[PPT] - Real Estate in Central & Eastern Europe Mike Edwards Head of PowerPoint Presentation

SLIDE 1

Real Estate in Central & Eastern Europe Mike Edwards Head of Valuation Advisory Services, Central Europe

SLIDE 2

Real Estate in Central & Eastern Europe

Evolution of the market Attributes of the market Performance Investment Considerations

SLIDE 3

Evolution of Property & investment in CEE

Phase 1 market entrants require fast access to modern buildings but

there is little suitable stock available

First Generation buildings arrive

Opportunistic Developers Built where land is readily available (“grape shot” development) Emphasis on speed rather than quality Low supply = high rents

SLIDE 4

Evolution of Property & investment in CEE

Phase 2 Developers respond to high demand, rents and low costs

Increase in stock leads to oversupply Oversupply leads to pressure on rents Tenants become more discerning Choice and competition leads to design improvements Developers look for niches

SLIDE 5

Evolution of Property & investment in CEE

Phase 3 Demand for new, quality stock

competition and differentiation in stock expansion of companies lease expiry

Marginalisation of first generation stock Consolidation of business districts Stabilisation of prime rents Emergence of regional market

SLIDE 6

Key Characteristics

An increasingly liquid and international market.
Title – Freehold & Leasehold, Restitution. Though some anomalies

such as RPU (Poland)

Ownership – SPV v Asset acquisition
Legal systems – transparency, effectiveness.
Lease structures

5 year plus leases. Annual indexation. Euro denominated leases, though some dollar and local currency

exist

Recoverable costs through service charge – German lease

structure

An evolving planning regime.
An active development market across countries & sectors.
Available financing subject to the profile of investment.

SLIDE 7

Central Europe

Country Population

Poland

38.7 mn

Czech Rep.

10.3 mn

Hungary

10.1 mn

Total

59.1 mn

Germany

82.0 mn

Great Britain

59.7 mn

Italy

57,2 mn

France

58.8 mn

Spain

39.4 mn

40 8 9

Number of Cities with a population over 100,000

SLIDE 8

Concerns with investing in CE

Land ownership structure. Land zoning procedures are can be lengthy and bureaucratic. Lack of transparency. Shortage of investment-grade property. Declining risk premium vs the West. Ongoing supply pressures from new development. Economic Problems Yield differentials between prime and secondary product

SLIDE 9

2 4 6 8 10 12 14 T h e " S t a n s " L a t v i a E s t

n

i a L i t h u a n i a S l

v

a k i a R u s s i a B u l g a r i a T u r k e y C z e c h R e p R

m

a n i a P

l

a n d I r e l a n d C r

a

t i a H u n g a r y U k r a i n e S l

v

e n i a W e s t GDP Growth (% pa) 2004/5 2005/6

Growth by Market

Source: Consensus Economic Forecasts/Cushman & Wakefield

SLIDE 10

Investment in Central & Eastern Europe

Source:Cushman & Wakefield

20 40 60 80 100 120 140 160 180 200 2 2 1 2 2 2 3 2 4 2 5 2 6 q 1 Annual Investment Volumes (€bn)

Rest of Europe Eastern Central

Central & Eastern Europe saw

investment of nearly €8bn – 122% up on 2004.

Investment in the CEE region

represented just 4.9% of the pan- European total– but this is up from just 1.5% in 2000.

The first quarter of 2006 saw total

investment of €45.1bn as against a quarterly average of €40.1bn in 2005.

The CEE region meanwhile saw

investment of just over €3bn in quarter1 – well up on the quarterly average of less than €2bn in 2005.

SLIDE 11

Source:Cushman & Wakefield

170 339 509 679 849 1,018 Russia Poland Slovakia Czech Rep Hungary Bulgaria Romania Turkey Croatia

Euro mn

2005 Quarterly Average 2006 Quarter One

Investment Volumes by Country

SLIDE 12

Prime Yield Convergence

Central European yields now stand,
n average, less than 50bp above

Western European levels.

Yields in Eastern Europe meanwhile

are still, on average, 365bp higher than in the West.

Excluding Turkey and Russia,

Eastern yields are 280 bp higher.

Central European yields have fallen

by 250bp since 2003 while Eastern yields have fallen by 518bp.

Eastern yields are now at the level of

Central yields in 2003. They have moved from over 15% to less than 10% in 5 years – a feat which took Central Europe 15 years to achieve.

Headline Yields - All Sector Average

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 2000 2001 2002 2003 2004 2005 2006 Grow th

West Average Central (3) East

Source: Cushman & Wakefield

SLIDE 13

Steady improvement in

rents forecast through 2006 and 2007

Overall prime rents to rise

3.5% this year and 4.7% next for Western Europe and 2% and 3% respectively in Central Europe.

Short term growth to be

led by offices in the West and retail in Central

What is the Rental Outlook?

8%
6%
4%
2%

0% 2% 4% 6% 8% 1 0% 1 2%

West Central

Source: C&W European Research Group

SLIDE 14

Property Performance in Central Europe

Despite weak rental growth, the

Central European property market is producing strong performance.

On average to March, rents fell 1.4%

versus a 2.6% gain in the West – principally due to falls in Poland

On a quarterly basis however, rents

were stable or up in all markets.

Yield compression in the past 12

months has been equivalent to 20% growth in capital values.

By comparison, Western European

yield compression has added 7.5%.

Implied total returns to March would

be 30% in Central Europe and 18% in the West.

Source: Cushman & Wakefield Prime Performance - All Sector Average

15%
10%
5%

0% 5% 10% 15% 20% 25% 30% Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Grow th 8% 9% 10% 11% 12% 13% 14% 15% 16% Yield

Yields Rental Growth Capital Growth

SLIDE 15

Why invest in CEE?

Expanding consumer market. Improving infrastructure. Development opportunities in under-supplied regional

cities.

Consolidation of the property market. Lease reform. Expanding and increasingly sophisticated property

market.

Still relatively high yielding market. Emergence of new formats such as retail parks and

factory outlet centres.

SLIDE 16

CHALLENGES WHEN INVESTING IN CEE

Too much capital chasing too little product – is pricing led by

economic considerations of herd instinct?

Yields in Budapest, Prague and Warsaw are similar to those in

Madrid, Paris and Milan – But do they offer better potential?

Germany is considered by many as cheaper than Central Europe –

does the economic growth reflect this

Equity is driving the market not debt – debt set to rise in cost
The emerging markets have quicker yield compression than CE –

can investors expect the same returns in the short term

Russians are rich but they want to work with international capital –

local knowledge, global experience

SLIDE 17

CEE market overview

The region will continue to grow in importance – a core market
Eastern Europe remains under priced – not for long
Central Europe is approaching being over priced
Don`t just look at the yield but at what you are buying – buy real

estate, not just an income

Eastern Europe can not meet demand for modern space – driving

prices up for western stock

Secondary towns to continue to be of interest - especially for

retail

Opportunities and asset managing first generation stock – value

generation by working assets.

SLIDE 18