro system
                                                                                                                                                             Invest selectively in CBD offices given the generally                        Long-leased logistics will continue to provide strong
Savills Investment Management LLP   Australia’s economy is still transitioning from     and even a new airport.                                      1       limited risk premium between prime and secondary                     3       returns (higher yields with strong fixed increases well
                                    the resource-led investment boom earlier this                                                                            assets. Target Sydney and Melbourne assets with lower                        above inflation). Buy assets benefitting from planned
                                    decade – which saw Australia come through           Meanwhile, Melbourne’s population continues to                       passing rents that will benefit from strong demand-                          infrastructure investment.
                                    the global financial crisis (GFC) relatively        grow at a faster rate and, given greater availability                supply fundamentals and improved infrastructure,
                                    unscathed – towards a more diversified, service-    of affordable land, is likely to surpass Sydney as                   including fringe/suburban locations.                                         Focus on non-discretionary retail with strong anchors
                                    based economy. This transition is benefitting       the largest city in Australia by 2030.                                                                                                    4       in metro areas with population growth.
                                    the country’s two largest cities, Sydney and                                                                             Target defensive, income-producing assets such as
                                    Melbourne, which are both undergoing strong                                                                      2       convenience-based retail and long-leased logistics
                                    population growth and infrastructure investment,                                                                         property with fixed rental growth at above-inflation
                                                                                                                                                             levels.
                                    coupled with property markets experiencing
                                    favourable supply-demand fundamentals.
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PLACEMAKING to                                                                                1 Aerial view Bath

ENHANCE RETURNS
                                                                                              2 Bath, 5-10 Westgate Buildings

                                                                                              3 Bath, 1-4 Westgate Buildings

                                                                                              4 Bath, Westpoint

                                                                                              5 Greenwich
                                                                                      2

by HARRY DE FERRY FOSTER,
Fund Director, Charities Property Fund,
Savills Investment Management LLP

                  hat if you could create somewhere that becomes

     W
                                                                              1
                  so attractive that workers, shoppers, residents and
                  visitors with spending power flocked to it? This
                  is the power of ‘placemaking,’ a strategy that is
                  central to the Charities Property Fund (CPF) and
  has contributed to a decade of fund outperformance during which
  time the fund grew by more than GBP 1 billion.                                  3       4

      Placemaking can be achieved either internally – through the
  acquisition of a series of buildings within an area and coordination
                                                                                              5
  of those buildings’ repositioning – or externally, through early
  movement into an area or sector benefitting from both yield shift
  and gentrification effects as other investors follow.                                           We have also taken advantage of the larger placemaking of Greenwich Peninsula in
                                                                                              London, which is rapidly transitioning from a former wasteland to a destination in its
      CPF has enjoyed success with both strategies. We have built up                          own right. At the end of 2017, CPF completed the Brocklebank Retail Park development
  significant holdings in core cities with excellent growth prospects,                        immediately adjacent to the peninsula. Eventually, the area will have more than 15,000
  including in Brighton and Bath, where the fund has acquired eight                           residential units and a new GBP 1 billion tower sitting close to the premier O2 Arena concert
  separate buildings in close proximity to each other. These asset                            venue and fast transport links to Central London.
  agglomerations create economies of scale and enable the fund to
  create prosperous new environments. For example, in Bath we have                                Ikea is also investing GBP 100 million in its first new London store in 10 years, 200 yards
  recently completed a conversion of a number of retail units and                             down the road from the new park. All of these elements will serve to gentrify and place make
  second-hand offices into retail, restaurants, a new hotel, serviced                         the area. Greenwich currently boasts a retail catchment population the size of Leeds, yet
  apartments, student accommodation and a gym, effectively creating                           currently has no dedicated shopping centre. In comparison, Leeds has five.
  a sense of place and improving the amenity as well as mix of uses
  and tenants.                                                                                    The retail park development contributes to the placemaking of the Greenwich Peninsula
                                                                                              as a next-generation food and fashion retail park, tenanted by Primark, Next and Aldi – some
      We have also been able to take advantage of significant falls                           of the standout retailers of the moment. By being involved in the construction process, we
  in the availability of office space due to permitted development                            were also able to improve its placemaking potential and capture the benefits of future
  to residential in these cities. In Brighton alone, around 800,000                           technological innovation with the addition of electric car charging points and almost 1,000
                                                                                              solar panels.

                                                                                                                                                                                                Images: Savills IM
  square feet of office space has been lost to residential development,
  and developers are not replacing it, preferring instead to put more
  resources into residential apartments. The office vacancy rate in                              This park is a prime example of the fund’s strategy of placemaking and insulating the
  the city is now less than 1%. We have seen the same thing happening                         portfolio against technological change by building up significant holdings in core cities with
  in Bath and Bristol and have exploited this with office acquisitions    1                   excellent growth prospects.
  in Clifton, Bath and two buildings in Brighton.
Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
OUTLOOK 2018
14                                                                                                                                                          savillsim.com
                                                                                                                                                                            15

                             LARGE,
     JAPAN HAS THE LARGEST
                             STABLE and
                             LIQUID
     CONCENTRATION OF
     INSTITUTIONAL-GRADE
     REAL ESTATE IN THE
     ASIA-PACIFIC AND
     RANKS SECOND IN THE
     WORLD IN TERMS OF        The investment case for the Japan office market
     MARKET SIZE AFTER THE
     UNITED STATES.                                                                   FIGURE 1:
                                                                                      Developed Asia-Pacific: institutional-grade real estate concentration by country

                                                                                                                     Japan         Australia     Taiwan

                                                                                                                     38%           12%           2%
                                                                                                                     China         Singapore     New Zealand

                                                                                                                     21%           7%            1%
                                                                                                                     Hong Kong     South Korea

                              by WILL JOHNSON,                                                                       16%           3%
                              Associate Director of Investment, Japan
                                                                                      Source: MSCI and Savills Investment Management (June 2017)
                              Savills Investment Management LLP
                                                                                      Note: MSCI real estate coverage adopted as measure for institutional ownership ratio.

