Savills: Germany set for another record years for investment volumes

September was the strongest month of all time in the German commercial and residential property investment market, according to Savills.

The overall transaction volume last month totalled almost €14.0 billion, Savills data shows. In total, around €43.4 billion of commercial property has changed hands over the year to date, representing a decrease of 2% compared with the corresponding period last year.

The transaction volume in the residential investment market has totalled €12 billion, which is also broadly in line with last year (-3% compared with Q1-Q3 18). While a reversal in interest rate policy now appears unlikely to be a factor for several years, a potential economic downturn may become an increasingly important issue for investors.

While the German economy remains in an industrial recession, this is scarcely perceptible in the real estate markets and not at all discernible in the major cities at present. Should this recession continue for a prolonged period, however, the downturn will spread to other sectors of the economy.

Companies are then likely to become somewhat more hesitant when it comes to leasing office space. Whether this materialises depends not least on whether the US and China settle their trade conflict. As far as demand in the real estate investment markets is concerned, however, the impact of the deferral of interest rate hikes can be expected to outweigh that of the economic downturn, with transaction volumes remaining at a very high level beyond the current year.

The commercial transaction volume is likely to increase to €65 billion by the end of the year, according to Savills, which would be another investment record. In the residential investment market, the fundamentals remain largely unchanged.

In fact, in view of the continued growth in the number of households and the further decrease in building permits, the supply shortage in many regions could even increase. Apartment owners can, therefore, expect income and capital values to remain stable in many locations.

Hence, investor demand is likely to remain strong. Nevertheless, there remains a growing uncertainty among investors with regard to the regulatory measures that have already been passed and those that remain on the table, particularly in respect of Berlin. The current discussion surrounding the rental cap makes it difficult for permissible rental levels to be estimated at present, which may well deter many investors from acquiring further apartments in the German capital for the time being.

Events in the German real estate investment market during the year to date have been dominated by a number of major transactions. There have been five portfolio transactions with a volume above €1 billion this year, compared with only three in 2018.

Furthermore, there have been four individual transactions with a volume of at least €500 million so far. Both of these are new records for the first three quarters of a year and a reflection of the sustained extremely high pressure on investors to invest capital.

Savills: City office take-up to exceed 6 million sq ft by year-end

Take-up in the City of London is on track to surpass 6m sq ft by the end of the year, according to international real estate advisor Savills.

Over 1m sq ft of space went under-offer in August, bringing the total amount of space currently under-offer in the City to 2.8m sq ft, which is up on the long-term average by 116%, according to the latest data from the Savills City Office Market Watch.

Josh Lamb, director in the City office agency team at Savills, explains:

“With nearly 3m sq ft currently under-offer we can expect to see an active final quarter. Take-up is likely to surpass 6m sq ft, which seemed highly unlikely earlier this year.”

Take-up for August in the City of London reached 421,421 sq ft across 26 deals, resulting in the total for the year reaching 3.9m sq ft. The largest deal to complete in August saw Convene acquire levels three through to six at TwentyTwo Bishopsgate, EC2 equating to 99,297 sq ft.

The US based serviced office provider has chosen this space to be their first international location outside of the US. The flexible workspace operator acquired the space at a rent of £65.00 per sq ft on a straight 15-year lease. The building is expected to complete in Q1 next year.

Lamb adds:

“We expect to see the rate of rental growth in EC2 and EC3 next year to outstrip the rental growth experienced this year. Approximately 1.8m sq ft of new space is being delivered into EC2 and EC3 next year, and the combined 5-year average grade A take-up for these postcodes is 3m sq ft, suggesting stronger rental growth as vacancy rates fall.”

Property developers increasingly to turn to platforms and challenger banks for finance

Property developers are expected to find it harder to secure funding from banks over the next two years, according to more than one-third of survey respondents (37%), compared to just 27% who think it will become easier, a new survey shows.

New research commissioned by secured property lender Fitzrovia Finance reveals that of those who believe it will become harder to secure property development finance from mainstream lenders, 82% said it will be because of difficulties caused by Brexit. In addition, 55% said it will be due to the financial health of mainstream lenders coming under greater pressure. 

Fitzrovia Finance says this helps explain why 60% believe property investment platforms and challenger banks will take market share from traditional lenders in the property development finance market.

