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”NEGATIVE INTEREST RATES CREATE RUSH FOR REAL ESTATE” Institutional Outlook (May 2015) by Pangea Property Research An investor survey covering the 150 largest institutional investors in the Nordics INSTITUTIONAL CROSS-BORDER CAPITAL FLOWS Over the next 12 months, Nordic institutional investors are planning to acquire real estate for approximately €5bn. In general, there is a growing interest for investing abroad with Sweden, Europe and the US being the most popular markets according to our investor survey. INTRODUCTION Welcome to the annual “Institutional Outlook” by Pangea Property Research NORDICS We are proud to present the 2015 edition of our “Institutional Outlook” covering the 150 largest institutional investors in the Nordic region. The purpose of this report is to provide a detailed picture of how these top tier investors, representing more than €1,100bn of assets under management, view real estate as an asset class. By doing this we hope to highlight current trends, topics and potential challenges of interest for the industry as a whole. Mikael Söderlundh Head of Research & Partner +46 73 770 77 90 [email protected] SWEDEN Adam Bakonyi Analyst +46 70 244 31 34 [email protected] This year, the following main areas are covered in the report: •• Current real estate exposure and long-term allocation targets NORWAY •• Price expectations for the next 12 months Espen Ugland Haugen Analyst +47 45 42 44 12 [email protected] •• Investment strategies for the next 12 months •• Investment preferences in terms of geography and sectors The report is based on public data and an extensive investor survey conducted by Pangea Property Research in March–April 2015. We would like to sincerely thank all contributing parties for their time and participation. Feel free to contact any of us if there are questions or comments. © Pangea Property Partners A study covering the 150 largest Nordic institutional investors 33 More than €1,100bn in assets under management represented PANGEA RESEARCH – INSTITUTIONAL OUTLOOK EXECUTIVE SUMMARY “Negative interest rates create rush for real estate” Pangea Property Research conducts an annual investor survey among the 150 largest Nordic institutional investors regarding their view of real estate as an asset class and their investment strategies in the forthcoming 12 months. •• In the current market, Nordic institutional investors consider real estate to be the most attractive asset class from an investment perspective, just ahead of equities. Institutional Outlook 2015 key findings: •• The most popular sector is residential, closely followed by office and public sector properties. Among institutions seeking real estate exposure abroad, Europe is considered the most attractive market. •• Nordic institutions are still underweighted in real estate with an average exposure slightly above 8% compared to long-term allocation targets of 10–15% in general. Altogether, the above findings show that real estate remains highly attractive as an asset class and will continue to attract significant institutional capital going forward. In fact, since we initiated this survey in 2011 there has never been such strong demand for real estate as today. There are many reasons for this, for example ultra-low interest rates pushing investors towards income producing assets and an attractive yield gap on real estate investments. However, since there is limited supply of high quality assets in the current market and increasing competition from other investor categories, it remains to see whether the institutions will reach their allocation targets and whether it will result in further yield compression. •• Over the next 12 months, Nordic institutions anticipate increasing capital values in the real estate market and equity market. However, there are country-wise differences such as institutions from Finland having a more cautious view. •• Over the next 12 months, a clear majority of the Nordic institutions (69%) aim to be net buyers in the real estate market. In total, they are planning to invest approximately €5bn in real estate and make divestments of approximately €1bn. 2011 2012 2013 2014/15 110 124 155 156 €872bn €968bn €1,057bn €1,134bn 8% 8% 8% 8% 28% 22% 38% 63% n/a n/a n/a 72% Net buyers (% of respondents) 81% 21% 54% 69% Increase by more than €50m (% of net buyers) 60% 43% 53% 62% Office Residential Office Residential Sweden Asia US Europe INSTITUTIONAL OWNERSHIP Number of institutions covered in the survey Total assets under management (AUM) Average real estate exposure (% of AUM) 12M EXPECTATIONS ON CAPITAL VALUES