                              With office vacancy rates low                     Next, with its recovery having lagged most            global financial crisis cutbacks and corporate
                              across the board, occupier flight                 other global markets, Japan’s once famously           restructuring. A continued flight to quality
                                                                                expensive real estate now looks relatively            and the gradual removal of large swathes of
                              to quality combined with the                      inexpensive – both from a historical                  obsolete pre-seismic stock will also funnel
                              removal of outmoded stock is                      perspective and pound for pound. Despite a            Japan’s plethora of small- and medium-sized
                              expected to support average                       steady recovery since 2012, average pricing           enterprises s to investment-grade buildings.
                              rents and the absorption of                       for commercial assets in Tokyo sits 11%
                                                                                                                                      With 2017 set to mark a sixth consecutive
                              near-term supply.                                 down from its 2007 peak, while prime office
                                                                                                                                      year of expansion in domestic GDP,
                                                                                space remains around 25% cheaper than
                                                                                                                                      Japanese corporates are enjoying record
                                                                                10 years ago. Commercial land prices are
                              Looking past the bells and whistles of                                                                  profitability, which has led to new property
                                                                                also edging up from historic lows and are in
                              Abenomics and quantitative easing, what                                                                 requirements for headcount increases as
                                                                                line with the pre-bubble era. This not only
                              does Japan’s property market offer overseas                                                             well as location and building upgrades.
                                                                                mitigates downside risk but also suggests
                              investors? First, it has regionally unrivalled                                                          This positive economic context looks
                                                                                that capital appreciation in Japan’s largest
                              breadth and depth: Japan has the largest                                                                set to remain through the medium term,
                                                                                metropolitan areas can be sustained for the
                              concentration of institutional-grade real                                                               supported by the political stability provided
                                                                                foreseeable future.
                              estate in the Asia-Pacific and ranks second                                                             by the recently re-elected Shinzō Abe
                              in the world in terms of market size after the    Furthermore, effective yields for prime               cabinet, as well as the Bank of Japan’s
                              United States.                                    Tokyo office assets are on par if not favourable      ongoing dedication to its inflationary
                                                                                compared to London, New York, Paris and               monetary policies.
                              In fact, Japan alone accounts for roughly
                                                                                Hong Kong. Meanwhile, borrowing costs are
                              10% of global stock. Moreover, Japan’s                                                                  The major challenges for global investors
                                                                                among the lowest globally, making Japanese
                              property market is highly liquid. There are                                                             remain Japan’s relative opacity and how
                                                                                property investments particularly attractive
                              no barriers to entry for overseas institutional                                                         to access investable stock without chasing
                                                                                on a risk-adjusted, levered return basis.
                              investors, land is predominantly freehold                                                               down yields. Savills IM’s long and successful
                              and the pool of local end-buyers for assets of    We also expect the occupier market to                 track record in this market is testament to
                              all shapes and sizes is deep and diverse. Such    remain landlord favourable through the                the fact that having an established specialist
                              buyers include private investors, domestic        medium term, particularly for quality                 team on the ground with experience
                              corporations and developers, as well as           mid-tier offices. The Tokyo market is well            executing through multiple cycles is key to
                              Japan’s rapidly growing public and private        positioned to absorb planned medium-term              accessing off-market deals as well as the
                              REIT sector.                                      supply, with cyclically low vacancy indicative        valuable arbitrage opportunities that can
                                                                                of latent demand following years of post-             provide outsized returns.
Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
OUTLOOK 2018
16                                                                                                                                                                                                                                                                                                                                    savillsim.com
                                                                                                                                                                                                                                                                                                                                                                            17

The state of the                                                                                                                                 Smart debt refinancing                                        FIGURE 1:
                                                                                                                                                                                                               Capital raised in Europe (EUR million)

GLOBAL LISTED REAL
                                                                                                                                                      Low interest rates and strong demand for fixed
                                                                                                                                                 income have resulted in an increase in debt issuance. For              Equity & rights Issue                 IPO                   Debt issue
                                                                                                                                                 example, in the year to November 2017, debt issuance             25
                                                                                                                                                 in Europe reached more than EUR 18 billion, with

ESTATE MARKET
                                                                                                                                                 a weighted average yield of 1.7%, down significantly
                                                                                                                                                                                                                  20

                                                                                                                                                 from 6% in 2008. Given its ability to borrow against             15    Equity & rights Issue                 IPO                   Debt issue

                                                                                                                                                 its balance sheet, the listed real estate sector continues       25
                                                                                                                                                                                                                  10
                                                                                                                                                 to benefit from this trend and is able to enhance EPS            20
                                                                                                                                                 growth by improving debt financing terms (figure 1).              5

                                                                                                                                                                                                                  15
                                                                                                                                                                                                                   0
                                                                                                                                                     In our view, not only is the reduction in average            10
                                                                                                                                                                                                                        2001     2002     2003     2004    2005     2006     2007    2008     2009     2010     2011    2012    2013    2014     2015     2016     2017
                                                                                                                                                                                                                        Equity & rights Issue                 IPO                Debt issue
                                                                                                                                                 interest rates key, but so is the tendency to increase the
                                                                                                                                                                                                                  25    Bond maturities
                                                                                                                                                 duration of debt in order to obtain more predictable cash
                                                                                                                                                                                                                   5

                                                                                                                                                                                                                  12                                                                                                                                               12%
                                                                                                                                                 flows into the future (figure 2). This provides insulation    FIGURE 2:
                                                                                                                                                                                                                  20
                                                                                                                                                                                                                   0
                                                                                                                                                                                                                  10 2001
                                                                                                                                                                                                                        2002 2003 2004 2005 2006                             2007     2008    2009     2010     2011    2012     2013    2014    2015      2016 10%
                                                                                                                                                                                                                                                                                                                                                                2017
                                                                                                                                                 against potential future interest rate rises.                 Bond
                                                                                                                                                                                                                 15
                                                                                                                                                                                                                  8
                                                                                                                                                                                                                    maturity
                                                                                                                                                                                                                     Equity & rights schedule
                                                                                                                                                                                                                                     Issue  IPO                                      Debt issue                                                                    8%

                                                                                                                                                                                                                   6 25Bond maturities                                                                                                                             6%
                                                                                                                                                     While there were some IPOs in 2017, we expect to
                                                                                                                                                                                                                  10
                                                                                                                                                                                                                   4
                                                                                                                                                                                                                  12                                                                                                                                               4%
                                                                                                                                                                                                                                                                                                                                                                   12%
                                                                                                                                                                                                                     20
                                                                                                                                                 see more primary issues as well as secondary equity and           5
                                                                                                                                                                                                                   2
                                                                                                                                                                                                                  10                                                                                                                                               2%
                                                                                                                                                                                                                                                                                                                                                                   10%

by THOMAS KÖRFGEN,                                                                                                                               rights issues in 2018.                                            0
                                                                                                                                                                                                                   8
                                                                                                                                                                                                                     15                                                                                  0%
                                                                                                                                                                                                                                                                                                         8%
                                                                                                                                                                                                                   0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031+
                                                                                                                                                                                                                      2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Global Head of Indirect Real Estate,                                                                                                                                                                               6 10                                                                                  6%

