Record-breaking year for European hotel investment

Investment in European hotels climbed to a record-breaking €27.8 billion in the 12-months to Q4 2019, according to CBRE data, an increase of 13.9% year-on-year. Hotel investment accounted for 8.8% of all capital deployed in European real estate in 2019.

The UK remained the largest investment market for Hotel investment in Europe, capturing 26.1% of capital deployed. However, investment volumes in the UK were down 7.4% on 2018.

Hotel investment in Italy continued to gain momentum, increasing 141% year-on-year and maintaining its place as the third largest European hotel market. Italy had a particularly strong end to the year with 21 deals taking place in the final quarter. Two landmark deals included the acquisition of the Venice Murano luxury hotel scheme by Hong Kong based Langham Hospitality Group, and the acquisition of the former BNL bank headquarters in Rome by Antirion SGR for €190 million (before conversion costs) to realize a 160-key ultra-luxury hotel.

France and Benelux recorded 19% growth in hotel deal volume year-on-year. Whilst the year got off to a relatively slow start, Benelux saw an influx of deal activity towards the end of the year, with transaction volumes reaching over €840 million in Q4 2019 alone.

Germany had a strong end to the year, with transactions in Q4 2019 totalling €2.4 billion. Notable transactions included the first for LaSalle’s Encore+ fund, having completed on the ibis Budget and Adagio Access aparthotel in Munich’s Olympiapark. Germany hotel investment increased by 24.5% year-on-year.

Paul Kapiris, Director, Head of Cross Border Hotel Investment at CBRE, explains:

 “A flurry of deal activity in Q4 2019 helped the European hotel investment market achieve impressive growth figures. Strong investor demand from more core investors have compressed yields in the traditional markets, resulting in higher return investors looking for opportunities in CEE and Portugal.”

Investors are looking to invest in markets with strong demand generators, combined with strong location, covenants and experienced management teams. Capital favours transparency, liquidity, corporate governance and currency plays. Margin pressures on operators to improve efficiencies will generate investment opportunities in 2020.

Central London investment activity up 140% year on year as confidence rebounds

Central London investment totalled £607.1 million in January 2020, a 138.5% increase compared with January 2019, indicating continued positive momentum from December and heightened investor confidence, according to Savills.

The West End market saw 14 transactions complete in January equating to almost £340 million, a 137% increase on last year. Several assets had been available for over 14 months before being placed under offer in January including: Seven Dials Warehouse, Eagle House on Jermyn Street and 101 St Martin’s Lane.

Paul Cockburn, director in the West End investment team at Savills, said:

“In addition to the absorption of some long lingering sales we also witnessed swift engagement on newly marketed assets in January, with the likes of Camden Works, Sanctuary Buildings and 2-4 Cork Street, all being placed under offer above their guide prices and within weeks of being marketed. This heightened momentum and investor appetite provides a strong indication that we have returned to much more normal West End market conditions – a world apart from last year’s shuffle.”

In the face of continued stock shortage, global push factors, enduring occupational market buoyancy and heightened investor enquiries, Savills prime West End yield remains at 3.50%.

In the City of London, over £267 million worth of stock was traded across 6 deals in January, a 140% increase on last year. Almost a half (49%) of the total transactional volume was for value-add opportunities which continue to attract significant interest.

Richard Bullock, director in the City investment team at Savills, said:

“The continued interest in value-add stock further reinforces the strength of the City of London real estate markets driven by the robust occupational market and continued appetite from experienced investors to deploy capital.”

Vendors are in a strong position benefiting from increased levels of activity from investors. Coupled with the continued constrained levels of stock, Savills expects a hardening of yields in the City in 2020. Savills prime City yield is currently at 4.0%. 

Bullock adds:

“The City remains an attractive prospect for many international investors when comparing with other principal European financial centres. For instance, prime central business district yields in Madrid, Milan (both 3.25%), Paris (2.9%), Frankfurt (2.80%), Berlin and Munich (2.70%) are trading at a significant premium to the City of London.”

CBRE: Middle Eastern investors flock to UK regions for yield pick-up

The UK regions, including Birmingham, Bristol, Liverpool, Edinburgh and Glasgow were the preferred destinations for Middle Eastern capital in 2019, according to global real estate advisor, CBRE.

