International Property Handbook: 2017 trends and a look back at 2016 April 2017 Introduction Dear Colleague, The International Property Handbook from Deloitte’s Global Real Estate & Construction group tracks the flows of real estate capital and provides an overview of investment trends and key deals in the most active global real estate investment markets. This handbook reflects back on 2016 analyzing economic data and real estate investment in 21 countries around the world to provide insights on potential trends in 2017. With a strong economic outlook, we saw increases in cross-border investment, yet the overall global transaction volume was around the same as it was in 2015. Private and unlisted funds were the most active investors followed by institutional funds, indicating the large amount of private capital available to be deployed to real estate investment. Given many of the investors still have significant amounts of capital to deploy, and the fundraising market for real estate investment remains strong, we believe that these trends indicate strong growth in the industry moving forward. Large institutional investors and sovereign wealth funds have been initiating or increasing capital allocations to global real estate investments, and we believe that will help sustain real estate investment activity into 2017 and beyond. Our analysis also indicates that while many of the largest real estate investment markets have fully (or nearly fully) recovered from the global financial crisis, other markets are in earlier stages of recovery, indicating potential opportunities for 2017 and beyond. We hope you find this report interesting. We would be delighted to discuss the details of this research with you and how it may impact your business. Regards, Robert T. O’Brien Global Leader, Real Estate & Construction Deloitte Global Deloitte International Property Handbook 2 Contents International economic overview 6 Netherlands 74 International investment activity 9 Norway 79 Unlisted real estate funds 15 Poland 84 Private fundraising 16 Russia 89 Pricing and performance 17 Spain 93 Listed property performance 18 Sweden 99 Data summary 19 Switzerland 104 International tax Rates 22 United Kingdom 110 North America Asia/Pacific Canada 23 Australia 117 United States 31 China 125 Europe Japan 131 Belgium 46 Singapore 137 France 51 South Korea 141 Germany 56 Taiwan 146 Ireland 64 Key contacts 150 Italy 69 Recent reports from Deloitte 153 Deloitte International Property Handbook 3 What has changed? Comparing data across the 21 countries under review for 2016 . The economic outlook is stronger - Both the current year and the 5-year outlook for GDP growth is positive for the coming years, with an average increase of 2 percent . Bond yields have fallen and stock markets have risen - The average 10-year government bond yield is now below 2 percent, remaining at historical lows - On average, global stock markets rose by 20 percent in 2016 . Aggregate global real estate investment totals remain broadly stable - Overall transaction volumes are 2 percent below the amounts reached in 2015 - Investment trends are very polarized due to different macroeconomic indicators with significant increases in China and other countries like Spain and Ireland, while other countries such as the United Kingdom and the United States show significant decreases - The countries with positive investment volume growth are those in which the potential investors expect capital growth due to macroeconomic indicators, expectations of rental growth, and yield compression . United States and China received 70 percent of total global real estate investment during 2016 - Investment in residential and offices remains stable and makes up 62 percent of total investment - Offices continue to be the preference for investors and therefore yields have declined further in most markets - Private and unlisted funds were the most active investors, followed by institutional funds . The capital raised continues to increase, but due to the reduction in investment opportunities in the main markets, investors are beginning to explore new alternative locations . 2016 saw significant increases in cross-border activity, especially in key countries in Europe due to the strength of the US Dollar Deloitte International Property Handbook 4 Cross-border capital flows The largest routes US to Europe $66bn Europe to Europe $35bn -42% -7% APAC to Europe $19bn -12% APAC to APAC $76bn +34% APAC to US $32bn -11% Investment volumes 2016 Investment Volumes 2015 vs. 2016 Source: RCA Deloitte International Property Handbook 5 International economic overview Main considerations 2016 was a volatile year due to the global political 2016 GDP growth uncertainties including Brexit, the US election, and the Italian 8% referendum, as well as China's slowdown. 7% 6% The United States saw moderate growth. However, the 5% financial markets have responded vigorously since President 4% Trump was elected and the labor market continues to show 3% improvement. 