Real estate market (% with a positive view) Equity market (% with a positive view) 12M REAL ESTATE INVESTMENT STRATEGIES REAL ESTATE INVESTMENT PREFERENCES Most attractive sector Most attractive foreign market PANGEA RESEARCH – INSTITUTIONAL OUTLOOK 444 NORDIC INSTITUTIONAL OWNERSHIP Average real estate exposure slightly above 8% Institutions Assets under management, €bn Real estate under management, €bn Real estate exposure, % Sweden 77 487 38 7.8% Norway 35 165 18 10.7% Denmark 19 258 19 7.2% Finland 25 224 20 9.0% 156 1,134 94 8.3% Country Nordics Note: All figures are excluding Norges Bank Investment Management (NBIM). The investors covered in this report are large corporate and public pension funds, insurance companies and other institutional investors such as foundations, endowments and unions. Altogether, the institutions have more than €1,100bn of assets under management, of which slightly above 8% in real estate. As can be seen in the table above, institutions from Norway have the highest real estate allocation and institutions from Denmark have the lowest allocation. Furthermore, it can be noted that smaller institutions (with less than €10bn of assets under management) tend to have a higher real estate allocation and a larger share of indirect real estate investments. Currently, Nordic institutions own real estate valued at approximately €94bn, which is almost €12bn higher than in previous survey. The increase can be explained by the fact that institutions have been net buyers in the real estate market as well as increasing capital v alues. However, the average real estate allocation has only increased from 7.6% to 8.3% due to increasing equity portfolios. Going forward, this means that there should be room for significant further acquisitions since the bulk of Nordic institutions have long-term real estate allocation targets between 10–15%. Institutional breakdown by category Average real estate exposure by type of institution Average real estate exposure by type of institution Institutional breakdown by category Institutional breakdown by category 12% 15% Corporate pension funds 15% 26% 9.8% 10% Public pension funds Corporate pension funds Insurance companies Public pension funds Other institutions Insurance companies 8.3% 8.2% 8% 7.1% 6% Other institutions 26% 4% 50% 2.8% 2% 50% 0% 9% Corporate pension Public pension funds Insurance companies Other institutions funds 9% Institutional breakdown by size Institutional breakdown by size (assets under management) (assets under management) Average realreal estate size of institution Average estateexposure exposure byby size of institution 14% 11.4% 12% 23% 10% >€10bn 44% All institutions 8.3% 8.1% >€10bn €1-10bn 8.3% 8% €1-10bn <€1bn 6% 4% 2% 33% 0% <€1bn All institutions The charts are based on number of respondents 55 PANGEA RESEARCH – INSTITUTIONAL OUTLOOK REAL ESTATE COMPARED TO OTHER ASSET CLASSES The most attractive asset classes The most attractive asset classes The most attractive asset classes In the current market, Nordic institutional investors consider real estate and equities to be the most attractive asset classes from an investment perspective. According to the survey, 38% of the respondents rank real estate as their first hand choice, followed by equities (32%) and alternative investments (18%) such as hedge funds and private equity. The least attractive asset classes are government bonds (3%) and infrastructure (0%). The most attractive asset classes 3% 3% 9% 9% Real estate Real estate 38% 38% 18% 18% Equities Equities Alternative investments Alternative investments Corporate bonds Corporate bonds Government bonds Government bonds 32% 32% Expected real estate capital values in thereal nextestate 12 months Expected real estate capital values in Expected capital values Expected real estate capital values The strong demand for real estate goes hand in hand with a positive view on real estate capital values (property prices) going forward. In the forthcoming 12 months, as much as 63% of the Nordic institutions anticipate capital values to increase and only 11% e xpect capital values to fall. The result is similar in all Nordic countries except Finnish institutions having a more cautious view on real estate capital values in the next 12 months. 