OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK

EUROPEAN QUARTERLYCOMMERCIAL PROPERTY OUTLOOK Q3 2018

RESEARCH

FIGURE 1

European commercial property investment volumes

Source: Real Capital Analytics / Knight Frank

0

20

40

60

80

100

18Q318Q218Q117Q417Q317Q217Q116Q416Q316Q216Q115Q415Q315Q215Q114Q414Q314Q214Q113Q413Q313Q213Q112Q412Q312Q212Q111Q411Q311Q211Q110Q410Q3

€ bi

llion

Q3 Q4 Q1 Q2 Q3 Q42010 2011 2012 2013 2014 2015 2016 2017 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Q3 2018 TRENDSQuarter-on-quarter change: -19%Year-on-year change: -30%

2

FIGURE 2

European prime office yields Q3 2018

Source: Knight Frank Research

0%

2%

4%

6%

8%

10%

Mos

cow

Buc

hare

st

War

saw

Pra

gue

Lond

on C

ity

Bru

ssel

s

Par

is L

D

Mila

n

Dub

lin

Bar

celo

na

Mad

rid

Lond

on W

E

Am

ster

dam

Fran

kfur

t

Par

is C

BD

Ber

lin

Mun

ich

Q3 2018 TRENDSQuarter-on-quarter change: 0 bpsYear-on-year change: -17 bps

Please refer to the important notice at the end of this report

A total of €38.3bn was invested in European commercial property in Q3 2018. While this is down from €47.4bn invested in Q2 2018 pockets of strong growth were seen in Belgium (+46% yoy), Ireland (+36%) and Poland (+26%). What’s more, we believe that investment volumes could bounce back significantly during the fourth quarter. There remains a very significant weight of capital targeting European assets, half of it coming from cross-border sources. Momentum seems assured as a myriad of new funds are raised to gain exposure to European property, either through direct purchases or debt provision.

The result of this demand is evident in pricing. European prime office yields came under further downward pressure in Q3 falling 17 basis points annually to 4.2%, with the most significant falls being recorded in Frankfurt (-50bps) and Munich (-35bps). However, the number of cities experiencing double-digit falls has slowed and, on a quarterly basis, very few markets have seen any yield movement at all. The average European yield is at least 50 bps lower than the long-term average. Further yield hardening is unlikely in the upcoming months, and we expect yields to remain stable across the majority of markets in the first half of 2019.

With yields remaining at multi-year lows, the challenge, for investors, will be in finding opportunities that can deliver the required returns. As a consequence we expect ongoing interest in assets further up the risk curve, with next tier cities and a wider range of property types increasingly coming into focus.

Part of the current allure of continental property is the fact that for many markets the economic recovery is at an earlier stage than in the US, or the UK. Reflecting this, leasing activity continues to hold up well, buoyed by continued business expansion and falling unemployment. In Vienna for example, take-up increased 166% thanks to an increase in the number of lettings over 1,000 sq m compared to the previous year. Milan has seen occupier take-up rise 82% year-on-year. Overall, take-up across our survey area increased 22% year-on-year and we predict that a continuation of this strong demand will be reflected in Q4 2018 data.

The vacancy rate has fallen for the eighth consecutive year and now stands at an average of 6.3% across our survey area, 174bps below the five-year average. Companies are riding the economic wave and moving their offices to modern, conveniently located spaces and willing to absorb the higher rents.

As attention turns to 2019, what can we can expect for the year ahead? Consensus forecasts suggest that economic fundamentals should remain supportive of healthy occupational demand on the continent, with the agreement of a smooth Brexit transition a potential catalyst for renewed demand in the UK. From an investment perspective we foresee no let-up in the weight of global capital targeting continental assets in particular, but with yields unlikely to move meaningfully in either direction, we expect that investors will continue to push into new markets, explore different property types, and take a more flexible approach to stock selection.

