UBS: central London office rental growth forecast flipped back positive

UBS has reversed its forecast for rental central London office rental growth – from declines of -3% and -2% in the City and West End to a positive 1.1% and 1.9% over 2019/20 – driven by outperformance of the occupational market.

In its Real Estate Outlook report, UBS explains that yields are ultimately flat in the short-term, “however we would note there is some upside risk to this assumption should a deal be reached with the EU by 31 October,” says Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets.

Under this scenario, UBS suggests a significant inflow of foreign capital coming back into the Central London market. Domestic players continue to focus on the South East and Rest of UK markets where supply conditions are favorable and modest rental growth is forecast. This is expected to drive small increases in rental levels over the next five years. Across all markets we would continue to expect stronger rental growth to come through in the prime segment reflecting the relatively weak levels of construction, and competition from serviced offices affecting smaller secondary assets.

The main shift in UBS’ office forecast over the past six months has been a change in its short-term expectations for Central London rental growth. We had originally been factoring a modest decline of -3% and -2% in the City and West End respectively in 2019/20. However, as the occupational market has continued to exceed expectations, we have revised these to a positive 1.1% and 1.9% for the same period, with a similar profile of moderate increases thereafter.

Retail market outlook

UBS forecasts a further 8% decline in retail rents out to 2021, with variations by region and sector, as headwinds do not let up.

Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“We expect there to still be fairly robust demand for food stores, which have already undergone something of a correction. In line with the weakening occupier outlook, we are expecting outward yield shift of around 60 bps over the next three years, again with significant variation based on sector and region. We do expect that, at some stage, the market will begin to improve as and when the sector has fully adjusted to structural changes affecting it. However, we feel this lies beyond 2021.”

Logistics market outlook

UBS forecasts pricing in the logistics sector to peak in 2019 and yields to stabilise, after significant yield compression over the past few years.

UBS says its forecast is driven by the record low levels assets have reached “as pretty much all investor types have been scrambling to buy UK industrial over the past few years”, explains Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, adding:

“In light of this, we are expecting moderate yield expansion of around 10 bps to 2021. However, rental growth is expected to remain positive, albeit moderating from the very high levels seen over the past five years, particularly in the South East and London where affordability is becoming more of a concern.”

RED: investment in Danish real estate forecast to reach €8bn in 2019

Investment in Danish real estate is forecast to reach DKK 60 billion (c. €8.0 billion) in 2019, supported by record low interest rates and available capital earmarked for deployment in the country, according to RED, the Danish real estate brokerage affiliate of Cushman & Wakefield.

Danish investment volumes in H1 were DKK 23 billion (€3.1 billion), compared to DKK 35.5 billion (c. €4.8 billion) in H1 2018, according to RED data, but the brokerage firm expects a stronger H2.

Nicholas Thurø Managing Partner, Cushman & Wakefield | RED, explains:

“Despite declining transaction volumes, in both Denmark and the rest of Europe, the level of activity is very high, and the very low interest rate means that real estate is still an attractive asset class. An asset that is partly protected against inflation and which generates a continuous return, unlike most other asset classes. Recent interest rate developments, [has made] lending [look] so attractive that we expect foreign investors in particular to increase their investments in the second half of 2019.

“Historically attractive loan conditions may affect the investment market We are currently experiencing historically low interest rates. The FED’s latest interest rate cut is historic and comes after more than 10 years without any cuts. The introduction of a 30-year loan at 0.5% interest rate speaks volumes about the current financing climate

“Foreign investor activity must, however, continue to rise in the coming quarters in order to reach the level of last year. International investors, however, still perceive the Danish property market attractive. Particularly the stable political environment, general economic growth and the low financing rate through the Danish mortgage credit system attracts investors. Therefore, we expect to see increasing activity from foreign investors – particularly in the Copenhagen prime markets.

Office investment volumes within Denmark reached DKK 3.2 billion (c. €430 million) in Q2, a 39% rise on the previous quarter but a 47% decrease on Q2 2018, according to RED data.

