savills.com

Southern Europe Investment Briefing

Eri Mitsostergiou - European Research Director

September 2016

Agenda

Southern European (SE)

markets overview

Economy

CRE Investment activity

Sectors

Players

Opportunities and risks

Spain

Italy

Greece

Portugal

Economy – Spain stands out

Strongest growth in Spain despite political

uncertainty – improving labour market and

consumer sentiment

Weak growth in Italy due to political risk

and fragile banking sector

Austerity prolongs recession in Greece

Slow growth and consumption in Portugal

Focus Economics

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Gre

ece

Italy

Fin

land

Port

ugal

Belg

ium

Fra

nce

Austr

iaN

eth

erlands

Germ

any

Esto

nia

Slo

venia

Cypru

sLatv

iaLithuania

Spain

Slo

vakia

Luxem

bourg

Malta

Irela

nd

GDP annual variation % 2016

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Gre

ece

Belg

ium

Fin

land

Italy

Austr

ia

Neth

erlands

Slo

venia

Fra

nce

Cypru

s

Germ

any

Port

ugal

Luxem

bourg

Slo

vakia

Spain

Latv

ia

Irela

nd

Esto

nia

Malta

Lithuania

Consumption annual % variation 2016

SE CRE investment activity - holds good

Generally correlated with rest of Europe

Investors avoided PIGS after the GFC

But CRE investment in SE picked up fast

since 2013

In 2015 was almost €18bn up 27% yoy

In H1 2016 was almost €7bn and expected

to match last year’s level

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-

50,000

100,000

150,000

200,000

250,000

-

5,000

10,000

15,000

20,000

25,000

€m

illio

n

S Europe investment vs Total

SE H1 SE H2 Total EU15

27% -2%

18% -18%

Spain is the largest market

Spain is the largest market

In H1 16 activity was 20%

above the LTA in Spain and

40% in Italy

However in the European

context, SE still accounts for

only 7% of the total activity

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€0.5

€6.8

€2.4

€8.3

S Europe investment by country 2015

Greece Italy Portugal Spain

4% 6% 6% 3% 6% 6% 6% 6% 6% 7%

86% 75% 65% 73% 71% 69% 74% 72% 74% 65%

10% 19% 29% 24% 23% 26% 20% 22% 21% 27%

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Share of S Europe commercial investment

S Europe Core Europe Rest of Europe

Higher allocations in retail driven by Xborder players

Prime regional shopping

centres and prime high

street units in strong

demand (40% yoy in IT)

Logistics is rising (34% yoy

in ES)

Prime offices in the capitals

always in demand but hard

to find

Xborder investors dominate

the scene directly or through

REITs in Spain (Socimi).

Importance of national

investors in Italy is rising

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49%47%

Grand Total

Domestic Investment %

Cross border Investment %

30%

66%

S Europe

46% 46%29%

22% 26%43%

11% 6% 15%20% 22% 13%

0%

20%

40%

60%

80%

100%

EU Italy Spain

Investment by sector 2016

Offices Retail Industrial Other

EU and US players dominate, slowdown from Asia/ME

EU players account for 80%

of the activity in Italy, US 4%

and ME 10%

US money leads the activity

in Spain, drop from ME/Asia

Demand is there for the right

type of product – lack of

supply

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42%

31%

10%

10%

7%

SE investment by investor origin 2015

EU US AsiaPac Middle Eastern Other/Unknown

56%30%

3% 4%7%

SE investment by investor origin 2016

EU US AsiaPac Middle Eastern Other/Unknown

Why SE? Economic recovery

Bail outs, austerity and reforms started paying

off, slowdown of recession in 2013 return to positive

growth in 2014

Significant reduction of country risk reflected in low

bond yields

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-10

-8

-6

-4

-2

0

2

4

6

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP % annual variation

Greece Italy Portugal Spain

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

10-year bond yield

Greece Italy Portugal Spain

Why SE? Attractive yield gap

Core vs periphery yield gap widened

dramatically by 2012 to over 200 bps

compared to a 114 LTA. Back to LTA

now.

Positive yield gap with previous peak

yield compression prospects.

