EUROPEAN QUARTERLY - Knight Frank

RESEARCHEUROPEANQUARTERLYCOMMERCIAL PROPERTY OUTLOOKQ4 2017OCCUPIER TRENDSINVESTMENT TRENDSMARKET OUTLOOK

EUROPEAN OUTLOOKEuropean commercial property markets have entered 2018 with strong momentum.In Q4 2017, European commercialproperty investment reached one of thehighest quarterly totals on record, at 80.7 billion. This took investment for thewhole year to 231.8 billion, an increaseof 8.4% on 2016.Following a slow start to the year,investment in the UK accelerated inH2, bringing annual volumes to 59.3billion. The continued flow of capitalfrom Greater China into the CentralLondon office market supported thisimprovement. The UK regained itsposition as Europe’s most active marketfrom Germany, which had edgedahead in H1. Nonetheless, the Germaninvestment volume of 50.9 billion wasa ten-year high, and the country wasthe leading destination for US capitalentering Europe in 2017.The French investment market had anextremely slow start to the year, butit recovered in Q4, when more capitalwas invested than in the three previousquarters combined. This was partlydue to a revival in investor confidencefollowing political uncertainty earlier inthe year. Domestic investors dominatedthe market in 2017, accounting for morethan 70% of transaction volumes.Elsewhere, stand-out markets in 2017included the Netherlands and Finland,FIGURE 1European commercial property investment volumes90Q4 2017 TRENDSQuarter-on-quarter change: 52.4%Year-on-year change: 9.7%8070 billion6050403020100Q1 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 Q42011201220132014201520162017Source: Real Capital Analytics / Knight FrankFIGURE 2FIGURE 3European weighted average primeoffice yieldEuropean prime office rental index1407120705503402Q4 2017 TRENDSQuarter-on-quarter change: -7 bpsYear-on-year change:-28 8200920102011201220132014201520162017 billion60%4Q2 2017 TRENDSQuarter-on-quarter change: -7.9%Year-on-year change:-13.6%Q4 2017 TRENDSQuarter-on-quarter change: 1.5%Year-on-year change: 132014201520162017680Index, Q1 2002 10080Source:ResearchSource:ResearchQ2KnightQ3 Q4FrankQ1 Q2Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Q1 Q2KnightQ3 Q4FrankQ1 Q2Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2201020112012201320142015201620172both of which had record years, on theback of large inflows of cross-borderinvestment. While North Americanand European investors were the mainsources of capital in these two markets,there was also increased investmentfrom Asian investors, who are showinggrowing interest in a broadening range ofEuropean markets.The logistics and industrial sector hadan outstanding 2017, with investmentvolumes rising 42% year-on-year to arecord 38.9 billion, or 17% of the totalcommercial market. Volumes in thissector were boosted by CIC’s purchaseof Logicor for over 12 billion andGLP’s acquisition of Gazeley for 2.4billion. As well as demonstrating thestrength of demand for logistics property,these deals are also indicative of theappetite for platform and portfolio dealsfrom investors seeking to deploy largevolumes of capital into real estate.Despite already being at record lowlevels across much of Europe, furtheryield compression was recorded inQ4 in markets including Amsterdam,Dublin, Frankfurt and Milan. As a result,the Knight Frank European WeightedAverage Prime Office Yield hardenedby seven basis points to a new low of4.20%. There is room for further yieldcompression in some markets in 2018,although a general stabilisation ofEuropean prime yields may be reachedby the year-end.Q4 was a stellar quarter for a number ofEuropean office occupier markets, withtake-up in Dublin, Madrid, Munich andPrague increasing by well over 50% yearon-year. For 2017 as a whole, aggregatetake-up in the major European marketsmonitored by Knight Frank was up by 9%compared with 2016.On the back of strong demand andtightening availability, European rentalgrowth gathered momentum in Q4.Markets such as Amsterdam, Berlin,Brussels, Frankfurt, Madrid and Paris allrecorded increases in prime office rents,pushing the Knight Frank European PrimeOffice Rental Index up by 1.5% duringthe quarter.Please refer to the important notice at the end of this report

