Preqin: investors displaying mix of increased caution and evidence they are nearing target allocation fulfilment

Investor confidence in real estate has dampened in recent months, according to a Preqin investor survey, with almost two-thirds (62%) of investors planning to invest less than $50 million in fresh capital in the coming year, up 14 percentage points on Q3 2018.

Investors are either demonstrating a cautious approach to minimise risk in the face of a potentially imminent market correction, or they are nearing the fulfilment of their target allocations, Preqin suggests. Additionally, the proportion committing $50-99 million is down six percentage points, and the proportion targeting commitments of $100-299 million has halved.

In its Q3 2019 Real Estate update, Preqin explains:

“Low-risk strategies have attracted increased interest in Q3 2019, with 16% more investors targeting core than a year ago, and 17% more targeting core-plus. Appetite for riskier strategies has dropped in contrast, with the share of investors targeting value-added funds decreasing by 14% and opportunistic by 9%.

“Investors appear to have shifted their focus somewhat away from North America, Asia-Pacific and emerging markets in favour of investment in Europe and Rest of World, which are the only regions to have recorded an uptick in interest as compared with Q3 2018.”

Preqin data for Q3 also showed:

  • After a slow start to the year, swathes of new private real estate funds have formed and been brought to market in the second half of 2019:
    • As of October, there are 856 funds in market globally, seeking a combined $251 billion from investors.
    • The majority (61%) of funds in market are targeting value-added and opportunistic strategies, where 60% ($150 billion) of targeted capital is headed.
  • Debt and core strategies also make up significant proportions of funds in market, targeting $35 billion and $25 billion, respectively.
  • More than half (52%) of funds in market have already held an interim close, securing a combined $81 billion – 32% of the total amount targeted.

Cushman: Brexit considered a tactical issue with respect to timing and price rather than a structural hit to its appeal

New York has strengthened its position as the number one global city for real estate investment, growing 20% year-on-year to take the top spot in Cushman & Wakefield’s ‘Winning in Growth Cities’ investment index for the eighth year running.

Los Angeles took second spot, while San Francisco climbed three places to third – in the process overtaking London in fourth and Paris in fifth. However, among international buyers, London remains the market to beat, according to Cushman’s analysis, with Brexit considered a tactical issue with respect to timing and price rather than a structural hit to its appeal.

David Hutchings, Head of Investment Strategy, EMEA Capital Markets at Cushman & Wakefield and author of the report, explains:

“Spain is increasingly favoured by international capital thanks to the relative pace of recent growth and is a reminder to other countries of the rewards economic and structural reform can bring – despite having had its own share of political uncertainty.”

According to Cushman’s data, overall investment volumes in real estate have plateaued, reaching US$1.02 trillion – a 0.7% fall. Nonetheless, demand remains at record levels with domestic and regional investors, rather than global players, driving activity. High pricing and stock shortages have held back activity, with investors by and large unwilling to embrace riskier markets or push up pricing given the uncertain interest rate and growth environment.

Trends were quite different market by market, with North America posting a near 13% gain in activity – its strongest performance in five years – while Europe and Asia saw volumes fall 12% and more precipitous declines were seen in Latin America (-38.5%) and the Middle East (-65.5%).

Carlo Barel di Sant’Albano, Head of Global Capital Markets at Cushman & Wakefield, explains:

“Ongoing headwinds, such as geopolitical unrest, means economic growth will remain in doubt in the months ahead, but it also means quantitative easing and negative interest rates are back on the agenda. As a result, property yields will be seen to offer better value and could fall into 2020 once investors have more faith that the cycle still has some life in it. However, buyers will have to find additional opportunities if they are to allocate capital, with a particular focus on alternatives and residential/multifamily likely to be seen.”

Due to a mix of risk, liquidity and steady growth, European cities remain most popular with foreign investors, with 12 of the top 25 global targets, followed by seven in the US and six in Asia. However, the most impressive gains in market share over the past year were seen in Asian cities, most notably Beijing, up 52 places in the global ranking, as investors sought new opportunities, particularly in higher-growth markets.

