The Office Handbook Investment & Financing Keys Spain 2017

February 2017 Financial Advisory I Real Estate @ 2017 Deloite Financial Advisory 1 of 15 The Office Handbook Javier García-Mateo, MRICS Partner Financial Advisory ‖ Real Estate Spain 2017 [email protected] Mob: +34 659 90 02 15

@ 2017 Deloite Financial Advisory 2 of 15 ► Vacancy Rate in (11%) and Barcelona Key Investment (10%) slightly decreasing. and Financing Drivers The Office Handbook ► New Supply continues to increase. 155,000 4 2 sqm recently refurbished delivered in 2016 in Spain 2017 Madrid and Barcelona Supply & ► High Liquidity for both ► Take-Up in Madrid and Barcelona decreased by Equity and Lending due Demand 13% and 25%, due to the lack of large letting to the progressive entry of new EXECUTIVE SUMMARY deals. Nowadays, most offices buildings aim to players. become a Grade A to compete at a higher rent. ► Increasing lender i. Impressive building design. appetite for technical Grade ii. Connection to the user and deep A buildings (LEED/BREAM understanding of the millennial way of work. iii. Becoming a green and technological building. ► Low yields sets a barrier for higher LTVs for senior loan ► Prime Rent are experiencing a positive trend facilities structures. 1 due to the favourable macro-economic conditions. Market Overview Consolidation of the recovery Office Key 2015 vs 2016 Investment Market ► GDP growth: +3.3% 2016 (+2.5% 2017 F) 3 5 Factors ► Unemployment rate (2016) decreasing by 9.7% (CAGR) since 2013. ► EMEA region accounts for 35% of the total Office Full Due Diligence required to Investment volume. Spain accounts for 2% of this perform the optimal deal analysis: ► Exports growth: +4.5% amount. ► Financial Factors: Understanding of NOI vs GRI ► Increase in Business Confidence Index: ► In Spain, Office Investment volume in 2016 decreased ► Business Performance: Analysis of income +6.6% (Q4 14 –Q4 16), but was stable in by 8% (€4,895 M) and accounted for 40% of total sustainability analysis Q4 15/Q4 16 var. non-residential investment. ► Legal Factors: All intervenient contracts analysis. Urban and legal risks analysis. ► Creation of Companies Index: +1.5% in ► Tax Factors: Analysis of tax impact on results YoY Var. ► SOCIMIs (Spanish REITs) took part in 55% of total analysis Office transactions in Spain during 2016 ► Technical Factors: Identification of structural or ► MAD & BCN are the most competitive cities technical defects and compliance with regulations. in Europe as an alternative to London due to ► Madrid leads Europe in Capital Value growth (20%). (*) IMPORTANCE OF LEED/BREEAM CERTIFICATION. @ 2017Brexit Deloite. Financial Advisory Barcelona grows by 13%. 3 of 15 Office Market: Madrid & Barcelona outperform Europe Capital Values and Trend Yield Analysis

The Office Handbook 10 Year Bond Spain 2017 Commercial 2015-2016 (18th January 2016) Investment 1.32% 0.80% 0.32% 1.39% 0.32% 0.32% 0.93% 0.43% 1.39% 0.66% 0.52% 1.91% n.a. 3.84% ▼38 bps ▼7 bps ▼15 bps ▼36 bps ▼15 bps ▼15 bps ▼6 bps ▼23bps ▼36 bps ▼18 bps ▼27 bps ▲35 bps ▲106 bps Europe and Spain Dif. 10 years bond – 183 bps 245 bps 333 bps 261 bps 388 bps 358 bps 332 bps 457 bps 236 bps 484 bps 348 bps 234 bps n.a. 141 bps EXECUTIVE SUMMARY Yield 2015

3.700

Capital Value Capital rent Drivers of the increase in crossOferta-border y pereach €1 of Supply 3 % investment: 8 % 273.200 demanda € Accessibility to credit and 4 % 20 % moreand attractive financing 13 % 9 % 12 % 2.700 - % 22 conditions 1% 18 % 1 € 2.200 2 % 8 % 14 %

YieldingDemand Assets are more 6 % 17 2016 attractiveCRE Market than - 1.700€

2 Investment Grade Capital Values Growth (%) Growth Values Capital 2015 12 LeccionesSpain 2015 0 1.200 Dollar strength (For € 8%