Brad Bauman, CEO, Fitzrovia Finance, said:

“Property investment platforms are growing their market share of the real estate development finance market and our research suggests this could be further fuelled by traditional lenders becoming less able to lend in this sector.

“While, there are many different property investment platforms for investors to choose from, they need to ensure they are comfortable with the ones they use in terms of their experience of the real estate market, their focus on risk management and their track record for delivering competitive risk-adjusted returns.”

Fitzrovia Finance competes with mainstream lenders, including the major banks, to lend money to established, experienced property businesses looking to borrow for projects of between £1m and £15m.

‘Logistics is still in growth mode’

Germany, the Netherlands and CEE countries have been at the heart of the Logistics boom over the last few years and continue to attract investors’ attention.

Logistics has been flavour of the month for several years now but the sector is still in growth mode and investors can find opportunities, delegates heard at Real Asset Media’s European Logistics Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

‘Lower for longer interest rates are leading even more investors across the spectrum to deploy their capital in Logistics so pricing will get even sharper over the next 3 to 6 months’, said Philip Dunne, Head of Logistics EMEA, CBRE Global Investors. ‘But you can still find opportunities by partnering with good quality developers’.

Germany, the Netherlands and CEE countries have been at the heart of the Logistics boom over the last few years and continue to attract investors’ attention.

‘Germany is the driving force in Europe,’ said Robert Dobrzycki, CEO Europe, Panattoni Europe. ‘We have an established presence in CEE and have reached our limit there, so we are pursuing a pan-European strategy and see the Netherlands as the next place to grow our business. We feel it is the perfect time to expand’.

Demand is coming from investors traditionally interested in the sector, from retail investors moving their allocation to logistics and now from bond investors as well, so there is a lot of capital ready to be deployed.

‘Germany and the Netherlands are a focus for us, because 25% of GDP is still manufacturing, so there are many drivers for logistics, not just e-commerce,’ said Ingo Steves, Managing Director, Gazeley North Europe. 

There are opportunities in Southern Europe as well. ‘Northern Italy is absolute value for money, but the problem is finding product,’ said Dunne. 

‘There is a huge appetite for Logistics in Spain across the spectrum, from big box to urban logistics, with new players coming into the market even for smaller deals and second-tier locations,’ said Alvaro Otero, Partner, CMS Spain. 

The problems virtually all European locations share is scarcity of product to buy and lack of land to develop.

‘Finding land is the main challenge,’ said Dobrzycki. ‘There are variations in different markets, but in general land is more difficult to buy, while demand from investors is strong and the markets are getting tighter’.

Regional riches: Europe’s non-capital cities are drawing in ever-greater investment

Investment into non-capital European cities has spiked in the first half of 2019, to reach 43% of all cross-border investment, according to Savills, including in cities such as Stockholm, Manchester and Lyon.

Investors are attracted to the extra yield for often marginally increased risk and often better growth potential. Eri Mitsostergiou, European research director at Savills, says the trend towards non-capital cities has been a decade in the making:  

“The share of real estate investment activity in non-capital cities has been a trend that has taken a few years to catch on in some countries. Turning the clock back to 2009 and it was clear that capital cities were still the order of the day with the likes of London, Paris, and Madrid catching the attention of investors from across the globe.

“Coming back to the present day however and there is a change in the air. Investment into non-capital cities which, at the end of 2018 sat at 36% (in line with the long-term average), has sprung up to 43% according to figures from Savills recorded at the end of H1 2019. Looking at where this investment is going and there are certainly some countries that stand out from the rest.

“France, whose share of regional investment has stood at an average of 16% in the last five years, has seen investment outside of Paris jump to 28%€ – a rise of 77%. A lack of stock in Paris and its outskirts as well as a compression of yields (now at 3% in the offices market in the heart of the capital) has meant investors are looking further afield for their returns. Areas such as Marseille, Bordeaux and Lille have become increasingly popular with investment levels standing at €662m, €263m and €255m respectively in 2018 and already on track to have an equally successful 2019 with Lille already boasting €456m at the end of H1 2019. “

There is a similar pattern in the UK where investment into the regions now stands at 55% compared to the five-year average of 35%. Standout places such as Edinburgh, Glasgow and Leeds have seen high investment volumes already in H1 2019 (£483m, £451m and £280m) in line with the year before.