EUROPEAN QUARTERLY Q4 2017MARKET HIGHLIGHTSFIGURE 5European commercial property investment volumes, 2017BERLINMILANInternational providers of co-working space have becomeincreasingly active in Berlin, with WeWork’s lease for 13,000sq m at Atrium Tower being the largest deal in Q4.Notable investment transactions in Q4 included thepurchase of Deloitte’s Milan headquarters by BNPParibas REIM for 115 million.DUBLINMOSCOWA very strong final quarter took Dublin office take-up for2017 to a record total of more than 330,000 sq m, helpedby large transactions involving Microsoft (27,900 sq m) andIndeed (19,600 sq m).A strong final quarter helped annual office take-up to reach726,000 sq m, which was 29% up on 2016, but still 18%below the ten-year average.NETHERLANDSThe Frankfurt investment market ended 2017 strongly,boosted by Deka Immobilien’s purchase of Tower 185for 775 million, in the city’s largest single-asset deal ofthe year.Office take-up in Munich was a record 985,000 sq m in2017, with nearly 40% of this coming in Q4. The figureswere boosted by two major owner-occupier deals involvingBMW, which totalled approximately 160,000 sq m.NORWAYCentral London office take-up reached 1.3 million sq m in2017, up 17% from 2016. Activity in Q4 was boosted by thecontinued expansion of WeWork, which leased more than62,000 sq m in a series of transactions, mostly in the City.Île de France office take-up reached a ten-year high of 2.6million sq m in 2017. With CBD office space in short supply,occupiers have increasingly gravitated to non-centrallocations, such as the Western Crescent where take-upincreased by 45% in 2017.MADRIDWARSAWSeveral large public sector transactions were completedin Madrid in Q4, helping quarterly take-up to reach abumper 210,000 sq m. For the whole year, take-up was573,000 sq m, the highest total since 2007.The Warsaw office vacancy rate decreased to 11.7% atthe end of 2017, its lowest level in five years. This cameon the back of strong leasing levels and a moderation ofdevelopment activity.-4%-2%0%2% 4.0 bnUK6%8%10%IRELAND 59.3 bn 2.3 bn 18.8% 50.9 bn 18.0%RUSSIA 3.4 bn 33.8%POLAND 5.4 bn-0.4%CZECHREPUBLIC 3.3 bn-9.7%-8.6%MADRIDBRUSSELSROMANIA 0.9 bnAUSTRIA 3.9 bnMILAN 28.0% 47.0%PARISPRAGUEBUDAPESTDUBLINSPAIN 12.5 bnFRANKFURT-4.0%MUNICHBUCHARESTLONDON (CITY)VIENNAWARSAWLONDON (WEST END)MOSCOW3-34.6% 1.1 bnAMSTERDAMChanges calculated in local currenciesGERMANYLUXEMBOURGBERLINSource: Knight Frank Research 7.7 bn12%STOCKHOLM 8.4%SWEDEN-49.1%4% 123.8%Change on2016 33.0%European prime office rental growth, 2017 8.6 bnCommercial investment,2017DENMARK-22.3%FIGURE 4-6% 9.7%BELGIUM 231.8 bnFINLAND 37.7% 5.2 bn 2.4 bnPARISLONDONEUROPE 14.3 bnMUNICHFRANKFURTRESEARCHSWITZERLANDHUNGARY 3.6 bn-27.1%PORTUGALFRANCE 1.8 bn 26.9 bn 52.5% 0.1% 1.6 bnITALY 47.4% 9.1 bn-8.2%Source: Real Capital Analytics / Knight Frank ResearchInvestment volumes comprise office, retail, industrial and hotel sectors4

EUROPEAN QUARTERLY Q4 2017RESEARCHEUROPEAN MARKET INDICATORSAmsterdam was arguably Europe’s most dynamic market in 2017; prime office rentsincreased by 9.6%, while prime yields hardened by 90 basis points.Commercial property prime rents and yieldsOfficesLogisticsShopping centresPrime rentsPrime yields Prime rents Prime yields Prime rents Prime yields( /sq m/yr)(%)( /sq m/yr)(%)( /sq m/yr)(%)3.60 685 45.00 61,000 44.75 6Amsterdam400 5Barcelona270 44.00 482 45.75 4600 44.25 4Berlin396 53.10 669 54.50 61,380 43.75 4Brussels320 54.50 455 45.50 41,800 44.25 4Bucharest216 47.50 448 48.25 6720 47.25 4Budapest276 56.00 645 57.75 41,140 55.85 6Copenhagen255 54.00 477 45.75 4698 44.25 4Dublin673 54.00 6100 55.25 63 500* 54.50 6Edinburgh406 45.00 6103 55.00 63,030* 55.50 5Frankfurt480 53.25 680 54.50 61,560 43.75 6Geneva641 43.00 4171 45.50 4975 44.00 4Hamburg312 53.20 672 54.50 61,650 43.75 6Helsinki396 44.00 6120 45.75 61,200 44.50 6Lisbon234 54.75 645 46.50 61,200 45.00 6London 1,212 (WE)4848 (City)43.50 (WE)44.25 (City)4182 54.00 65,394* 44.50 5Madrid366 53.75 463 45.75 4600 44.25 4Milan530 44.00 450 46.50 6850 45.00 4Moscow654 49.75 662 611.00 62,921 410.25 4Munich436 53.00 685 54.50 61,900 43.75 6Oslo437 43.75 4124 45.50 41,219 44.25 4Paris810 53.00 458 55.00 42,500 43.75 4Prague246 54.75 458 46.00 41,560 44.75 4Stockholm691 43.50 4107 45.50 4805 44.25 4Vienna309 43.90 472 45.75 61,320 54.10 6Warsaw276 45.25 460 46.75 41,800 45.50 4Zurich684 43.00 4214 45.25 41,282 44.00 4CityRetail warehousingPrime rents Prime yields( /sq m/yr)(%)135 45.50 6129 45.50 4150 45.00 6185 45.50 4120 49.50 4102 47.50 6165 46.00 4290 55.25 6364 45.75 4170 45.00 6154 45.00 4150 45.00 6120 46.00 4120 47.00 6570 44.50 4156 45.25 6300 46.00 4N/AN/A180 45.00 6132 45.75 4180 44.75 4126 56.50 4213 45.50 4168 45.85 4132 47.50 4171 45.00 4Indicative 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 coveredshopping 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. Arrowsprovide 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 ResearchFIGURE 6Prime office rental cycleGenevaHelsinkiLondon (West End)MoscowOsloWarsawZurichRents anPragueStockholmRental Growth – nEdinburghFrankfurtHamburgMunichParisRental Growth – SlowingLondon (City)ViennaRents DecliningThe 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.5