American investors) and

aprendidas y Viena

Berlin

Dublin

Lisbon

Madrid

Munich London

3 Euro weakness Brusels

Frankfurt Barcelona

perspectivasLecciones 7% Amsterdam Luxemburgo Politicalaprendidas and financial y uncertainly in certain 6% 4 regions perspectivasof Europe 5%

4% Europe has experienced a global yield compression from

3% 2016 2015 and now, which has resulted in - significant increases in Capital

apart from the effect that 2% 2015 Values, Trend(%) Yield other market factors could have had @ 2017 Deloite Financial Advisory Min. 2007 Max. 2009 2015 2016 such as the trend in rent. 4 of 15 Source: Deloitte RE, Bloomberg 4 Brexit Opportunity The Office Handbook Spain 2017 From a cost perspective, Madrid and Barcelona are the most competitive cities despite the limited office space available. EXECUTIVE SUMMARY Total Office Inventory vs Vacant Space at January 2017 (Mill. Sqm)

60 Key Drivers for the alternative cities to London 53 48 after the potential impact of Brexit: 50

Office Inventory and the MAD/BCN 40 current vacant space available 42 €m for companies 1 30

Rental Level and the 20 affordability of spaces for 13 12 potential companies 2 10 6 3.7 1.4 0.6 1.0 2.2 Total Costs for a company, PARIS 0 including fit out costs and 207 €m 103 €m Madrid Barcelona Frankfurt Paris London 3 labor / wages costs Inventory (Mill. sqm) Vacant Space (Mill. Sqm)

Quality of life and leisure Labour & Wages Av. Fit out Min. Contract Rent CBD Total costs for a opportunities for the costs Costs Duration (€/sqm/month) company* (€m) 4 employees (€/person/h) (€/sqm) (years) Madrid 29 21 693 3 42 Barcelona 21 21 693 3 41 Frankfurt 37 32 1,334 5 103 Strong competence Paris 65 35 1,422 9 207 between cities in Europe to London 124 26 1,028 7 138 attract companies *Total costs calculated for a company occupying 3,000 sqm in CBD with the after the Brexit Minimum contract per city and considering 1 employee/10 sqm working 8 Impact. Madrid and hours/day. Fit out Costs: Medium specification @ 2017 Deloite Financial Advisory Source: Deloitte, Eurostat Barcelona, potential options. 5 of 15 European Investment Market The Office Handbook Cepsa Tower (Spain) with €490m of Investment Spain 2017 Volume, was the fourth largest transaction of 2016 in Europe. EXECUTIVE SUMMARY

2% of the Total Office Investment of the analysed countries Poland Belgium €1,000m Russia 19% €650m €730m France Spain 13% United Kingdom €490m 38% Switzerland Norway €220m 6% Ireland Italy Italy Spain United Kingdom Germany France 5% Netherlands Sweden PIAZZA CEPSA CITYPOINT 9 PLACE EDISON TOWER ROPEMAKER TOWER VENDÔME Poland Italy ST Office Office Office Office Sweden 1% Belgium Norway Office 4% 1% France Netherlands Russia 3% Ireland Switzerland 1% Germany 3% 2% Spain Source: Deloitte 2% United Kingdom

BUYER BUYER BUYER BUYER BUYER Cepsa Tower. 4 Towers area. Trophy Assets Pontegadea Brookfield Office Pr. Samsung SRA Norges Bank IM

VENDOR VENDOR VENDOR VENDOR VENDOR Nord Ovest IPIC Receiver - KPMG Commerzbank Sloane Cap. Part. 29,128 sqm 56,250 sqm 65,587 sqm 52,700 sqm 26,800 sqm

@ 2017 Deloite Financial Advisory Source: Deloitte 6 of 15 European Investment Market The Office Handbook Spain with €4,895m of office investment volume in 2016, is Spain 2017 one of the most significant players in the European Market.

