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@ 2017 Deloite Financial Advisory1 of 16
The Office Property Handbook 3.0Investment & Financing Keys
Spain 2018
Financial Advisory I Real Estate
January 2018
@ 2017 Deloite Financial Advisory2 of 16
► Vacancy Rate in Madrid (10.2%) and Barcelona (7.9%) decreasing at a lower pace than expected.
► New Supply & Refurbishments continues to increase. 236,000 sqm recently delivered in 2017 in Madrid and Barcelona.
► Take-Up in Madrid and Barcelona increased by 11% and 7%, respectively.
► BCN take-up in Q4 2017 decreased in YoY var. However, take-up figures in H2 2017 are in line with take-up reached in H2 2016.
► Thanks to public sector companies (Government) Madrid take-up grew in 2017. This segment accounted for 14% of total annual take-up in the city.
► Prime Rent is experiencing a positive trend Both face rents and net effective rents improved in CBD.
► GDP growth: +3.1% 2017 (+2.5% 2018F)
► Unemployment rate (2017) decreasing by 11.0% (CAGR) since 2013.
► Exports growth: +3.0% YoY Var.
► Increase in Business Confidence Index: +3.0% (Q4 16 –Q4 17)
► Creation of Companies Index: +1.5% in YoY Var. The performance of the different region-cities has been heterogeneous.
2Supply &
Demand
3OfficeInvestment Market 5 Key Investment
Indicators
The Office Property Handbook 3.0Spain 2018
EXECUTIVE SUMMARY
Market Overview
1Strong growth but some
uncertainties remain
2017-2018
► EMEA region represents 35% of the worldwide Office Investment volume. Office Investment in Europe grew by 9% in 2017.
► Office Investment volume decreased by 53% (€2,295M YoY Var.) in Spain during 2017 and accounted for 21% of total non-residential Real Estate investment.
► The overall high valuation of non-prime office properties is the main reason of the lower investment activity in 2017. Failed divestment processes are leading to refinancing strategies to profit from the lower borrowing cost and the higher LTVs currently achievable.
4Financing Activity
► German lenders are back and expect to take the lead for low LTVs
senior loan facilities.
► Spanish banks forced to movetowards value added financing.
► More lenders capable to act as bookrunners in 2018.
► Borrowing cost reached its lowestpoint since 2007.
► Alternative capital providers eagerto structure junior or mezzaninefinancing tranches.
Key Indicators by areas in 2017
Rent (€/sqm/mth) (YoY Var. %) Cap. Value (€/sqm) (YoY Var. %)
Madrid Barcelona
CB
DD
EC
Max.
Avg.
Min.
Max.
Avg.
Min.
Cap.Value
13,292 (+5%)
10,457 (+13%)
6,900 (+11%)
5,082 (+15%)
3,026 (+15%)
1,800 (+8%)
Rent
► 36 (-3%)
► 30.5 (+5%)
► 23 (+5%)
► 18 (+3%)
► 12.5 (+1%)► 8.25 (+3%)
Cap.Value
8,571 (+14%)
7,200 (+12%)
4,800 (+13%)
6,171 (+6%)
4,350 (+4%)
2,824 (+3%)
Rent
25 (+6%)
22.5 (+7)
17 (+6%)
18 (+6%)
14.5(+4%)10 (+3%)
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3
Oferta y
demanda
Commercial
Investment Europe and Spain
Supply
and
DemandCRE Market
Spain 2015
EXECUTIVE SUMMARY
Europe has experienced a global yield compression since
2013 and now, which has resulted in significant increases in Capital Values, apart from the effect that
other market factors could have had such as the trend in rent.
European Investment Office Market: Capital Values in MAD and BCN are hitting double digit growth since 2013
20%
3%
19%
12%
16%
5%
13%
9%
1%
21%
(10%)
0
5,000
10,000
15,000
0
Lo
nd
on
Paris
Mu
nic
h
Barcelo
na
Fran
kfu
rt
Berli
n
Du
bli
n
Am
ste
rd
am
Mad
rid
Bru
sels
Vie
na
Mil
an
Lu
xem
bu
rg
o
Lis
bo
n
30% 40%
26%
1.50%▲11 bps
0.57%▲25 bps
0.57%▲25 bps
Yie
lds T
rend (
%)
2017-2
016
Min. 2007 Max. 2009 2016 2017
10 Year Bond
2016-2017(12th January
2018)0.60%▲17 bps
0.93%▼6 bps
0.57%▲25 bps
0.84%▲4 bps
1.33%▲1 bps
0.66%▲14 bps
2.00%▲9 bps
1.83%▼201 bps
0.73%▲7 bps
Source: Deloitte RE, Bloomberg
0 €
5,000€
10,000€
15,000€
n.a.