11% in Increasing capital values Unchanged capital valuesvalues Increasing capital Decreasing capitalcapital values values Unchanged 26% Decreasing capital values 26% 63% 63% Expected equity market capital values in the next 12 months Expected equity market capital values Nordic institutions expect strong equity markets as well. In the survey, 72% of the respondents anticipate positive returns and 22% anticipate negative returns over the next 12 months. Institutions from Finland have a neutral view on the equity market in the coming year, with 25% expecting a strong market, 25% expecting a weak market and 50% expecting a flat market. the next 12 months the next 12 months 11% Expected equity market capital valuesequity in themarket next 12 months Expected capital values in the next 12 months 22% 22% Increasing capital values Unchanged Increasing capital capitalvalues values Decreasing values Unchangedcapital capital values 6% Decreasing capital values 6% 72% 72% The charts are based on number of respondents PANGEA RESEARCH – INSTITUTIONAL OUTLOOK 666 INVESTMENTS STRATEGIES €5bn of institutional capital allocated to real estate investments A clear majority of the Nordic institutions (69%) are planning to increase their real estate holdings over the forthcoming 12 months. Among these net buyers, 62% want to increase by more than €50m, 29% between €10–50m and 10% by less than €10m. Furthermore, there are some investors (10%) planning to decrease their holdings over the next 12 months, according to the survey. In total, the Nordic institutions are planning to acquire real estate for approximately €5bn and divest real estate for just above €1bn in the coming year1. Since their current real estate portfolios are valued at €94bn this means a net increase of 4% (excluding value changes). Most institutions mainly focus on direct investments, however, approximately one out of four prefer indirect investments such as real estate funds. Over the last few years, the institutions’ investment strategies have become more aggressive in terms of number of net buyers and targeted investment volumes, as illustrated in the charts to the right. Countrywise, there are some differences such as institutions from Sweden and Denmark being somewhat more active on the sell-side and Finnish institutions focusing more on indirect real estate investments. Real estate investment strategies in the next 12 months Real estate investment strategies in the next 12 months 100% 21% 80% 6% 54% Net buyers 69% 60% Net sellers 40% Neutral 15% 73% 10% 20% 31% 21% 0% 2012 2013 2014/2015 Targeted investment volumes in the next 12 months Targeted investment volumes in the next 12 months 100% 80% 43% 53% 62% >€50m 60% €10-50m 40% <€10 21% 43% 29% 20% 26% 14% 10% 0% 2012 2013 2014/2015 The charts are based on number of respondents Real estate investment strategies in the next 12 months Real estate allocation Targeted investment volume Investment focus Increase Decrease Neutral >€50m €10–50m <€10m Direct Indirect Sweden 75% 17% 8% 56% 33% 11% 71% 29% Norway 63% 0% 38% 60% 20% 20% 83% 17% Finland 60% 0% 40% 75% 25% 0% 50% 50% Denmark 75% 25% 0% 67% 33% 0% 100% 0% Nordics 69% 10% 21% 62% 29% 10% 76% 24% Based on answers in survey 2015 and Pangea’s estimates where information is missing 1 77 PANGEA RESEARCH – INSTITUTIONAL OUTLOOK INVESTMENT PREFERENCES Which markets and sectors are most popular? Geography Sector wise Over the past years, interest for investing in real estate abroad has increased gradually among Nordic institutions. Currently, Europe is considered to be the most attractive market for foreign real estate investments. As can be seen in the chart below, Europe is ranked as the first hand choice by 41% of the respondents, followed by Sweden (36%) and the US (27%). A clear trend is that interest in Asia has declined over the past few years, while interest in Europe is rising. Which is the most popular sector in the current market is a close call between residential, office and public sector properties. All these three sectors are ranked as either the most attractive or second most attractive real estate sector by more than 50% of the Nordic institutions. Country-wise, there are some notable differences such as, in relative terms, higher rankings for public sector properties in Sweden, offices in Norway and logistics/warehouses in Finland. Most attractive real estate markets for foreign investments Most attractive real estate markets for foreignreal investments Most attractive estate markets for foreign investments 100% 100% 90% 80% 80% 41% 70% 70% 60% 60% 50% 50% 30% 35% 30% 20% 20% 6%10% 0% 27%13% 36% 41% 27% 36% 7%13% 7% 7% 7% 6% 0% 12% Europe 14% Europe 14% Sweden 7% 7% Sweden USA 90% 80% 70% 60% 80% 33% 70% 50%19% 40% 30%22% 30% 20% 10% 0% 10% 22% 29% 7% 20% 22% 35% 29% 35% 29% 22% 7% 7% 0%19% 7% 7% 13% 20% Finland Norway 19% 22% 22% 13% Residential 13% Ranked no 2 Ranked no 3 Ranked no 3 43% Ranked no 4 Ranked no 4 Ranked no 5 13% 25% 25% 29% 29% 7% 7% 19% Norway19% Asia