Nuveen: investors refocus on fundamental differences between sectors

With the all-encompassing cyclical drivers of rental growth and yield compression running out of road, the fundamental differences between sectors are back on the minds of investors, says Nuveen Real Estate.

Headline investment activity remains historically strong, but volumes are retreating slightly, according to Stefan Wundrak, Head of Research, Europe, at Nuveen Real Estate. In a Q3 outlook of the European market, Wundrak continues:

Offices continue to benefit from rental growth, but the medium-term outlook is more muted. Rising sector allocations drive investment volumes and pricing for logistics. Strong construction activity supplies product.

“Retail valuation in Continental Europe has fallen for two consecutive quarters. France, Germany and Central and Eastern Europe defy the downward trend much better than other markets. Niche living markets are developing fast, but secular opportunities seem largely priced in.”

The logistics sector still benefits from underweighted investors who are increasing allocations substantially, says Nuveen, adding the sector remains priced for growth.

Wundrak continues:

“While we also expect logistics rental growth significantly above previous cycles, recent deals seem to imply aggressive growth expectations that the market is unlikely to deliver on. Double-digit rental growth across many office markets have vindicated low yields in the office sector over recent years. Yields haven’t compressed further over the last 18 months, implying that the rental growth cycle is expected to slow down from 2020 onwards.

“2019 is poised to deliver another year of good rental growth based on solid demand and a relative disciplined supply response so far. However, despite interest rate rises pushed beyond 2020 it is hard to see what could drive a further sharpening of cap rates.”

Elsewhere, Nuveen says the residential sector is “internationalizing” largely along niche sectors, such as micro-apartments, co-living, senior living and student housing.

Wundrak continues:

“Similar to the logistics sector, living investments have secular winds in their sails; most investors are under-allocated and the sector is bolstered by demographic changes driving a shift in demand. Investors face a similar dilemma as with logistics. Do secular trends like rising tourism and growing international student numbers justify the high valuations?

“Retail, on the other hand, is becoming increasingly unloved as the challenge of e-commerce is filtering through the system. On a pan-European basis, valuations have been drifting downwards over the last six months. Losses have so far been confined to more secondary assets, where yields have decompressed, leaving only Germany and France largely untouched.

“The former remains relatively insulated due to high investment pressure and consumers being supported by the strong economy. We expect values to continue to soften this year with no market escaping value adjustments.”

james.wallace@realassetmedia.com

Alternatives now the largest sector in UK commercial real estate investment market as investor activity evolves

rolling annual total to £58bn, according to Cushman & Wakefield data, which if the momentum trajectory continues would lead to an estimated £45 billion for 2019.

Institutions have decreased their investment activity. A slowing UK economy and a fast-approaching Brexit deadline has made those already heavily invested in the UK more

Cautious, explains Cushman. Meanwhile, private equity investors have been increasingly active as buyers and sellers. As buyers, they had a 28% share of all investment in the second quarter – their largest share since 2008.

According to Cushman, the main sources of foreign capital are changing. Greg Mansell, Head of UK Research & Insight at Cushman & Wakefield, explains:

“Top investors from the United States, China and Hong Kong have either been net sellers or absent from the market. In their absence, other investors have stepped up. Persistent buying by French investors over the last 12 months has launched the country back into the top 10 rankings for net investment into the UK since 2006.

“Investors from South Korea and Israel have also been buying in large volumes. Both countries are now top 20 net investors into the UK, displacing traditional European sources like the Netherlands.”

The top three deals this quarter were a third of all investment – the highest share

since 2013. Vinci, an infrastructure operator based in France, bought a major stake in Gatwick Airport, classified as an Alternative asset, for £2.9bn. They announced the deal in 2018 and completed it in May 2019, making it the largest deal in the quarter.

The second-largest deal was over £1bn for a London office bought by an owner-occupier.

This deal highlights the trend of large corporates preferring ownership to leasing large amounts of space on long leases. For many companies, buying may be a cheaper option over the long term since the IFRS 16 Leases accountancy standard became effective at the start of 2019. Lessees must now recognise leases as assets and liabilities on their balance sheet.

The third-largest deal was the sale of 12 supermarkets to Realty Income Corporation at a 5% net initial yield. The sale was part of British Land’s drive to have a “a smaller, refocused retail business”. Mansell added: “Long-income portfolios, such as this one, attract buyers looking for low-risk, long-term income. With further declines in government and corporate bond yields this quarter, demand for these portfolios should continue. The appetite for long income has also driven growth in ground rent and income strip deals. The largest of these deals last quarter was £206m of ground rents secured on over £1bn of London Hotels bought by Alpha Real Capital.”