EXECUTIVE SUMMARY GLA Price # Country Asset Buyer Vendor (sqm) (€m)

1 France 9 place Vendôme 26.800 1.000 Norges Bank IM Sloane Capital Partners European Yields (2016): 2 Germany Commerzbank Tower 52.700 730 Samsung SRA Asset Management Commerzbank/CFB-Fonds 64/ 65 3 United Kingdom CityPoint, Ropemaker St 65.587 650 Brookfield Office Prop Receiver - KPMG Minimum Prime Yield 4 Spain Cepsa Tower 56.250 490 Pontegadea IPIC Country last 5 France 65-67 avenue des Champs-Elysées 10.500 Middle-East investor Meyer Bergman & Thor Equities 2016 490 10 years 6 United Kingdom Principal Place 55.740 443 ENPAM (Italy) Brookfield Property Part France 3.25% 3.80% 7 United Kingdom The International Quarter 47.844 429 Deutsche Asset & Wealth Lend Lease 8 United Kingdom Aldgate Tower 30.193 402 China Life Insurance Co Aldgate Developments Ltd Germany 3.65% 4.00% 9 Germany International Business Campus 84.000 400 GEG German Estate Group AG RFR Holding GmbH UK 3.15% 3.75% 10 Spain Adequa 100.000 380 Merlin Properties - SOCIMI Lone Star 11 Germany Zurich Zentrale Köln 60.000 350 Warburg HIH Invest Strabag Real Estate; ECE Belgium 5.50% 4.80% 12 United Kingdom Fore Street, 1 21.998 315 Kingboard (Hong Kong) Brookfield Office Prop Spain 3.75% 3.80% 13 France CBX Tower 41.000 300 Tishman Speyer Properties France Dexia Crédit Local 14 Germany BayWa Hochhaus 54.000 280 WealthCap BayWa AG, Competo Capital Sweden 3.70% 4.25% 15 France 2-8 rue Ancelle 17.200 267 Amundi Uninail Rodamco Italy 4.25% 4.50% 16 Germany Treptowers 3 90.000 230 Blackstone Real Estate Partners n.a. 17 Italy Piazza Edison 29.128 220 Fondo Italia Trophy Assets - Hines Fondo Core Nord Ovest - Ream SGR Source: Deloitte 18 Italy Via Monterosa 91 86.086 220 AXA Selectiv'Immo and AXA CoRE Partners Group For more information see CHAPTER 4 (Key 19 Italy Via Lorenteggio, Vodafone Village 61.857 200 Coima Res SIIQ Real Estate Center (Carminati Gr) Investment and Financing Drivers) 20 France 115-123 boulevard Montmartre 9.500 176 Korea Post Natixis in the full report. 21 Spain Las Mercedes B.P. 80.000 140 GreenOak Standard Life Investments 22 Italy Piazza Cordusio 2 14.272 130 Bayerische Versorgungskammer Fondo Donatello - Comparto David 23 Spain Cuatrecasas HQ 15.094 124 Axiare Familia Reig 24 Spain Gas Natural HQ 32.000 120 IBA Capital Partners Gas Natural Fenosa Top 5 deals per country (UK, 25 Italy Via della Chiusa 25.000 120 AXA Group Northstar Germany, France, Italy and Spain) amount to €3,360m (2016).

Top 5 Spanish Deals accounts for 15% of this investment volume. @ 2017 Deloite Financial Advisory Source: Deloitte 7 of 15 Spanish Investment Market (CRE) The Office Handbook The total investment volume was 4% higher in 2016 than the Spain 2017 investment volume in 2015. Office typology investment decreased by 8% despite the strong macro-economic EXECUTIVE SUMMARY conditions. However the retail segment continues to improve.

12,298 Top 10 Spanish deals: 11,845 12,000 Offices # ASSET PRICE (€m) GLA (sqm) ZONES 2,155 1 Cepsa Tower 490 56,250 CBD Retail Shopping Centre 2,702 2 Adequa 380 100,000 DEC 10,000 3 Las Mercedes B.P. 140 80,000 DEC Retail High Street 820 8,552 4 Cuatrecasas HQ 124 15,094 RBD 674 660 Logistics 5 Gas Natural HQ 120 32,000 DEC 897 Rest of CRE 8,000 1,263 6 Alcalá 45 104 18,655 RBD Hotels 596 60% 7 Gas Natural Portfolio 86.5 25,100 n.a. 3,769 1,894 8 Meridia Portfolio 66 40,000 n.a. 6,000 2,242 9 Castellana 55 60 10,667 CBD 10 Roca Junyent HQ 55 9,960 CBD 4,470 750 Source: Deloitte 4,000 150 3,189 3,151 2,297 Total office investment volume in Spain at 2016: 576 607 €4,895m 1,467 2,087 5,313 279 120 4,895 Office 591 751 Segment 2,000 644 519 88 A total office pipeline investment volume of 687 571 867 2,520 40% €1,417m is expected to be transacted in Spain 1,460 1,056 365 544 807 Source: Deloitte - 1% 31% 2010 2011 2012 2013 2014 2015 2016

