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@ 2017 Deloite Financial Advisory1 of 16

The Office Property Handbook 3.0Investment & Financing Keys

Spain 2018

Financial Advisory I Real Estate

January 2018

EXECUTIVE SUMMARY


► Vacancy Rate in Madrid (10.2%) and Barcelona (7.9%) decreasing at a lower pace than expected.

► New Supply & Refurbishments continues to increase. 236,000 sqm recently delivered in 2017 in Madrid and Barcelona.

► Take-Up in Madrid and Barcelona increased by 11% and 7%, respectively.

► BCN take-up in Q4 2017 decreased in YoY var. However, take-up figures in H2 2017 are in line with take-up reached in H2 2016.

► Thanks to public sector companies (Government) Madrid take-up grew in 2017. This segment accounted for 14% of total annual take-up in the city.

► Prime Rent is experiencing a positive trend Both face rents and net effective rents improved in CBD.

► GDP growth: +3.1% 2017 (+2.5% 2018F)

► Unemployment rate (2017) decreasing by 11.0% (CAGR) since 2013.

► Exports growth: +3.0% YoY Var.

► Increase in Business Confidence Index: +3.0% (Q4 16 –Q4 17)

► Creation of Companies Index: +1.5% in YoY Var. The performance of the different region-cities has been heterogeneous.

2Supply &

Demand

3OfficeInvestment Market 5 Key Investment

Indicators

The Office Property Handbook 3.0Spain 2018

EXECUTIVE SUMMARY

Market Overview

1Strong growth but some

uncertainties remain

2017-2018

► EMEA region represents 35% of the worldwide Office Investment volume. Office Investment in Europe grew by 9% in 2017.

► Office Investment volume decreased by 53% (€2,295M YoY Var.) in Spain during 2017 and accounted for 21% of total non-residential Real Estate investment.

► The overall high valuation of non-prime office properties is the main reason of the lower investment activity in 2017. Failed divestment processes are leading to refinancing strategies to profit from the lower borrowing cost and the higher LTVs currently achievable.

4Financing Activity

► German lenders are back and expect to take the lead for low LTVs

senior loan facilities.

► Spanish banks forced to movetowards value added financing.

► More lenders capable to act as bookrunners in 2018.

► Borrowing cost reached its lowestpoint since 2007.

► Alternative capital providers eagerto structure junior or mezzaninefinancing tranches.

Key Indicators by areas in 2017

Rent (€/sqm/mth) (YoY Var. %) Cap. Value (€/sqm) (YoY Var. %)

Madrid Barcelona

CB

DD

EC

Max.

Avg.

Min.

Max.

Avg.

Min.

Cap.Value

13,292 (+5%)

10,457 (+13%)

6,900 (+11%)

5,082 (+15%)

3,026 (+15%)

1,800 (+8%)

Rent

► 36 (-3%)

► 30.5 (+5%)

► 23 (+5%)

► 18 (+3%)

► 12.5 (+1%)► 8.25 (+3%)

Cap.Value

8,571 (+14%)

7,200 (+12%)

4,800 (+13%)

6,171 (+6%)

4,350 (+4%)

2,824 (+3%)

Rent

25 (+6%)

22.5 (+7)

17 (+6%)

18 (+6%)

14.5(+4%)10 (+3%)


3

Oferta y

demanda

Commercial

Investment Europe and Spain

Supply

and

DemandCRE Market

Spain 2015

EXECUTIVE SUMMARY

Europe has experienced a global yield compression since

2013 and now, which has resulted in significant increases in Capital Values, apart from the effect that

other market factors could have had such as the trend in rent.

European Investment Office Market: Capital Values in MAD and BCN are hitting double digit growth since 2013

20%

3%

19%

12%

16%

5%

13%

9%

1%

21%

(10%)

0

5,000

10,000

15,000

0

Lo

nd

on

Paris

Mu

nic

h

Barcelo

na

Fran

kfu

rt

Berli

n

Du

bli

n

Am

ste

rd

am

Mad

rid

Bru

sels

Vie

na

Mil

an

Lu

xem

bu

rg

o

Lis

bo

n

30% 40%

26%

1.50%▲11 bps

0.57%▲25 bps

0.57%▲25 bps

Yie

lds T

rend (

%)

2017-2

016

Min. 2007 Max. 2009 2016 2017

10 Year Bond

2016-2017(12th January

2018)0.60%▲17 bps

0.93%▼6 bps

0.57%▲25 bps

0.84%▲4 bps

1.33%▲1 bps

0.66%▲14 bps

2.00%▲9 bps

1.83%▼201 bps

0.73%▲7 bps

Source: Deloitte RE, Bloomberg

0 €

5,000€

10,000€

15,000€

n.a.