The sources of capital crossing borders into real estate also grew more diverse in the past 12 months. For the fourth year running APAC – led by Singapore and South Korea – remained the biggest source region overall despite outbound volumes dropping nearly 13% and its market share easing to 38% overall. By contrast, North American capital increased 18%, capturing a market share of 30%, its highest share since 2015. European outbound capital rose 3.3% to 27% of all cross-border spending.

David Hutchings added:

“What differentiates markets going forward will be less about growth – that will be down – but more about relative financing costs, the timing and direction of structural market shifts and, as ever, finding stock in a global market with relatively limited distress.

“We expect more M&A activity as a result but also more pressure on investors to diversity to both gain exposure to the right cities and to reduce risk. Residential will be the asset class to watch and will continue to rise as the professionally managed rental sector continues to grow and mature.

“The winning markets of 2020 will be the biggest and best across gateway and challenger cities, but increasingly those with the right mix of strong innovative governance on the one hand and appeal to talent on the other.”

‘We are incredibly positive on the London story’

Many investors have adopted a wait-and-see attitude to London to see how the UK’s fraught departure from the European Union pans out, but this is creating opportunities for others.

A focus on strong European cities with economies that will outperform will serve investors well, experts agreed at Real Asset Media’s Global Capital Flows & Winning Cities investment briefing, which was held at the International Investors’ Lounge at EXPO REAL recently.

‘If there’s anything we should have learnt from the last cycle, it’s that chasing yield is not an investment strategy,’ said Daniel Harris, Principal – Head of European Investments, CAIN International.  His advice is not to go to secondary cities but rather ‘focus on Europe’s gateway cities, because when there are bumps in the road they bounce back the quickest’.

Large cities like Paris, London or Madrid are underpinned by solid macro fundamentals that will withstand economic fluctuations and they will continue to attract young talent, which will guarantee future growth. The same applies to the two clusters of Holland Metropole and the Rhine-Ruhr in Germany.

Andrew Angeli, Head of European Strategy and Research, CBRE Global Investors, Damian Harrington, Director, Head of EMEA Research, Colliers International, Daniel Harris, Principal – Head of European Investments, CAIN INTERNATIONAL, Stefan Walter, Managing Partner RSM Austria Steuerberatung GmbH and Larry Young, Head of International Investment Group, BNP Paribas Real Estate discuss the Capital Flows through the European Real Estate Investment Market. Filmed at the International Investors Lounge at EXPO REAL by Real Asset Media.

Many investors have adopted a wait-and-see attitude to London to see how the UK’s fraught departure from the European Union pans out, but this is creating opportunities for others.

‘We’re incredibly positive on the London story,’ said Andrew Angeli, Head of European Strategy and Research, CBRE Global Investors. ‘It’s generating returns in excess of Europe and now, because of Brexit, it’s a less competitive market, which is something we absolutely want to make the most of’.

Investors with a long-term view look beyond current instability, which in any case is not confined to the UK, said Harris: ‘We are big on London. Once the Brexit issue is resolved there’ll be a huge inflow of capital into the city’. 

Money will definitely flow into London again, agreed Larry Young, Head of International Investment Group, BNP Paribas Real Estate: ‘Investors want to get back, it’s not a question of if but rather of when. The pricing is interesting, especially for value-add, and they know they can make very good money’. 

Damian Harrington, Director, Head of EMEA Research, Colliers International said that the impact of Brexit has been such that ‘the UK is the most mispriced market in Europe’.

Preqin: global real estate fundraising volumes rose to $121 billion YTD; on track for record annual haul

Global private real estate fundraising momentum continued in Q3 with a year-to-date total of $121 billion secured in 2019, according to data by Preqin, keeping the year on track to break the annual fundraising record.

Within the quarter, 48 funds closed in the quarter, which Preqin says continues the trend, albeit at a slower pace, of capital consolidation.