Savills Investment Management LLP                                                                                                                                                                                  4        France               Germany                     Netherlands                  United Kingdom                         Europe
                                                                                                                                                                                                                                                                                                                                                                       4%
                                                                                                                                                 Further decrease in loan-to-value                                2
                                                                                                                                                                                                                60%
                                                                                                                                                                                                                        5Bond maturities
                                                                                                                                                                                                                                                                                                                                                                       2%
                                                                                                                                                                                                                 12                                                                                                12%
                                                                                                                                                                                                                  0                                                                                                   0%
                                                                                                                                                     With the direct real estate market remaining strong,           0
                                                                                                                                                                                                                 10 2017
                                                                                                                                                                                                                      2001 2018
                                                                                                                                                                                                                            2002 2019
                                                                                                                                                                                                                                  2003 2020 2021 2006
                                                                                                                                                                                                                                       2004 2005  2022 2007
                                                                                                                                                                                                                                                        2023 2008
                                                                                                                                                                                                                                                               20242009
                                                                                                                                                                                                                                                                     20252010
                                                                                                                                                                                                                                                                            2026
                                                                                                                                                                                                                                                                               20112027
                                                                                                                                                                                                                                                                                      20122028
                                                                                                                                                                                                                                                                                            2013 2029
                                                                                                                                                                                                                                                                                                   2014 2030
                                                                                                                                                                                                                                                                                                         2015 2031+
                                                                                                                                                                                                                                                                                                               201610%
                                                                                                                                                                                                                                                                                                                     2017
                                                                                                                                                                                                                50%
                                                                                                                                                 overall loan-to-value (LTV) ratios are declining (figure         8                                                                                                8%

                                                                                                                                                 3). This has been buffeted by recent disposals by listed

      T
                                                                                                                                                                                                                            France
                                                                                                                                                                                                                  6           Bond maturitiesGermany                         Netherlands                      United Kingdom                      Europe          6%
                  he outlook for the listed real estate market is                                                                                                                                               40%

                                                                                                                                                 real estate companies. The average LTV ratio is now            60%
                                                                                                                                                                                                                  4                                                                                                                                               4% 12%

                                                                         Key themes
                                                                                                                                                                                                                       12
                  positive. We expect the listed real estate market to
                                                                                                                                                 much lower than the historic average of 35%. With                2 10
                                                                                                                                                                                                                30%                                                                                                                                               2% 10%
                  provide a total return of between mid to high single                                                                                                                                         FIGURE 3:
                                                                                                                                                                                                                50% Jan-12
                                                                                                                                                                                                                  0 8              Jan-13      Jan-14       Jan-15      Jan-16       Jan-17                                                                       Oct-17
                                                                                                                                                                                                                                                                                                                                                                  0%
                                                                                                                                                 such a low ratio, REITs are much more insulated from                                                                                                                                                                8%

                                                                         in 2018
                  digits in 2018.                                                                                                                                                                              Historical loan-to-value ratios: European market
                                                                                                                                                                                                                     6
                                                                                                                                                                                                                      2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031+
                                                                                                                                                                                                                                                                                                                                                                       6%
                                                                                                                                                 external impacts. In our view, current LTV levels will         40%
                                                                                                                                                                                                                     4                                                                                                                                                 4%
                                                                                                                                                 likely remain stable, which reduces financial risk for                     France               Germany                   Netherlands                   United Kingdom                         Europe
      With a growing average dividend yield close to 4% for the entire                                                                                                                                               2                                                                                                                         2%
                                                                                                                                                 listed companies.                                              30% FTSE EPRA/NAREIT Americas Index
                                                                                                                                                                                                                60%                                                                               FTSE EPRA/NAREIT Global Index
  market, we believe that with the right stock selection, investors                                                                                                                                                 FTSE  EPRA/NAREIT
                                                                                                                                                                                                                     0Jan-12          Middle East andJan-14
                                                                                                                                                                                                                                    Jan-13            Africa Index                                FTSE EPRA/NAREIT
                                                                                                                                                                                                                                                                                              Jan-15          Jan-16 EMEA Index
                                                                                                                                                                                                                                                                                                                              Jan-17           0%
                                                                                                                                                                                                                                                                                                                                              Oct-17
                                                                                                                                                                                                                    FTSE2017  2018 2019
                                                                                                                                                                                                                          EPRA/NAREIT     2020
                                                                                                                                                                                                                                      Europe     2021 2022 2023
                                                                                                                                                                                                                                             Index                                           2024 FTSE
                                                                                                                                                                                                                                                                                                    2025EPRA/NAREIT
                                                                                                                                                                                                                                                                                                          2026 2027 Global
                                                                                                                                                                                                                                                                                                                      2028 ex2029  2030 2031+
                                                                                                                                                                                                                                                                                                                              US Index
  can achieve 5%+ income return. Moreover, we expect mergers and         M&A and IPO            EPS            Gearing to         Dividends                                                                     50% FTSE EPRA/NAREIT Asia Pacific Index

  acquisitions activity to increase over the coming period. Clampdown     activity to      enhancement          decline            to grow                                                                     10.0%           France               Germany                    Netherlands                     United Kingdom                      Europe
                                                                                                                                                 Dividend yields                                                40%
  on tax avoidance strategies and search for liquid listed investments     increase           through                                                                                                             60%
                                                                                                                                                                                                                     FTSE EPRA/NAREIT Americas Index                                                FTSE EPRA/NAREIT Global Index

  will result in increasing numbers of new market entrants.                                 refinancing                                              The average dividend yield for listed real estate is       8.0% FTSE EPRA/NAREIT Middle East and Africa Index
                                                                                                                                                                                                                 30% FTSE EPRA/NAREIT Europe Index
                                                                                                                                                                                                                                                                                                    FTSE EPRA/NAREIT EMEA Index
                                                                                                                                                                                                                                                                                                    FTSE EPRA/NAREIT Global ex US Index
                                                                                                                                                 approximately 3.7% (figure 4). In our view, with interest         50%Jan-12       Jan-13
                                                                                                                                                                                                                     FTSE EPRA/NAREIT                 Jan-14
                                                                                                                                                                                                                                      Asia Pacific Index                                     Jan-15               Jan-16                Jan-17               Oct-17

      Direct European real estate markets performed strongly in                                                                                  rates remaining lower for longer and demand for               10.0%
                                                                                                                                                                                                                6.0%
                                                                                                                                                                                                                   40%

