Europe International Real Estate WELCOME Learning

Europe & International Real Estate WELCOME

Learning Objectives n Identify how the social, economic, political, and geographical characteristics of European countries impact real estate. n Recognize how formation and development of the EU impacts member countries economically and culturally. n Develop market intelligence by researching factors that shape European real estate markets and assessing business opportunities. n Develop a network of key contacts in real estate, business, and government in order to reach clients and customers and complete property transactions. n Gain ideas on methods for promoting markets, properties, and services. Page 2

Course Structure Introduction Europe Today Market Dynamics: Challenges, Choices, Trends Does Culture Matter? A Look at Germany A Look at the United Kingdom A Look at Spain Country Profiles Page 2

Countries Included Austria Belgium Bulgaria Croatia Czech Republic Denmark Finland France Germany Hungary Ireland Italy Latvia Netherlands Norway * Poland Portugal Russia * Slovakia Slovenia Spain Sweden Switzerland * Turkey * Ukraine * United Kingdom Page 5

1. Europe Today Page 8

Europe Lives Its History n. Two World Wars n. The Marshall Plan n. NATO n. The Cold War Page 10

Europe Lives Its History n. Fall of Berlin Wall, Cold War ends n. Revitalization of Central and Eastern Europe n. Formation of the EU n. EU expansion 04– 07 Page 11

United in Diversity n. Peace, prosperity and freedom…in a fairer, safer world n. Four Freedoms § Goods § Capital § People § Services Page 12

Schengen Agreement n. Unrestricted cross-border travel n. No passport check at border n. United Kingdom and Ireland—opt out n. Schengen area countries participate in the U. S. Visa Waiver Program § Except Poland Page 12

EU Decision Making n Council of Ministers and European Council § Primary decision-making body n European Parliament § Cooperation § Assent § Co-decision n European Commission § Implements regulations and directives Page 13 -16

Reform Treaty n. Streamlined decision-making n. Capped EU Parliament at 751 delegates § 6– 96 delegates per country n. Subsidiarity and proportionality § Decisions made close to the citizen § EU acts only when more effective than local, regional, or national action Page 16 -17

Future Expansion n. Stabilization and Association Agreements n. Catch up economically n. Unanimous approval required n. Candidates: FYROM, Iceland, Montenegro, Serbia, Turkey n. Potential candidates: Albania, Bosnia Herzegovina, Kosovo Page 17

Turkey EU Membership? n Pro—Crossroads of East and West § § § § Affinity to Europe Constitution Oil & gas pipelines Market opportunities Large military NATO member Many Turks live in Europe already n Con—Too big, too poor, too different 5% of land is European EU members disapprove Immigrants Human, minority, religious rights § Cyprus situation § Erodes small countries’ influence § § Page 18

Cultural Heritages n. Council of Europe as conservator and advocate n. Cultural heritage: a force for fostering social cohesion and inclusion n. Dynamic resources: built environment, natural environment, values, traditions, historic sites, arts, archeology, and languages Page 22

Council Initiatives n. European Heritage Days n. Cultural Corridors n. Culture Watch Europe n. Compendium n. Youth programs n. Teacher training Page 23

Cultural Heritage and Real Estate n Economic development n Town planning, building standards, and future development n Specialized building skills n Preservation enhances property values Page 24 -26

2. Market Dynamics

Demographics n European countries are aging, 2040 median age— 47 n Reduced workforce, productivity, economic growth n Higher pension, health care costs n Intergenerational equity? n Some countries grow, some decline Challenges for Real Estate? Potential decreased demand for all types of real estate —residential, commercial, and retail Page 30 -31

Immigration n Challenge or a solution for demographic issues? n Integration into the society and the workforce n Immigrant in EU— 6% of population n 3 out of 4 immigrants live in Germany, Spain, U. K. , France, or Italy Challenges for Real Estate? Population growth correlates with demand for real estate. Immigrants become homeowners, renters, business owners, and retirees. Page 32 -35