Together these funds raised $37 billion, at an average of $843 million per fund, Preqin data shows, although this is skewed by the monster $20.5 billion closing of Blackstone Real Estate Partners IX. Funds focused on North America once again dominated the market, with 28 funds accounting for 76% of aggregate capital raised.

Blackstone Real Estate Partners IX became the largest private real estate fund of all time in September. Following in the wake of Brookfield Strategic Real Estate Partners III’s $15 billion closure earlier in the year, the more experienced, blue-chip fund managers are successfully attracting the majority of capital commitments.

Preqin data for Q3 also showed:

  • Investors continued to favour value-added and opportunistic strategies:
    • 20 and 12 such funds closed respectively.
  • Among private real estate funds closed so far in 2019, two-thirds have either achieved or surpassed their targets:
    • Fund managers are also completing these raises in less time, with 88% of funds closing inside 24 months, compared to 82% in 2018.

In its Q3 2019 Real Estate update, Preqin explains:

“With the threat of slowing economic growth and increasing political risk, the final quarter of 2019 is shrouded in uncertainty.

“Investors are still looking to put their money towards real estate, albeit in smaller quantities than this time last year, while fund managers continue to bring record numbers of funds to market. Blackstone raised the largest ever closed-end private real estate fund in Q3, while opportunistic fundraising is on track to reach its second-highest total.

“As the industry searches for stability, there has been an uptick in fundraising for lower-risk strategies, with core and core-plus funds already outpacing full-year 2018 fundraising. Notably, high levels of capital have been raised by a very small number of funds in Q3 – half the number closed in Q3 last year. Broadly, industry fundamentals appear strong, even as we approach the increasingly uncertain end of the year. Investor appetite for the asset class persists, and the dry powder is there, waiting to be spent on the right deals.”

Solvency II review: EIOPA delays updating solvency capital requirements for real estate citing scarce necessary data

The European Insurance and Occupational Pensions Authority (EIOPA), Europe’s insurance watchdog, has proposed changes to the Solvency II regime which would require insurers across the bloc to hold capital reserves against possible future financial stress.

EIOPA launched a consultation last week on technical changes ahead of a 2020 review of the Solvency II rules, in an effort to evolve the three-year old capital rules through “one of evolution rather than revolution”.

Included in the 878-page consultation paper is a section on ‘Property Risk’ (pages 366-370), which addresses the solvency capital requirement (SCR) for real estate, which is currently 25%.  In the ‘Advice’ section which concludes this part of the paper, EIOPA states the following:

  • Given the scarce available data and the on-going analyses, EIOPA is, at the time of this draft opinion, not in a position to provide the European Commission with a definitive advice implying a change to the current approach.
  • Therefore, EIOPA will continue its analyses towards a potential change to the capital requirement calculation method for this risk.

Since 2011, INREV has contributed extensive, detailed data and background information to help EIOPA measure the volatility of real estate investments across Europe.  INREV will continue to work with EIOPA, and will respond to the consultation paper ahead of the closing deadline of 15 January 2020.

Jeff Rupp, INREV’s Director of Public Affairs, explains:

“We welcome the fact that EIOPA has paid such close attention to real estate in this consultation paper and that it is continuing to reflect on the all-important issue of the solvency capital requirement (SCR) for our industry.  We had hoped EIOPA might have reached a conclusion on the standard model SCR by now. 

“However, we’re very pleased that it has recognised the inadequacy of determining a 25% SCR on the back of data that comes predominantly from one country – the UK – which distorts the reality for the wider European real estate universe.  EIOPA has also acknowledged that the data paints an inaccurate picture of homogeneity across real estate sectors.  We’re pleased that EIOPA has committed to undertaking further analysis.

“We will continue to work with EIOPA and the European Commission, as well as with national real estate associations and national regulators across Europe, to provide as clear an understanding of the available data and methodologies as possible.  We hope this will enable EIOPA to reach a final conclusion on an SCR that better reflects the true volatility of European real estate investments.”

