RCA: Paris Closing Investment Gap with London

The second quarter was the slowest quarter for property investment in the UK since 2012, including six-year lows for both cross-border and domestic investment levels, according to Real Capital Analytics.

France fared relatively better than the other large European real estate investment markets in H1, although transaction volumes were down 11% year-on-year, RCA data shows. The Paris office market was buoyed by an influx of capital from South Korea, with more than €2.0 billion of deals in the first-half involving a South Korean purchaser.

The gap between Paris and London – the number two and number one most active metropolitan real estate investment market in Europe – continued to narrow markedly in the first six months of 2019. The French capital lagged its UK counterpart by about €1.2 billion in transactions. Investment volume fell by 34% year-on-year in London to €11.3 billion, while Paris was down a modest 6% at €10.1 billion.

Tom Leahy, RCA’s Senior Director of EMEA Analytics, explains:

“London remains Europe’s biggest commercial property market, but the UK capital has registered a weak six months. Deal volume dropped 34% year-on-year and in the City submarket Q2’19 activity was the lowest for any quarter since 2009.

“One of the reasons for London’s doldrums is that overseas players who had previously supported deal volume have shifted their sights. South Korean buyers switched to Paris in 2019 because of the reported difficulty some of the securities firms experienced in syndicating their purchases among fellow South Korean institutions. More than €2b of Paris deals involved a South Korean purchaser in H1’19. With the recent completion of the Tour Majunga deal and another €1.4 billion pending, there is more to come in Paris.”

Germany retained the top slot as the most active European national investment market in H1, slightly ahead of the UK, but deal volume fell by 21% due primarily to declining office transactions. Cumulatively, the largest seven German city office markets ended 2018 at record levels, but the first six months of 2019 were particularly slow.

In Frankfurt, deal volume fell by 50%, with only two €100 million-plus deals completed. RCA has recorded three pending deal completions totalling over €1.0 billion for Frankfurt in the second-half of 2019, so the market should recover some ground in coming months.

In the apartment sector, by contrast, German institutions acquired more properties through to June 2019 than they did for all of 2018. Prices for the average German apartment have almost doubled since the start of 2007, driven by strong demand from both listed and nonlisted investors.

RCA’s Commercial Property Price Indices (CPPI) show there is a strong correlation between the start of the European Central Bank’s quantitative easing programme and the period of very strong German apartment price growth, meaning the five-year compound annual growth rate (CAGR) is almost double that of the 10-year rate.

Spain and Sweden both stand out among the group of the largest European investment markets as recording increased investment volumes in the first-half.

In Sweden, the first six months data were flattered by a particularly slow comparative period a year prior, but the market also seems to have benefitted by the central bank’s dovish policy towards rates and there was a strong showing from the office, apartment and industrial sectors.

Spain similarly recorded growth from a low base. However, here transaction volumes are close to a record, with almost €24 billion invested in the market over the last 12 months and demand particularly strong for office and residential assets.

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

RCA: China and Hong Kong investors become net sellers in Europe in H1

German institutions continued to top the rankings of investors in European real estate in H1 and on a rolling 12-month basis their investments are at record levels, according to Real Capital Analytics, but one other group that is conspicuous in their absence from the Top 10 list are Chinese and Hong Kong-based investors.

Between 2013 and the end of 2017, these investors spent over €50 billion on European commercial property, but domestic capital restrictions mean buying has virtually ground to a halt. For the first time, they have become net sellers in European markets. Chinese and Hong Kong investors sold €3.2 billion in European assets in the first-half of 2019 versus acquisitions of just €1.0 billion.

The largest dispositions were in Germany but assets in London and France were also sold. In early Q3, Anbang sold the Hilton Doubletree in Amsterdam for €430 million.

German institutions continue their buying spree led by Allianz which spent €1.1 billion on assets in the UK, Milan, Madrid and Paris. Domestically, the largest German players have already purchased more apartment properties than they did in the whole of 2018. The gap in investment volumes thus far is in the office sector, where activity has dipped significantly.

Overall, cross-border capital accounted for 54% of all investment volumes in Q2’19 – the highest proportion since the start of 2016, according to Real Capital Analytics. The main reason is that domestic activity slowed in both the first and second quarters, whereas global investment volumes rebounded into the second quarter.

Domestic investment slowed significantly in the UK, down 32%, and in France, down 34%. In France, there has been an influx of overseas money, which is competing with the domestic players. In the UK, it appears that all capital sources are taking something of a pause while the Brexit saga plays itself out.

The three biggest players in the market all slowed their activity in H1’19. However, investment from U.S. institutions is still elevated and they remain by far the biggest source of overseas money. Unsurprisingly, Blackstone has been the biggest acquirer of European real estate this year, spending more than €4b so far. The largest single asset trade was a JV with German investor Quincap to purchase the Oberbaum City office complex in Berlin for €450m.