Cushman’s analysis continues tomorrow.

james.wallace@realassetmedia.com

Help New Business find you at EXPO REAL 2019

Joining the International Investors Lounge as a Stand Partner gives you and colleagues a ‘home’ and helps potential business partners find you at EXPO Real.

The International Investors Lounge returns to EXPO Real, for its fourth successful year, bringing a full programme of expert panel discussions, networking events and partner stands to help create and facilitate a positive environment for cross-border investment and international business.

With an expanded stand and new location in the Nova Hall A3, focused on innovation and investment, the International Investors Lounge is open on three sides to accommodate both stand partners and attendees at the successful programme of events attracting investors and real estate specialist from across the globe.

The focus is fundamentally international with the full programme in English focused on sector opportunities, cities, countries and regions as well as mega trends and hot topics influencing the investment decisions of international capital.

Stand Partners include the RICS, International Campus, CMS, Bonard, NAS Invest, RSM, Blackbird Real Estate, and we will also launch an area dedicated to Healthcare real estate.

Joining the International Investors Lounge as a Stand Partner gives you and colleagues a ‘home’ and helps potential business partners find you at EXPO Real. As a Stand Partner you receive all the benefits of an exhibitor without the need to dedicate the significant time and budget needed for an individual stand. As a stand partner, your company benefits from official Exhibitor status including a listing in the EXPO Real catalogue (online & print). Clients and potential business partners can find you easily and efficiently and meet you at your stand.

All enquiries please contact:

Thorsten Herbert
Founding Partner, Managing Partner
Real Asset Media I Investment Briefings & TV
M: +49 170 47 98 793
E: thorsten.herbert@realassetmedia.com

Richard Betts
Founding Partner, Group Publisher
Real Asset Media I Investment Briefings & TV
M: +44 7557 37 31 34
E: Richard.betts@realassetmedia.com

Frank Beinborn
Director Client Relations
Real Asset Media I Investment Briefings & TV
M: +49 1525 4878668
E: frank.beinborn@realassetmedia.com

Knight Frank: global prime residential prices continue to cool

Mounting economic headwinds are contributing to slower global residential prime price growth, according to Knight Frank, and is leading policymakers in developed and emerging markets alike to cut interest rates, presenting opportunities for the least risk-averse.

Knight Frank’s Prime Global Cities Index, which tracks the movement in luxury residential prices across 46 cities, increased by 1.4% in the year to June 2019, up marginally from 1.3% in March 2019 but still significantly lower than its four-year average of 3.8%.

Although Berlin leads the index, its rate of annual growth has slowed from 14.1% in March 2019 to 12.7% in June 2019. Frankfurt, by comparison, has seen its annual price growth increase from 9.6% to 12.0% over the same period. However, with prime prices in Berlin and Frankfurt currently around €11,500 per sq m and €13,500 per sq m respectively they remain competitive by European standards.

Some 35 of the 46 cities tracked by the index (76%) registered price growth in the year to June 2019. Of the eleven that saw prices decline year-on-year, Istanbul (-9.9%) and Vancouver (-13.6%) were the weakest markets.

Six European cities now sit within the top 10, down from seven last quarter as Edinburgh (4.3%) saw price growth moderate pushing it to 12th place. Madrid and Paris are following similar paths recording 5.2% and 5.0% annual growth respectively. In both cases, the headline figure conceals variations at a neighbourhood level.

In Madrid, areas such as Chamberí as well as outer non-prime districts are performing strongly. In Paris, the Left Bank, in particular the 6th and 7th arrondissements, are now pausing for breath having witnessed upward of 11% price growth since 2017, whilst the 18th continues its upward trajectory.

In mainland China, tier 1 cities such as Beijing (4.5%) and Guangzhou (2.7%) saw prime price growth strengthen in the first half of 2019 as optimism grew surrounding the potential relaxation of housing policies, even though authorities reiterated their stance against speculation.

In Hong Kong (0%), the opening of various cross-border infrastructure projects, which should boost economic links in the Pearl River Delta over time, failed to counteract immediate concerns over the US/China trade war and political discord.

Singapore’s prime market (0.9%) remains subdued as buyers adjust to the latest round of regulations, yet despite this, a number of record sales prices have been achieved so far in 2019.

Sluggish economic growth explains the wave of interest rate cuts evident in the last three months (Figure 1) as policymakers try to stimulate growth. Much hinges on the next three months with stronger headwinds on the horizon we expect the index to moderate further in the second half of 2019 before strengthening in 2020.

