1. © University of Reading 2006www.reading.ac. ukNovember 24, 2015 The Changing Location Dynamics of Real Estate Investing: Some Evidence from European Locations. Éamonn D’Arcy, School of Real Estate and Planning, University of Reading Sotiris Tsolacos, Property & Portfolio Research, London

2. 2 Introduction Over the last two decades the fundamental characteristics of non- residential real estate investment markets in Europe have undergone significant changes –expanded range of actors and menu of product choices –unparallel growth in investment volumes €227 bn 2006 €246 bn 2007 –shift from domestic towards cross-border strategies 48% 2006 55% 2007

3. 3 Introduction Strong a priori reasons to suggest that recent real estate capital flows in Europe have been spread over a wider range of investment locations –greater diversity of players, especially on the indirect side, –a more focused approach to the construction of cross-border investment strategies based on the pursuit of return opportunities and diversification potential –significantly better product and performance information for a wider range of locations –very few established centers have experienced significant levels of oversupply –Yield convergence across some very diverse locations

4. 4 Introduction This research has a number of objects –Establish systematically the stylised facts of recent European investments cycles –Identify the principal drivers and their characteristics and how these differ between cycles –Assess principal market impacts and their implications Core locations Secondary Locations Differences in Product Characteristics between locations Insights into the location dynamics of investing Insights into issues of pricing and market adjustment User and Investment Market Linkages

5. 5 European Investment Market Context Over the last two decades European Real Estate markets have experienced three distinct cycles of investment activity –1988-92 - 5 years (Cycle differences) –1998-2001 – 4 years –2004-2008 – 5 years Important to examine drivers, characteristics and principal market implications

6. 6 Drivers General Arguments –Return opportunities –Diversification Potential –Modern Portfolio Theory –Capital Scarcity Cycle specific

7. Investment Cycles Drivers 1988-19921998-20012004-2008 Structural Change in Investment Markets Deregulation of Financial Markets -investment flows Greater diversity of European investment players Extreme liquidity conditions in global real estate capital markets -Europe now the most ‘ global ’ region in terms of real estate capital flows -Capital flows at unprecedented levels 1987 Equity Market Crash – New capital inflows to real estate Emergence of a number of European indirect investment players -key role of German-opened ended funds Explosive growth in European non- listed indirect investment vehicles Internationalisation of capital flows – US, Japan European Cross-Border – Dutch, Swedish Diversion of US investment flows to Europe as a result of the Asian Financial Crises New European REIT Regimes -France -Italy -UK -Germany Behavior of Institutional Investors Structural Change in specific Investment Markets -France internationalisation -CEE Improvements in institutional framework for investing Structural Change in specific Investment Markets -Germany, Nordic Countries internationalisation - CEE Attracts significant investment flows -Southern Europe removal of currency risk -emergence of new regional cross- border players Better performance and market information -IPD European Universe -Global/Regional Delivery platforms in Real Estate Services Better performance information on – listed and non-listed real estate EPRA,INREV - improved quality of market analysis Role of specialist real estate analysts

8. Investment Cycles Drivers 1988-19921998-20012004-2008 Economic growth and change Very positive Economic growth in both core and peripheral countries Economic RecoveryVery positive Economic growth especially in peripheral countries Structural change in the composition of employment - new space requirements Key growth in business and financial services activity Continued strong growth in business and financial services activity Micro-chip revolution ‘ new economy ’ tenants Policy and Politics Lead-up to EU single market programme -free movement of capital Implementation of Single Market Programme Introduction of the ‘ Euro ’ from 2001 First Reform of EU Structural Funds Second Structural Fund Programme EU enlargements in 2004 and 2007 Collapse of communism in Eastern Europe Movement towards monetary union and single currency More intensive place marketing with a clear focus on attracting real estate investment flows Headline Regeneration and key events RegenerationRegeneration and key events

9. 9 1988-92 Market Impacts –Investments strategies predominately direct reflecting the characteristics of the investors involved –Focus on key financial and business centres Again reflects investor characteristics Investment style exclusively ‘core’ or ‘core +’ –Problems of over supply in core markets – made worse by poor economics conditions Four year plus supply pipelines – London, Paris, Madrid –Impacts on core markets more concentrated by a lack of viable indirect investment opportunities –Performance and Market Information constraints for non-core markets also a key factor in concentrating flows –Cycle Timing Differences UK vs. Continental Europe

10. 10 1998-2001 Market Impacts –Investment flows less concentrated in core Markets Reflects greater diversity of players and strategies combined with better market information –More markets becoming significant recipients of cross-border investment flows –Supply pipeline better balanced in most core markets –Clear evidence of structural change in European real estate investment markets with a wider range of viable investment objectives accommodated. –Cycle Timing Differences with CEE Markets

11. 11 2004-2008 Market Impacts –Record investment volumes without significant oversupply in most markets (Frankfurt an exception but….) –CEE locations are major recipients of investment flows for the first time €12.7bn in 2006 (2000 €0.4bn) –Yield compression and convergence –No Timing Differences –A more diverse and complex investment market Expanded range of objectives and viable strategies Greater diversity of players and locations By 2007 the majority of flows are cross- border –Sustainability of players, locations post 2007?

12. 12 Empirical Analysis Initially to focus on the last cycle Strong evidence to suggest significant changes in the location dynamics of real estate investing in Europe. How to best test examine research objectives Definition of core and secondary locations Date Sources –Market reports + Publicly available information compiled by PPR –Real Capital Analytics (RCA) Data Set (some deficiencies in European Coverage). –DTZ Money into Property – JLL/LIM Capital Flows

13. 13 European Capital Flows Source: DTZ Research

14. 14 European investment volumes 2000-2008 by origin

15. 15 Investment Volumes by Country 2004-08 Source: DTZ Research

16. Office yield convergence Note: Yields are average with the exception of Bratislava and Bucharest where prime yields are reported Source: PPR

17. 17 European Fund Launches by Style Source: INREV Core Value-Added Opportunity

18. 18 Deviations of office total returns from trend Source: PPR Re-pricing expected Non-synchronized cycles (%)

19. 19 Average office yield spreads (bps) Source: PPR (respective city in relation to London City)

20. 20 Estimates of premia in CEE office markets (%) Source: PPR Investors consider markets risky Confident investors

21. 21 Future Work In terms of the most recent cycle –Explore the characteristics of both the recipient locations and the investment market actors involved. –Assess the implications for the competitiveness of the locations involved and at a more general level for the structure of European real estate investment markets. Work to achieving wider research objectives outlined Contribution to a better understating of the market implications of periods of high liquidity Comments, Observations, Questions very welcome?