‘We have never seen so much capital from so many places coming and looking for product,’ said Stephen Miles, executive director – EMEA investment properties, CBRE. ‘Many markets have been starved of development for a long time, so investors who want good product need to go up the risk curve. People are re-defining what they think it’s opportunistic.’
There is a huge amount of demand from Asian capital, driven by currency, spreads and diversification needs. ‘South Koreans look for long income and good covenants to underwrite in a safe way, while Singaporeans are focused on value-add and core plus, driving value in the capital they are deploying,’ he said.
Everyone mentions the late cycle, but this awareness does not stop investments. ‘Investors now want assets that deliver a long stable income for when the downturn eventually comes,’ said Kim Politzer, director, head of research, European Real Estate, Fidelity International.
‘We see a lot of capital availability from an ever wider range of sources, including many new entrants with specific requirements and a specific project,’ said Alexander Fischbaum, managing director, AF Advisory.
In such a competitive environment finding assets to buy can be a challenge, said Jos Short, executive chairman, Principal Real Estate Europe: ‘There is so much capital still available that it is difficult to find product. We were aiming for £1 bn of transactions this year, but we have struggled to find them’.
In the UK Logistics and Industrial has been the best-performing sector in terms of total returns and capital growth, especially in London and the South-East. Offices are also performing well in the rest of the UK and not just in the capital.
‘UK offices have done better than most people predicted,’ said Neil Blake, EMEA chief economist and global head of forecasting, CBRE. ‘Rents have held up and there is no shortage of tenants. Next year vacancies may increase due to more supply coming to the market and rents are likely to go sideways.’
Landlords have a lot to learn from the success of WeWork, which has become the biggest tenant in London, said Morag Beers, director real estate, IMMO Investment Technologies: ‘The relationship between tenant and landlord is often still too adversarial. WeWork doesn’t just offer flexibility but also the feeling of belonging to a club’.
Technology will play an increasingly big role in getting tenants onside, she said: ‘Occupiers are fully aware of technology, but the investor side is not fully engaged yet. We are still only scratching the surface of what technology can offer.’
On the negative side the retail sector is experiencing difficulties, Blake said, as it is ‘caught in the perfect storm of e-commerce growth, reduced spending power and changing consumer habits’. Shopping centres are the worst performers.
‘Fidelity International’s forecast is that the price of UK retail assets could fall by up to 70%,’ said Politzer. ‘Retailers cannot afford the rent at the moment, profitability has been squeezed by increases in the minimum wage and business rates, so we need to see significant changes in pricing.’
The risk, she said, is that ‘this trend could spill from the UK into Europe, which is why we are bearish and underweight in retail.’
Moving into the new year ‘there will be question marks until Brexit is resolved, but we see no risk to occupational demand or a shock to rents,’ said Politzer. ‘The first quarter of the year is likely to be quiet, then activity will pick up.’
Looking ahead to 2019 ‘there is nothing to inspire pessimism or fear,’ said Blake. ‘The fundamentals are good. No one ever mentions lack of investment demand and there is plenty of money looking for a place to go. We are optimistic that the cycle will not end soon and we will not see a slowdown next year. The downturn may happen in 2020 or 2021.’