  2017, on average experiencing both good fundamentals and further                                                                               income to remain strong, the right stock selection will
  yield compression. In our view, momentum is strong enough going                                                                                enable investors to achieve 5% average income from a           8.0%
                                                                                                                                                                                                                   30%
                                                                                                                                                                                                                4.0% FTSE EPRA/NAREIT Americas Index                                            FTSE EPRA/NAREIT Global Index
                                                                                                                                                                                                                             Jan-12                Jan-13
                                                                                                                                                                                                                    FTSE EPRA/NAREIT Middle East and Africa Index       Jan-14                 Jan-15       Jan-16
                                                                                                                                                                                                                                                                                                FTSE EPRA/NAREIT EMEA Index Jan-17                                Oct-17
  into 2018 to result in higher-than-consensus net asset value (NAV)                                                                             diversified listed property market portfolio.                 FIGURE    4:
                                                                                                                                                                                                                    FTSE EPRA/NAREIT Europe Index                                               FTSE EPRA/NAREIT Global ex US Index

  growth.                                                                                                                                                                                                      Dividend
                                                                                                                                                                                                               6.0%         yields Asia Pacific Index
                                                                                                                                                                                                                    FTSE EPRA/NAREIT
                                                                          M&A and IPO activity to increase                                                                                                     2.0%
                                                                                                                                                                                                               10.0% Dec-08             Oct-09    Aug-10       Jun-11        Apr-12        Feb-13     Dec-13       Oct-14       Aug-15     Jun-16         Apr-17

     While the overall backdrop for commercial real estate remains            We think the current NAV-to-share-price discounts on some          Interest rates                                                 4.0%
                                                                                                                                                                                                                            FTSE EPRA/NAREIT Americas Index                                           FTSE EPRA/NAREIT Global Index
                                                                                                                                                                                                                            FTSE EPRA/NAREIT Middle East and Africa Index                             FTSE EPRA/NAREIT EMEA Index

  positive, the listed sector is able to further enhance earnings per     REITs are attractive and could result in increasing M&A activity. In                                                                  8.0%
                                                                                                                                                                                                                            FTSE EPRA/NAREIT Europe Index                                             FTSE EPRA/NAREIT Global ex US Index
                                                                                                                                                     Many investors worry that rising bond yields could                     FTSE EPRA/NAREIT Asia Pacific Index
  share (EPS) growth by improving the terms of its debt financing.        the context of intense competition for direct real estate, investors
                                                                                                                                                 result in a fall in real estate values and, in turn, could     2.0%
                                                                                                                                                                                                                 10.0%

  We also anticipate that rising real estate values and disposals will    intending to grow their portfolios may choose to do so through the                                                                    6.0% Dec-08             Oct-09     Aug-10      Jun-11         Apr-12       Feb-13      Dec-13       Oct-14      Aug-15      Jun-16         Apr-17
                                                                                                                                                 impact on listed property market share prices. We do
  reduce gearing, resulting in lower financial risk. Therefore, we do     indirect market. UK listed property companies look particularly
                                                                                                                                                 not expect an increase in interest rates to have a material       8.0%

  not expect that rising interest rates will likely have a significant    attractive for an M&A play, and we see rising potential for M&A                                                                       4.0%
                                                                                                                                                 impact on listed property market values: higher interest
  impact on real estate investment trusts (REITs) going forward.          activity in the shopping centre segment and for German residential
                                                                                                                                                 rates usually follow a strong economy, and a strong               6.0%
                                                                          companies.                                                                                                                            2.0%
                                                                                                                                                 economy benefits the real estate market, which more                  Dec-08            Oct-09   Aug-10       Jun-11       Apr-12        Feb-13      Dec-13       Oct-14       Aug-15     Jun-16         Apr-17

      With interest rates expected to remain lower for longer, demand                                                                            than offsets increased cost of financing. Moreover, with         4.0%
  for income remains strong. REITs are attractive investments due to          Moreover, strong demand for income-yielding investment
                                                                                                                                                 many listed companies having de-geared their balance
  their high pay-out ratio, tax efficiency and liquidity.                 should result in new initial public offerings (IPOs). Additionally,
                                                                                                                                                 sheet, we expect that even the direct impact on cost of          2.0%
                                                                          some value-add investors who acquired assets during the global                                                                                     Dec-08       Oct-09    Aug-10          Jun-11      Apr-12       Feb-13     Dec-13         Oct-14    Aug-15        Jun-16       Apr-17
                                                                                                                                                 financing should be limited.
      We like REITs with a strong balance sheet as well as stable cash    financial and Eurozone crises are now looking for an exit through
  flow and dividend yields. Another primary consideration is the          the listed market route.                                                                                                             Source: European Public Real Estate Association
  experience and track record of management teams.
Outlook 2018 - Navigating the Australian real estate market - Savills Investment Management
OPPORTUNITIES
                                                                                                                                                                                                                                                                                                                                                                                                     OUTLOOK 2018
18                                                                                                                                                                                                                                                                                                                                                                                                     savillsim.com
                                                                                                                                                                                                                                                                                                                                                                                                                       19

in NORDIC RETAIL                                                                                                                                                                                                              How e-commerce is transforming retail                                            FIGURE 3:
                                                                                                                                                                                                                              store formats                                                                    European retail park prime rental growth (%)
                                                                                                                                                                           2017f               2018f             2019f
                                                                                                                                                                                                                              E-commerce disruption is having an impact
                                                                                                                                                                                                                                                                                                                      End 2016-18f               End 2018-21f                 End 2016-21f
                                                                                                                                                                    3.0                                                       on the way people shop and is threatening the
                                                                                                                                                                                                                              traditional retail store concept. Nevertheless,                                   4.0

                                                                                                                                                                    2.5                                                       some retail segments will be less sensitive than                                  3.5

                                                                                                                                                                                                                              others to rising trends in online shopping. For                                   3.0

                                                                                                                                                                                                                              example, value and convenience segments are
                                                                                                                                                                                                                                                                                                                2.5
                                                                                                                                                                    2.0 2017f                  2018f             2019f
                                                                                                                                                                                                                                                                                                                2.0

                                                                                                                                                                    3.0
                                                                                                                                                                                                                              more resilient, including retail parks offering                                   1.5
                                                                                                                                                                                                                                                                                                                        End 2016-18f             End 2018-21f                 End 2016-21f
                                                                                                                                                                    1.5                                                       bulky goods shopping, where shoppers generally                                    1.0
                                                                                                                                                                                                                                                                                                                4.0

                                                                                                                                                                    2.5
                                                                                                                                                                                                                              value convenience over shopping experience.                                       0.5
                                                                                                                                                                                                                                                                                                                3.5
                                                                                                                                                                    1.0                                                                                                                                         0.0
                                                                                                                                                                                                                                                                                                                3.0