217 bpsYield 2017 - Dif. 10

years bond 231 bps 243 bps 225 bps 313 bps 268 bps 332 bps 340 bps 200 bps 402 bps 324 bps 150 bps n.a. 317 bps

Capital Valu

es G

row

th (

%)

2017-2

016

Cap

ital V

alu

e

(€/

sq

m)

1.50%▲11 bps

2%

3%

4%

5%

6%

7%

8%

Cap. Value (€/sqm) 41,143 24,762 14,000 7,200 12,000 9,785 14,565 10,350 10,457 6,000 8,615 14,570 13,116. 4,932


Initial Yield European Chart:

Germany

Italy

Spain

UK

France

2,5%

3,0%

3,5%

4,0%

4,5%

5,0%

5,5%

6,0%

6,5%

7,0%

7,5%


EXECUTIVE SUMMARY

4% of the Total Office Investmentof the analysed countries

Source: Deloitte

TORRE GLORIES (#87 in European Deals Ranking)

Transactions in Spain have not been relevant within Europe in 2017.

European Investment Office Market:

Source: Deloitte

€1,800m €1,433m €1,363m

€1,100m €775m

FranceUnited KingdomUnited KingdomGermanyGermany

VENDORCA Immo Deutschland

100,410 sqm

BUYERDeka Immobilien

Coeur Defense

Office

BUYERPrimonial REIM

VENDORLone Star

175,362 sqm

20 Fenchurch Street

Office

BUYERLee Kum Kee

VENDORMorgan Stanley

62,336 sqm

Sony Center

Office

BUYERMadison Int.

VENDORHines

132,496 sqm

Tower 185

Office

LeadenhallBuilding

Office

BUYERC C Land Hldgs

VENDORBritish Land

56,669 sqm

Poland2%

Ireland2%

Switzerland2%

Russia2%Belgium

3%Norway

3%

Sweden3%

Spain4%

Italy5%

Netherlands7%

France18%

Germany25%

United Kingdom26%



EXECUTIVE SUMMARY

Top 5 deals per country (France, UK, Germany) amount to

€6,471m (2017).

European Yields (2017):

For more information see CHAPTER 4 (Key Investment and Financing Drivers)

in the full report.

CountryPrime Yield

2017

Minimumlast

10 years

France 3.15% 3.15%

Germany 3.75% 3.75%

UK 3.50% 3.25%

Belgium 4.75% 4.75%

Spain 3.50% 3.75%

Sweden 3.50% 3.50%

Italy 3.50% 3.50%

Source: Deloitte

Spain (€2,295m) accounted for 4% of total European Office Investment.

European Investment Office Market

Source: Deloitte


# Country AssetGLA

(sqm)