EUROPEAN OUTLOOKDespite a slowdown in the investment market, the occupier market is still buoyant

RUSSIA

€0.6 bn-67%

POLAND

€4.7 bn+26%

NETHERLANDS

€8.9 bn-15%

FRANCE

€15.4 bn+3%

BELGIUM

€2.9 bn+46%

IRELAND

€2.2 bn+36%

GERMANY

€30.3 bn-15%

SWEDEN

€3.7 bn-36%

NORWAY

€1.7 bn-35.7%

FINLAND

€2.3 bn-60%

SWITZERLAND

€1.7 bn-32%

CZECHREPUBLIC

€0.9 bn-67%

AUSTRIA

€1.2 bn-64%

PORTUGAL

€2.1 bn+70%

SPAIN

€7.4 bn

-22%

UK

€37 bn-12%

ITALY

€3.7 bn-41%

LUXEMBOURG

€1.1 bn-8.6%

HUNGARY

€0.8 bn

-39%

ROMANIA

€0.6 bn-10%

DENMARK

€1.9 bn-22%

-17.0%Change on Q1-Q3 2017

€129 bnCommercial investment,

Q1-Q3 2018

EUROPE

EUROPEAN QUARTERLY Q3 2018 RESEARCH

FIGURE 5

European commercial property investment volumes, Q1-Q3 2018

Source: Real Capital Analytics / Knight Frank Research Investment volumes comprise office, retail, industrial and hotel sectors

Source: Knight Frank Research Changes calculated in local currencies

43

OFFICES

29.3%

SPECIALIST

37.0%

BARC

ELON

A

LISB

ON

MAD

RID

BERL

IN

PRAG

UE

DUBL

IN

MUN

ICH

FRAN

KFUR

T

BUCH

ARES

T

BUDA

PEST

WAR

SAW

AMST

ERDA

M

ASSUMING A 3-5 YEAR HOLD FROMTODAY WHICH OF THESE IS YOURPREFERRED INVESTMENT IN 2019?

COUNTRIES

RUSSIA

2.2%

POLAND

4.4%

OTHER CEE

4.4%

OTHER SOUTHERN EUROPE

4.4%

SPAIN

7.8%

FRANCE

11.1%

GERMANY

12.2%

BENELUX

14.4%

NORDICS

17.8%

UK

21.1%

SECTOR

INDUSTRIAL & DISTRIBUTION

21.7%

RETAIL

7.6%

ASSUMING A 3-5 YEAR HOLD FROM TODAYWHICH OF THESE IS YOUR PREFERREDINVESTMENT?

COUNTRIES SECTOR

INDUSTRIAL & DISTRIBUTION

OFFICES RETAIL HOTELS SPECIALIST

RUSSIA

POLAND

UK

OTHER SOUTHERN EUROPE

2.2%

4.4%

OTHER CEE

4.4%

4.4%

SPAIN

7.8%

FRANCE

11.1%

GERMANY

12.2%

BENELUX

14.4%

NORDICS

17.8%

21.1%

21.7%

29.3%

7.6%

4.3%

37.0%

HOTELS

4.3%

MARKET HIGHLIGHTSVIENNA

Many tenants are unwilling to absorb the higher rents after a long period of stable rents and few incentives.

WARSAW

There has been a further decrease in the vacancy rate despite the high volumes of office space currently under construction.

MUNICH

Office rents are still growing and total take-up in the Munich market is up 16% year-on-year; a historic high. Strong demand and low vacancy rates are leading to increasing rents.

MOSCOW

There is a shortage of good quality office stock in themost sought-after areas where the vacancy rate is below 6%. Occupiers are finding it increasingly difficult to find space larger than 20,000 sq m.

MILAN

Though Milan is still proving to be the most attractive destination for investments in Italy, the general italian economic weakness might affect investor demand in the coming quarters.PRAGUE

Approximately 38,200 sq m of modern office space was delivered to the Prague market in the third quarter of 2018, bringing the total modern office stock to 3.45 million sq m. New completions include four properties over three developments: Palmovka Open Park in Prague 8 with two buildings totalling 23,000 sq m, AFI Vokovice in Prague 6 with 12,200 sq m and the new Eurovia headquarters in Prague 4 with 3,000 sq m.