According to the property advisor, Middle East investors deployed £880 million into the UK regions in 2019, compared to £650 million in Central London. Whilst investment into the UK from the Middle East in 2019 was down on 2018, falling from £3.7 billion to £1.5 billion, this is the first time investors have deployed more capital into UK regional cities than into Central London.

Middle East investors deployed £230 million in Scotland with transactions taking place in all of the major cities: Edinburgh, Glasgow and Aberdeen. This included the £27 million acquisition of Centrica’s HQ in Edinburgh by BLME/Darin Partners.

Other notable transactions around the UK included the largest regional transaction of the year, the £140 million purchase of the Lewis Building and Priory Court in Birmingham by GII, as well as the £68 million purchase of the Exchange Flags office building in Liverpool by Ashtrom and Al Duwaliya’s purchase of Eagle House office building in Bristol.

Chris Brett, Head of EMEA Capital Markets, CBRE, explains:

“In 2019, we saw a number of Middle East investors dispose of their London assets as they reached the end of their investment cycles, including the sale of 25 Canada Square, Citibank’s HQ. This group of investors have long been active in cities outside of London having invested £6 billion the UK regions in the last five years. However, this is the first-time regional investment activity has exceeded that in London. Investors are increasingly attracted by the high levels of investment into regional infrastructure and the opportunity to achieve greater yields.”

Last year, South Korean investment into Europe grew by 122% year-on-year in 2019 to €12.5 billion (from €5.6 billion in 2018) according to Savills. France was the biggest beneficiary of this increase in capital, boasting record volumes of investment; €4.5 billon and 36% of the total (up from €355 million in 2018). Germany comes in second place with 16%, €1.9 billion of the total (compared to €1.3 billion in 2018), followed by the UK with 13%, €1.6 billion of the total (compared to €2.2 billion in 2018).

Coronavirus: the context for real estate markets

The unfolding coronavirus is both a potential humanitarian crisis and an unquantified risk to the global economy, which will add a layer of volatility to investor sentiment and global trade over the lifecycle of the epidemic’s spread.

Capital Economics has estimated that the cost of coronavirus in lost global productivity could be worth up to $280 billion, but really this estimate is based on containment expectations that are grounded in scenario assumptions, rather than expectations based on vaccine progress. Ground zero for the virus’ transmission from animals to humans was in the Hubei province of China, in Wuhan, arguably the most disruptive location for the epicentre of an epidemic to be given country’s centrality to global supply chains.

It is also a reminder – should we need it – that China, which is emerging as the largest economy of the world, is vital to the world economy though it poses a higher risk profile as a developing, middle-income country relative to world’s largest major developed economies, such as the US, Germany, Japan and even the UK.

JLL wrote:

“With the world now more interconnected with China than ever, issues like this ripple through the global economy in a way they would not just a decade or two ago. The responses to the crisis – quarantines, shutting down stores and factories, travel limitations or bans – will likely produce an impact, primarily on China’s economy and secondarily on the global economy and the US economy. Much of this should only temporarily hit economies because it concerns the movement of people, not goods. That will likely persist, even after the cause becomes resolved, a phenomenon in economics known as hysteresis. Ultimately, much of any slowdown will reverse, but some will not. For now, the situation seems more temporary than permanent disruption, but the situation remains highly idiosyncratic and should increase market volatility.

“For commercial real estate (CRE), geopolitical risk is becoming a feature of the economic landscape, not a bug. The sector thus far has sloughed it off well with fundamental and capital market performance driven by economic factors. Our view on that has not yet changed. Hotel demand and travel-oriented retail could take a small hit, though we don’t anticipate significant fallout in the U.S. and any impact should largely reverse over time. Other sectors should see little direct impact. Uncertainty surrounding the outcome of the election should produce a marginal impact on spending, contributing to the slowdown in GDP growth this year. That should produce a somewhat greater consequence for CRE, but nothing significant. In sum, CRE should continue to largely ignore geopolitical concerns. The pullback in non-residential construction could reduce the development pipeline in the coming quarters. Although development remains in check this cycle, reducing it further could put marginal upward pressure on the pricing of existing assets.”