Purchase

Price (€M)Buyer Vendor

1 France Coeur Defense 175,362 1,800 Primonial REIM, Predica CA AssurancesLone Star

2 United Kingdom 20 Fenchurch Street 62,336 1,433 Lee Kum Kee Morgan Stanley, Landsec, Brookfield AM

3 United Kingdom Leadenhall Building 56,669 1,363 C C Land Hldgs British Land, Oxford Properties Group

4 Germany Sony Center 132,496 1,100 Madison International, Oxford Prop. Hines, NPS

5 Germany Tower 185 100,410 775 Deka Immobilien WPV, CA Immo Deutschland

6 Germany Commerzbank Tower 85,501 730 Patrizia, Samsung SRA Commerz Real

7 Italy Telecom 1,099,973 617 EDF, Credit Agricole Assurances Beni Stabili SpA

8 United Kingdom Cannon Place 38,851 571 Deka Immobilien Candar Finance SARL, Hines

9 France Duo - Office & Retail 89,998 571 Natixis Hines, Ivanhoe Cambridge

10 France Window 44,199 500 Hines, Oxford Properties Group Groupama Gan REIM

11 France So Ouest Plaza 40,999 474 Hyundai M&F Insurance, Vestas Inv. Unibail-Rodamco

12 United Kingdom 20 Canada Square 51,560 469 Cheung Kei Group Brascan RE Opportunity Fend

13 United Kingdom Principal Place 57,691 447 ENPAM, Antirion Brookfield Prop Prtnrs

14 France In/Out 34,999 445 Primonial REIM, Primopierre SCPI Societe Fonciere Lyonnaise

15 United Kingdom One Rathbone Square 24,897 436 DekaBank Great Portland Estates

16 Germany German Commercial Portfolio 430 Profond Confidential

17 Germany Axel-Springer-Campus 52,199 425 Norges Bank (NBIM) Axel Springer

18 United Kingdom Winnersh Triangle 139,350 397 Frasers Centrepoint Patrizia, Oaktree

19 France Vivacity 24,499 365 Amundi Blackstone

20 United Kingdom 2-3 Bankside 35,116 355 grundbesitz europa (RREEF) M&G Real Estate

79 Spain Boston Portfolio BBVA (14.a) 116,000 159 Oaktree and Freo BBVA

83 Spain Fifth Tower (Caleido Tower) 69,998 150 Megaworld Corporation Grupo Villar Mir

87 Spain Glories Tower 29,999 142 MERLIN Properties Agbar Group

129 Spain Isla de Chamartin 38,133 103 Tristan Capital Partners, Zaphir GroupLone Star

149 Spain Luxa Barcelona 16,414 90 Grupo Catalana Occidente 1810 Capital Investments, Castellví


Oferta y

demanda

Lecciones

aprendidas y

perspectivasLecciones aprendidas y perspectivas

Commercial


Supply

and

DemandCRE Market

Spain 2015

EXECUTIVE SUMMARY


European Investment Office Market: Capital Allocation Matrix: The “Classics” are not anymore attractive as long as “cash on cash” approach is the goal still…

Source: Deloitte RE, Bloomberg

Rental GrowthYoY Var.

Capital Value(€/sqm)

GDP GrowthYoY Var.

Overweight Cash-Cow

Underweight

Hig

hLo

w

Low High

Overweight (Lack of product)

Underweight (Structural Oversupply)

Question

Cash-Cow(To yield)

Ren

tal

Gro

wth

GDP Growth

Quadrant Explanation

CityPrime Rent2017

Capital Value2017

GDP Growth

2017

Madrid 30.5 10,457 3.1%

Barcelona 22.5 7,200 3.1%

Oslo 40 12,800 3.5%

Stockholm 57 19,600 2.9%

Amsterdam 34.5 10,350 3.2%

Lisbon 20.5 4,932 2.5%

Vienna 28 8,615 3.5%

Helsinki 35.5 10,400 3.0%

Zurich 62.5 21,500 1.1%

Milan 42.5 14,570 1.7%

Representative Sample


# ASSET PRICE (€m) GLA (sqm) ZONES

1 Boston Portfolio BBVA 159 116,000 n.a.

2 Torre Caleido (5ª Torre) 150 69,998 CBD

3 Torre Glories 142 29,999 DEC

4 Isla Charmartín 103 38,133 DEC

5 Luxa Barcelona 90 16,414 DEC

6 Banco Popular 80 4,000 CBD

7 Mapfre 72 14,424 RBD

8 Agencia Tributaria de

Cataluña

65 8,126 RBD

9 Palacio de Miraflores 60 7,132 RBD

10 Bank Offices 56 n.a. n.a.

EXECUTIVE SUMMARY

Top 10 Spanish deals:

Source: Deloitte

Source: Deloitte

Spanish Investment Market (CRE)

Top 10 Spanish deals:

Total office investment volume in Spain at 2017: €2,295m

A total office pipeline investment volume of €3,588m is expected to be transacted in Spain

Source: Deloitte

Source: Deloitte

1,460 1,056 544 807

2,520

5,313 4,895

2,295

644 687

365

867

2,297

1,894 3,769

2,990

1,467

591

571

751

2,242

1,263

660

651

150

279

88

120

596

674

930

1,449

750

576

519

607

932

2,702

2,145

3,090

4,470

3,189

2,087

3,151

8,587

11,845 12,398

10,475

-

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015 2016 2017

Total (€m)

Hotels

Logistic

Retail High Street

Retail Shopping Centre

Offices

Investment volume in Office segment decreased by 53% due to the higher prices requested by Sellers.