Asia 15% 7% Denmark 7% Ranked no 5 no 6 Ranked Ranked no 6 no 7 (worst) Ranked Ranked no 7 (worst) Denmark 15% 10% 15% 20% 20% 20% 15% 20% 20% 9% 13% 4% 13% 9%Public sector Retail 20% 22% Retail The institutions were asked to rank the attractiveness of different markets (votes on home markets excluded) and sectors 888 10% 20% 15% 15% 22% Public sector 15% 15% 26% 9% 4% 9% Office PANGEA RESEARCH – INSTITUTIONAL OUTLOOK 43% 6% 6% 4% 4% 22% 4% 4% Office Ranked no 2 19% 22% 21% 4% Residential 4% 13% 26% 13% 21% 13% Ranked no 1 (best) Ranked no 1 (best) Most attractive real estate sectors Most attractive real estate sectors 29% 19% 40% 7% 13% 60% 50% 20% 33% 20% Finland 100% 90% 20%40% USA13% Most attractive real estate sectors 100% 20% 40% 20% 12% 13% 14% 13% 14% 19% 13% 20% 29% 6% 33% 13% 20% 6% 29% 6% 7% 7% 13% 33% 21% 35% 6% 7% 7% 7% 7% 13% 21% 40% 40% 10% 13% 90% 30% 30% 20% 20% 20% Logistics/ Hotel warehouse Logistics/ Hotel warehouse Ranked no 1 (best) Ranked no 1 (best) Ranked no 2 Ranked no 2 Ranked no 3 Ranked no 3 Ranked no 4 Ranked no 4 Ranked no 5 Ranked no 5 Ranked no 6 (worst) Ranked no 6 (worst) SUMMARY AND OUTLOOK A bigger appetite but a smaller market To conclude, the overall theme in this year’s investor survey is that Nordic institutions have a very positive view on real estate. They anticipate increasing capital values and want to be large net buyers over the next 12 months. In fact, since we initiated this survey in 2011 there has never been such strong demand for real estate as today. The reason for this is most likely a combination of several factors. For example, significant market uncertainty and ultra-low interest rates are pushing investors towards income producing assets like real estate. There are also few other viable investment alternatives available and since property yields are lagging interest rates there is currently an attractive yield gap. The challenge facing many institutional investors today is that there are few motivated sellers in the market and a general lack of supply. In addition, competition from other buyers such as e.g. listed real estate companies, family offices and foreign investors is increasing. Going forward, this should open up for wider investment criteria and more focus on sizeable platform deals if the institutions want to reach their allocation targets. To invest €5bn over the next 12 months is rather aggressive in relation to historical figures, as illustrated in the chart below. Real estate investments by Nordic institutions 6,0 5,0 EURbn 4,0 3,0 2,0 1,0 0,0 2009 2010 2011 2012 2013 2014 2015F The chart shows real estate investments by Nordic institutions with 2015 being a forecast based on the survey 99 PANGEA RESEARCH – INSTITUTIONAL OUTLOOK PANGEA PROPERTY PARTNERS A leading property advisor in the Nordic region Services Track Record Pangea Property Partners is an independent Nordic corporate finance and advisory firm focusing on the property sector. Since the start in 2009, Pangea Property Partners has executed more than 200 transactions with an underlying property value above EUR 13bn. 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PANGEA RESEARCH – INSTITUTIONAL OUTLOOK 1010 10 Company Facts Books CONTACT Pangea Property Partners STOCKHOLM Pangea Property Partners OSLO VISITING ADDRESS: Norrlandsgatan 15, 7th floor Tel +46 8 545 25 780 www.pangeapartners.se VISITING & POSTAL ADDRESS: Tjuvholmen Allé 3, 8th floor N-0250 Oslo NORWAY POSTAL ADDRESS: Box 7740 103 95 Stockholm SWEDEN Tel +47 21 95 80 70 www.pangeapartners.no Disclaimer This presentation has been prepared by Pangea Property Partners KB and Pangea Property Partners AS (”Pangea”) for the exclusive use of the party to whom Pangea delivers this presentation (together with its subsidiaries and affiliates, the ”Company”) using information provided by publicly available information. The valuations, forecasts, estimates, opinions and projections contained herein involve elements of subjective judgment and analysis. 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There is no guarantee that any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. Pangea, its affiliates, directors, officers, employees and/or agents expressly disclaim any and all liability relating or resulting from the use of all or any part of this presentation. This presentation has been prepared solely for informational p urposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The Company should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The Company should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. 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