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0

50

100

150

200

250

300

06 Q2

06 Q4

07 Q2

07 Q4

08 Q2

08 Q4

09 Q2

09 Q4

10 Q2

10 Q4

11 Q2

11 Q4

12 Q2

12 Q4

13 Q2

13 Q4

14 Q2

14 Q4

15 Q2

15 Q4

16 Q2

Periphery vs Core yields

Core vs Periphery SC yield gap Core vs Periphery CBD office yield gap

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

01 Q1

01 Q4

02 Q3

03 Q2

04 Q1

04 Q4

05 Q3

06 Q2

07 Q1

07 Q4

08 Q3

09 Q2

10 Q1

10 Q4

11 Q3

12 Q2

13 Q1

13 Q4

14 Q3

15 Q2

16 Q1

Prime CBD office yields

Athens Barcelona Lisbon Madrid Milan

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

IPD/MSCI Total return

Italy Spain Germany France

Why SE? Attractive returns

S European prime yields still more

attractive compared to core

Despite the rapid yield compression

yield differential of prime assets with

risk-free rate (10y bonds) remains

attractive

Yield gap with previous peak mostly

closed. Yields to stabilise this year.

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Risks – Slow economic recovery

Weak economic growth

High youth unemployment

Ageing population

KPMG

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GDP % annual variation

Greece Italy Portugal Spain

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Malta

Austr

ia

Germ

any

Esto

nia

Neth

erlands

Luxem

bourg

Irela

nd

Belg

ium

Lithuania

Slo

venia

Fin

land

Latv

ia

Fra

nce

Slo

vakia

Italy

Port

ugal

Cypru

s

Spain

Gre

ece

Unemployment % active population 2016

Risks – The burden of NPLs on banks

Spain the only country where NPL ratio is

down, first to create bad bank – SAREB

New institutional framework in Greece

attracts demand from international loan

management industry

In Italy Atlante 2 private equity fund set up

to buy exclusively NPL’s. The recovery of

the real estate market will boost NPL

volumes in Italy.

Three of Italy’s largest

banks, UniCredit, Intesa Sanpaolo, and

MPS, have established internal bad loan

divisions to house non-core assets and

have set out deleveraging

strategies, which include NPL sales

KPMG

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Greece Italy Portugal Spain

NPL ratios

2013 2015

Risks – Politics

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Outlook / Opportunities - Retail

Consumer spending growth –

highest in ES, positive in PT and

IT, slow in GR

Retail parks – evolution of the

concept – redevelopment

opportunities, rental growth

prospects

Shopping centres - Undersupplied

regions – new/re developments

ES, IT, PT, GR

High streets – secondary cities –

strong tourist destinations in IT, ES

(Venice, Florence, Bologna, Turin), 8

0% yoy rise

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Greece Italy Portugal Spain Average Europe

Consumption annual variation

2016 2017 2018

Outlook / Opportunities - Offices

Improving fundamentals – rising take

up, low supply, falling vacancies

30% yoy rise in Madrid

Good rental growth potential (Madrid

and Barcelona top performers)

4% yoy rental growth in Madrid

30-40% below peak

Refurbishments in CBD

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

Warsaw

Moscow

Oslo

Zurich

Athens

Prague

Helsinki

Brussels

Rome

Vienna

Copenhagen

Luxembourg

Lyon

Amsterdam

Budapest

Lisbon

Milan

Paris

Frankfurt

Hamburg

London

Munich

Berlin

Stockholm

Dublin

Barcelona

Madrid

average pa

Axi

s Ti

tle

Prime office rental growth 2016-2018

Outlook / Opportunities - Other

Tourism

Hotels and second homes in

tourist destinations (ES, GR)

Logistics

Ecommerce creates new

opportunities in the sector

In H1 16 34% rise yoy in Spain

(€450m), 80% in Italy (€200m)

Privatisation of public assets

European Travel Commission

0

1

2

3

4

5

6

7

8

2014 2015 2016 2017 2018

Tourist numbers growth

Europe Northern Europe

Southern Med Europe Western Europe

Conclusions

Economic recovery in SE steady but slow. Spain outperforms

More reforms needed to drive economic growth and reduce public debt. Politics pivotal to

economic recovery

Measures to speed up the deleveraging of the banking sector, improving investor

sentiment

CRE investment is strong driven by Xborder investors and retail

Most of yield compression is done, spread with bonds remains attractive

Opportunities through asset management and rental growth

offices and retail parks,

refurbishments/redevelopment of offices and shopping centres,

ecommerce/logistics synergies,

high street in tourist destinations,

tourism facilities

Thank you!