217 bpsYield 2017 - Dif. 10
years bond 231 bps 243 bps 225 bps 313 bps 268 bps 332 bps 340 bps 200 bps 402 bps 324 bps 150 bps n.a. 317 bps
Capital Valu
es G
row
th (
%)
2017-2
016
Cap
ital V
alu
e
(€/
sq
m)
1.50%▲11 bps
2%
3%
4%
5%
6%
7%
8%
Cap. Value (€/sqm) 41,143 24,762 14,000 7,200 12,000 9,785 14,565 10,350 10,457 6,000 8,615 14,570 13,116. 4,932
The Office Property Handbook 3.0Spain 2018
Initial Yield European Chart:
Germany
Italy
Spain
UK
France
2,5%
3,0%
3,5%
4,0%
4,5%
5,0%
5,5%
6,0%
6,5%
7,0%
7,5%
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EXECUTIVE SUMMARY
4% of the Total Office Investmentof the analysed countries
Source: Deloitte
TORRE GLORIES (#87 in European Deals Ranking)
Transactions in Spain have not been relevant within Europe in 2017.
European Investment Office Market:
Source: Deloitte
€1,800m €1,433m €1,363m
€1,100m €775m
FranceUnited KingdomUnited KingdomGermanyGermany
VENDORCA Immo Deutschland
100,410 sqm
BUYERDeka Immobilien
Coeur Defense
Office
BUYERPrimonial REIM
VENDORLone Star
175,362 sqm
20 Fenchurch Street
Office
BUYERLee Kum Kee
VENDORMorgan Stanley
62,336 sqm
Sony Center
Office
BUYERMadison Int.
VENDORHines
132,496 sqm
Tower 185
Office
LeadenhallBuilding
Office
BUYERC C Land Hldgs
VENDORBritish Land
56,669 sqm
Poland2%
Ireland2%
Switzerland2%
Russia2%Belgium
3%Norway
3%
Sweden3%
Spain4%
Italy5%
Netherlands7%
France18%
Germany25%
United Kingdom26%
The Office Property Handbook 3.0Spain 2018
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EXECUTIVE SUMMARY
Top 5 deals per country (France, UK, Germany) amount to
€6,471m (2017).
European Yields (2017):
For more information see CHAPTER 4 (Key Investment and Financing Drivers)
in the full report.
CountryPrime Yield
2017
Minimumlast
10 years
France 3.15% 3.15%
Germany 3.75% 3.75%
UK 3.50% 3.25%
Belgium 4.75% 4.75%
Spain 3.50% 3.75%
Sweden 3.50% 3.50%
Italy 3.50% 3.50%
Source: Deloitte
Spain (€2,295m) accounted for 4% of total European Office Investment.
European Investment Office Market
Source: Deloitte
The Office Property Handbook 3.0Spain 2018
# Country AssetGLA
(sqm)
Purchase
Price (€M)Buyer Vendor
1 France Coeur Defense 175,362 1,800 Primonial REIM, Predica CA AssurancesLone Star
2 United Kingdom 20 Fenchurch Street 62,336 1,433 Lee Kum Kee Morgan Stanley, Landsec, Brookfield AM
3 United Kingdom Leadenhall Building 56,669 1,363 C C Land Hldgs British Land, Oxford Properties Group
4 Germany Sony Center 132,496 1,100 Madison International, Oxford Prop. Hines, NPS
5 Germany Tower 185 100,410 775 Deka Immobilien WPV, CA Immo Deutschland
6 Germany Commerzbank Tower 85,501 730 Patrizia, Samsung SRA Commerz Real
7 Italy Telecom 1,099,973 617 EDF, Credit Agricole Assurances Beni Stabili SpA
8 United Kingdom Cannon Place 38,851 571 Deka Immobilien Candar Finance SARL, Hines
9 France Duo - Office & Retail 89,998 571 Natixis Hines, Ivanhoe Cambridge
10 France Window 44,199 500 Hines, Oxford Properties Group Groupama Gan REIM
11 France So Ouest Plaza 40,999 474 Hyundai M&F Insurance, Vestas Inv. Unibail-Rodamco
12 United Kingdom 20 Canada Square 51,560 469 Cheung Kei Group Brascan RE Opportunity Fend
13 United Kingdom Principal Place 57,691 447 ENPAM, Antirion Brookfield Prop Prtnrs