Insurers have until January 15 to provide feedback on the updates to the Solvency II rule book. The watchdog said it plans to publish its final opinion on the rules in June 2020.

‘Student Housing is the n1 alternative asset class’

The sector took off in the US first, then in the UK and now it is having an impact in Continental Europe, growing well beyond its initial niche status.

Student Housing has become the number 1 alternative asset class out of 19 in terms of volume, with over 700 companies investing in the sector, delegates heard at Real Asset Media’s Student Housing, Micro & Co-Living investment briefing, which was held at the International Investors’ Lounge at EXPO REAL recently.

‘There is a wall of capital ready to be deployed and a pipeline of €10.6 bln of new projects in Europe,’ said Samuel Vetrak, CEO of Bonard. ‘The only problem is that it is difficult to find the right product to invest in’.

The sector took off in the US first, then in the UK and now it is having an impact in Continental Europe, growing well beyond its initial niche status.

Rienk Oosterhof, CREO, The Student Hotel, Samuel Vetrak, CEO BONARD, Clare Thomas, Partner CMS, Rainer Nonnengässer, CEO International Campus GmbH, Thibault Valla, Debt & Special Situations LaSalle Investment Management discuss the current trends and investment outlook for Student Housing, Micro-Living and Co-Living Filmed at the International Investors Lounge at EXPO REAL by Real Asset Media.

It is attractive to investors because it is mature and transparent and because ‘it will continue to deliver in economically challenging times,’ he said. ‘International student demand remains strong and consistent regardless of the cycle’.

Demand is high and rental growth has been above inflation. ‘In some hotspots like Dublin or Porto we have seen double digit growth,’ Vetrak said. Iberia, the Netherlands, Germany and Italy are the main markets for new development, along with the UK where investments are set to grow because of the weakness of the pound and a loosening of regulations.

The UK has a bed-to-student ratio of over 25%, while in Continental Europe it is just 13% and as low as 5% in some cities. 

According to new data presented by Bonard, an independent research provider that specialises in alternative asset classes, 1.1 million student beds need to be built in Europe to keep up with the UK. The current pipeline of 592 projects, which represent a €17 bln investment, will deliver 151,000 private beds in the next two and a half years.

Vetrak identified three distinct markets that can appeal to different investors. The first is super-sized cities with over 30,000 international students. In Europe they are Paris, Vienna, Madrid, Berlin and London, which is way ahead with over 110,000.

The second is big cities with a student population of between 15 and 30,000, which include Munich, Rome, Barcelona and Budapest. The third is mid-sized cities with between 5 and 15,000 international students, such as Amsterdam, Frankfurt, Oslo, Heidelberg and Turin.

Opportunistic investors focused on returns rather than volume will opt for the niche cities, while institutions wanting big-ticket items will focus on the super-sized cities. 

European shopping centre market development activity polarised by country and city

European shopping centre market development activity is strongly polarised at both a country and city level, research from Cushman & Wakefield shows.

The first half of 2019 saw development activity remain stable or slightly improved in most countries. However, a strong decline in openings in Turkey led to an 18% decrease in development across Europe overall, with approximately 863,000 square of new shopping centre space completed.

Some 5.4 million sq m of new space is already under construction and scheduled to open in the second half of this year and into 2020.  However, over the past three years an average of 8% of scheduled openings were postponed, which means that the number of openings is likely to fall below what is currently understood to be in the current pipeline for this period.

Shopping centre development activity continues to be strongly polarised, by country and by city. For example, while the overall number of openings has decreased, major cities have boosted their share of development from 25% in 2016 to 41% in the first half of 2019.

Due to its sizeable market, Russia took the top spot for development activity in the first half of 2019 when nearly 200,000 sq m of new space was opened (+13% y/y). More than 50% of new space was delivered in Moscow alone where, despite the delivery of a large shopping centre, vacancy rates have remained unchanged. Italy, Poland, France and Germany completed the list of the top five most active development markets in the first half of this year.