2% 1% In Europe, some economies have been developing better than 0% -1% others, such as Ireland, Spain and Sweden; but in general US terms, the European Central Bank’s economic policies and the UK Italy Spain China countries’ efforts have made for a strong and continuous Japan Russia Poland France Taiwan Ireland Canada Norway Sweden Belgium economic recovery. Australia Germany Singapore Switzerland Netherlands The United Kingdom’s decision to leave the European Union by South Korea 2019 has raised some concern about the future of the Union, Source: Economist/Deloitte raising uncertainty. 2016 Stock market performance Ireland has been one of the fastest growing economies in the Eurozone. Meanwhile Russia stands in last place; its economy contracted 0.6 percent during 2016 and its inflation is above 7 70% percent. 60% 50% Some recent data from the Chinese government indicates that 40% the economy is stabilizing, fuelled in part by government 30% stimulus and an easing of monetary policy. 20% In property investment markets, where the major investors 10% look for “macro risks”, we see a correlation between the trend 0% US in property investment and the macroeconomic indicators such UK Italy as GDP growth. Spain China Japan Russia Poland France Taiwan Ireland Canada Norway Sweden Belgium Australia Germany Singapore Switzerland Netherlands South South Korea Source: Bloomberg/Deloitte Deloitte International Property Handbook 6 International economic overview Main considerations There remains significant divergence between the monetary Short and long-term interest rates, January 2017 policies being enacted by the major central banks. 8% In the United States, the Federal Reserve is setting an 6% appropriate monetary policy with an unusual situation of low 4% unemployment, low interest rates and low inflation; raising its benchmark interest rate by 0.25 percent, only the second 2% increase in a decade. 0% In Europe, although interest rates have been low for a long -2% time, the European Central Bank’s quantitative easing program US UK (which began in March 2015 by purchasing securities every Italy Spain China Japan Russia Poland France Taiwan Ireland Canada month worth €60bn) is expected to continue in order to reduce Norway Belgium Sweden Australia Germany borrowing costs and bond yields to encourage corporate Singapore Switzerland Netherlands investment. It is anticipated that there will be further South Korea quantitative easing in Europe and interest rates are not 10 Years Government Bond Rate expected to increase until at least the second half of 2017. 3 Months Government Bond Rate Source: Bloomberg/Deloitte Despite this, due to higher oil prices and wage pressure in the Inflation forecasts United States, we expect an increase in inflation over the coming years. 8% China’s debt level shows potential risks that provide uncertainty. Total debt, including both private and public sector 5% debt, is now circa 260 percent of GDP. This compares with circa 280 percent for developed economies on average, suggesting that China’s debt level is not excessive. Yet China is an 2% emerging country, and emerging countries historically carry far less debt as a share of GDP than developed economies. -1% UK USA Italy Spain China Japan Russia Poland France Taiwan Ireland Canada Norway Sweden Belgium Australia Germany Singapore Switzerland Netherlands South South Korea 2017-2020 Average 2016 Source: Deloitte Global Economic Outlook 4Q 2016 Source: Economist/Deloitte Deloitte International Property Handbook 7 International economic overview Main considerations The latest Deloitte European CFO Survey reported a Is this a good time to be taking greater risk onto your deterioration in confidence during 2016. Sentiment has fallen balance sheet? most in northern European economies, consistent with the 0% weaker export outlook for these countries. The Austrian CFOs’ perception of external economic and financial uncertainty -10% remains the highest among the 13 countries covered in the -20% survey. -30% -40% Europe faces an unusual situation with the rise of populist movements due to the declining trust in political parties and -50% government institutions. The UK’s Brexit decision is a clear -60% warning for political leaders for 2017 and beyond. -70% The M&A Index model predicts a modest decline in volumes for -80% 2016. Overall, volumes have held up reasonably well and are -90% down only 3 percent compared with 2015, due to slowing AUS UK GER SWI NOR FR POL BEL IRE ITA NED SPA RUS activity since the second half of 2016. Source: Deloitte European CFO Survey Global M&A deal volumes 12,500 12,000 High: 11,964 11,500 Mid: 10,520 11,000 Low: 9,111 10,500 10,000 9,500 9,000 Jun-10 Jun-13 Jun-11 Jun-12 Jun-14 Jun-15 Jun-16 Dec-09 Dec-12 Dec-13 Dec-16 Dec-10 Dec-11 Dec-14 Dec-15 M&A deal volumes (actuals) Deloitte M&A Index (projections) Source: Deloitte M&A Index Deloitte International Property Handbook 8 International investment activity Main considerations Global investment in real estate decelerated slightly during Investment volume growth: 2015 vs 2016 ($bn) 2016, overall transaction volumes were 2 percent below the 40% amounts reached in 2015.