14 France In/Out 34,999 445 Primonial REIM, Primopierre SCPI Societe Fonciere Lyonnaise
15 United Kingdom One Rathbone Square 24,897 436 DekaBank Great Portland Estates
16 Germany German Commercial Portfolio 430 Profond Confidential
17 Germany Axel-Springer-Campus 52,199 425 Norges Bank (NBIM) Axel Springer
18 United Kingdom Winnersh Triangle 139,350 397 Frasers Centrepoint Patrizia, Oaktree
19 France Vivacity 24,499 365 Amundi Blackstone
20 United Kingdom 2-3 Bankside 35,116 355 grundbesitz europa (RREEF) M&G Real Estate
79 Spain Boston Portfolio BBVA (14.a) 116,000 159 Oaktree and Freo BBVA
83 Spain Fifth Tower (Caleido Tower) 69,998 150 Megaworld Corporation Grupo Villar Mir
87 Spain Glories Tower 29,999 142 MERLIN Properties Agbar Group
129 Spain Isla de Chamartin 38,133 103 Tristan Capital Partners, Zaphir GroupLone Star
149 Spain Luxa Barcelona 16,414 90 Grupo Catalana Occidente 1810 Capital Investments, Castellví
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Oferta y
demanda
Lecciones
aprendidas y
perspectivasLecciones aprendidas y perspectivas
Commercial
Investment Europe and Spain
Supply
and
DemandCRE Market
Spain 2015
EXECUTIVE SUMMARY
The Office Property Handbook 3.0Spain 2018
European Investment Office Market: Capital Allocation Matrix: The “Classics” are not anymore attractive as long as “cash on cash” approach is the goal still…
Source: Deloitte RE, Bloomberg
Rental GrowthYoY Var.
Capital Value(€/sqm)
GDP GrowthYoY Var.
Overweight Cash-Cow
Underweight
Hig
hLo
w
Low High
Overweight (Lack of product)
Underweight (Structural Oversupply)
Question
Cash-Cow(To yield)
Ren
tal
Gro
wth
GDP Growth
Quadrant Explanation
CityPrime Rent2017
Capital Value2017
GDP Growth
2017
Madrid 30.5 10,457 3.1%
Barcelona 22.5 7,200 3.1%
Oslo 40 12,800 3.5%
Stockholm 57 19,600 2.9%
Amsterdam 34.5 10,350 3.2%
Lisbon 20.5 4,932 2.5%
Vienna 28 8,615 3.5%
Helsinki 35.5 10,400 3.0%
Zurich 62.5 21,500 1.1%
Milan 42.5 14,570 1.7%
Representative Sample
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# ASSET PRICE (€m) GLA (sqm) ZONES
1 Boston Portfolio BBVA 159 116,000 n.a.
2 Torre Caleido (5ª Torre) 150 69,998 CBD
3 Torre Glories 142 29,999 DEC
4 Isla Charmartín 103 38,133 DEC
5 Luxa Barcelona 90 16,414 DEC
6 Banco Popular 80 4,000 CBD
7 Mapfre 72 14,424 RBD
8 Agencia Tributaria de
Cataluña
65 8,126 RBD
9 Palacio de Miraflores 60 7,132 RBD
10 Bank Offices 56 n.a. n.a.
EXECUTIVE SUMMARY
Top 10 Spanish deals:
Source: Deloitte
Source: Deloitte
Spanish Investment Market (CRE)
Top 10 Spanish deals:
Total office investment volume in Spain at 2017: €2,295m
A total office pipeline investment volume of €3,588m is expected to be transacted in Spain
Source: Deloitte
Source: Deloitte
1,460 1,056 544 807
2,520
5,313 4,895
2,295
644 687
365
867
2,297
1,894 3,769
2,990
1,467
591
571
751
2,242
1,263
660
651
150
279
88
120
596
674
930
1,449
750
576
519
607
932
2,702
2,145
3,090
4,470
3,189
2,087
3,151
8,587
11,845 12,398
10,475
-
2,000
4,000
6,000
8,000
10,000
12,000
2010 2011 2012 2013 2014 2015 2016 2017
Total (€m)
Hotels
Logistic
Retail High Street
Retail Shopping Centre
Offices
Investment volume in Office segment decreased by 53% due to the higher prices requested by Sellers.
