Where Do European Property Values Go From Here?

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SEPTEMBER 2022

Overview

The economic outlook for the euro area has turned more dismal with downside risks increasing. Signs of the market reacting to a changing economic outlook and elevated levels of uncertainty are beginning to emerge. Uncertainty surrounding inflation, persistent labor shortages, Russian invasion of Ukraine, and the risk of an ECB Policy error are some of the challenges investors are having to navigate. To help our investor clients think through the implications of the shifting macro environment, we modeled how net operating income (NOI), yields, total returns, and thus property values across sectors will perform under four unique economic scenarios across Europe*:

• Scenario 1: Soft Landing (30%) • Scenario 2: Upside Scenario (5%) • Scenario 3: Baseline - Mild Recession (50%) • Scenario 4: Stagflation (5%)

*For all variables except NOI, we have used the European aggregate from the MSCI quarterly Index. Note: Scenario probabilities do not add to 100% because there are a variety of other scenarios that could unfold outside of the four presented in this report.

CONTENTS

PART 1 CRE is long-term investment

Total returns strong over various hold periods Compares favorably vs. alternative asset classes Property is nuanced PART 2 Economic & Property Value Scenarios Economic scenarios considered Property value forecasts over the next five years PART 3 Investment Ideas & Opportunities Volatility creates opportunity Strategies to consider for 2022/23

/ 3

Before we get to the forecasts, we remind you that property tends to be a long-term investment

/ 4

CRE is an appealing long-term investment

Cumulative Total Unlevered Returns On Real Estate Investment

3-Yr Hold (bought in 2020)

5-Yr Hold (bought in 2018)

7-Yr Hold (bought in 2016)

10-Yr Hold (bought in 2012)

Office

13%

34%

49%

89%

Industrial

43%

85%

110%

214%

Retail

10%

45%

All Property Types

15%

34%

48%

92%

Source: MSCI, calculations by Cushman & Wakefield Research

/ 5

CRE Returns Outpace Alternative Investment Options Total Returns, H1 2012 to H1 2022

208%

Over the past 10 years, property—measured by MSCI delivered returns of 134%, broadly outperforming the REIT market which delivered returns of 88%. Over the same period property returns significantly outpaced both corporate and government debt investments, while marginally outperforming the STOXX 50. Property has also proved to be an effective hedge against inflation. In fact, on average, all-property returns across Europe have outplaced inflation in 19 out of 22 years by a margin of 7.6%.

140%

134%

98%

88%

38%

27%

Value-Added Real Estate¹

Core Real Estate²

MSCI Europe All-property

STOXX 50 FTSE EPRA NAREIT Europe

BBB Corporate Bonds³

10Yr Gov't Bonds⁴

Source: MSCI, Preqin, Bloomberg, Cushman & Wakefield Research ¹ Preqin Value-added includes investment in lower quality buildings that often require redevelopment/repositioning in both primary and secondary markets, in the main property types. ² Preqin Europe Focused RE is a subset of the PrEQIn Private Capital Quarterly Index that captures the return earned by investors in their private capital portfolios in Europe.

³ Bloomberg Euro Government 10 Year Term Total Return ⁴ IBOXX Euro Corporates 7-10 BBB Total Return Index

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Nuances Like Sector, Geography, Quality and Risk Tolerance All Matter Capital Value Growth Index, 2011 to 2021, % Change

By Sector

By Geography

Ireland

Industrial

Germany

All Property

Netherlands

Office

Healthcare

Spain

Other

Euro area

Hotel

Retail

France

0% 10% 20% 30% 40% 50% 60%

20% 40% 60% 80%

Source: MSCI, calculations by Cushman & Wakefield Research

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Now, the forecasts…

/ 8

The macro-economic environment is shifting…

/ 9

Economic Indicators Point to Weakness

Euro area

REITS Point to Price Correction

PMI’s Fall Below 50

Bond Rates Rising

0 10 20 30 40 50 60 70

S&P Eurozone Investment Grade Corporate Bond yield ICE BofA Euro High Yield Corporate Bond Yield