Real Capital Analytics’ H1 European investment trends analysis concludes tomorrow.

james.wallace@realassetmedia.com

Brexit: three scenarios reveal how politics could unravel from here

Mercers, the global multi-asset class investment consultant, outlines three possible scenarios for how Brexit could unravel over the coming months and considers the investment implications.

Scenario 1: renegotiation

Prime minister Boris Johnson’s stated preferred option is to renegotiate, and the pass, a revised Withdrawal Agreement (WA). Despite the new PM aggressively dismissing the current WA, he once voted in favour of it, according to Mercers.

The renegotiation features getting rid of the backstop as a key component. However, most commentators see the renegotiation route as highly unlikely.

Mercers explains:

“The EU has repeated and consistently said that the WA is not open for renegotiation and it seems very unlikely that they would concede on this. In particular, the EU will not get rid of the backstop as this is expressly against the wishes of Ireland. The WA cannot pass without Ireland’s support, and if the EU even attempted to ignore Ireland’s wishes, it would risk the collapse of the EU.

“Johnson and some on the UK side think technical solutions are available to solve the border issue, but that is a minority view, although one that the EU will explore along with other options in detail once the WA is passed.

“The EU has responded to the new PM’s plan and has rejected it outright. It has said it is happy to meet Johnson, but while modifications could be made to the political declaration, they can’t be made to the WA, and in particular the backstop can’t be removed. It seems likely therefore that perhaps fairly soon Johnson will announce that talks have failed and that the UK will step up its no-deal planning and that, unless the EU changes course, Britain will exit on 31 October without a deal.”

Scenario 2: no deal

In parallel, the new PM intends to aggressively dial up the UK’s preparation for no-deal, both to strengthen the UK’s negotiating position and to prepare the UK if no-deal does materialize.

HM Treasury estimates that a no-deal Brexit would cost the UK economy close to 10% of GDP. Many of those close to the PM argue that the number is much smaller, with much of the damage being largely eliminated if the UK plans appropriately, while noting that much of the world (including the US, China) trade with the EU on World Trade Organisation (WTO) rules only.

However, Mercers insists:

“In our view, this is simply not true. While the EU does not have a free trade deal with the US and China, it has a broad array of agreements with China and the US. In fact, the EU does not trade with any countries in the world on the basis of WTO rules only. In addition to the Treaties, there is a broad array of agreements that facilitate trade that are at a lower level than the Treaties.

“Thus, if the UK leaves the EU without a deal, the whole legal framework under which the UK trades with the EU falls away overnight. The EU has unilaterally agreed some mitigants in the event of no-deal so that there is some legal framework over and above general public international law including the WTO. However, these are a small fraction of what is in place now and would need to be in place if a no-deal Brexit was to occur. The EU has designed this framework to mitigate some of the downside on the EU side rather than the UK side.”

In the concluding part of Mercer’s Brexit analysis, tomorrow we consider a general election scenario and implications for investors.

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

RCA: Brexit risk aversion triggers 31% fall in UK property investment in H1

Escalating concerns over the economic impact of Brexit drove the volume of property investment transactions in the UK down by 31% year-on-year in the first-half of 2019 to €23.4 billion, according to Real Capital Analytics.

Investment in European commercial property fell again in Q2, although the decline was shallower than that seen at the start of the year. The UK led the slowdown as the twin investor fears of Brexit and retail sector woes dragged on investment activity.

The wider slowdown across Europe was visible in a 15% drop in deal volume to €114 billion between January and June, Real Capital Analytics’ Europe Capital Trends Q2 report shows.

Tom Leahy, RCA’s Senior Director of EMEA Analytics, explains:

“The political process surrounding Brexit is clearly unsettling property investors in the UK market, who are becoming increasingly risk averse. But we also saw transaction volumes slow in most major European markets in the first-half of 2019, with the notable exceptions of Spain and Sweden. That slowdown was magnified by the sharp declines in retail investments, but excluded defensive segments such as apartments, hotels, senior housing and care homes. These ‘Beds’ sectors are benefitting from structural market factors, and are now attracting around a third of all the investment capital being placed in European property.”

European retail real estate transaction volume dived by 51% to total €12.6 billion in the first six months of this year. The retreat in this property sector, which has been most marked in the UK, due predominately to the challenge presented by e-commerce and the extended Brexit process now appears to be echoing across Europe. Retail looks set to end the year with the worst performance since the depths of the Global Financial Crisis in 2009.

Investors appear to be switching out of retail property into the more defensive ‘Beds’ sectors – apartments, hotels, senior housing and care homes. Apartments overtook retail as the second largest real estate investment sector, after offices, in the second-half of 2018 and have clearly consolidated that lead in the first half of 2019, with European transaction volume up 6% to €23.5 billion over the same period of last year.