Offices


Retail High Street

Logistics

Hotels

21%

Office Typology

-53%

Rest of CRE

79%

Short Term MediumTerm

Long Term TOTAL

58%€3,588m

35%

7%



Oferta y

demanda

Lecciones

aprendidas y

perspectivasLecciones aprendidas y perspectivas

Commercial


Supply

and

DemandCRE Market

Spain 2015

EXECUTIVE SUMMARY


2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20092017

◄Bear Market►

◄Bull Market►

Spanish Investment Market: OfficesReal Comps vs Cap. Values gap in Spain

Source: Deloitte

◄Bull Market►

Real Comps (€/sqm) Theoretical Capital Value €/sqm

6 years…?7 years 4 years

Real Comps < Theoretical Cap. Values

Real Comps > Theoretical Cap. Values

€-

€2.000

€4.000

€6.000

€8.000

€10.000

€12.000

€14.000

Office market behaviour in 2017 is still considered as Bull Market,

where prices paid by investors are above the theoretical Capital Values. This trend has been specially seen in

buildings with long-term lease agreements and high end tenants

Offices21%


30%

Retail High Street

6%

Logistic14%

Hotels29%

2017 CRE Investment Breakdown


EXECUTIVE SUMMARY

Recovery of Business Confidence indicators is having a progressive, but limited impact on average rental.

Leasing Market: Is there room for further growth?

As take-up increased,

vacant space reduced and as a consequence, Rent has

increased during the recent

years, specially in CBD

Average Rent Growth Madrid

Avera

ge R

ent

trend

IN

DEX

BA

SIS

10

0 (

20

14

)

vs

Avera

ge R

ent

trend

IN

DEX

BA

SIS

10

0 (

20

14

)

Average Rent Growth Barcelona

For more information see CHAPTER 2 (Supply & Demand) with the full rental market analysis based on Deloitte Database.

CBD

RBD

DEC

RC

OUT

CBD

RBD

RC

OUT

DEC

CBD

Central Business District

RBD RC DEC OUT

Rest of Business District Rest of City Decentralized Out of the city

Source: Deloitte

108

118

124

103

108

116

100

104

113

105

115

100

106

98

103

108

113

118

123

128

2014 2015 2016 2017

110

140

150

108

118

120122

126

104

111

118

95

105

115

125

135

145

2014 2015 2016 2017



EXECUTIVE SUMMARY

The lease contracts have

responded positively to the market momentum, particularly in

CBD, where the vacant space in quality

buildings strongly decreased during the

recent years.

THE KEY FOR SUCCESS

Source: Deloitte

Source: Deloitte

Standard lease terms generally accepted

Source: Deloitte

CONNECTION

TO THE END

USER

DESIGN

SUSTAINABILITY

CONNECTION

TO THE ASSET

MANAGEMENT

Landlords decrease incentives overall

Average Rent Free Period (months)

Contract Duration (years)

Space leased by companies per employee(sqm/employee)

Transfer of Property Tax and Community Charges to the tenant

Average space leased by companies(sqm)

2014

5(Break option 3rd Year)

(1)

80-100 %

13-14(sqm/employee)

912/638 (sqm)(2)

4(months)

2015


(1)

12(sqm/employee)

919/748 (sqm) (2)

4(months)

100 %

2016


(1)

10(sqm/employee)

853/560(sqm) (2)

3(months)

100 %

(1) Break option Year depending on the size of the company. For Companies >1,000 – 1,500 sqm, the regular mandatory period is 5 years.(2) Average Space leased by companies in MADRID / BARCELONA

2017


(1)

10(sqm/employee)

978/857 (sqm) (2)

2-3(months)

100 %



EXECUTIVE SUMMARY

P&L reconstruction Restructuring of the Financial Sector

Fundamentals improvement

Alternative to the fixed income / bond yields

Development loans: Regular lenders are returning to

the market

Senior DebtYielding assets: 2018 more and

more competitive

MAIN DRIVERS FOR THE INCREASING LENDER APPETITE

Monetary Policy: QE, low funding costs, etc.