Like France, this is the result of high competition for core/core plus product in the capital and record low yields. Likewise in Spain, this figure has jumped from 53% to 65% as investors turn to the likes of Seville, Bilbao, Valencia and Murcia. Savills Aguirre Newman recently announced its third office in Spain in Valencia in response to growing client demand across a diverse range of asset classes.

So, what next? Mitsostergiou explains:

“We believe that secondary cities will remain on investors’ radars (especially the ones with core+/value add or opportunistic strategies), as pricing and activity in the core segment remains extremely competitive. Several of these secondary cities are also supported by positive economic fundamentals and offer a good quality of life at a lower cost.

“According to Oxford Economics five out of the top ten cities with the strongest office-based employment growth forecasts for the next five years are secondary cities including Manchester (2nd), Lyon (4th), Malaga (5th), Gothenburg (8th), Malmo (9th). What remains to be seen is whether there will be even more cities joining them as investors look beyond traditional prime CBD opportunities.”

Patrizia: unlevered European residential annual returns to average up to 6.5% over the next five years

Total unlevered annual returns across the European residential market of between 5% to 6.5% are expected over the next five years, forecasts Patrizia, of which 2.5% to 3.5% is expected to be income.

Patrizia emphasis the defensive qualities of residential asset class amid protracted geopolitical volatility and also argues that the trend of urbanisation, driving the sectors, strength, is here to stay.

In the absence of a Europe-wide professional benchmark index, Patrizia has undertaken its own bespoke analysis of the European rental cycle data using online portals and other market sources.

Patrizia’s research shows that since the millennium, rental income has remained on an upward trajectory and displayed low volatility throughout the global financial crisis (GFC), underpinning the fact that the multi-family asset class remains a stabiliser for any portfolio.

Patrizia’s key residential market insights include:

  • Demand for residential investment remains strong with investment volumes growing from €5 billion in 2009 to €50.8 billion in 2018;
  • Downside protection from residential investments can be seen when comparing the residential income return post-GFC with the corresponding numbers for offices and retail;
  • German investors are the most active players across the European residential market followed by Nordic players; German and Nordic investors are investing €15.1 billion outside of their domestic markets on an annual basis;
  • Cross-border capital targeting European residential, particularly in Spain and Southern Europe, is dominated by US and Canadian investors mostly seeking M&A deals;
  • Luxembourg, Belgium, Sweden and Germany are dominated by domestic investors, whilst a blend of domestic and international investors is active in the Netherlands, France, Finland and the UK; by contrast, international capital constitutes most of the investment in Denmark, Spain and Austria.

Dr Marcus Cieleback, PATRIZIA’s Chief Economist and the author of the study, explains:

“The trend of urbanisation is here to stay, with population growth and, as a result, future housing demand surpassing macroeconomic or political volatility. Our latest European residential research demonstrates that multi-family assets continue to offer institutional investors an attractive investment product.”

“Many cities are struggling to meet the challenges of urbanisation with some governments responding with rent limits. However, history teaches us that this can negatively impact the quality of stock and, ultimately, the supply of rental housing. Despite this, we expect residential investments to remain high on the radar of institutional investors as an asset class that offers cash-flow stability and diversification.”

“Liquidity across many of Europe’s major urban areas has increased demonstrably since 2009, reflecting the maturing nature of this asset class and the vast number of opportunities available to investors. Sophisticated demographic analysis shows that the investible market for residential, at 25% of the European territory is quite significant. And so with such an opportunity, expertise and experience are absolutely critical to being able to identify institutional, quality products.”

Brexit ‘the cream on top’ for Germany

Even now that the economy is slowing down, investors do not doubt Germanys resilience or stability.

Brexit is just the ‘cream on top’ as there are other drivers behind Germany’s rising appeal in investors’ eyes, experts agreed at Real Asset Media’s Germany Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

‘Brexit has been an advantage for Germany and has led directly to an increase in demand and in prices, but it is just the cream on top,’ said Rainer Schorr, Founder & Owner, PRS Family Trust. ‘There are other factors at play, notably low interest rates and the safety issue. For pension funds and family offices all over the world Germany is a safe haven, not just in Europe but on earth. Their number one objective is capital preservation’.