The first six months have seen steadily increasing activity, which RED said it expects will continue throughout the year. Copenhagen represents 81% of the market and remains the second largest segment accounting for 23% of transaction volume in Q2 2019. In Copenhagen, six transactions with a value exceeding DKK 100 million were completed.

The largest of these was Norwegian KLP Ejendomme’s acquisition of the IT company Visma’s future domicile, Emil Christian Hansen House in The Carlsberg City District. The domicile is 19,700 sq and traded for an estimated DKK 711 million, which significantly impacts the statistics.

RED also highlights:

  • a positive business environment has supported strong office space demand and helped to reduce vacancy rates in major cities, with strongest office space demand in the CBD and inner Copenhagen;
  • increasing demand for centrally-located office space, coupled with a limited amount of speculative new construction, is driving upward pressure on primary and secondary rental levels; and
  • within the residential sector, Q2 investment was DKK 6.9 billion (c. €925 million) in Q2, virtually double Q1’s DKK 3.5 billion (c. €470 million). The residential sector reflects more than half the Danish market, which was 57/43 weighted to foreign capital in H1. AXA, Heimstaden and Blackstone were the largest foreign investors in H1.

Multi-family matures into a global asset class

The institutionalisation of the global residential market took another step forward this week with the launch of the first of its kind global multi-family fund, managed by Atlas residential, which plans to deploy $1 billion across the US, the UK and China.

Atlas said it plans to incorporate its institutional standard practises into the UK and China, for which the fund will be weighted 15% and 20%, respectively, with the balance in the US.

This milestone development will be discussed at our European Residential Investment Briefing on Wednesday afternoon at TaylorWessing London headquarters.

The residential sector has become a magnet for investors interested in European real estate. Shortage of housing has become a common feature in most European cities, with Governments and local authorities coming up with different responses to the challenge. The unstoppable urbanisation trend is exacerbating the problem.

Reserve your free seat at the event – to be held between 15:30 and 18:00 at TaylorWessing UK’s headquarters at 5 New Street Square, London, EC4A 3TW.

Additional topics to be covered include:

What are the main trends, strategies and opportunities?

How are developers responding?

How is Build to Rent developing in different countries?

To what extent has US-Style multi-housing found a foothold in Europe?

Meanwhile, sectors that were once niche, like student housing and micro-living, have become mainstream and are attracting significant amounts of capital.

What are the prospects for further growth?

How have the sector’s success stories overcome operational challenges?

What about senior living?

What are the prospects for mixed-use developments in inner cities?

Which European countries or cities offer the best opportunities?

Lisbon and residential were both high on the PwC/ULI Trends report on investor intentions; what are the opportunities and the local market trends?

How does this compare with the UK and main continental European markets?

Join this time-efficient briefing, benefit from the latest research, hear the views of market-leading experts and get to ask your own questions in this interactive investment briefing.

Attendance is free, as our guest, but registration is essential – please book now to ensure your place.

RSM and Nyenrode Business University launch European real estate tax guide

RSM International, the leading global network of audit, tax and consulting firms focused on the middle market, and Nyenrode Business University, the only private university in the Netherlands, have launched the Guide to Commercial Real Estate Taxation in Europe.

This guide provides cross-border businesses, investors and other stakeholders with a concise overview of real estate tax levies in various European countries. The guide follows the real estate cycle from acquiring, holding and selling commercial real estate that is held either directly or indirectly by domestic or foreign investors and legal entities.

Real estate can be held through a variety of structural entities, such as registered and privately held corporations, investment funds, partnerships and trusts.

The guide – which can be downloaded here – has been developed in close partnership with Nyenrode Business University.

Onno Adriaansens, Head Real Estate RSM Netherlands and Co-Chair RSM Real Estate Sector Team for Europe, explains:

“The Guide to Commercial Real Estate Taxation in Europe’ underlines one of our core principles: think global, act local. Information on local tax and audit principles enables our clients and partners to facilitate cross border real estate transactions which support their business development goals and objectives. RSM’s local real estate desk is the catalyst to connecting with RSM’s extensive network of real estate expertise and a substantial pool of real estate professionals.”

