2018 CULS Market Trends Andrew Hook 22nd November 2018

Where are we in the cycle? Property markets are well-advanced in the cycle… Late-cycle indicator 2007 2016 2018 2018 Risk Assessment Absolute pricing Strong Capital values are far above average and yields extremely low. Relative pricing Weak Despite property yields at record low, relative pricing remains supportive. Prime-secondary yield gap Moderate Structural factors sustaining prime-secondary yield gap. REIT premium/discount to NAV Listed market pricing in private market weakness. Alternative sector investment Strong and sustained demand for alternative sectors. Leverage Though increasing, debt usage is still modest by historic standards and well below the peak seen in 2007. M&A activity Companies have been engaging increasingly in M&A. Portfolio and large asset premiums Investors have been paying a significant premium to acquire large lot sizes or portfolios. Style drift “When an income player seeks out development exposure to get access to assets, you need to think about investment market capital value sustainability.” New supply Development levels are below historical norms but on the increase. NOT UPDATED New supply => green to orange Discount to NAV: -0.78% => Evaporating Continent NAV premium suggests public market no longer anticipates further yield compression.

Almost all central banks are now tightening policy Gently rising interest rates is set to characterise the investment backdrop

Forecast assumptions: bond yields set to gradually increase Reaching 3.0% in 2023 % % Interest rates jumped in Q1 following strong US economic performance Source: Thomson Reuters Datastream, IPD Annual Digest, 2000-2017; AI in-house forecasts Q3 2018, 2018-2022.

Residential Leading indicators point to a slowdown House prices – next fiver years: Greater London -0.5 SE 0% RUK 1%

The balance of (identifiable) risks is to the downside Increased risk of global trade war Rising levels of required cap ex Higher interest rates Tightening tantrum Stronger UK growth Higher inflation (policy error) Low Likelihood High Domestic political shock Looser global capital controls Soft Brexit Global Trade war Oversupply Hard Brexit Lower for longer interest rates Global geopolitical crisis Extreme efficiencies in use of space No Brexit Negative Impact Positive Source: Aviva Investors, August 2018