Despite a development downturn this year, Turkey is set to ramp up activity and the country currently has Europe’s largest development pipeline. Approximately 1.5 million sq m of shopping centre space is currently under construction and expected to open later this year and into 2020.

Elsewhere, construction activity in Russia is expected to remain stable, with 1.4 million sq m of new space in the pipeline. In a departure from the trend seen in 2019, new projects in 2020 will open mainly in the regions, with large projects scheduled to launch in Yekaterinburg, Perm, Grozny and Kirov, among other cities.

In Spain, strong fundamentals such as buoyant consumer spending, together with a solid performance from the tourist industry, have supported retail development activity. The positive economic backdrop is reflected in recent sales performances and footfall numbers – notably in prime schemes – and is supportive of the development pipeline. Approximately 355,000 sq m of new space is scheduled to open in the second half of this year and into 2020, with 42% of this space earmarked for the Madrid region.

Construction activity in France remains solid, albeit constrained by tight planning and strong competition between retail locations. Finland meanwhile has the fifth largest development pipeline, with 244,000 sq m expected to open in this year and next with 70% located be in the key cities of Helsinki, Espoo and Turku.

Silvia Jodlowski, a senior research analyst from Cushman & Wakefield, explains:

“The evolving and challenging nature of the retail market means we are still seeing some parts of Europe perform better in terms of investment in and development of shopping centres. The polarisation, even within individual countries, is continuing and we are also seeing certain city types being targeted.

“Cities with large populations are seen as an opportunity for destination schemes, while high-footfall locations are sought after for small convenience centres. In some countries with adequate provision in the major cities, investor interest has shifted to smaller cities and towns. As retailers continue to experiment with new formats, we are also seeing buoyant activity in the factory outlet centre market, notably in Central and Eastern Europe in Russia, while the retail park sector is also active in some Western European countries including France.”

JLL: steady demand in Dublin office market

Take-up with Dublin’s office market for Q3 totalled 394,093 sq ft across 44 deals, which is 19% higher than last quarter.

In the year-to-date, take-up is 2.2 million sq ft. The increase in the quarter was caused by a rise in the number of larger-sized deals, with 2 greater than 50,000 sq ft, compared to none last quarter.

As per last quarter, the suburbs saw the most activity accounting for 61% of take-up. The top 3 deals in terms of size were in the suburbs. TMT companies made up the largest share of activity, with 31% of take-up. TMT companies who occupied space in the last 3 months include Elavon and AirBnB.

Hannah Dwyer, Director of Research at JLL, explains:

“It is positive to see that take-up has remained steady in the third quarter with close to 400,000 sq ft of demand in the last 3 months. In addition to the space that has already signed, there is also an additional 1.7 million sq ft of space that is reserved and did not sign in Q3.

“With year-to-date volumes at 2.2 million sq ft, and such a high level of reserved space, we expect a strong Q4. We expect year-end take-up to achieve over 3.0 million sq ft. Whilst this is lower than the 3.9 million sq ft achieved in 2018 (a record year for market activity), it is significantly higher than the 10-year average of 2.3 million sq ft.”

On the supply side, supply remains tight, with overall vacancy for completed stock at 7.1%. Excluding reserved space, the vacancy figure is 4.9%. In certain locations, supply remains even tighter, with 4.9% of space in D2 vacant. When reserved space is excluded from this, the vacancy rate drops to just 2.6%.

In addition to the completed space, there is currently 5.4 million sq ft of space under construction, or which 81% is in the city centre. There is also an additional 6.1 million sq ft with full planning permission across the entire market.

Hannah added:

“Existing supply remains tight in the Dublin market, particularly in some core sub-locations like Dublin 2. Whilst there is a steady stream of pipeline activity, the trend for pre-lets and mid-lets continues, with 53% of space currently on site in the city centre already committed.”