                                                                                                                                                                    2.0
                                                                                                                                                                                                                              According to PMA, Sweden is set to experience                                     2.5
                                                                                                                                                                                                                                                                                                                        Sweden     Netherlands    Germany       Spain         France         Italy   Portugal     UK

                                                                                                                                                                    0.5                                                       the strongest retail park rental growth among                                     2.0
                                                                                                                                                                                                                                                                                                               Sources:    PMA, Savills Investment Management
                                                                                                                                                                                                                                                                                                                1.5 In store       Online
                                                                                                                                                                    1.5                                                       European countries over the next five years                                      Note: 'f' denotes forecast
                                                                                                                                                                    0.0
                                                                                                                                                                                                                              (figure 3). Furthermore, according to a global                                    1.0
                                                                                                                                                                                                                                                                                                               Books, music, movies & video games
                                                                                                                                                                             Denmark                       Finland                  Norway           Sweden                                                     0.5
                                                                                                                                                                    1.0                                                       survey by PricewaterhouseCoopers (PwC),                                          FIGURE  4:
                                                                                    FIGURE 1:                                                                                                                                 grocery, furniture and homeware; do-it-
                                                                                                                                                                                                                                                                                                                 0.0
                                                                                                                                                                                                                                                                                                               Consumer   electronics & computers
                                                                                                                                                                                                                                                                                                               Preferred
                                                                                                                                                                                                                                                                                                                     Swedenpurchase    method
                                                                                                                                                                                                                                                                                                                              Netherlands     (globalSpain
                                                                                                                                                                                                                                                                                                                                          Germany     survey)France                          Italy   Portugal     UK
                                                                                    Nordics: consumer spending forecast (% year on year)                                                                                      yourself/home improvement; and household
                                                                                                                                                                    0.5 EUR average spending/year                                                                                                              Clothing & footwear
                                                                                                                                                                                                                              appliances are the most resilient segments to                                             In store         Online
                                                                                           2017f            2018f               2019f                             1,200                                                                                                                                        Toys
                                                                                                                                                                     0.0                                                      e-commerce (figure 4).
                                                                                                                                                                                                                                          End 2016-18f         End 2018-21f          End 2016-21f
by PETER BROSTRÖM,                                                                   3.0                                                                                      Denmark                      Finland                       Norway                Sweden                                          Books,&music,
                                                                                                                                                                                                                                                                                                               Health  beautymovies & video games
                                                                                                                                                                                                                                                                                                                              (cosmetics)
                                                                                                                                                                  1,000
Nordic III Fund Manager,                                                                                                                                                                                                      Such structural changes in retail mean that factors
                                                                                                                                                                                                                                   4.0
                                                                                                                                                                                                                                                                                                               Consumer
                                                                                                                                                                                                                                                                                                               Sports    electronics & computers
                                                                                                                                                                                                                                                                                                                      equipment/outdoor
                                                                                     2.5                                                                                                                                            3.5
Savills Investment Management LLP
                                                                                                                                                                   800
                                                                                                                                                                                                                              like location,      consumer experience and quality of
                                                                                                                                                                           EUR average spending/year
                                                                                                                                                                                                                                    3.0                                                                        Clothing & footwear
                                                                                                                                                                                                                                                                                                               Household  appliances
                                                                                               2017f          2018f               2019f                                                                                       retail2.5premises are increasing in importance to both
                                                                                     2.0
                  ordic-based retail is benefitting from the region’s                                                                                             1,200
                                                                                                                                                                    600                                                       tenants
                                                                                                                                                                                                                                    2.0 and     consumers. The
                                                                                                                                                                                                                                            End 2016-18f       End trend
                                                                                                                                                                                                                                                                   2018-21ftowards eating
                                                                                                                                                                                                                                                                                      End 2016-21f             Toys
                                                                                                                                                                                                                                                                                                               Jewelery/watches

     N
                                                                                       3.0
                   strong economic and employment growth, with                       1.5                                                                                                                                      out has
                                                                                                                                                                                                                                    1.5
                                                                                                                                                                                                                                         led
                                                                                                                                                                                                                                       4.0
                                                                                                                                                                                                                                              to quickly  expanding   food   and beverage                      Health & beauty
                                                                                                                                                                                                                                                                                                               DIY/home        (cosmetics)
                                                                                                                                                                                                                                                                                                                         improvements
                                                                                                                                                                                                                              (F&B)3.5concepts, which, in turn, has resulted in
                                                                                                                                                                                                                                    1.0
                                                                                                                                                                  1,000
                   several international brands looking to expand in                   2.5                                                                          400
                                                                                                                                                                                                                                    0.5
                                                                                                                                                                                                                                                                                                               Sports equipment/outdoor
                   these markets. Sound demographics coupled with                    1.0                                                                                                                                      stronger
                                                                                                                                                                                                                                    0.0
                                                                                                                                                                                                                                       3.0 demand for space. The presence of creative
                                                                                                                                                                                                                                                                                                               Furniture & homeware