Even now that the economy is slowing down, investors do not doubt its resilience or stability.

Tobias Schultheiß, Managing Partner Blackbird Real Estate GmbH, Sven Henkes, CEO ZIEGERT – Bank- und Immobilienconsulting GmbH and Rainer Schorr, Founder & Owner PRS Family Trust GmbH discuss the German Real Estate Investment Market. Filmed at the International Investors Lounge, EXPO REAL by Real Asset Media.

‘Stability used to be boring but at a time of insecurity it becomes an important asset,’ said Sven Henkes, CEO, ZIEGERT Bank und Immobilienconsulting. ‘Add to that a transparent market, great liquidity, clear regulations so that investors know exactly what they can and they cannot do, and you get the current situation where supply cannot keep up with demand and prices keep rising.

The residential sector is a safe haven within the safe haven, he said, because of the supply/demand gap, particularly in Germany’s main cities.

‘We see a very positive future for the residential sector in Germany,’ said Henkes. ‘Our new report focuses on Germany’s top 8 cities and it shows they are all developing strongly and growing faster than the rest of the country’. 

International investors’ interest is such that sometimes domestic capital chooses to take a step back. ‘In Germany often local investors will not compete with foreign investors,’ said Tobias Schulteiß, Managing Partner, Blackbird Real Estate. ‘The locals know the issues and the problems and they don’t want to pay too high a price, but foreign investors want to be in Germany at all costs and they are prepared to pay’.

They tend to stick to the main cities they know, but ‘in Germany there are many regional cities they have never heard of that actually deliver better returns,’ he said.

Savills: alternative investment volumes reflect almost 30% of YTD UK volumes

The proportion of investment volumes made up by alternatives amounted to 28% of the £29.4 billion, or £8.3 billion, invested into UK commercial real estate this year, according to Savills.

Savills says the increased appetite for the alternative sector reflects investors search for long-term, stable income streams supported by structural demand drivers, against a backdrop of political uncertainty and a maturing property cycle. A total of £8.3 billion has been invested into alternatives this year including PRS and student housing, Savills data shows.

Compared to other asset classes, London offices has recorded £6.4 billion of investment, while UK industrial stands at £3.9 billion and UK retail £3.1 billion, which serves to underline the mainstream credentials of the often-dubbed ‘alternative’ sector.

Savills says domestic investors have accounted for the lion’s share of investment into alternatives notes the firm, with just under £5 billion spent.

James Gulliford, joint head of investment at Savills, explains:

“Alternatives are rapidly becoming Conventionals as political uncertainty and Brexit continue to delay decision making in traditional markets. In response, investors are turning to assets with operating models that have both perceived structural support and more stable income prospects.”

The growth in the alternatives sector has also been supported by increased institutionalisation – and maturity – of the popular asset class, supported by ever-greater reams of data and analysis which supports due diligence, risk monitoring, relative value analysis and performance measurement.

There are two clear pools of capital chasing the sector: long-term liability-matching capital of pension funds and insurance companies, and private equity which are chasing the scale through building platforms – across the ‘beds and sheds’ sectors – for eventual exit to natural long-term owners and through IPOs.

Oxane Partners: real estate finance sector is primed for digital transformation, survey reveals

Approximately half the UK and European real estate debt industry is still reliant on Microsoft Excel for their work processes, despite awareness on its diminishing utility, a survey by Oxane Partners reveals.

Oxane Partners, a leading technology-driven solutions provider to alternative investments industry, has released its Real Estate Finance Technology Report 2019 which reveals that real estate debt investors in the UK and Europe are still evolving in digital maturity and technology adoption but there are good indicators that point to near-term, far-reaching progress and that the sector is primed for digitalisation.

In the report, Oxane Partners explored the digital ecosystems, awareness mapping, priorities and drivers for technology adoption that is underway in real estate finance. Oxane Partners surveyed 75 senior real estate debt professionals across the UK and continental Europe and found that while Microsoft Excel is still the mainstay with the majority relying on manual processes, the respondents tellingly admit that Excel has outlived its utility.

Kanav Kalia, Director at Oxane Partners, explains:

“The rise of real estate debt as an attractive investment option and the expanding universe of non-bank lenders means increased competition in the market which is driving the need for efficiencies in evaluating opportunities, deploying capital and managing investments. To address these challenges, we have seen start-up debt funds as well as large institutional managers inclining towards digitalisation to meet rising expectations of investors as well as to stay competitive.”