Kate Everett-Allen, International Residential Research, at Knight Frank explains:

“We’ve seen a wave of interest rate cuts in the last three months as policymakers try to stimulate growth. Much hinges on the next three months with stronger headwinds on the horizon we expect the index to moderate further in the second half of 2019 before strengthening in 2020.”

james.wallace@realassetmedia.com

Savills: bumper July for central London as Q3 gets off to a flyer

Investment in central London rocketed in July to £1.394bn transacted in the West End and the City of London across 13 deals, according to Savills data, representing a 185% increase on the £489m transacted in June.

The City of London recorded its second highest monthly turnover in 2019 with £1.017bn transacting across nine deals in July, compared to £318m in June. In the West End, £377m was transacted across four transactions – including 23 Savile Row which sold for £277m, the largest West End transaction to date this year – compared with £171m in June.

23 Savile Row was sold by a joint venture between Angola’s Quantum Global and LaSalle Investment Management to Lazari for £277m, which reflects a net initial yield of 4.14%.

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

“The boost in activity we have experienced is reflective of a number of factors ranging from improved sentiment and stronger demand for assets on the market. While the West End experienced lower volumes than the City, over £2bn of property is under offer and we expect this enhanced activity to filter through to August.”

In the City, US investors still account for the largest share of investment so far in 2019, accounting for 37% of total investment, having acquired five buildings in the City market totalling £1.50bn. UK investors continue to lead the way in terms of number of deals having acquired 34 buildings totalling £1.27bn (31% of total volume). However, July saw a marked increase in activity from Asian investors, as they spent c.£480m, more than double their spend for the rest of the year.  

Richard Bullock, director in the City Investment team at Savills, explains:

“With sterling continuing to track lower, and an increase in value add and core properties being marketed we are seeing a rise in interest from international investors.”

Against the backdrop of the sale of 8 Finsbury Circus – by Mitsubishi Estate to Stamford Land Corporation for £260m reflecting a net initial yield of 3.98% – and an increase in investor appetite for Core buildings, Savills has moved its prime city yield back to 4.0% which compares with the West End prime yield of 3.75%.

james.wallace@realassetmedia.com

Help New Business find you at EXPO REAL 2019

Joining the International Investors Lounge as a Stand Partner gives you and colleagues a ‘home’ and helps potential business partners find you at EXPO Real.

The International Investors Lounge returns to EXPO Real, for its fourth successful year, bringing a full programme of expert panel discussions, networking events and partner stands to help create and facilitate a positive environment for cross-border investment and international business.

With an expanded stand and new location in the Nova Hall A3, focused on innovation and investment, the International Investors Lounge is open on three sides to accommodate both stand partners and attendees at the successful programme of events attracting investors and real estate specialist from across the globe.

The focus is fundamentally international with the full programme in English focused on sector opportunities, cities, countries and regions as well as mega trends and hot topics influencing the investment decisions of international capital.

Stand Partners include the RICS, International Campus, CMS, Bonard, NAS Invest, RSM, Blackbird Real Estate, and we will also launch an area dedicated to Healthcare real estate.

Joining the International Investors Lounge as a Stand Partner gives you and colleagues a ‘home’ and helps potential business partners find you at EXPO Real. As a Stand Partner you receive all the benefits of an exhibitor without the need to dedicate the significant time and budget needed for an individual stand. As a stand partner, your company benefits from official Exhibitor status including a listing in the EXPO Real catalogue (online & print). Clients and potential business partners can find you easily and efficiently and meet you at your stand.

All enquiries please contact:

Thorsten Herbert
Founding Partner, Managing Partner
Real Asset Media I Investment Briefings & TV
M: +49 170 47 98 793
E: thorsten.herbert@realassetmedia.com

Richard Betts
Founding Partner, Group Publisher
Real Asset Media I Investment Briefings & TV
M: +44 7557 37 31 34
E: Richard.betts@realassetmedia.com

Frank Beinborn
Director Client Relations
Real Asset Media I Investment Briefings & TV
M: +49 1525 4878668
E: frank.beinborn@realassetmedia.com

Savills: strongest H1 investment volumes for Polish warehouses in history

Almost 1.1 million sq m of modern warehouse and industrial space was delivered in the first half of 2019 in Poland, which is the highest volume of new supply recorded ever during the first six months of a year, says real estate advisory firm Savills.

