OUTLOOK 2018UK commerc ia l proper ty

D r Wa l t e r B o e t t c h e r, C h i e f P r o p e r t y E c o n o m i s t

E u r o p e a n I n v e s t m e n t B r i e f i n g

P r o p e r t y E U C o n f e r e n c e , 1 4 t h J u n e 2 0 1 8

-6%

-4%

-2%

0%

2%

4%

6%

8%

-30%

-20%

-10%

0%

10%

20%

30%

40%

De

c-8

1

Ja

n-8

6

Ja

n-9

0

Ja

n-9

4

Ja

n-9

8

Ja

n-0

2

Ja

n-0

6

Ja

n-1

0

Ja

n-1

4

Ja

n-1

8

Ja

n-2

2

UK Property Returns and Real GDP

Total Return GDP real

Sources; MSCI/IPD, Oxford Economics

UK PROPERTY & ECONOMY – INTRINSICALLY CYCLICAL

• Intrinsically cyclical

• Led by occupier market and

rental growth expectations

• Total returns leads GDP

performance by one year

• Forecasts all revert to

mean, which means in some

respects they are meaningless

• UK economic profile

improving, property returns

lagging?

R = 0.71 (GDP 1 year lag)

Forecast

HOW DOES THE UK ECONOMY STACK UP?

0.0%

1.0%

2.0%

3.0%

2017 2018 2019 2020 2021 2022

Economic growth forecasts

Eurozone United Kingdom

Source: Oxford Economics, May 2018

0.0%

1.0%

2.0%

3.0%

Economic growth forecasts%pa annualised 2018 to 2022

Source: Oxford Economics, May 2018

Source:

Oxford Economics

-10%

-5%

0%

5%

10%

15%

Ja

pan

Ru

ssia

Pola

nd

Ge

rman

y

Sp

ain

Italy

Eu

rozo

ne

Ch

ina

Fra

nce

UK

US

Ca

nad

a

Population

change

2018 to 2028

Aged 15 – 64

Total

DEMOGRAPHIC GROWTH IS THE KEY DRIVER

Oxford Street

Economic performance linked to population growth

Sources:

ONS, Bank of England

Sterling & EU

net migration

to UK

Sterling index

Net migration

IS BRITAIN AT RISK FROM FALLING MIGRATION?

70

75

80

85

90

95

100

0

50

100

150

200

250

Dec 0

7

Dec 0

8

Dec 0

9

De

c 1

0

Dec 1

1

Dec 1

2

Dec 1

3

Dec 1

4

Dec 1

5

Dec 1

6

Dec-1

7

‘000s YTD 2005 = 100

Source:

Oxford Economics

Population

change

2018 to 2028

Aged 15 – 64

Total

DEMOGRAPHIC GROWTH IS A KEY REGIONAL DRIVER

Oxford Street

Economic performance linked to servicing population growth

-4%

0%

4%

8%

12%

Liv

erp

oo

l

Le

ed

s

Gla

sg

ow

Man

ch

este

r

UK

Som

ers

et

Birm

ingh

am

Bristo

l

Lo

nd

on

Edin

bu

rgh

REGIONS OUTPERFORMING LONDON

50

55

60

Regional monthly PMI average

Aug 13 to Jun 16 Since Aug 16

Data through April 2018

Strong

Expansion

Expansion

0

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Office leasing take-upLondon

Big Six CBDs

Million sq ft per annum

UK OCCUPIER MARKETS ROBUST

Source: Colliers International

10 year average

10 year average

Confidential – Colliers International 2014

-2

0

2

4

6

8

10

2017 2018 2019 2020 2021 2022

IPF UK Consensus Forecasts

Total returns

Capital growth

Rental growth

Source: IPF, May 2018

UK COMMERICAL PROPERTY RETURN EXPECTATIONS

Actual

• Annualised returns since 1981 is

9.2%

• Remarkable agreement among

forecasters: IPF (4.8% pa), Colliers

(5.1% pa) over 2018 to 2022.

• Low volatility and low yields a

function of weight of global capital

and ongoing ‘search for yield’

• Suggests an imminent step up in

risk appetite?

• Global weight of capital defining force

($100+ trillion) 1% = $1 trillion

• Global interest rate still very low. ‘Baby

boomers’ desperate for yield

• Real estate allocations to rise further

beyond 10% in 2018

Institutional allocations to real estate

2013 8.9%

2014 9.4%

2015 9.6%

2016 9.9%

2017 10.1%

2018e 10.3%Source: IPE, Colliers International

DEMOGRAPHIC GROWTH & WEIGHT OF GLOBAL CAPITAL

$0

$20

$40

$60

$80

$100

2013 2014 2015 2016 2017

Institutional¹ Private Equity Sovereign Wealth

Source: ¹IPE ((Top 400 Institutional funds), PERE, SWFI

Global fund assets under management

tr

ll io

n s

£0

£20

£40

£60

£80

£100

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

Q3

15

Q4

15

Q1

16

Q2

16

Q3 1

6

Q4

16

Q1

17

Q2

17

Q3

17

Q4

17

Q1

18

b i l l i o n s UK direct commercial property investment

Ex-Central London Central London

INVESTMENT PATTERN - CYCLICAL OR POLIT ICAL?