Employment n Unemployment n Lack of job opportunities n High youth unemployment § EU Youth Guarantee n Erosion of fundamental economic capacity Challenges for Real Estate? Can workers buy a home, form a new household? Correlation with commercial and retail real estate. Page 35 -38

North-South Disparity n Triggering events: global recession, revelation of Greece’s misstated deficit n Scrutiny on Spain, Ireland, Italy, Portugal n Solvent, optimistic, prosperous north versus indebted, pessimistic struggling south n France: northern economy, southern attitude Challenges for Real Estate? Capital flight, high-yield buying opportunities with high risk, erosion of property values, suppressed demand. Page 38 -40

Future of the Euro n Monetary union without a fiscal (banking) union n Interconnected globally, few firewalls n Governance structure slows action n ECB policy mandate: maintain stability, low inflation Challenges for Real Estate? High cost of dismantling the eurozone? Currency devaluations would cause immediate value loss. Investor equity wiped out. Recalculation of mortgages. Investor stampede to exit. Page 41 -42

Integration or Separation n Break up EU or integrate to solve structural issues? n Will countries be willing to cede more control? n Scared into greater integration? n Will future generations see EU membership as a benefit or a burden? Challenges for Real Estate? Dissolution without planned transition would provoke economic chaos. Integration could standardize property transaction procedures Page 42 -44

National Banks or Banking Union n Completion of an EU banking union for financial stability and consistency n Pre-crisis: no enforcement mechanisms or consequences for missing goals n Post-crisis: EC and ECB moving toward a banking union, SSM, SRM, deposit guarantees Challenges for Real Estate? Real estate thrives in an environment of orderly financial markets and banking systems. Page 44 -45

Europe 2020 n Smart: Developing an economy based on knowledge and innovation n Sustainable: Promoting a more resource efficient, greener, and competitive economy n Inclusive: Fostering a high-employment economy of economic, social, and territorial cohesion Challenges for Real Estate? Roadmap for the EU to recover and prepare for the next decade. See page 46 of Manual. Page 46 -47

Europe 2020 Economic Governance n. European Semester n. Stabilization and Growth Pact n. Euro Plus Pact Challenges for Real Estate? Economic monitoring for property bubbles, growing current account deficits or surpluses, or decreases in competitiveness Page 47 -48

Austerity or Government Stimulus n National budgets are more complex than households n Continuing austerity or increasing government spending to stimulate the economy? n Economic growth or downward deflationary spiral? Challenges for Real Estate? Austerity has generated a general downward spiral as economic capacity diminishes and real estate investment is postponed, infrastructure deteriorates. Page 48 -49

Residential Real Estate n. High rate of homeownership: 70% n. Highest ownership rates in Central and Eastern European n. Germany—wealthy country but majority rent, very pro-tenant n. House price trends reflect north-south economic disparities Page 49 -51

Housing Bubbles n. Rapid price appreciation: Estonia, Slovakia, Latvia n. Spain and Ireland housing construction booms n. Euro mortgages in non-euro countries n. Recourse debt Page 52 -53

Mortgage Directive n. Standardized Information Sheet n. Warnings on foreign-currency loans n. Evaluation of borrower’s ability to repay n. Early pay off permitted n Authorized intermediaries “passport” n. Encourage reasonable forbearance n. No mandatory LTV or DTI Page 53

Property Expos n Barcelona Meeting Point n CEREAN Conference n Expo Real n FIABCI World Congress n MIPIM Europe n OPP Live n Place in the Sun n RECon Page 58

Investor Visas n Intersection of bargain real estate and non. European wealth n Investment buys resident status § § Unrestricted travel in Schengen area Safe haven for cash Access to prestigious schools, universities Personal safety n Moral, ethical questions? Page 54 -55

Commercial Real Estate Trends n. Foreign direct investment returning to pre-crisis levels n. Competition for prime assets n. Cash chasing assets n. Sustainability as a strategy Page 55 -56

Your Challenge: Business Building n Who is my target market and where are they? n How can I reach them? n What does my target market buy or sell? n What is my value proposition? n Will I compete on time, cost or quality? n No planning is a plan to do nothing. How will you meet the challenge of building your European real estate business? Page 57