5

EUROPEAN QUARTERLY Q3 2018 RESEARCH

Commercial property prime rents and yields

Offices Logistics Shopping centres Retail warehousingCity Prime rents Prime yields Prime rents Prime yields Prime rents Prime yields Prime rents Prime yields (€/sq m/yr) (%) (€/sq m/yr) (%) (€/sq m/yr) (%) (€/sq m/yr) (%)

Amsterdam 410 5 3.50 6 85 4 5.00 6 1,000 4 4.75 4 N/A N/A

Barcelona 270 4 4.00 4 82 4 5.25 6 600 4 4.25 4 129 4 5.50 4Berlin 396 5 3.00 6 84 5 4.30 6 1,380 4 3.75 4 150 4 5.00 6Brussels 320 5 4.25 4 55 4 5.50 4 1,800 4 4.25 4 185 4 5.50 4Bucharest 222 5 7.50 4 48 4 8.25 4 720 4 7.25 4 120 5 9.50 6Dublin 673 4 4.00 4 105 5 5.25 4 3,500* 4 4.50 4 290 5 5.25 4Edinburgh 420 5 5.00 4 102 5 N/A 3,143* 5 5.50 5 364 4 5.75 4Frankfurt 492 5 3.10 4 80 4 4.25 5 1,560 4 4.00 4 170 4 5.00 6Geneva 661 4 3.00 4 200 5 5.50 4 1,140 4 4.00 4 180 4 5.00 4London 1,217 (WE)4 852 (City)43.50 (WE)4 4.25 (City)4 205 5 4.00 6 5,984* 5 4.75 5 N/A N/AMadrid 366 4 3.75 4 63 4 5.25 6 600 4 4.25 4 156 4 5.25 4Milan 570 4 4.00 4 55 5 6.50 4 900 5 5.00 4 300 4 6.00 4Moscow 693 4 9.50 4 74 5 11.00 4 3,500 4 10.25 4 N/A N/A

Munich 443 5 2.80 6 82 6 4.50 6 1,900 4 3.75 4 N/A N/A

Paris 840 (CBD)5500 (LD)43.00 (CBD)6 4.00 (LD)6 120 4 4.75 6 2,000 6 4.25 4 180 4 5.00 4Prague 246 4 4.80 6 54 5 6.00 4 1,560 4 4.75 4 126 5 6.50 4Vienna 309 6 3.75 6 72 4 5.50 6 1,320 4 4.00 6 168 4 5.85 4Warsaw 288 4 5.25 4 60 4 6.75 4 1,200 6 5.50 4 132 4 7.50 4Zurich 705 4 3.00 4 250 5 5.25 4 1,322 4 4.00 4 171 4 5.00 4

Indicative prime yields, as quoted locally, based upon a hypothetical Grade A unit. Office rents are for prime city area Grade A space, 2,000 sq m. Shopping Centre rents are based on prime covered shopping malls, quoted on best position, 100 sq m units. Retail Warehouse rents are for units of 1-5,000 sq m located in purpose built parks. Typical Retail Warehouse schemes vary between countries. Logistics rents are for prime industrial space of units over 5,000 sq m. The data above is provided for general reference purposes only. Local market conditions will vary. *Zoned/weighted figure. Arrows provide a broad indication of recent movements and the short-term outlook for prime rents and yields. London office data is quoted for the West End (WE) and City (C) submarkets.

Source: Knight Frank Research

Rents Bottoming Rental Growth – SlowingRental Growth – Accelerating Rents Declining

GenevaLondon CityWarsawZurich

AmsterdamBarcelonaMadrid MoscowPragueLondon West End

FIGURE 6

Prime office rental cycle

The above diagram is intended to provide a comparative guide to the current positions of European prime office markets in their rental cycles. Markets will move through their cycles at different speeds and, sometimes, in different directions. The positions indicated in the diagram do not constitute formal forecasts of future rental trends.

BerlinBrusselsBucharestDublin FrankfurtMunichParis CBDParis - La Defense

Milan Vienna

EUROPEAN MARKET INDICATORSThe average European office yield is at least 50 bps lower than the long-term average. The majority of yields are expected to remain stable into the first half of 2019.

Knight Frank Research Reports are available at KnightFrank.com/Research

Important Notice

© Knight Frank LLP 2018 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

EUROPEAN RESEARCH

William Matthews Head of Commercial Research +44 20 3909 6842 william.matthews@knightfrank.com

Alice Marwick Associate, International Research +44 20 3866 7843 alice.marwick@knightfrank.com

EUROPE

Chris Bell Managing Director, Europe +44 20 7629 8171 chris.bell@knightfrank.com

Andrew Sim Head of Global Capital Markets +44 20 7629 8171 andrew.sim@knightfrank.com

Nick Powlesland Head of European Valuations +44 20 7629 8171 nick.powlesland@knightfrank.com

Colin Fitzgerald Head of International Occupier Services +44 20 7629 8171 colin.fitzgerald@knightfrank.com

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