Cyclical peak

Source: Property Data Ltd

Weight of capital

anti-cyclical

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-£15

-£10

-£5

£0

£5

£10

£15

Q1

01

Q1 0

2

Q1 0

3

Q1 0

4

Q1 0

5

Q1 0

6

Q1 0

7

Q1 0

8

Q1 0

9

Q1 1

0

Q1 1

1

Q1 1

2

Q1 1

3

Q1 1

4

Q1 1

5

Q1 1

6

Q1 1

7

Q1 1

8

Net value of direct investment

Overseas Investors

UK Institution

Private Investors

Equivalent yield (%)

billionsPercent

INSTITUTIONAL INVESTMENT – CYCLICAL OR POLIT ICAL?

Source: Property Data Ltd, Colliers International

YIELD COMPRESSION CONTINUES

-1.00

-0.50

-

0.50

1.00

Initial yield movements

Since 2007Last yearLast quarter

Source: MSCI/IPD Quarterly

A few observations

• Weight of global capital driving yields lower

• Investor sensitivity to structural change may

explain why retail has not compressed as

much as other sectors, especially industrial

• Hotels and Other (alternatives) compression

may be linked to greater familiarity with

properties that are intrinsically linked to

specific operations/operators

• All property compression is in line with the

2007 peak. This is remarkable given that the

property sector is not overleveraged

REIT PERFORMANCE CONSISTENT WITH STORY

60

80

100

120

140

160

UK Real Estate Investment Trusts

SEGRO (Industrial)

NRR (Retail)

REGIONAL REIT (ex-M25)

DERWENT (London Offices)

Investing.com 5th Jun 2018

( 100 = June 1, 2016 )

Jun 16 Jun 17 Jun 18

UK MARKET STILL UNLEVERAGED

-15%

-10%

-5%

0%

5%

10%

15%

-£15

-£10

-£5

£0

£5

£10

£15

Q1-9

4

Q1-9

8

Q1-0

2

Q1-0

6

Q1-1

0

Q1-1

4

Q1-1

8

% All commerical lending (RHS)

Source: Bank of England

Net lending to UK commercial property

billions

-£6

-£4

-£2

£0

£2

£4

£6

12-M

ar

13-M

ar

14-M

ar

15-M

ar

16-M

ar

17-M

ar

18-M

ar

Construction Development

Commercial buildings Domestic buildings

Lending to construction and development

(12 month rolling total)billions

Source: British Bankers Association

INTEREST RATE ENVIRONMENT REMAIN SUPPORTIVE

0%

2%

4%

6%

8%

10%

May-2

008

May-2

009

May-2

010

May-2

011

May-2

012

May-2

013

May-2

014

May-2

015

May-2

016

May-2

017

May-2

018

All property equivalent yield

10Y gilt yield

FTSE 100 yield

Comparative yields

Source: Haver, MSCI

450

bps

Confidential – Colliers International 2016

TRANSITION TO A NEW NORMAL?

-5%

0%

5%

10%

15%

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

10 year government bonds

UK

US

EZ

Japan

Source: Oxford Economics (June 2018)

Forecast

• Forecast horizon suggests

very slow transition to new

normal

• The new normal about 100

bps lower than old normal?

• Lower bond yields will support

lower property yields

• US to peak in 2021

• UK to peak in 2024

• Japan peaks in 2025

• EZ to peak in 2030

Confidential – Colliers International 2016

Factors Description ¹Long term effect on rates

Demographic aging Reduced labour pool lowering economic growth potential

Increased savings (‘savings glut’) & demand for interest

↓100 bps+

↓25 bps

Quantitative easing Impact primarily on long-term bond rates ↓100 bps (US)

Slow productivity growth Undermining economic growth potential ↓80 bps

Rising debt margins Base rates compensate for increased borrowing costs ↓70 bps

Shortage of ‘safe’ assets Lack of ‘safe haven;’ assets globally ↓50 bps (US)

Capital goods price falls Impact of globalisation and free trade ↓50 bps

Income inequality Wealthy have higher savings rate ↓45 bps

Fall in public investment Constrained budgets limit fiscal economic stimulus ↓20 bps

¹These numbers are indicative only, interpreted from OE’s compilation of values from numerous academic studies.

Source: Oxford Economics, Research Briefing 28 October 2016.

BOND RATES LOWER FOR LONGER

Walter BoettcherResearch & Forecasting Mobile +44 7824 691586walter.boettcher@colliers.com

• @Colliers_UK