€1,417m 68% - 8%

@ 2017 Deloite Financial Advisory Source: Deloitte Source: Deloitte 8 of 15 Short Term Medium Term Long Term TOTAL Lease Market The Office Handbook Recovery of Business Confidence indicators is having a Spain 2017 progressive impact on average rental prices in both Markets and areas. EXECUTIVE SUMMARY Average Rent Growth Average Rent Growth Madrid Barcelona

CONSUMER EXPENDITURE 112 CONFIDENCE Recovery of most 128 127 INDEX 94.9 points consumption groups CBD (base 100) during 2013-2016 110 109 CBD EFFORT BUSINESS 108 123 CONFIDENCE RATES Recovery since 108 Household E.R. 2013. Growth being reduced of 31,4% 2013-2016 GROWTH 118 106 vs RBD 105 CREATION OF 105 DEC GDP COMPANIES DEC 112 Growth of Q1 2017 113 3.3% in 2016 aggregated 104 110 RC increase of 3,76% compared 104 to Q12015 RC RBD 108 109 102 103 UNEMPLOYMENT EXPORTS 108 OUT RATE Growth of 4.5% Decreasing ar CAGR of (2014 – 2015) 107 9.7% since 2013 100 OUT 103

100 100 104 Average Rent trend Rent Average

98 (2014) 100INDEX BASIS 98 Average Rent trend Rent Average INDEX BASIS 100 (2014) 100INDEX BASIS 2014 2015 2016 As take-up slightly 2014 2015 2016 decreased, vacant space reduced and as a CBD RBD RC DEC OUT Central Business District Rest of Business District Rest of City Decentralized Out of the city consequence, Rent has increased during recent For more information see CHAPTER 2 (Supply & Demand) with the full rental market analysis based on Deloitte Database. years.@ 2017 Deloite Financial Advisory Source: Deloitte 9 of 15 Standard lease terms generally accepted The Office Handbook Spain 2017 2014 2015 2016 EXECUTIVE SUMMARY Contract 5 5 5 Duration (Break option 3rd Year) (Break option 3rd Year) (Break option 3rd Year) (years) (1) (1) (1) THE KEY FOR SUCCESS Space leased by companies 13-14 12 10 CONNECTION per employee (sqm/employee) (sqm/employee) (sqm/employee) TO THE ASSET (sqm/employee) MANAGEMENT Average space leased by 912 / 638 919 / 748 853 /561 (2) CONNECTION companies (sqm)(2) (sqm) (sqm) (2) (sqm)

TO THE END DESIGN Terms USER Average Rent Free Period 4 4 2-3 (months) (months) (months) (months) SUSTAINBILITY Main Main Transfer of Property Tax and Community 80% 100% 100% Source: Deloitte Charges to the tenant

The lease contracts have (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. responded positively to the (2) Average Space leased by companies in MADRID / BARCELONA market momentum, particularly in CBD, where the vacant space in quality buildings strongly decreased during the @ 2017 Deloite Financial Advisory Source: Deloitte recent years. 10 of 15 Source: Deloitte Financing Market The Office Handbook Yield assets: Improvement of the financing terms Spain 2017

EXECUTIVE SUMMARY 2013 2014 2015 2016

Framework Credit Access Financing MAIN DRIVERS FOR THE INCREASING Constraints Upturn LENDER APPETITE

MACROECONOMIC ENVIRONMENT Main Players Institutional Investors Banking / Assurance / Debt Funds Companies . Fundamentals improvement . Monetary Policy: QE, low funding costs, etc. Upfront Fee 200-250pbs 150-200pbs 75-150pbs 50-100pbs FINANCIAL SECTOR . Restructuring of the Financial Sector . P&L reconstruction Spread 250-300pbs 200-250pbs 150-200pbs 100-175pbs

REAL ESTATE INVESTMENT MARKET

. Excess of Liquidity: Increase in transactions . Entry of new sponsors LTV <40%(1) 30%-40% 30%-50% 30%-55%

. Alternative to the fixed income / bond yields Main Main Conditions

Balloon 70%(2) 60% 80%-100% 80%-100% Development loans: Regular lenders are returning to the market (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) Senior Debt (2) Sustainable LTV to face the debt service with high funding costs (A higher LTV will result in a larger debt service) Yielding assets: 2016 more and @ 2017 Deloite Financial Advisory Source: Deloitte more competitive 11 of 15 The Office Handbook Main Players: Spain 2017 Equity EXECUTIVE SUMMARY