                   high population growth provide strong tailwinds. The                2.0
                                                                                                                                                                   800
                                                                                                                                                                   200                                                        F&B options         in retail parks and onSpain
                                                                                                                                                                                                                                       2.5 Sweden Netherlands Germany
                                                                                                                                                                                                                                                                              high streets
                                                                                                                                                                                                                                                                                    France       Italy      Portugal
                                                                                                                                                                                                                                                                                                               Grocery
                                                                                                                                                                                                                                                                                                                       UK
                                                                                                                                                                                                                                                                                                                 Household     appliances
                                                                                                                                                                                                                              motivates customers to dwell longer.
                                                                                     0.5                                                                                                                                               2.0
  economic recovery gap between Sweden and the rest of the Nordics                                                                                                    0
                                                                                                                                                                    600                                                              1.5In   store        Online                                               Jewelery/watches                                 0%      10%     20%    30%     40%   50%   60%   70%
                                                                                       1.5
  is expected to narrow as Denmark, Finland and Norway pick up pace.                 0.0                                                                                      UK        Germany        Nordics                   1.0
                                                                                                                                                                                                                  France Netherlands           Spain     Belgium    Italy
  Rapid population growth and improved consumer sentiment should be                            Denmark                  Finland                Norway                      Sweden                                             While    physical
                                                                                                                                                                                                                                  Books,
                                                                                                                                                                                                                                     0.5           stores& video
                                                                                                                                                                                                                                          music, movies      are offering
                                                                                                                                                                                                                                                                  games    more online                         DIY/home improvements
                                                                                                                                                                    400
  supportive of retail sales going forward.
                                                                                       1.0
                                                                                                                                                                                                                              solutions,
                                                                                                                                                                                                                                     0.0    online retailers are also establishing                             Furniture &UKhomeware
                                                                                                                                                                                                                                  Consumer    electronics
                                                                                                                                                                                                                                          Sweden          & computers
                                                                                                                                                                                                                                                    Netherlands  Germany   Spain  France            Italy    Portugal
                                                                                                                                                                    200
                                                                                                                                                                                                                              physical stores across Europe. Similarly, online-
                                                                                       0.5
                                                                                                                                                                                                                                  Clothing & footwear                                                          Grocery
                                                                                         EUR average spending/year                                                                                                            only retailers
                                                                                                                                                                                                                                         In store are seeking
                                                                                                                                                                                                                                                          Online to establish a store-
  The Nordic consumer                                                              1,2000.0
                                                                                                                                                                      0                                                       based
                                                                                                                                                                                                                                  Toyspresence to maximise synergy effects,                                                                                     0%      10%     20%    30%     40%   50%   60%   70%
                                                                                    FIGURE 2:
                                                                                           Denmark         Finland          Norway          UK
                                                                                                                                           Sweden                                          Germany     Nordics       France   Savills  reports.
                                                                                                                                                                                                                              Netherlands
                                                                                                                                                                                                                                    Books,  Spain     Belgium
                                                                                                                                                                                                                                             music, movies  & videoItaly
                                                                                                                                                                                                                                                                     games
                                                                                                                                                                                                                                  Health & beauty (cosmetics)                                                  Source: PwC Total Retail 2017 Global Survey
  The Nordics region is well-positioned for further growth in retail sales          Average online spending per year per capita (EUR, 2016)
                                                                                   1,000
                                                                                                                                                                                                                                   Consumer electronics & computers
  due to its positive economic and sociodemographic backdrop (figure                                                                                                                                                              Sports equipment/outdoor

  1). The success of brick-and-mortar retail will increasingly depend on            800        EUR average spending/year                                                                                                           Clothing & footwear
                                                                                                                                                                                                                                  Household appliances
  the experience and services offered in stores. Retailers are increasingly
  recognising that successful integration of physical stores and online
                                                                                    1,200
                                                                                    600                                                                                                                                           Recommendations
                                                                                                                                                                                                                                    Toys
                                                                                                                                                                                                                                  Jewelery/watches
                                                                                                                                                                                                                                    Health & beauty (cosmetics)
                                                                                                                                                                                                                                  DIY/home improvements
  offerings is crucial to stay competitive, which is resulting in a larger focus    1,000
                                                                                    400                                                                                                                                             Sports equipment/outdoor
  on omnichannel solutions.                                                                                                                                                                                                       Furniture &We
                                                                                                                                                                                                                                             homeware
                                                                                                                                                                                                                                                 recommend     targeting medium-sized                                                       The rapidly changing retail environment means
                                                                                      800
                                                                                    200
                                                                                                                                                                                                                                    1
                                                                                                                                                                                                                                   Household appliances
                                                                                                                                                                                                                                  Grocery regional centres     and neighbourhood schemes in                                        2        that the polarisation between successful and
  Despite the strong growth of e-commerce sales, the majority of Nordic                                                                                                                                                                      locations with good economic      foundations
                                                                                                                                                                                                                                                                                  30% 40% and                                               less successful retail formats will increase. The
                                                                                       600                                                                                                                                          Jewelery/watches
                                                                                       0                                                                                                                                                                            0%   10% 20%            50% 60% 70%
  retail sales still take place in physical stores. According to PostNord, the                  UK     Germany      Nordics      France Netherlands     Spain     Belgium       Italy                                               DIY/home sociodemographics.
                                                                                                                                                                                                                                               improvements         Such centres and schemes                                                renowned Swedish brand H&M, for example,
  Nordic e-commerce market ranks third in Europe in terms of average                   400                                                                                                                                                   offer a more enhanced shopping experience                                                      delivered weaker-than-expected sales in 2017,
                                                                                                                                                                                                                                    Furniture & homeware
  online spending per year per capita (figure 2). However, consumers                                                                                                                                                                         and attract footfall via F&B providers, leisure                                                believed to be partly due to a lack of successful
  across the demographic spectrum prefer to shop in store for social                   200                                                                                                                                          Grocery
                                                                                                                                                                                                                                             facilities and entertainment. Retail parks with                                                integration between online and physical store
  and entertainment experiences as well as dining and trialling products.                  0
                                                                                                                                                                                                                                             easily adapted space are 0%   10% 20% 30% 40% 50% 60% 70%
                                                                                                                                                                                                                                                                         particularly attractive,                                           offerings, resulting in planned store closures.
  Consumers, and particularly technology-savvy millennials, embrace                               UK     Germany      Nordics      France Netherlands     Spain     Belgium        Italy
                                                                                                                                                                                                                                             with Sweden expected to benefit most from prime                                                This highlights the importance of stock selection
  e-commerce, but as retailers evolve to meet consumer needs, physical                                                                                                                                                                       rental growth in this area.                                                                    for investors going forward. We recommend this
  shops continue to offer a multichannel experience that online platforms
                                                                                                                                                                                                                                                                                                                                            approach in key high street locations in major cities.
  alone cannot.                                                                     Sources: PMA, Savills Investment Management

                                                                                    Note: 'f' denotes forecast.
OUTLOOK 2018
20                                                                                                                                                                                                                                                                                                   savillsim.com
                                                                                                                                                                                                                                                                                                                            21

GENERATING
                                                                                                                                                       Structural shift                                               FIGURE 1:
                                                                                                                                                                                                                      UKIG Fund sector distribution
                                                                                                                                                           The fund shifted from 54.4% retail warehousing

ALPHA
                                                                                                                                                       to 42.0% industrial between 2014 and 2017 (figure 1).              Office        Retail Warehouse   Retail       Industrial         Foodstore          Alternative
                                                                                                                                                       The industrial sector has been favoured as changing                             1.7%
                                                                                                                                                       shopping habits have reduced the need for high street
                                                                                                                                                       and out-of-town retail space. At the same time, demand                  12.4%       12.2%
                                                                                                                                                                                                                                                                                           9.6%

RETURNS
                                                                                                                                                                                                                                                                          26.6%
                                                                                                                                                       for industrial space to service Internet retailing has           7.9%
                                                                                                                                                       increased, leading to rental growth. The fund has                                           11.4%
                                                                                                                                                                                                                                                                                                     16.9%

                                                                                                                                                       targeted the industrial sector to take advantage of this                    2014                                              2017
                                                                                                                                                       dynamic.                                                                                                                                        4.9%

                                                                                                                                                       Economic drivers                                                            54.4%                                             42%

                                                                                                                                                           Greater London and the southeast are the UK’s
                                                                                                                                                       economic powerhouse and create 38% of GDP, according
                                                                                                                                                                                                                      FIGURE 2:
                                                                                                                                                       to Oxford Economics. Currently, 47% of the fund is
                                                                                                                                                                                                                      UKIG Fund geographic allocation
                                                                                                                                                       invested in Greater London and the southeast, while three
                                                                                                                                                       years ago, only 5% was allocated there (figure 2).