Euro area France Germany UK % Change since year-end 2021

Composite

0% 2% 4% 6% 8%

-35% -30% -25% -20% -15% -10% -5% 0%

Jul-20

Oct-21

02-Jul-22

22-Jul-22

Mar-22

Feb-20

Dec-20

Sep-19

Aug-22

13-Apr-22

May-21

03-Jan-22

23-Jan-22

12-Jun-22

04-Mar-22

24-Mar-22

12-Feb-22

11-Aug-22

03-May-22

23-May-22

Energy Prices Surging

Consumer Sentiment Dropping

Labour Markets Slowing

80 100 120 140 160 180

Germany Euro area

Spain France

0 2 4 6 8

Electricity

Gas

May-22 Aug-22

-40 -30 -20 -10 0

-8 -6 -4 -2

% y/y employment growth

Consumer energy prices (2015 =100)

Jul 16

Jul 17

Jul 18

Jul 19

Jul 20

Jul 21

Jul 22

Jan 17

Jan 18

Jan 19

Jan 20

Jan 21

Jan 22

2019Q1

2019Q2

2019Q3

2019Q4

2020Q1

2020Q2

2020Q3

2020Q4

2021Q1

2021Q2

Source: Bloomberg, European Commission, Eurostat, Moody’s Analytics

/ 10

Odds of a Recession Rising Rapidly Euro area & UK

*Probability of a recession in the next 12 Months?

Spread between 10-Yr & 2-Yr Government Bond Yields

Euro area UK

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

3.5

2.5

Expectations for the euro area and UK falling into recession is now greater than 50%

1.5

0.5

-0.5

Jul-22

Apr-22

Jan-22

Jun-22

Mar-22

Feb-22

Aug-22

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

May-22

Source: *Bloomberg surveys (5 th Aug - 11 th Aug), Moody’s Analytics

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Property Values Fall in Every Recession Peak-to-Trough REIT Total Return During European Recessions

In the periods leading up to a recession, REITs have tended to experience variable but significant losses in value. REITs are priced daily, therefore adjust to uncertainty relatively quickly. Private real estate valuations that are backward-looking in nature, tend to show moderate losses in value (if any at all). This is largely a result of the smoothing effect of private valuations. Public valuations meanwhile can often be overreactive, typically resulting in meaningful declines. Nonetheless, property values almost always fall to some extent during a recession.

-25.2%

-27.5%

-33.3%

-49.6%

-71.0%

Early 1990s

GFC (2008)

European Sovereign Debt Crisis (2011)

COVID-19 (2020)

Russia-Ukraine Conflict (2022)

Source: Bloomberg (FTSE EPRA NAREIT Developed Europe Index TR), Cushman & Wakefield Research

/ 12

…and divergence in macroeconomic projections has led us to model four economic scenarios that cover a wide range of possible outcomes.

/ 13

Economic Scenarios Euro area

Scenario 1: *Soft Landing (30% probability) • Russia’s invasion of Ukraine continues but does not escalate • Recovery in demand as consumer and business sentiment improves • Oil markets rebalance in 2023, allowing oil prices to drop • Supply chain issues continue to improve • Inflation pressures ease with inflation returning close to target in 2024 • ECB continues with increasing policy rates, pausing in Spring 2023 • GDP decelerates below 2% range but recession is avoided

Scenario 4: Stagflation (5% probability)

Scenario 2: Upside Growth (5% probability)

Scenario 3: Mild Recession (50% probability) • Russian invasion of Ukraine continues • Oil prices remain elevated for several more months before slowly coming down • Inflation continues to increase in the coming months, driven by energy and food prices • ECB hikes policy rate which ultimately causes the economy to slip into recession • Underlying strength of labour market keeps recession shallow and short, lasting only 2 quarters (Q4 2022 and Q1 2023)

• Russian invasion worsens, lasting longer than anticipated • Oil prices remain above $100 barrel through end of 2023, weighing on consumer spending • Supply-chain issues persist, sustaining higher inflation, inflation expectations de-anchor causing wage-price spiral • ECB initially slow to react, taking a much more aggressive stance thereafter, raising rates much higher • Euro area economy falls into a recession in 2024 • Euro area economy begins to recover in 2025

• Faster resolution of the Russian invasion of Ukraine • Quick recovery in demand as consumer and business sentiment recovers • Supply chain issues continue to improve, energy prices fall • Inflation pressures begin to ease • Economic growth slows in H2 2022 but gathers momentum in H1 2023 • In the short-term the ECB continues to increase policy rates, with rates higher than baseline, successfully curbing inflation without derailing the economic recovery

Source: Moody’s Analytics adjusted by Cushman & Wakefield Research; *Soft landing refers to the consensus forecast as of July 2022 Note: Probabilities do not add to 100% because there are chances of other scenarios occurring, such as a recession that is not mild, but also not consistent with stagflation.