According to Savills, total stock of modern warehouse and industrial space in Poland rose to 16.8 million sq m, thanks to the record high new supply in the first half of the year. Warsaw maintains its leading position (4.1 million sq m), while Central Poland (2.73 million sq m) overtook Upper Silesia (2.66 million sq m) due to 246,500 sq m delivered to the market in that region in H1. Over 2.2 million sq m of warehouse and industrial space remains under construction across Poland, with Panattoni BTS Gliwice the biggest project (210,000 sq m).

Kamil Szymański, Head of Industrial Agency, Savills Poland, explains:

“In the first half of the year the largest level of new supply was observed in Central Poland, making this region the second most important logistics market in the country, just behind Warsaw (zone I and II). What’s more, in the capital city of Poland as well as in Wroclaw we noticed very strong demand. City logistics is still one of the key trends. At the end of June 2019 there was ca. 52,100 sq m of space under construction located in such schemes and the demand for urban logistics warehouses remains high at ca. 31,000 sq m of net take-up in H1 2019,”

According to Savills, the largest volume of take-up was noted in Warsaw (almost 580,000 sq m), nearly 50% more than the year before. Key lease agreements (ca. 60,000 sq m each) signed in H1 include: Jysk (Logistic City Piotrków Trybunalski), Pantos Logistics (Panattoni Park Wrocław XI) and PepsiCo (P3 Mszczonów).

Poland’s vacancy rate slightly decreased (0.4 pp compared to the first quarter) and at the end of June 2019 stood at 5.1%. The highest rate was observed in Upper Silesia (7.6%) and Poznań (7.5%). Headline rents were stable: EUR 2.7–4.2/sq m/month for big-box warehouses and EUR 5.35/sq m/month for SBUs in Warsaw.

Szymański added:

“The warehouse market is keeping its momentum. Following the record-breaking level of new supply in H1, the whole year may end with the highest volume of new warehouse and industrial space delivered to the market at ca. 2.5 million sq m. Share of leased space in under construction remains relatively high at ca. 60%, ensuring stability of vacancy rate in the future.

“However, some macroeconomic risks appear. Slowdown in the manufacturing sector in Germany could impact industrial production and related sectors in Poland. On the other hand, private consumption is to remain high, among others due to pre-election fiscal stimulus, ensuring demand from retail, e-commerce and 3pl sectors.

“Taking into consideration these risks, a mild decline in total volume of leasing activity at the end of 2019 compared to two previous years is projected. As easing of demand is expected there is no space for rental growth within the next six months.”

james.wallace@realassetmedia.com

Colliers: London offices take-up edged back up in Q2

Take-up in London offices edged back up above the 10-year average in Q2 2019, according to Colliers, as the seesawing of activity between City and West End markets continued.

City transaction levels rose above average after a poor Q1, but West End volumes fell to a 30-month low. Regardless, across London, pre-letting activity rose to a 12-month high, boosted by EBRD’s (European Bank of Reconstruction & Development) decision to pre-lease 365,000 sq ft of space at 5 Bank Street.

Colliers says never ending political uncertainty is accentuating the volatility across occupational markets, although transaction levels still appear to be on course, in 2019, to match the long-term trend.

“Stable levels of take-up, coupled with sluggish delivery of new supply, meant that London-wide vacancy dipped below 5% for the first time in over two years. New/refurbished availability was broadly unchanged quarter-on-quarter, albeit near 80% below the 10-year average. In contrast, second-hand availability fell by 8%, which was the largest quarterly fall for five years. A prolonged shortage of prime product now seems to be having a quantifiable effect upon second-hand vacancy levels.

“The supply pipeline remains extremely constrained. While construction levels have risen in 2019, it is pre-letting activity that is mainly responsible, enabling commencement of larger scale projects. Paradoxically, at the same time, the very nature of pre-letting is eroding the available pipeline further.”

Since 2000, average annual speculative completions across London have totalled 2.9 million sq ft, according to Colliers. Currently, totals for 2019-2020, even combined, will still undershoot that figure. The recent trend of improving financial services demand has been firmly realised in 2019, with 32% of named take-up deriving from that sector in the year-to-date. The financial services sector has accounted for over 1.5 million sq ft of take-up in 2019, with the nearest sector, Media and Tech, down at 765,000 sq ft.

Flexible offices stands at over half a million sq ft in 2019 as at the end of Q2, but a further 600,000 sq ft is believed to be potentially under offer, with WeWork, in particular, looking at large-scale opportunities, akin to its recent subletting ofEMA space at 30 Churchill Place, E14. Flexible providers are finding it harder to secure space

in the core markets, but where landlords and tenants are looking to mitigate voids and overheads, they are still finding traction.

Colliers added:

“While anecdotal evidence suggests that the time is ripe for rental uplift, the only firm evidence of pricing movement comes from a moderating of incentive packages. We still expect to see pockets of positive rental movement during H2 2019.