UK capital values edge down in January but Q4 momentum soon to show uptick

Across UK commercial property, capital values decreased -0.2% in January, according to the latest CBRE UK Monthly Index. Rental values were unchanged from December, while total returns were 0.3% for the month.

In January, capital growth in the Industrial sector was 0.3%. Rental values also increased 0.3% over the month and total returns were 0.7%. This solid performance is in line with figures reported throughout last year in line with that of the previous year. As was the case in 2019, South East Industrials outperformed, pulling up the figures for the sector as a whole.

The Office sector reported capital value growth of 0.1% in January. Rental values grew 0.1%, while total returns were 0.5% across the sector. Rest of UK offices continued its strong performance from 2019 with the largest rental value growth and total return of any Office subsector in January.

Retail sector capital growth was -0.7% in January, a similar fall to that seen in January 2019. Standard shops actually recorded positive growth (0.1%) for the first time in 23 months, though growth was confined to the South East. Across the sector rental values fell -0.2% and total returns were -0.2%.

Toby Radcliffe research analyst at CBRE, explains:

“2020 looks to be off to a similar start to 2019; Offices and Industrials continue their steady performance while Retail is more challenging. However, UK investment volumes in Q4 2019 surged, and it may be that this momentum will have a knock-on effect on valuations with the usual lag in a few months’ time.”

Asian REITs and investors lead the way with AI adoption in real estate

Asian REITs and investors are leading the adoption of artificial intelligence within real estate, according to the findings of Deloitte’s 2020 real estate outlook survey.

The survey, which captured views of 750 CRE executives— owners/operators, developers, brokers, and investors—in 10 countries during the summer of 2019, shows that four of the top five countries for AI adoption are in Asia: Japan, Singapore, Hong Kong, and China. The Netherlands is in fifth, with Germany in seventh and the UK in 10th.

AI has the potential to create a positive impact on the entire CRE organisation, by helping capture, manage, and leverage data more effectively, says Deloitte, with its predictive capabilities increasingly influencing future profitability and returns.

CRE organisations seem to have only scratched the surface when it comes to using AI technology, with 63% of surveyed CRE executives planning to use it in the future. The differentiator for any CRE organisation may lie in its ability to coalesce the use of AI technology across its business and enhance predictive capabilities to result in smarter location decisions and improved tenant experiences.

Deloitte’s tips for how real estate owners and managers can leverage AI:

  • Strengthen predictive capability. More than 55% of the surveyed CRE executives believe that AI can benefit sales and CRM and accounting and financial planning and analysis departments. “AI technologies have the potential to evaluate diverse sets of traditional and alternative data with significant speed and accuracy. They can make more sophisticated and accurate forecasts, do scenario-based analyses, and plan for the future.”
  • Modernise leases. “Automating lease administration is a big AI opportunity for CRE organisations. The industry relies on duration-based leases, commonly classified as short-term or long-term. However, more than six in 10 of the surveyed respondents asserted that tenants prefer flexible leases as opposed to traditional ones. Notable rising demand for flexibility is witnessed in New York City, where the amount of space under flexible lease rose 44% year over year in 2018 and the UK, with 76% of respondents holding this view.”
  • Explore new revenue opportunities. “The ultimate value that CRE organisations can derive from the use of AI is generating new revenue sources. As a very basic example, data about people’s movement within a building can potentially be sold to advertisers or urban planners to help them in their decision-making. In another instance, CRE organisations can collect in-store shopping behavior data, use AI technology to identify patterns and generate insights, and then sell those to institutional investors to facilitate investment decisions. CRE organisations could then sell the same insights to their retail tenants, which could influence decisions related to in-store inventory, etc.”

Global commercial real estate investment volumes reached US$800 billion in 2019

Global investment volumes in the fourth quarter of 2019 grew by 10% to US$245 billion, taking annual transactional activity US$800 billion, according to JLL data, setting a new high watermark for annual global volumes.

The global outlook for the sector remains positive, according to JLL. Target allocations to real estate by institutional investors rose for the sixth consecutive year in 2019, with most groups expected to either maintain or increase their allocations in 2020.