The Scenarios

C&W Baseline

Scenario 1: *Soft Landing (30% probability)

Scenario 2: Upside Growth (5% probability)

Scenario 3: Mild Recession (50% probability)

Scenario 4: Stagflation (5% probability)

2021 2022 2023 2024 2025

Euro area Economy

Real GDP

5.3 2.9 0.9 1.8 1.7

Real GDP

5.3 2.4 -0.4 -0.4 0.1

Real GDP

5.3 3.4 2.9 2.3 2.0

Real GDP

5.3 2.7 0.0 1.8 2.4

Employment Growth, mils

3.3 2.0 0.5 0.1 0.5

3.3 1.2 -0.6 -1.2 0.2

3.3 1.8 -0.2 0.3 0.4

3.3 2.3 1.1 0.6 0.4

Unemployment Rate 7.6 7.3 7.2 7.3 7.3

Unemployment Rate 7.6 7.8 8.4 9.1 9.1

Unemployment Rate 7.6 7.4 7.8 7.8 7.6

Unemployment Rate 7.6 7.1 6.9 7.0 7.1

Inflation

2.4 7.2 3.5 2.3 1.9

Inflation

2.4 7.4 5.5 2.3 1.1

Inflation

2.4 7.2 3.1 2.1 1.9

Inflation

2.4 7.1 3.0 1.5 1.8

10-year Gov't Bond 0.2 2.7 2.9 2.9 2.8

10-year Gov't Bond

0.2 2.5 3.0 3.0 2.9

10-year Gov't Bond

0.2 2.7 3.3 3.5 3.6

10-year Gov't Bond 0.2 2.7 3.5 3.3 3.2

Each economic scenario and its assumptions are put through econometric models to forecast the impact on property values We illustrate our approach on the next slide…

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In order to predict the impact that each economic scenario would have on property values*, we need to forecast NOI and yields

We forecasted NOI first…

*(Property value = NOI/Yield)

/ 17

Slowdown in NOI Growth, With Industrial Remaining Positive Mild Recession

MSCI NOI Growth: Historical and Projected (Q4-on-Q4 percentage change)

Forecast

In our baseline scenario which assumes a mild recession, NOI growth decelerates across all product types, only remaining positive for the industrial sector. Despite the slowdown in NOI, it is expected to fare better across most property types relative to past recessions largely due to the strong leasing fundamentals entering this recession.

-2%

-4%

-6%

-8%

-10%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 Office

2012

2013

2014 Industrial

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Retail

Source: MSCI, Cushman & Wakefield Research

NOI Scenarios

NOI Growth (Q4-on-Q4 percentage change)

2020

2021

2022

2023

2024

2025

2026

Office S1: Soft Landing S2: Upside Growth S3: Mild Recession S4: Stagflation Retail S1: Soft Landing S2: Upside Growth S3: Mild Recession S4: Stagflation Industrial S1: Soft Landing S2: Upside Growth S3: Mild Recession

1.5% 1.5% 1.5% 1.5% -9.0% -9.0% -9.0% -9.0% 2.3% 2.3% 2.3% 2.3%

0.9% 0.9% 0.9% 0.9% -3.5% -3.5% -3.5% -3.5% 3.7% 3.7% 3.7% 3.7%

0.5% 0.6% 0.5% 0.4% 0.5% 0.6% 0.5% 0.4% 1.9% 1.9% 1.8% 1.8%

0.2% 0.5% -0.1% -0.7% 0.5% 1.3% -0.4% -0.9% 2.0% 2.4% 2.0% 2.0%

0.5% 1.1% -0.3% -1.6% 1.1% 1.8% 0.5% -1.1% 3.0% 3.5% 2.5% 2.1%

1.3% 1.7% 0.6% -0.7% 1.4% 1.8% 1.0% -0.2% 4.2% 4.8% 2.9% 0.5%

1.9% 2.1% 1.7% 0.5% 1.6% 1.9% 1.6% 1.0% 3.4% 3.8% 3.7% 2.5%

S4: Stagflation

Source: MSCI, Moody's Analytics, Cushman & Wakefield Research

Now, yields…

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Key Assumption: Spreads Will Adjust

Office Yield vs 10Yr Bond Yield (Avg 273 bps*)

Industrial Yield vs 10Yr Bond Yield (Avg 335 bps*)

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Forecast

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Forecast

2002

2004

2006

2008

2010 Industrial

2012

2014

2016

2018

2020

2022

2024

2026

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

Office

10Yr Gov't Bond

Source: MSCI, Moody’s Analytics, Cushman & Wakefield Research *Spreads from 2001 to present

/ 21

Significant Increases in Yields Mild Recession

MSCI Yields: Historical and Projected

In the mild recession scenario (C&W baseline), yields move out across all property sectors in the forecast period, most acutely in the 2023-2024 period. Towards the end of the forecast period, as the 10-year government bond yields begin to trend down and risk premia declines, yields for offices and industrial are expected to compress while retail yields are expected to stablise. Industrial is expected to witness outward movement in yields, relative to the compression seen over 2017-2021.