The European office investment market had the slowest start in five years in the first half of 2019, with €47.6 billion in transactions completed, a 9% decline over the same six months of 2018. RCA’s hedonic data for Europe’s major office markets show the extended period of yield-driven capital growth turning a corner and starting to turn upwards from historic lows.

Office yields in London have risen 50 basis points since the middle of 2015. Deal activity in industrial/logistics properties, which has been one of the most ‘in-vogue’ investment sectors in Europe, boosted partly by burgeoning e-commerce volumes, was down in nine of the Top 10 markets year-on-year, although Eurozone yields are still compressing on average. In the UK, transactions dropped 40% in the first-half and yields have started to tick up from their all-time lows, while yields for Eurozone industrial stock have continued to move in.

Real Capital Analytics’ H1 European investment trends analysis continues tomorrow.

james.wallace@realassetmedia.com

Brexit: prepare for ‘no-deal’, Mercers warns global investors

The new UK government says it will try to renegotiate the current deal, but prepare for no-deal and implement no-deal if the renegotiation fails, multi-asset class global investment consultant Mercers warns.

New prime minister Boris Johnson has dispensed with the practice of his predecessors in assembling a team with “a bit of balance”, says Mercers, to reflect “the different political wings of their party and those considered the best people for the job, regardless of whether those people voted for the leader or not”.

Instead, Johnson has “largely picked people who voted for him and also those who support his policy on Brexit”.

Mercers continued:

“This has resulted in the government becoming the most-right wing it has been in recent times and also the most Eurosceptic ever. This government says it will try to re-negotiate the current deal, but prepare for no-deal and implement no-deal if the renegotiation fails.”

Political priorities

The UK and the European Union (EU) need to agree on a Withdrawal Agreement (WA), which largely deals with withdrawal issues. Additionally, they must separately agree on a Political Declaration (PD) that sets out what both sides see as the likely shape of the future relationship between the UK and the EU.

Mercers explains:

“The passage of the WA and the PD creates the transition period during which the final end relationship will be negotiated (which may or may not follow the PD template) and during which the future economic relationship between the UK and the EU will remain unchanged. If the WA and PD do not pass, then the UK leaves without a deal on 31 October 2019, unless the UK manages to secure an extension to the Article 50 process. Theresa May’s government negotiated and agreed on a WA and a PD (subsequently tweaked) in November 2018.

“The WA also contained a backstop provision in relation to the Northern Irish and Republic of Ireland border. A backstop was agreed in a joint declaration in December 2017 that any agreement must ensure that no physical infrastructure appears on the border to protect the Good Friday Agreement and the peace process. May’s government and the EU agreed in November 2018 that the WA would contain a provision that the backstop would kick in if subsequent negotiations either failed or if the agreement failed to obviate the need for physical infrastructure. This agreement caused huge backlash from MPs in Westminster. That backstop provision would keep Northern Ireland (and/or whole UK) closely aligned with the ROI and thus the EU.

“Under PM May’s leadership, the WA and PD failed to gain the support needed for it to successfully get through Parliament three times. The key sticking point was the Irish backstop which those on the right of the party and the DUP rejected as potentially keeping the UK under the control of the EU. Boris Johnson voted against it twice and once in favour.”

In tomorrow’s follow-up, we outline three Brexit scenarios envisioned by Mercers.

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

PGIM: UK could outperform if Brexit uncertainty fades

The UK’s real estate market could surprise on the upside and outperform if Brexit uncertainty fades, predicts PGIM Real Estate in its forecast of late cycle investment opportunities, while low vacancy office markets, logistics, residential and real estate debt strategies are also tipped as late cycle winners.

Among major European markets, the cycle of the UK is clearly at odds with other major core markets, says PGIM.

Greg Kane, Executive Director, Head of European Research at PGIM Real Estate, explains:

“Brexit continues to pose a significant policymaking challenge and remains a source of uncertainty. So far, it has not led to an economic recession or a sustained downturn in real estate markets, but performance has lagged Continental Europe since mid-2016. However, assuming an orderly exit from the European Union, the economic outlook remains fairly bright. This begs the questions: at what point does the ‘wait-and-see’ approach of investors shift? And what constitutes a clear buying signal?

“The supply side has responded, both in London and in other key cities such as Birmingham, Edinburgh and Manchester. Already, a yield gap has opened between major UK markets and their counterparts in France and Germany. Historical analysis suggests that once the spread reaches a peak, the UK normally goes on to significantly outperform other European markets – by as much as 5% to 10% per year in the case of office returns – over subsequent years.

“For now, investor caution persists due to the binary nature of the risk profile, that features the prospect of a severe correction in a no-deal Brexit scenario. Some combination of the worst Brexit options being ruled out by legislation and a yield correction of 50 to 100 basis points to more adequately compensate for lingering downside risks, would act as a relatively strong buy signal for UK assets.”