Carol Hodgson, senior director, global research at JLL explains:

“Investor conviction in the real estate sector is still strong, supported by robust supply and demand fundamentals in many global markets and healthy spreads to risk-free rates. In this environment we forecast global investment in commercial real estate to moderate slightly in 2020, by 0%-5%, to roughly US$780 billion. While investors are still keen to access the sector, continued caution and selectivity, as well as limited availability of product, stand to impact transaction volumes.”

2018 was the peak for global office leasing volumes, with a slowdown recorded in Asia Pacific and the Americas in 2019. Economic uncertainty created by US-China trade tensions along with political unrest has flowed through to corporate decision-making. Even so, demand remains at solid levels and, in some markets, activity is constrained by a lack of available space. JLL’s outlook for 2020 is for a further gradual slowing of demand across all three regions. The global office vacancy rate stabilised at 10.7% in the final quarter of 2019. This is expected to be the turning point of the cycle. Vacancy rates moved down in Europe (-20 bps) but started to move out in the U.S. (+10 bps) and Asia Pacific (+40 bps).

Globally, new office deliveries are projected to reach 19.8 million sq m in 2020, the anticipated peak of the cycle. However, the highest level of new completions varies by region – it is predicted to have been 2019 in the US, 2020 in Asia Pacific and 2021 in Europe. Given the pick-up in completions, the global office vacancy rate is forecast to edge up to 11.2% in 2020. Global prime office annual rental growth slowed to 3.2% in Q4 2019. The standout performers with double-digit increases were Boston, San Francisco and Toronto. However, several markets are now recording falling rents including Dubai, Shanghai, Hong Kong and Jakarta.

Carol Hodgson added:

“Aggregate rental growth for prime offices across the 30 global cities is likely to stay positive in 2020 but ease further to around 0.9% as supply options increase. Toronto, San Francisco, Boston, Amsterdam and Berlin are projected to be the top rental performers in 2020 with Beijing and Hong Kong expected to be the weakest.”

Real estate executives increasingly acknowledge the need for data governance frameworks

Almost two-thirds of global real estate executives plan to increase data governance investments over the next 18 months, according to Deloitte’s 2020 real estate outlook survey.

The survey, which captured views of 750 CRE executives— owners/operators, developers, brokers, and investors—in 10 countries during the summer of 2019, shows that the real estate industry is starting to take data governance significantly more seriously now that individual firms are capturing and utilising their own proprietary data for businesses decisions.

Technology has unleashed the potential of data for real estate owners, investors, developers and financiers – and with that comes responsibility for security and new protocols. Deloitte says real estate companies need to develop platforms, processes, and a governance structure that enable data discovery, availability, management, and usability. The development of a flexible data governance framework that outlines processes, policies, standards, roles, responsibilities, and procedures will structure data’s commercial utility and security.

Deloitte explains:

“Data governance policies should also identify the data management and governance owners and assign responsibilities. This is important even if the data is managed externally, as is the case for 45% of our survey respondents. For the remaining

55% of respondents, data is managed by a chief data officer or an equivalent C-suite executive or by collaboration across business verticals. The bigger focus, though, should be on recruiting the appropriate talent to manage various data governance activities.”

“CRE companies, managers, tenants, and third-party vendors should be clear about who owns different forms of sensor data captured at their properties. These parties can improve transparency on data ownership by outlining policies at the time of a service contract and avoid any confusion related to the ways in which the data can be utilised. For instance, the data captured by beacons in retail stores could be owned individually or collectively by the retailer, mall owners, and/or the equipment vendors.

“CRE organisations should consider using data lakes, a common repository that stores all structured and unstructured data at any scale and in raw format. Next, they would require a data dictionary, a ‘firmwide policy that defines the terms and attributes of each data element’ that can be used across an organization.26 When put into action, CRE organizations would have to index which specific data characteristics they want to use to support the use of data analytics tools to generate meaningful insights. They should also consider classifying data based on its value and risk, such as personally identifiable information (PII), and ensure compliance with regulations, such as GDPR.”

There are a variety of tools and technologies available for every stage of the data governance process. CRE companies should evaluate and make appropriate choices based on quantity and quality of data they can capture and analyses they wish to perform, Deloitte added.