                                                                                                                                                            The industrial sector plays a key role in the fund’s
by JAMIE PEARSON,                                                                                                                                      strategy within the southeast. Particularly in Greater
Fund Manager, UK Income and Growth Fund,                                                                                                               London, industrial land has been lost to alternative uses at
Savills Investment Management LLP                                                                                                                      an average rate of 100 hectares per annum for the last 16
                                                                                                                                                       years, benefitting from both increased demand and reduced
                                                                                                                                                       supply leading to exceptional rental and capital growth. The
                                                                                                                                                       fund’s London industrial assets increased in value by over                                                                          2014                  2017
                                                                                                                                                       18% during the 11 months to November 2017.                                                                        SCOTLA ND         5.4%                  2.5%

                                                                                                                                                                                                                                                                         NORTHWEST         7.6%                  11.7%

                      lpha is the risk-adjusted excess return above the                                                                                Infrastructure developments

         A
                      market or benchmark. In the capital markets,            Key terms and concepts                                                       Looking at the longer-term picture, the fund seeks                                                            YORKSHIRE         16.6%                 21.2%

                      alpha is the risk-adjusted excess return of                                                                                      to acquire assets in strategic locations where potential
                      common stocks above a benchmark such as the
                                                                              Alpha:                                                                   infrastructure developments could bring fundamental
                                                                                                                                                                                                                                                                    EA ST M IDLA NDS       6.7%                  0%

                      FTSE 100 Index, or the risk-adjusted excess                                                                                      change. Hounslow, which will benefit from Heathrow’s
     return of a portfolio of real estate investment trust (REIT) stocks      the excess return generated above what is necessary to compensate                                                                                                                     W EST M IDLA NDS       22.3%                 11.2%
                                                                                                                                                       third runway, and Dalston, where Crossrail 2 should
     above the European Public Real Estate Association REIT index.            for risk. Sources of alpha include asset management such as
                                                                                                                                                       drastically improve accessibility, are both locations                                                                  W A LES
                                                                              repositioning, lease optimisation and cost control. Alpha can also                                                                                                                                           0.0%                  1.9%
                                                                                                                                                       where the fund has invested in long-term plays. These
         In the commercial real estate market, alpha is the excess            arise when assets are purchased and disposed of.
                                                                                                                                                       buildings will likely deliver steady income in the short                                                             LONDON
                                                                                                                                                                                                                                                                                           4.7%                   27.3%
     return generated by the investment manager above what is
                                                                                                                                                       to medium term, with an aim to exploit higher-value
     needed to compensate for risk. This can be achieved by both
                                                                              Beta:                                                                    alternative uses in the long term.                                                                               SOUTHEA ST         1.7%                   21.9%
     hands-on control of the real estate asset as well as optimising
     allocations to certain sectors and geographic regions throughout         the generated portfolio return that can be attributed to overall                                                                                                                          SOUTHW EST         35.2%                  2.4%
     the property cycle.                                                      market returns. Exposure to beta is equivalent to exposure to
                                                                                                                                                                                                                      Source: Savills Investment Management
                                                                              systematic risk.

     The Savills IM UK Income and Growth Fund
         Launched in March 2010, the Savills IM UK Income and                 Idiosyncratic risk:
     Growth Fund’s (UKIG’s) core strategy is to generate income and           the risk that comes from investing in a single asset or real estate
     income growth. The fund is 70% focused on income and 30%                 segment. The level of idiosyncratic risk an individual asset possesses
     focused on growth. In the last three years, UKIG has undergone a

                                                                                                                                                         for 2018
                                                                              is highly dependent on its own unique characteristics.
     major strategic change to position itself to capture property cycle
     alpha returns.
                                                                              Systematic risk:
         In our view, the UK real estate market is past its cycle peak, and                                                                              Over the next few years, we expect income return to be the main driver of total returns. In what will be a more challenging
                                                                              the risk that comes from investing in any real estate asset within         environment, the fund is defensively positioned to continue to outperform. The fund’s low exposure to retail should be
     to position the fund defensively – where yield shift is not expected
                                                                              the market. The level of systematic risk that an individual asset          beneficial, as weaker retailers will face headwinds in the next year, while the focus on London and the southeast will
     to deliver performance – income is the major element of returns.
                                                                              possesses depends on how correlated it is with the overall market.         deliver income due to strong demand. However, with a bedrock of over 60% of income with guaranteed fixed or inflation-
     Each asset within the fund has a clear role to either deliver income
     or capital growth.                                                                                                                                  linked rental growth and 80% low-risk tenants, UKIG has relative certainty of performance in an uncertain economic
                                                                                                                                                         environment.
OUTLOOK 2018
22                                                                                                                                                                                                             savillsim.com
                                                                                                                                                                                                                                  23

                                                                                                      DEMAND                                               SUPPLY

EUROPEAN REAL
                                                                                                                                                                                              Property yields continue to drift
                                                                                                                                                                                              lower
                                                                                           Offices                                                                                                One and a half years after the UK
                                                                                                                                                                                              referendum on EU membership, the

ESTATE MARKET UPDATE:
                                                                                      Occupier activity in the European office              European office vacancy continued to              UK has regained its position as the
                                                                                  sector remained robust in the year to Q3 2017.        decrease in 2017. Looking ahead, JLL expects          biggest property market in Europe,
                                                                                  Leasing volumes remain strong across most             vacancy to stabilise between 7.5% and 8.0%,           reports Real Capital Analytics.