Forecast

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 Office

2012

2013

2014 Industrial

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Retail

Source: MSCI, Cushman & Wakefield Research

Yield Scenarios

Yields (Year-end)

2020

2021

2022

2023

2024

2025

2026

4.2% 4.2% 4.2% 4.2% 5.7% 5.7% 5.7% 5.7% 4.4% 4.4% 4.4% 4.4%

3.9% 3.9% 3.9% 3.9% 5.3% 5.3% 5.3% 5.3% 3.6% 3.6% 3.6% 3.6%

4.0% 3.9% 4.1% 4.3% 5.4% 5.3% 5.5% 5.8% 3.7% 3.6% 3.7% 3.9%

4.8% 4.5% 5.1% 5.6% 5.7% 5.4% 6.1% 6.5% 4.5% 4.3% 4.7% 5.2%

4.8% 4.3% 5.1% 5.8% 5.7% 5.2% 6.1% 6.7% 4.5% 4.1% 4.7% 5.4%

4.7% 4.2% 5.0% 5.9% 5.6% 5.1% 6.0% 6.8% 4.4% 4.0% 4.6% 5.5%

4.6% 4.0% 4.8% 6.0% 5.5% 4.9% 5.8% 6.9% 4.3% 3.8% 4.5% 5.6%

S4: Stagflation

Source: MSCI, Moody's Analytics, Cushman & Wakefield Research

With NOI and yield forecasts, we can determine the implied impact on property values across scenarios…

/ 24

European Office Sector

Property Value Index*

Year-over-Year Percentage Change

120

S1: Soft Landing

S2: Upside Growth

S3: Mild Recession

S4: Stagflation

100

2022

-2.0%

0.6%

-4.4% -8.9%

2023

-16.5% -12.9% -19.7% -23.8%

2024

0.5%

5.8%

-0.3% -5.0%

Soft Landing Upside Growth Mild Recession Stagflation

2025

3.5%

4.1%

2.6%

-2.4%

2026

4.1%

7.2%

5.9%

-1.2%

2021 2022 2023 2024 2025 2026

Source: Cushman & Wakefield Research Note: *Price index = 100 in year 2021 and imputed based on total returns.

/ 25

Office Will Increasingly Bifurcate Price Gap Between Older and Newer Office Buildings

10Yrs+ 1-10 Yrs New Building Premium (RHS)

It is no longer a ‘one-office’ market anymore. Since the pandemic, the type of office occupiers require has evolved, with a focus on high-quality, high spec, energy efficient, well located ‘prime’ offices. This has led to a divergence in prime and secondary office rents and values. The price gap between newer office buildings (less than 10yrs) and older buildings has widened, with the premium for new CBD offices now standing at 35%. This has increased from 14% in 2010. European office markets saw a similar flight to quality during the GFC. A trend that tends to prevail during times of uncertainty.

40%

200

180

35%

160

30%

140

25%

120

20%

100

15%

10%

40 Commercial property price (CPP)

2010

2013

2016

2019

2022

Source: RCA, Cushman & Wakefield Research Note: Western Europe CBD Offices. CPP Indicator Split by Building Age or Years Since Building Was Renovated / Refurbished (Data refers to Q1)

European Industrial Sector

Property Value Index*

Year-over-Year Percentage Change

120

S1: Soft Landing

S2: Upside Growth

S3: Mild Recession

S4: Stagflation

100

2022

-0.9%

1.9%

-1.0% -6.0%

2023

-16.1% -14.3% -19.7% -23.5%

2024

3.0%

8.5%

2.5%

-1.7%

Soft Landing Upside Growth Mild Recession Stagflation

2025

6.6%

7.4%

5.1%

-1.3%

2026

5.8%

9.3%

6.0%

0.7%

2021 2022 2023 2024 2025 2026

Source: Cushman & Wakefield Research Note: *Price index = 100 in year 2021 and imputed based on total returns.