Keeping Up-to-Date n. Market information n. Prospects and clients n. Reminders n. Maps n. Spheres of influence n. News and trends n. Magazines, journals, books, and newspapers Page 59

3. Does Cultural Matter?

High and Low Context n High Context n Low Context Values formality, face-saving communication, relationships and the slower pace needed to develop them Values informality, results, fast pace, punctuality, and direct communication Page 62

Geographic Location North and West CONTEXT High Low Central Portugal Spain Hungary Belgium France U. K. Denmark Finland Germany Ireland Netherlands Norway Sweden Switzerland South and East Bulgaria Greece Italy Romania Russia Turkey Ukraine Austria Czech Republic Latvia Poland Slovakia Page 63

4. A Look at Germany

Geography 16 Federal States (Länder) Page 68

25 Years After Reunification n. Economic convergence n. Privatizing property n. Solidarity tax n. Social convergence Page 69 -70

When Germans Buy Homes n. Once-in-lifetime event n. No MLS, brokers sell their own listings n. All of the facts, please n. No extended preclosing time n. Signing ceremony completes transaction Page 72 -73

Nation of Renters n “Once a renter always a renter” n Lowest rate of home ownership in the EU n About 53% own homes n Laws are very pro-tenant Page 74

Energy Efficiency n. Required energy certificates: § Demand-oriented certificate § Consumption-oriented certificate n. Provides information on energy operating costs n. Allowable factor for rent increases Page 74

When Germanys Buy Abroad n Mediterranean coastlines and islands, west coast of Florida n Check direct air routes from German hubs n Deliberate approach to second home buying n Buyer loyalty may be an issue Page 75

When Foreigners Buy in Germany n. No restrictions on foreign purchase n. All proceedings are conducted in German n. Hire an interpreter n. Obtain a copy of the purchase contact before the signing ceremony n. Be prepared to ask questions during contract reading Page 75

Commercial Real Estate n. Concentrated in Berlin, Hamburg, Düsseldorf, Frankfurt, Munich, and Stuttgart n. Eastern Germany lags behind the west n. Competition for prime assets bids up prices n. Spillover seeks opportunity in outlying areas, second-tier cities Page 75 -77

Doing Business n. Rules and regulations contribute to an orderly life n. Business proceeds without a personal relationships n. Straightforward communications n. Punctuality! n. Contracts followed to the letter Page 78 -79

Beyond the Basics n. Business and personal life are separate n. Working overtime shows lack of planning n. No hand gestures, touching, or backslapping n. Home—the one place where a German can relax, show individuality Page 80

5. A Look at the United Kingdom

Geography n England, Wales, Scotland, Northern Ireland § All citizens of U. K. are British § Only those from England are English n Scotland, Northern Ireland, Wales gradual home rule, devolution n High-speed Eurostar rail service—the Chunnel—connection to continent Page 82 -83

Economy Page 84

Conveyancing n. The transaction process n. Buyer and seller appoint conveyancers or solicitors n. Offers not a legally binding until contracts exchanged, deposit paid n. Conveyancer sets a date for completion of the sale Page 84 -87

Housing Trends n. Chronically undersupplied and high priced n. Stagnated pace of homebuilding n. Aging housing stock n. Pent-up demand Page 88

Mortgage Lending n. Help-to-Buy Mortgage Guarantee n. Help-to-Buy Equity Loan n. Mortgage Review § Ascertain borrower’s capability to repay § “Fully advised sale” § Restrictions on interest-only mortgages Page 88 -89

Buying Abroad n. British retirees, holiday homes: § Mediterranean § Iberian coastline & islands § France § Central Florida n. Where direct flights reach sun and sand Page 90

When Foreigners Buy in the U. K n 85% of new London homes bought by foreign investors in 2013 n Wealthy buyers: Russia, China, Singapore, Hong Kong, Malaysia, India, and Middle East n No restrictions, low capital gains tax n Middle-income buyers priced out of market n Controversy: Luxury homes stand empty with housing in short supply Page 91 -92

