3. Transaction volumes & capital flows
Transaction volumes across Europe are expected to fall for a second consecutive year in 2019, predicts Colliers International. While 2018’s
- JLL says: “There are signs that activity is slowing as we move into 2019 and, while demand remains robust, volumes are likely to moderate…. Ongoing investor selectivity and reluctance to recycle capital, due to the difficulty in finding alternative income-producing assets, are likely to limit investment growth.”
However, platform or entity transactions are expected to again prop up overall transaction volumes this year which flatters the perception of the market’s liquidity and investor universe.
- PGIM Real Estate explains: “Rather than reflecting new capital sources or
a churnof existing investors into new fund vehicles – creating a point at which there is a choice to rotate into other asset classes – mergers are more akin to a of existing deployed capital. However, while global entity transactions increased by 70% in 2018, their volume – and potential distorting effect on activity – pales in comparison to 2007.” recategorisation
Within the UK, predictions are more specific.
- CBRE forecasts “slightly lower” volumes – at around £65bn in 2019. The following three-year period – 2020 through 2022 – will see activity cool to around £50bn per annum. After which, volumes will
reboundto £65bn in 2023.
- JLLis more bearish, forecasting around £55bn – assuming a Brexit deal is secured. Investors will focus on
scarceprime product which consequently will limit volumes and drive further platform transactions. Foreign demand for UK commercial real estate remains healthy, with overseas cash accounting for over 40% of all investment, according to Colliers, driven by Asian capital, followed by European and US investors.
According to INREV’s Global Investment Intentions Survey 2019:
- Institutional investors intend to deploy a minimum of €72.4bn of new capital into the asset class in 2019, including around two-thirds, or €47.6bn, of this total through non-listed vehicles.
- Half of all investors will increase their allocations over the next two years.
- For investors targeting Europe, there’s a significant shift towards core, which rose from 31.8% to 39.1%, while opportunity virtually halved to 9.8%. Value added funds remains preferred investment style (51.1%) with investors still attracted to the risk-adjusted return prospects.
- INREV explained: “These results suggest investors may be taking a more risk-averse approach to their real estate investments, in preparation for the approaching late stage of the current cycle.”
Final thought: While there remains considerable capital to deploy in 2019, new capital raising appears to be tailing off. Preliminary Preqin data for European-focused funds (up to November 2018), shows that the amount of capital raised was only a little more than half of that achieved in 2017. The true scale of which is yet to be revealed.