The survey reveals there is high awareness of technology solutions as well as consistency amongst respondents on solutions most valuable to them. Most respondents cite data aggregation, data management, and analytics – the foundation of all modern technology platforms as their top most priorities.

The responses reflect that the industry has begun contemplating about technology solutions more seriously and with rising expectations around compliance, transparency and reporting, is set to embark on its journey of digitalisation.

Vishal Soni, co-founding partner at Oxane Partners, explains:

“We have seen first-hand how firms are able to completely recalibrate their strategic and operational priorities and drive better performance with the use of technology. We believe the real estate debt industry is approaching an inflexion point and expect significant digital maturation over the coming 24-36 months.

“This will be driven by three intertwined forces – increased technology requirements of real estate debt professionals, increased transparency driven by continued institutionalisation of real estate debt as an asset class and a rapidly rising opportunity cost of simply maintaining the status quo. The challenge for technology solution providers is to build platforms which allow easy integration with existing systems and are flexible enough to host complex bespoke real estate debt transactions.”

Other key findings from the survey include:

  • Digital maturity remains low across the board: Over half the respondents rate themselves 5 or lower (on a scale of 10) in technology maturity, with the score dipping further as assets under management cross the £5bn mark.
  • But switch-over to technology tools is underway: Technology solutions have made significant impact into some of the critical business processes, notably: (i) pipeline management (36%); (ii) investor reporting (38%); and (iii) portfolio and risk management (40%).
  • Business-fit over off-the-shelf products: Business-fit is deemed most critical in the selection and adoption of a technology solutions with a near unanimous score of 87%.
  • Business automation and AI/ML trump blockchain: Artificial Intelligence (AI)/Machine Learning (ML) (60%) and business automation (56%) trump blockchain (29%) by a big margin.

Expo Real: ‘Capital is being re-focused on offices’

After a high volume of transactions in 2018, this year saw a significant slowdown in the first few months as fears of a late cycle and higher interest rates took hold.

Offices in Europe’s winning cities are still top of investors’ wish lists, delegates heard at Real Asset Media’s European Office Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

After a high volume of transactions in 2018, this year saw a significant slowdown in the first few months as fears of a late cycle and higher interest rates took hold. Over the course of 2019 the tables have turned again.

‘In the lower for longer context, capital is being re-focused and investors are ready to deploy capital and make significant investments,’ said John Mulqueen, Head of Offices EMEA, CBRE Global Investors. ‘If you invest for the long term, you can fix very low levels of interest for long periods of time’.

John Mulqueen, Head of Offices EMEA CBRE Global Investors, Andrew Westbrook, Partner, RSM, Boudewijn Ruitenberg, Chief Operating Officer EDGE Technologies, William Matthews, Partner, Global Capital Markets Research, Knight Frank discuss the current trends in the European Office Sector. Filmed at the International Investors Lounge, EXPO REAL 2019 by Real Asset Media.

Activity is picking up again and concentrating on the same top five countries, but in a different order. ‘The rankings have changed,’ said William Matthews, Partner, Global Capital Markets Research, Knight Frank. ‘Germany has overtaken the UK and is now the number one destination for office investment’.

What has not changed is the focus on the main cities that attract talent as well as capital.

Investors should look at cities with young populations, good universities and good prospects, said Andrew Westbrook, Partner, RSM: ‘Ask yourself where the workforce of tomorrow will want to be. The answer is that cities like Berlin, Munich, Paris and London will go from strength to strength’.

The demand for good quality buildings in those cities is already strong and will intensify further, said Boudewijn Ruitenburg, COO, EDGE Technologies: ‘The future is winning cities and losing regions, because talent is concentrating in a few areas’.

Start-ups and tech companies are flocking to Berlin, where ‘rents have gone up but are still half of those of London or Paris so from our point of view it still has a long way to go,’ said Mulqueen.

Follow the growth of tech to determine a city’s attractiveness, said Ruitenburg: ‘The tech sector can produce double digit numbers with no correlation to the country’s GDP, so that is what we look at rather than the cycle. It is true in Berlin and it is true in London, where the banks may be down but tech is still going up and up’.