1. 2018 CULS Market Trends
Andrew Hook
22nd November 2018

2. 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.

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

4. 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, ; AI in-house forecasts Q3 2018,

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

6. 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