CORE PROFILE STILL DOMINATES: 2015 2016

n.a. Value n.a. 5% 15% Core+Added Value Added 3% 9% 5% Core+ 7%

Core 73% Core 84%

(€m) (€m) Core 3.889 Core 4.102 Debt Core+ 355 Core+ 149 Value Added 247 Value Added 419 n.a. 822 n.a. 225

Source: Deloitte

Most active players expected to stay active in 2016: @ 2017 Deloite Financial Advisory Source: Deloitte 12 of 15 The Office Handbook Spain 2017 WHAT IS NEXT?

@ 2017 Deloite Financial Advisory 13 of 15 What is next? Innosys by Deloitte The Office Handbook Key for lease asset management: Spain 2017 Data, Analytics and Planning

EXECUTIVE SUMMARY

Keys for asset management:

Solution developed by Deloitte for management real estate 1 companies. Data

Goals: Planning, Analytics & Lease Analytics 2 Management.

Lease Management: innosys 3 Landlord & IFRS16

More than 185 Planning implementations at 4 European level. Source: Deloitte

Innosys for lease asset management

Technology Microsoft, Arcplan, Esri, Leverton & Excel

Reporting / Analytics Source: Deloitte @ 2017 Deloite Financial Advisory Scenaries / Simulations 14 of 15 Key Market Indicators: The Office Handbook Spain 2017 Historical Analysis – 10 year basis

EXECUTIVE SUMMARY MADRID Key Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Inventory (mill. Sqm) 9.94 11.22 11.55 11.92 12.21 12.38 12.63 12.69 12.73 12.83 12.93 Key Office Market Indicators Vacant Space (mill. Sqm) 0.50 0.58 0.81 1.11 1.29 1.41 1.58 1.80 1.70 1.51 1.39 Vacancy Rate (%) 5% 5% 7% 9% 11% 11% 13% 14% 13% 12% 11%

New Supply (sqm) 568,000 1,281,000 337,000 366,000 295,000 168,000 251,000 56,000 40,000 100,000 96,704

Rent in CBD (€/sqm/month) 29 36 39 31 27.5 26 23 23.5 24.5 26.5 29

Take-Up (sqm) 681,500 844,700 491,300 312,700 454,400 356,600 297,300 395,100 420,000 573,000 496,000

Yield CBD (%) 4.25% 5.00% 5.90% 5.80% 5.60% 5.65% 6.00% 5.75% 5.50% 4.25% 3.75%

Capital Value CBD (€/sqm) 8,188 8,640 7,932 6,414 5,893 5,522 4,600 4,904 5,345 7,482 9,280

BARCELONA

Key Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

vs Inventory (mill. Sqm) 4.85 4.97 5.34 5.58 5.76 5.83 5.86 5.92 5.88 5.89 5.94

Vacant Space (mill. Sqm) 0.27 0.29 0.41 0.63 0.81 0.81 0.83 0.89 0.83 0.67 0.59

Vacancy Rate (%) 6% 6% 8% 11% 14% 14% 14% 15% 14% 11% 10%

New Supply (sqm) 138,000 115,000 372,000 241,000 181,000 69,000 30,000 55,000 -35,000 5,000 58,000

Rent in CBD (€/sqm/month) 20 22 22 18 17.0 16 15 14.5 15.0 16.5 21

Take-Up (sqm) 386,800 358,200 349,800 202,200 237,500 267,500 204,600 197,600 217,000 420,600 315,000

Yield CBD (%) 4.50% 5.25% 6.00% 6.00% 5.80% 5.95% 6.25% 6.00% 5.75% 4.75% 4.00%

Capital Value CBD (€/sqm) 5,267 4,914 4,400 3,600 3,517 3,176 2,832 2,900 3,130 4,168 6,300

Recovery of rental key SPAIN Key Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 since 2013. It is indicators Offices Investment Volume (mill. €) 3,818 5,879 4,289 1,013 1,460 1,056 544 807 2,520 5,313 4,895 expected to remain stable during the next years given the slow down of the macro-economic conditions.@ 2017 Deloite Financial Advisory Source: Deloitte 15 of 15 10 of 134 Source: Deloitte @ 2017 Deloite Financial Advisory 16 of 15