“As at the half year, London investment volumes have struggled to reach £5.5 billion, which puts it over 20% down year-on-year. Shortage of stock and overseas capital have been the prevailing trends, although H2 2019 should reinforce evidence of a return of Asia-Pacific capital into the market.”

james.wallace@realassetmedia.com

REAL ASSET INSIGHT launches new EXPO Real Guide

The Guide will highlight key content at the fair, VIP speakers, panels and presentations, including the programme at the INTERNATIONAL INVESTORS LOUNGE, who you should meet and much more …


The next issue of REAL ASSET INSIGHT (October 2019 magazine) will be published to coincide with EXPO Real and will be distributed throughout the halls to reach the 45,000 attendees as well as our readers around the world. This EXPO Real Special Issue will focus on thought leadership, market insights, strategy and the latest research, including special features on ‘Cradle to Grave’ investment opportunities, Capital Flows and the outlook for European markets, ESG, Carbon Neutral & Impact Investing, Iberia, the UK and Germany.

REAL ASSET INSIGHT will also publish a new EXPO Real Guide which will be launched as a digital publication in September – exactly when attendees are planning their visit – and then published in print at EXPO Real alongside REAL ASSET INSIGHT.

The Guide will highlight key content at the fair, VIP speakers, panels and presentations, including the programme at the INTERNATIONAL INVESTORS LOUNGE, who you should meet at EXPO Real from the various sectors, new research being launched, new initiatives, new exhibitors as well as the key networking opportunities, stand parties and drinks events. If you have a programme or an event at EXPO Real that you would like to highlight to attendees please get in touch.

All enquiries please contact:

Frank Beinborn
Director Client Relations
Real Asset Media I Investment Briefings & TV
M: +49 1525 4878668
E: frank.beinborn@realassetmedia.com

Thorsten Herbert
Founding Partner, Managing Partner
Real Asset Media I Investment Briefings & TV
M: +49 170 47 98 793
E: thorsten.herbert@realassetmedia.com

Richard Betts
Founding Partner, Group Publisher
Real Asset Media I Investment Briefings & TV
M: +44 7557 37 31 34
E: Richard.betts@realassetmedia.com

Brexit: review your investment portfolios and hedging arrangements in advance of no-deal possibility, warns Mercers

In the final part of Mercers’ Brexit scenario analysis following the ascension of Boris Johnson to prime minister, Mercers considers a general election scenario and the overall implications for investors of its three scenarios outlines yesterday and in this installment.

Scenario 3: forced general election

As the 31 October deadline approaches, political pressure in the UK will intensify with opposition parties and some Conservative MPs seeking to stop a no-deal Brexit. Some

Conservative MPs have threatened to vote alongside parties in a no confidence motion that would bring down the government and force a general election.

Mercers explains:

“Generally, politicians don’t bring down their own PM, but tensions are high. A number of Conservative MPs are implacably opposed to no-deal, and the Conservative government has a miniscule majority in parliament. While the rightwing of the party is largely united behind Johnson, any concession given by Johnson might fracture that unity. If Johnson seems likely to lose a no confidence vote, he might just call an election anyway.

“Following a general election, a referendum and no Brexit would become possibilities.”

Potential implications for investors

In terms of no-deal planning, the UK can make whatever plans it likes, and these may smooth things on the UK side. However, the UK cannot plan or make legal changes on the EU side.

Mercers says:

“The EU would be required under WTO rules to treat UK exports in the same way it treats the exports from other countries with the same level of trade agreements (which in no-deal means none, aside the mitigants).

“The checks, restrictions and prohibitions suggest severe damage to UK exports. We would expect much of the damage to happen quickly. However, ultimately a no-deal scenario could not last for years as close neighbours inevitably reach some agreement on trade. On balance we would expect a nodeal Brexit to have an immediate and substantial impact on the UK economy, pushing the UK economy into a deep recession and the EU into a mild one.”

Mercers added that it is difficult for investors to fully prepare for the potential effects Brexit could cause given the fluidity of the situation. However, Mercers recommends investors review their investment portfolios in order to ensure their robustness to a potential no-deal Brexit fallout. Mercers also recommend clients evaluate their currency hedging profile in regard to overseas equities so that if markets were to significantly turn down, they could potentially evade the full effects.

Mercers concludes:

“On balance we would expect a no-deal Brexit to have an immediate and substantial impact on the UK economy, pushing the UK economy into a deep recession and the EU into a mild one.”

james.wallace@realassetmedia.com