‘It is great to be in retail today’

Even with economic growth slowing down in some European countries, evidence shows consumers are still happy to shop.

Despite negative sentiment in some quarters, the retail sector is not in crisis mode. It is in fact changing and becoming a more interesting asset class to work in, experts agreed at Real Asset Media’s European Retail Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

‘It is great to be in retail today,’ said Eric Decouvelaere, Head of Retail EMEA, CBRE Global Investors. ‘We used to be in a supply-driven model and falling asleep on the job. Now we have a demand-driven model, consumers are changing, retailers are adapting and landlords are being much more reactive and collaborative’.

Now the emphasis is less on the bricks and mortar element and more about curating the activities that take place in the buildings. 

‘For 30 years the creative element of retail was silent, but its importance is being realised,’ said Bill Kistler, Executive Vice-President & MD EMEA, ICSC. Everyone talks about mixed-use these days, but ‘the real catalyst is retail,’ he said. ‘You cannot have a successful product mix without retail’.

Eric Decouvelaere, Head of Retail EMEA CBRE Global Investors, William Kistler, Executive Vice President & Managing Director- EMEA ICSC, Herman Kok, Head of Research, Meyer Bergman, Eri Mitsostergiou, Director of European Research Savills and Andrew Westbrook, Partner, RSM UK discuss the outlook for the Retail Investment Market in Europe. Filmed at the International Investors Lounge, EXPO REAL 2019 by Real Asset Media.

Even with economic growth slowing down in some European countries, evidence shows consumers are still happy to shop. What they are doing is opting to spend their money on different things, said Eri Mitsostergiou, Director of European Research, Savills: ‘They go for more experiential sectors like eating out or health & beauty, which are growing faster than traditional shopping, so we must redesign our retail spaces to cater for these changes’.

The hands-off approach no longer works in today’s retail environment.

‘At the end of the day intensive asset management is what makes the difference in retail,’ said Decouvelaere. ‘You need operational teams on the ground with a good knowledge of the market. The other key to success is looking at the three C’s when buying assets, whether it is a shopping centre or a high street shop: catchment area, connectivity and condition. If those two conditions are fulfilled, then you can still find some very good opportunities in retail’.  

Super prime residential sale volumes in London resilient amid wider slowdown in the capital

New homes accounted for more than a third of London’s super prime sales in Q2 2019, up from less than a fifth two years ago, as the global wealthy sought out homes more akin to the hotels they are accustomed to, according to the latest research by property consultancy Knight Frank.

According to Knight Frank’s London Residential Development H2 2019 report, new homes sold for more than £10 million have remained resilient in the face of a wider slowdown in the capital, and as a result, accounted for 34% of total sales in Q2, up from 18% in Q2 2017.

Rupert des Forges, Head of Prime Central London Developments at Knight Frank, explains:

“Prime buyers are increasingly focused on securing a London residence in a new scheme, prioritising the high level of security and extensive amenity on offer. These purchasers are becoming far more discerning, and in an increasing number of cases we’re seeing them benchmark the homes in which they live against the hotels in which they stay.

“With that in mind, prime apartments offer a seamless transition away from transient hotel living for the new, younger generation of global wealth now driving the top end of the market. This is a demographic who truly understands the superior modern services and amenities that a new home can offer, compared to what is available on the resale market.”

Several high profile schemes have sold out in recent months, and the current planning pipeline points to yet more constrained supply on the horizon, The number of units given consent across Westminster City Council and The Royal Borough of Kensington and Chelsea, where much of the capital’s super-prime homes are delivered, fell to its lowest level in a decade during the twelve months to Q2 2019.

Given the current scarcity of supply, three best in class examples of completed schemes that are ready to move in are:

  • Qatari Diar’s Chelsea Barracks, with starting prices from £5.25 million;
  • Native Land’s Holland Park Villas, with starting prices from £7.5 million; and
  • Finchatton’s Twenty Grosvenor Square, with starting prices from £17.5 million.