Elsewhere, PGIM says office assets in major German cities and Paris remain an attractive near-term proposition, despite historically low initial yields. This is because

strong leasing demand and limited grade A availability imply significant rental growth potential in CBD and non-CBD areas, PGIM forecasts.

Greg Kane, Executive Director, Head of European Research at PGIM Real Estate, explains:

“Pricing on stabilised core investments already factors in decent rental growth, but opportunities are attractive for value creation strategies, for example capturing reversion potential, taking on re-leasing risk and repositioning or developing space.

“Among commercial sectors, logistics continues to look attractive, offering returns that compare favorably to other commercial sectors. As online retail penetration increases towards US and UK levels in Continental Europe, the upside risks to rental growth become more pronounced.”

PGIM Real Estate also tipped residential and real estate debt strategies. Residential markets offer comparatively favourable returns and downside protection, while providing a source of portfolio diversification. PGIM states:

“One key concern for investors looking at the residential sector are the low yields, with high-quality residential assets in major markets now trading below 3%. However, prime yields have always been relatively low due to their stable income-generating profile. In addition, the spread to commercial property yields has narrowed substantially, which suggests that residential real estate still offers attractive relative value, especially given that low interest rates are set to persist for a while longer.”

Another sector famed for its downside protection characteristics is of course real estate debt. PGIM states:

“As the cycle grows in length, investors are increasingly concerned about the downside portion of the range and using debt can limit exposure to such adverse outcomes – albeit by limiting upside potential too.

“The UK has the most mature non-bank lending sector, which already accounts for one-third of the market. Continental European markets remain more heavily bank-dominated, although the impact of regulations means debt fund and insurers are now starting to gain a foothold in the market. With regulations set to remain tight, the opportunity set is likely to expand further as existing loan books mature and refinancing needs grow.”

james.wallace@realassetmedia.com

BNP Paribas RE: European real estate volumes reached €102bn in H1

The total commercial real estate investment volume in Europe reached €56.4bn in Q2 making a cumulative total of €101.7bn in H1 2019, according to BNP Paribas Real Estate, 13% below H1 2018 turnover, which was an all-time record.

This result is also below the 5-year average by 7%. The 16 largest city markets monitored within this report posted a 10% decrease compared to H1 2018, reaching €38.8bn.

The office investment volume slightly decreased in H1 2019 (-6%), but its market share progressed reaching 46%, a record for the main sector. The retail segment experienced the strongest decline (-31%), as investors are very cautious about this asset class. The industrial & logistics investment volume also followed a downward trend (-16%), but this remains a strong result considering the record levels of the last two years.

Central Paris (-4%) takes the lead in the European city markets ranking in H1 2019. Offices drove the market, thanks notably to two deals over €1bn: a 28-asset portfolio in the CBD and the Lumière office building. In Central London (-39%), the strong occupier market should attract investors in normal times, but the capital is encountering ongoing Brexit uncertainties over the future of the occupational base, which is dampening the immediate appetite to transact.

Germany’s four top locations play a significant role in the country’s transaction volume and together recorded the second-best result in the past 10 years even though it was 16% lower than H1 2018. Berlin (+67%) posted an increase, which represents a new all-time high. Frankfurt (-34%), Munich (-46%) and Hamburg (-49%) faced a lack of product and ended up under the 5-year average. The office sector (+280%) led Madrid’s overall market performance (+104%) while retail plus industrial & logistics sector volumes dropped. Milan (+56%) performed well in H1 2019 due to strong activity in both offices and retail.

2019 is off to a very good start for the Prague market with a 120% progression supported by South Korean investors interest in prime office schemes. In Vienna (+26%), investors’ strong appetite for all asset classes resulted in a lack of prime products in the market. In Amsterdam (-34%), the decline is mainly due to the drop in retail volumes (-62%) that now represents a share of only 2% of the turnover.

Concentrated activity in the office sector drove Warsaw’s excellent performance (+117%): 3 mega deals represented 40% of the investment volume. Brussels experienced a strong decline (-48%) mainly due to the low level of big transactions. The Dublin market (-19%) showed reduced volumes overall although the office sector continues to drive transactions. Luxembourg, where European investors (78%) dominate the market, dropped (-34%) in comparison to record H1 2018.

After reaching historically low levels in 2018, property yields stabilized in most cities, except for Hamburg (-10 bps), Prague and Warsaw (-25 bps) which prime yields contracted between Q1 and Q2 2019. Only Milan showed expansion (+10 bps).

The most expensive markets are in Germany: Berlin’s prime office yield remained at 2.70%, followed by Munich (2.80%), then Frankfurt and Hamburg (2.95%). Paris posted a 3.00% prime office yield. The highest prime office yield is in Warsaw (4.50%).

james.wallace@realassetmedia.com