economy to trump politics
                                                                                  of Europe, but there is increasing evidence of        reflecting development pipeline increases in          We expect some total investment
                                                                                  corporates struggling to fulfil their office space    2018-19.                                              volumes to continue moderating this
                                                                                  requirements, especially in the Grade A segment                                                             year following a similar trend last
                                                                                  where availability is particularly low.                   Robust leasing activity in 2017 offset stronger   year. However, in 2017 cross-border
                                                                                                                                        development completions in most cities. In the        investment in Germany and the UK
                                                                                      Office take-up rose significantly in London       Eurozone, 17 out of 24 key markets recorded a         was at its highest recorded levels since
                                                                                  in 2017, with activity boosted by a few large         decrease in vacancy in Q3 2017, according to JLL.     2008, with a growing number of active
                                                                                  transactions. Overall office demand was strong,       This fall was particularly strong in Warsaw (Q3       Asian investors.
                                                                                  with London West End recording its highest            vacancy rate of 12.7%), Prague (7.6%), Budapest
                                                                                  quarterly leasing volume on record in Q3              (7.8%) and Amsterdam (7.2%). Dublin, Milan and            Perceptions of elevated geopolitical
                                he global economy is now growing at its fastest                                                                                                               uncertainty, capital protection measures

                   T
                                                                                  2017. The momentum in Paris continued, and            Stockholm all saw a minor rise in vacancy in Q3 on
                                pace since 2010, with the upturn becoming                                                                                                                     and economic risk could possibly
                                                                                  in Germany, the Big 5 office markets showed           the back of new supply.
                                increasingly synchronised across countries,                                                                                                                   constrain real estate investment across
                                                                                  no signs of weakening: Berlin and Munich saw
                                according to the Organisation for Economic                                                                                                                    Europe. However, recent volatility in
                                                                                  steady increases, while activity in Düsseldorf and       According to JLL, the completion dates of
                                Co-operation and Development (OECD).                                                                                                                          the bond market as well as stretched
                                                                                  Hamburg tailed off. Meanwhile, Q3 2017 was one        many planned schemes have been pushed back
               This long-awaited lift to global growth, supported by policy                                                                                                                   equity market valuations reinforce
                                                                                  of Frankfurt’s strongest quarters on record for the   to 2018. At 5.3 million square metres (sqm),
               stimulus, is being accompanied by solid employment gains, a                                                                                                                    the case for real estate investment, as
                                                                                  last 10 years. Other notable Q3 performances          the 2018 European development pipeline will
               moderate upturn in investment and a pick-up in trade growth.                                                                                                                   property can provide long and stable
                                                                                  include Madrid, Warsaw, Prague and Budapest.          be more significant, with most of the increase
                                                                                                                                        concentrated in London, Paris, Dublin, Berlin         income flows. Furthermore, real estate
                   Furthermore, the political landscape at the close of 2017                                                                                                                  potentially offers opportunities to add
                                                                                                                                        and Munich.
               was arguably much more positive than many would have                                                                                                                           value through active asset management.
               dared hope at the outset. Resurgent support for centre-ground
               parties in the Netherlands, France and Germany quelled                                                                                                                             Intense competition for limited
               various far-right threats.                                               Retail                                                                                                property supply in core markets
                                                                                                                                                                                              continues to exert downwards pressure
                                                                                      Following economic recovery and decreasing            The availability of quality retail space
                   In the European economic realm, IHS Markit’s index                                                                                                                         on yields, with prime yields declining
                                                                                  unemployment, European countries are                  on Europe’s best high streets and in its best
               of private-sector activity suggests that both services and                                                                                                                     in a number of markets in Q3 2017.
                                                                                  experiencing an increase in retail sales. However,    shopping centres is limited, but availability of
               manufacturing continue to strengthen, reaching levels not seen                                                                                                                 Despite Brexit-related uncertainty,
                                                                                  sales volume increases varied depending on            secondary space remains high. Shopping centre
               in more than six years. Current projections are for a continued                                                                                                                prime London office yields remained
                                                                                  factors such as political uncertainty, terrorist      development has been well below average for the
               modest recovery in economic growth over the next few years,                                                                                                                    stable.
                                                                                  incidents, CPI inflation and weather. Retail sales    past three years. According to Property Market
               aided by a combination of European Central Bank (ECB) asset
                                                                                  growth is forecast to remain positive in 2018.        Analysis (PMA), completions are expected to               There is sufficient momentum in
               purchases and strengthening labour markets.
                                                                                                                                        increase year on year in 2017 , especially in         the real estate market going into 2018
                                                                                      In many cases in 2017, retail sales volumes       Finland, Portugal, Italy and Spain.                   to result in prime yields, on average,
                   Consumer spending, supported by improving labour
                                                                                  were boosted by price discounting. Retailer                                                                 moving lower. However, we remain
               market conditions and low interest rates, is expected to
                                                                                  profit margins continue to be squeezed by cost            Retail park development has also been             mindful of heightened global political
               remain a key driver of economic growth. However, increasing
                                                                                  pressures as well as increasing competition,          rising and is expected to increase, notably in        risk, which could potentially upset the
               inflation is expected to temper household spending recovery.
                                                                                  especially from e-commerce. Retailers will            France. Small or outdated schemes are likewise        investment cycle.
               Countries forecast to enjoy the strongest consumer spending
                                                                                  likely remain cautious about expanding store          being future proofed via redevelopment and
               growth – largely because of either strong economic recovery                                                                                                                        Investor risk aversion as well as
                                                                                  networks and closing or disposing of non-             refurbishment.
               or solid consumer fundamentals – include Poland, Hungary,                                                                                                                      the economic environment of lower
                                                                                  performing stores and brands.
               the Czech Republic, Spain and Ireland, whereas Finland,                                                                                                                        growth and lower-for-longer interest
               Italy and the UK are projected to underperform.                                                                                                                                rates are forecast to result in a renewed
                                                                                                                                                                                              investor focus on prime real estate in
                                                                                         Industrial                                                                                           core markets. The risks to income are
                                                                                                                                                                                              likely to be higher for secondary than
                                                                                      Occupier demand for logistics space                   Speculative completions have increased,           prime property. Consequently, yields
                                                                                  remained strong in 2017 and is expected to            but there is a shortage of vacant, prime and          for secondary assets may also come
                                                                                  remain healthy, boosted by growing e-commerce.        modern space in Europe’s core logistics hubs.         under upwards pressure as a result of
                                                                                  With low availability of prime logistics space,       Urban logistics is set to be one of the most          lower growth forecasts, investors’ flight
                                                                                  demand is moving beyond core locations, and           significant growth markets of the next few years      to safety and expectations that lenders
                                                                                  build-to-suit activity is increasing. Urban           as e-commerce continues to grow across Europe.        will have less appetite to lend on such
                                                                                  logistics may start to see innovative approaches                                                            assets.
                                                                                  to address increasing space requirements,
                                                                                  potentially resulting in a multistage model for
                                                                                  logistics real estate.
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