Offices
Retail Shopping Centre
Retail High Street
Logistics
Hotels
21%
Office Typology
-53%
Rest of CRE
79%
Short Term MediumTerm
Long Term TOTAL
58%€3,588m
35%
7%
The Office Property Handbook 3.0Spain 2018
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Oferta y
demanda
Lecciones
aprendidas y
perspectivasLecciones aprendidas y perspectivas
Commercial
Investment Europe and Spain
Supply
and
DemandCRE Market
Spain 2015
EXECUTIVE SUMMARY
The Office Property Handbook 3.0Spain 2018
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20092017
◄Bear Market►
◄Bull Market►
Spanish Investment Market: OfficesReal Comps vs Cap. Values gap in Spain
Source: Deloitte
◄Bull Market►
Real Comps (€/sqm) Theoretical Capital Value €/sqm
6 years…?7 years 4 years
Real Comps < Theoretical Cap. Values
Real Comps > Theoretical Cap. Values
€-
€2.000
€4.000
€6.000
€8.000
€10.000
€12.000
€14.000
Office market behaviour in 2017 is still considered as Bull Market,
where prices paid by investors are above the theoretical Capital Values. This trend has been specially seen in
buildings with long-term lease agreements and high end tenants
Offices21%
Retail Shopping Centre
30%
Retail High Street
6%
Logistic14%
Hotels29%
2017 CRE Investment Breakdown
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EXECUTIVE SUMMARY
Recovery of Business Confidence indicators is having a progressive, but limited impact on average rental.
Leasing Market: Is there room for further growth?
As take-up increased,
vacant space reduced and as a consequence, Rent has
increased during the recent
years, specially in CBD
Average Rent Growth Madrid
Avera
ge R
ent
trend
IN
DEX
BA
SIS
10
0 (
20
14
)
vs
Avera
ge R
ent
trend
IN
DEX
BA
SIS
10
0 (
20
14
)
Average Rent Growth Barcelona
For more information see CHAPTER 2 (Supply & Demand) with the full rental market analysis based on Deloitte Database.
CBD
RBD
DEC
RC
OUT
CBD
RBD
RC
OUT
DEC
CBD
Central Business District
RBD RC DEC OUT
Rest of Business District Rest of City Decentralized Out of the city
Source: Deloitte
108
118
124
103
108
116
100
104
113
105
115
100
106
98
103
108
113
118
123
128
2014 2015 2016 2017
110
140
150
108
118
120122
126
104
111
118
95
105
115
125
135
145
2014 2015 2016 2017
The Office Property Handbook 3.0Spain 2018
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EXECUTIVE SUMMARY
The lease contracts have
responded positively to the market momentum, particularly in
CBD, where the vacant space in quality
buildings strongly decreased during the
recent years.
THE KEY FOR SUCCESS
Source: Deloitte
Source: Deloitte
Standard lease terms generally accepted
Source: Deloitte
CONNECTION
TO THE END
USER
DESIGN
SUSTAINABILITY
CONNECTION
TO THE ASSET
MANAGEMENT
Landlords decrease incentives overall
Average Rent Free Period (months)
Contract Duration (years)
Space leased by companies per employee(sqm/employee)
Transfer of Property Tax and Community Charges to the tenant
Average space leased by companies(sqm)
2014
5(Break option 3rd Year)
(1)
80-100 %
13-14(sqm/employee)
912/638 (sqm)(2)
4(months)
2015
5(Break option 3rd Year)
(1)
12(sqm/employee)
919/748 (sqm) (2)
4(months)
100 %
2016
5(Break option 3rd Year)
(1)
10(sqm/employee)
853/560(sqm) (2)
3(months)
100 %
(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.(2) Average Space leased by companies in MADRID / BARCELONA
2017
5(Break option 3rd Year)
(1)
10(sqm/employee)
978/857 (sqm) (2)
2-3(months)
100 %
The Office Property Handbook 3.0Spain 2018
@ 2017 Deloite Financial Advisory11 of 16
EXECUTIVE SUMMARY
P&L reconstruction Restructuring of the Financial Sector
Fundamentals improvement
Alternative to the fixed income / bond yields
Development loans: Regular lenders are returning to
the market
Senior DebtYielding assets: 2018 more and
more competitive
MAIN DRIVERS FOR THE INCREASING LENDER APPETITE
Monetary Policy: QE, low funding costs, etc.