Excess of Liquidity: Increase in transactions

Entry of new sponsors

FINANCIAL SECTOR

REAL ESTATE INVESTMENT MARKET

MACROECONOMIC ENVIRONMENT

Yielding assets: General improvement of the basic terms

Financing Market

Source: Deloitte

Macro Economic Context Overview

1(1) Balloon need to cover the high funding costs during the loan´s duration. (a smaller balloon will result in a larger annual debt service)(2) Sustainable LTV to face the debt service with high funding costs (A higher LTV will result in a larger debt service)

Main

Conditio

ns

LTV

Upfront Fee

Spread

<40%(1) 30%-40% 30%-50%

200-250pbs 150-200pbs 75-150pbs

250-300pbs 200-250pbs 150-200pbs

Framework

Main Players

Balloon 70%(2) 60% 80%-100%

Credit Access Constraints

Financing Upturn

40-55%

70-150pbs

100-175pbs

60%-100%

2014 2015 20162013 2017

Institutional Investors / Debt Funds

Banking / Insurance Companies

Alternative lenders

+

30-55%

50-100pbs

100-175pbs

80%-100%



EXECUTIVE SUMMARY

“Core” tipologies still

accounted for 77%

in 2017:

Main Players:

More room for Value added strategies

Equity

Debt

2016 2017MORE ROOM FOR VALUE ADDED:

Source: Deloitte

Source: Deloitte

Debt NPL

Core84%

Core+3%

Value

Added9%

n.a .5%

Core37%

Core+40%

Value

Added19%

End user

4%

(€m)

Core 840

Core+ 914

Value Added 446

End user 94

(€m)

Core 4,102

Core+ 149

Value Added 419

n.a. 225



Substance concentrationSimplification of holding structures as a way to concentrate substance. Creation of investment platforms with qualified personnel and substance

Funding structureMore conservative funding structures with SHLs duly supported by complete TP documentation

Withholding taxesReinforced substance at platforms as to facilitate dividend WHT. Back-to-back borrowing to be avoided

Business rationaleOngoing monitoring and support of tax benefits being proportionate to business reasons deriving from the structure

12

34

A more defensive tax environmentBEPS are making an impact on tax structuring strategies

EXECUTIVE SUMMARY


Tax advisory is key to be successful at exit.

Drivers of the increase in cross-border

investment:

Yielding Real Estate is still more attractive than Investment Grade Bonds

2

3

1

4

Yield compressions in most of the countries led to a significant growth of capital values

Accessibility to credit and more attractive financing conditions

Political and financial uncertainly in certain regions of Europe, but markets still responding well.


WHAT IS

NEXT?



Source: Deloitte

3.0OfficesThe office market incoming trends have created the term office 3.0 which consider all the following points :


EXECUTIVE SUMMARY

Apart from the physical component of the

offices technology and particularly “apps” are disrupting

the way we work improving the

productivity of employees and

reducing the entreprises costs.

HOW MUCH COST TO BE UPDATED?

Professional fees

13-18%

IT / Audiovisual / Security Systems

150-300€/sqm

Furniture and office equipment

150-250€/sqm

Change of layout and installations

HIGH STANDARDS – 850€/sqm

AVERAGE STANDARDS– 625€/sqm

LOW STANDARDS - – 400€/sqm



José María EspejoSenior ManagerFinancial Advisory ‖ Real Estate

[email protected]

Luis González Martino, MRICSSenior ManagerFinancial Advisory ‖ Real Estate

[email protected]

Francisco AstorgaManagerFinancial Advisory ‖ Real Estate

[email protected]

Félix VillaverdeManagerFinancial Advisory ‖ Real Estate

[email protected]

Javier CatónManagerFinancial Advisory ‖ Real Estate

[email protected]

Javier García-Mateo, MRICSPartnerFinancial Advisory ‖ Real Estate

[email protected]

Alberto Valls, MRICSManaging PartnerFinancial Advisory ‖ Real Assets

[email protected]

Jorge de BlasAnalystFinancial Advisory ‖ Real Estate

[email protected]

Carlos de HerediaAnalystFinancial Advisory ‖ Real Estate

[email protected]

Lorena JuriolSenior ManagerFinancial Advisory ‖ Real Estate

[email protected]

the office property handbook 3 - deloitte.com · 9 france duo - office & retail 89,998 571...

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