Commercial Real Estate n Perennial favorite of international buyers n Stability, quality of assets, many investment grade properties, prestige, value growth n Competition pushes prices up but depresses yields n London plus the “Big 8” § Bristol, Birmingham, Cardiff, Edinburgh, Glasgow, Leeds, Manchester, and the West Corridor Page 92 -96

Doing Business in the U. K. n. Observe formalities n. No back pats, hugs, or air kisses n. Be on time n. English are masters of understatement n. Make your case with facts and solid evidence n. Avoid a hard-sell approach Page 97

Beyond the Basics n. Multiculturalism reflects the colonial history n. Guard personal privacy, don’t discuss personal or family matters n“Keeping a stiff upper lip” n. Younger generations more relaxed about protocol and interpersonal interactions Page 97 -98

6. A Look at Spain

The Costas of Spain a ni o l ta a Val enc i a C s land s ric I a Bale Andalucía Canary Islands Page 100 -101

The Boom n. The “Spanish Miracle” n 15 years of above average-GDP growth until 2007 n. Built on bricks and sunshine—home construction and tourism Page 102

The Real Estate Bubble n Enablers: § Abundant and cheap mortgage financing § Loosened banking regulations § Pent-up demand § Vacationers and retirees seeking warm climate, low cost of living n 200% price increase 1996 to 2007 n More new homes under construction than Germany, France, and the U. K. combined Page 102 -103

The Economic Crisis n 2007 global financial crisis n. Housing starts plummeted n. Thousands of furloughed workers n. Other European economies faltering n. Repossessions and evictions n. Shadow economy thriving Page 104 -106

SAREB n. Spain’s “bad bank” n. Removed € 50 billion in sour real estate assets from bank balance sheets n. Assets repackaged, sold to investors n. Small savings banks (cajas) compete to unload properties n. Monitor SAREB activity Page 107

Comeback n. Buyers looking for opportunities n. Foreigners made 21. 4% of residential purchases in 2013 n. Buyers from: England, Germany, Denmark, and Sweden, Middle East, Asia, and Russia n. Visa investor purchases n. Aspects that make Spain attractive— climate, sun, beaches—still there Page 107 -108

The Future n 2015 as turnaround year? n. Low Euribor rate keeps mortgages payments low n. Several years of inventory on the market n. No new construction in the pipeline n. Future shortage of quality of homes buyers want to purchase? Page 108 -109

Spanish Real Estate Transactions n. No restrictions foreigners to buy and resell real property n. Some differences in taxation of foreign real estate ownership n. Access Spanish property registry records and info at http: //registradores. org Page 109 -112

Commercial Real Estate n Madrid and Barcelona n Commercial downturn, same as housing n Stabilized at the bottom of the cycle? n Opportunities for risk-tolerant investor n Introduction of SOCIMIs (exchangetraded real estate investment funds) Page 113

Madrid n Center of country, capital, and largest city n Population: 3. 3 million (6. 5 Million metro area) n International finance, corporate headquarters offices, government administration n Prime areas: § CBD: Paseo de la Castellana (CBD) § Calle Serrano and Calle de José Ortega y Gasset (the Golden Mile) n High-speed AVE rail network hub Page 114 -115

Barcelona n Second largest city in Spain n Population: 1. 6 million (4. 5 million metro area) n On the Mediterranean coast n Prime areas: § Avinguda Diagonal § Passeig de Grácia n “ 2014 European Capital of Innovation Award” n Center for art, architecture, and design n Official language is Catalan Page 114 -115

Doing Business in Spain n. Take the time to develop a relationship n. Loyalty is to the individual, not the company n. Saving face is important n. Observe body language Page 116

Beyond the Basics n. Intense Madrid and Barcelona rivalry, don’t make comparisons! n. Castilian official language of Spain, but other official languages: § Catalan in Barcelona, Valencia and the Balearic Islands(not a Spanish dialect) § Galacian (Gallego) in Galicia § Basque (Vasco) in Basque country Page 117