CRE firms’ data strategy is rising among corporate priorities

The commercial real estate (CRE) industry is heavily relying on data to drive-decision making but is hindered by disparate data requiring greater amounts of time to manage, according to a survey by Altus Group.

According to the report, which is based on a global survey of 400 CRE executives, there exists a growing prioritisation by CRE firms to address these challenges through dedicated executive ownership and governance related to overall data strategy. 

Altus Group’s CRE Innovation Report also highlights:

  • Almost half (45%) of CRE teams are spending at least 15% to over 25% of their time managing and organizing data (equivalent to two to three months of the year);
  • Eight out of 10 CRE firms now have a Chief Data Officer or equivalent senior executive who oversees their organization’s data strategy and data governance. This compares to Altus Group’s 2016 research where 44% of firms surveyed indicated a lack of executive sponsorship;
  • CRE executives now believe the timeframe for competing technologies to start gaining traction and is upon us, with PropTech consolidation a necessary outcome;
  • 89% of CRE executives said significant consolidation is needed for PropTech to more effectively deliver on the needs of the CRE industry, with 43% saying it is already underway or will occur within 12 months
  • Areas of PropTech most likely to experience consolidation include property management, property transactions and listing services, and financing and lending firms;
  • A large majority of CRE executives (87%) believe global data standards for commercial real estate will eventually be adopted, however, numerous obstacles were identified including a lack of standardized data definitions on a global scale, and privacy and data protection regulations; and
  • 50% of executives believe 5G wireless will create major disruptive impact on the CRE industry with 81% saying it will support increased adoption and use related to smart city development.

The 2020 Altus Group CRE Innovation Report is based on a global quantitative survey of 400 CRE C-level and senior executives in both front and back office positions at owner operator and investor firms in North America, Europe, Asia-Pacific and Latin America. All firms represented in the survey had a minimum of assets under management of at least US $250 million at the time of being surveyed, representing an approximate total AUM of over US $2 trillion.

Structural demand drivers and technology reorder customer experience as top real estate priority

Increasing urbanisation, changing workforce demands, including flexible location and workspaces, and technology advancements, such as AI and Internet of Things (IoT), are combining to make prioritisation of tenants’ and end users’ needs ever more urgent, according to Deloitte.

In Deloitte’s 2020 outlook surveyed 750 CRE executives— owners/operators, developers, brokers, and investors—in 10 countries during the summer of 2019 to assess how emerging technologies and analytics are helping CRE companies to make more informed location decisions and create a more memorable tenant experience.

According to Deloitte’s survey 92% of respondents plan to maintain or increase their tenant experience–related technology investments.

  • Most respondents rated tenant experience as a top priority. Yet, for a majority, digital tenant experience is not a core competency.
  • Executives acknowledge that the benefits of IoT and AI technologies are not limited to tenant experience. They also can raise operational efficiency and lower costs.
  • When it comes to tenant experience–related technology investments over the next 18 months, 36% of respondents expect their organisations to hold the line, 42% anticipate a moderate increase, and 14% plan to significantly increase.

Interestingly, almost three-quarters of respondents (72%) of Deloitte’s surveyed CRE executives plan to maintain or increase their overall technology investments even if an economic slowdown occurs. In contrast, 81% of the surveyed executives from CRE broker firms and consultants with revenues of US$10 billion or more are likely to maintain or reduce technology investments. This could be because the existing technology budgets of some of the largest brokers and consultants are high, and they are more likely to be further along in capturing and leveraging data and using analytics to generate meaningful insights than smaller firms, suggested Deloitte.

The survey revealed divergent view about how the CRE industry will perform over the next 18 months: 15% are very optimistic, 61% are somewhat optimistic, 14% are neutral, and 10% are somewhat pessimistic. “This is not surprising,” wrote Deloitte in its 2020 real estate outlook paper, “when it comes to economic changes, the industry typically lags the broader economy by six months.”

Regionally, respondents from Asia are the most optimistic, followed by those from North America and Europe. A relatively higher proportion of respondents from Hong Kong, Singapore, Japan, and the United States are very optimistic about the industry’s performance. In contrast, on an average, 18% of Netherlands and UK respondents are somewhat pessimistic about the industry’s performance, which is higher than the global aggregate of 10%.