Excess of Liquidity: Increase in transactions
Entry of new sponsors
FINANCIAL SECTOR
REAL ESTATE INVESTMENT MARKET
MACROECONOMIC ENVIRONMENT
Yielding assets: General improvement of the basic terms
Financing Market
Source: Deloitte
Macro Economic Context Overview
1(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)(2) Sustainable LTV to face the debt service with high funding costs (A higher LTV will result in a larger debt service)
Main
Conditio
ns
LTV
Upfront Fee
Spread
<40%(1) 30%-40% 30%-50%
200-250pbs 150-200pbs 75-150pbs
250-300pbs 200-250pbs 150-200pbs
Framework
Main Players
Balloon 70%(2) 60% 80%-100%
Credit Access Constraints
Financing Upturn
40-55%
70-150pbs
100-175pbs
60%-100%
2014 2015 20162013 2017
Institutional Investors / Debt Funds
Banking / Insurance Companies
Alternative lenders
+
30-55%
50-100pbs
100-175pbs
80%-100%
The Office Property Handbook 3.0Spain 2018
@ 2017 Deloite Financial Advisory12 of 16
EXECUTIVE SUMMARY
“Core” tipologies still
accounted for 77%
in 2017:
Main Players:
More room for Value added strategies
Equity
Debt
2016 2017MORE ROOM FOR VALUE ADDED:
Source: Deloitte
Source: Deloitte
Debt NPL
Core84%
Core+3%
Value
Added9%
n.a .5%
Core37%
Core+40%
Value
Added19%
End user
4%
(€m)
Core 840
Core+ 914
Value Added 446
End user 94
(€m)
Core 4,102
Core+ 149
Value Added 419
n.a. 225
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Substance concentrationSimplification of holding structures as a way to concentrate substance. Creation of investment platforms with qualified personnel and substance
Funding structureMore conservative funding structures with SHLs duly supported by complete TP documentation
Withholding taxesReinforced substance at platforms as to facilitate dividend WHT. Back-to-back borrowing to be avoided
Business rationaleOngoing monitoring and support of tax benefits being proportionate to business reasons deriving from the structure
12
34
A more defensive tax environmentBEPS are making an impact on tax structuring strategies
EXECUTIVE SUMMARY
The Office Property Handbook 3.0Spain 2018
Tax advisory is key to be successful at exit.
Drivers of the increase in cross-border
investment:
Yielding Real Estate is still more attractive than Investment Grade Bonds
2
3
1
4
Yield compressions in most of the countries led to a significant growth of capital values
Accessibility to credit and more attractive financing conditions
Political and financial uncertainly in certain regions of Europe, but markets still responding well.
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WHAT IS
NEXT?
The Office Property Handbook 3.0Spain 2018
@ 2017 Deloite Financial Advisory15 of 16
Source: Deloitte
3.0OfficesThe office market incoming trends have created the term office 3.0 which consider all the following points :
The Office Property Handbook 3.0Spain 2018
EXECUTIVE SUMMARY
Apart from the physical component of the
offices technology and particularly “apps” are disrupting
the way we work improving the
productivity of employees and
reducing the entreprises costs.
HOW MUCH COST TO BE UPDATED?
Professional fees
13-18%
IT / Audiovisual / Security Systems
150-300€/sqm
Furniture and office equipment
150-250€/sqm
Change of layout and installations
HIGH STANDARDS – 850€/sqm
AVERAGE STANDARDS– 625€/sqm
LOW STANDARDS - – 400€/sqm
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The Office Property Handbook 3.0Spain 2018
José María EspejoSenior ManagerFinancial Advisory ‖ Real Estate
jespejo@deloitte.es
Luis González Martino, MRICSSenior ManagerFinancial Advisory ‖ Real Estate
lgonzalez@deloitte.es
Francisco AstorgaManagerFinancial Advisory ‖ Real Estate
fastorga@deloitte.es
Félix VillaverdeManagerFinancial Advisory ‖ Real Estate
fvillaverde@deloitte.es
Javier CatónManagerFinancial Advisory ‖ Real Estate
jcaton@deloitte.es
Javier García-Mateo, MRICSPartnerFinancial Advisory ‖ Real Estate
jgarciamateo@deloitte.es
Alberto Valls, MRICSManaging PartnerFinancial Advisory ‖ Real Assets
avalls@deloitte.es
Jorge de BlasAnalystFinancial Advisory ‖ Real Estate
jdeblas@deloitte.es
Carlos de HerediaAnalystFinancial Advisory ‖ Real Estate
cdeheredia@deloitte.es
Lorena JuriolSenior ManagerFinancial Advisory ‖ Real Estate
ljuriol@deloitte.es