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European Retail Sector

Property Value Index*

Year-over-Year Percentage Change

140

S1: Soft Landing

S2: Upside Growth

S3: Mild Recession

S4: Stagflation

120

2022

-1.4%

0.6%

-3.2% -8.3%

100

2023

-4.8% -0.6% -10.2% -11.6%

2024

1.1%

5.7%

0.5%

-4.1%

Soft Landing Upside Growth Mild Recession Stagflation

2025

3.2%

3.8%

2.7%

-1.7%

2026

3.4%

6.1%

5.1%

-0.5%

2021 2022 2023 2024 2025 2026

Source: Cushman & Wakefield Research Note: *Price index = 100 in year 2021 and imputed based on total returns.

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European All Property Types*

Property Value Index**

Year-over-Year Percentage Change

120

S1: Soft Landing

S2: Upside Growth

S3: Mild Recession

S4: Stagflation

100

2022

-1.6%

0.9%

-3.3% -8.1%

2023

-14.1% -10.8% -17.8% -21.2%

2024

1.2%

6.4%

0.5%

-4.0%

Soft Landing Upside Growth Mild Recession Stagflation

2025

4.1%

4.8%

3.2%

-2.0%

2026

4.4%

7.4%

5.8%

-0.6%

2021 2022 2023 2024 2025 2026

Source: Cushman & Wakefield Research Note: **Price index = 100 in year 2021 and imputed based on total returns; *Weighted average, includes office, industrial and retail

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Investment Ideas & Opportunities

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Investment Ideas for 2022/23

Mild Recession

Idea

Soft Landing Upside Growth

Stagflation Comment

Trading at a discount but with tight supply for the best and favorable demand as corporates adjust their needs to support a return to the office. However, scenarios that undermine demand and corporate buying power will blunt near-term performance. Quadruple whammy of higher standards demanded by ESG and remote work as well as cost of living and rising interest rates. Distress however may bring opportunities to sell/repurpose/reimagine. With supply and interest rate risks lower than other sectors, food-centric/grocery-anchored retail, followed by necessity retail and then experiential in top consumer locations could outperform. Key aspects include F&B, health & fitness, brands and medical retail. Demand is well underpinned, but the sector is the most exposed to the rising cost of capital, meaning investors may want to monetize some low yielding core assets and keep their capital dry awaiting recap opportunities as debt maturities increase. The sector is sensitive to interest rates, but much of Europe is still underbuilding homes for all ages relative to demand. Many years of strong fundamentals still lie ahead with rental accommodation particularly attractive for defensive reasons. “No - cycle” sectors led by life science, self -storage, healthcare and data centers offer protection from the economy. More driven by demographics, they offer safer yields during a downturn

High-quality office

Low-quality office

The right retail

E-commerce/ logistics

Living Sectors

Niche Operational Sectors

Although not immune from rising debt costs and broader economic exposure, a positive hotel sector trading recovery and strong demographic trends will drive continued investor interest.

Hospitality

Very attractive investment

Somewhat attractive investment

Due diligence

Consider reducing your position

Strongly consider reducing your position

• Economic indicators point to weakness, with the probability of Europe entering a recession rising. • Property values almost always decline during recessions, this one won’t be different. • In our baseline scenario (mild recession), we estimate average (MSCI) property values will decline by ~18% over the next year, ranging from 10% to 20% depending on the product type. • It is important to note that real estate is a long-term investment, with many able to reap healthy cumulative returns even during a recession. • Across all property types, there will be variation at the city and asset level. Not every product type/geography will follow the European path; many assets will outperform in particular the prime end of the market that is largely undersupplied. • Times of volatility creates opportunities for investors. Now is the time to reassess real estate portfolio strategies to diversify and maximise returns.

Key Takeaways

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ABOUT CUSHMAN & WAKEFIELD Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in over 400 offices and approximately 60 countries. In 2021, the firm had revenue of $9.4 billion across core services of property, facilities and project management, leasing, capital markets, and valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

Sukhdeep Dhillon Head of EMEA Forecasting EMEA Research Sukhdeep.dhillon@cushwake.com

Kevin Thorpe Chief Economist Global Head of Research kevin.thorpe@cushwake.com

Guilherme Neves Senior Research Analyst EMEA Research guilherme.neves@eur.cushwake.com

Rebecca Rockey Economist, Global Head of Economic Analysis & Forecasting rebecca.rockey@cushwake.com

©2022 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy .

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