Tom Berkhout, Professor of Real Estate at Nyenrode Business University, adds:

This tax guide offers a handy overview to the complex fiscal world of real estate. The authors are local RSM tax specialists who advise clients on a wide range of topics on a daily basis.”

RSM is the sixth largest network of independent audit, tax and consulting firms, encompassing 116 countries, 750 offices and more than 41,000 people internationally. The RSM Real Estate Sector Team combines a wide range of European sector expertise with specific tax and audit information on regimes in more than 17 European countries.

Nyenrode is the only private university in the Netherlands, founded in 1946 by business and for business and has traditionally been internationally oriented. It offers intensive academic education, short-term and longer-term programs in the fields of business, management, accountancy, controlling, and fiscal law and undertakes scientific research in these areas.

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

Richard Betts
Founding Partner, Group Publisher
Real Asset Media I Investment Briefings & TV
M: +44 7557 37 31 34

Frank Beinborn
Director Client Relations
Real Asset Media I Investment Briefings & TV
M: +49 1525 4878668

RED: Danish investment volumes slip 54% in H1 while foreign capital still dominates

Investment volumes in Danish real estate markets were DKK 13.7 billion (€1.8 billion) in Q2, taking the H1 total to DKK 23 billion (€3.1 billion), which is 54.4% lower than the DKK 35.5 billion (c. €4.8 billion) recorded in H1 2018, according to RED, the Danish real estate brokerage firm.

Transaction volumes in Q2 was 45% above Q1, indicating that the significant Q1 decline will not be indicative of the entire 2019, according to RED, which is an affiliate of Cushman & Wakefield.

Nicholas Thurø Managing Partner, Cushman & Wakefield | RED, explains:

“The market has been quite active over the past six months – thus more transactions were completed in the first six months of 2019 compared to the same period in 2018, although they were smaller. In the first half of 2018 five properties with a value exceeding €100 million or approx. DKK 745 m were sold while we have not yet seen a single property transaction of this magnitude in 2019. The absence of the very large transactions, which usually drive the transaction volume obviously impacts the total transaction volume.

“However, we know of several significant properties which are expected to be sold during the last six months of the year. Therefore, we expect the second half of the year to end strongly. Residential transactions have seen a significantly better second quarter The Q1 decline in the sale of residential property has stagnated in Q2. Thus, the transaction volume for the residential segment in Q2 2019 is only 4% below the Q2 2018 level.

“If we compare the first half of 2019 with the first half of 2018, residential volumes have dropped a total of 28%, while industrial & logistics has dropped 23%, although it is a smaller market. The office transaction volume has dropped 43% and retail has dropped 58%. Consequently, the sale of residential rental properties is second least affected by the volume decline and remains the largest segment with 54% of total transactions.”

Within the residential sector, three foreign investors have dominated the activity with approximately one-third of Q2 investment volumes: AXA accounts for 14% of residential investments in Denmark, with the French insurer pushing Heimstaden to second place, after several quarters as the largest residential investor. Heimstaden and Blackstone represented 12% and 7%, respectively.

Foreign investors acquired DKK 8.8 billion (c. €1.2 billion) worth of Danish properties in H1, compared to DKK 13.6 billion (c. €1.8 billion) in the same period last year, including lower Q2 in 2019 relative to 2018. Regardless, foreign capital is still behind the largest transactions in the year to date: four of the five most active investors in Q2 2019 were overseas, top was again France’s AXA, followed by Norwegian capital in second and third with Heimstaden and KLP Ejendomme. The largest Danish investor was Industriens Pension in fifth place.

Nicholas Thurø, Managing Partner, Cushman & Wakefield | RED, added:

“There is more capital for real estate investment than ever before, but international investors still experience difficulties finding the right products in Copenhagen and Aarhus. This means that the capital [has] accumulated and some investors are hesitating. In Q2 2019, foreign investors represent 39% of total volumes.”

UBS: secondary UK shopping centres averaging 20% vacancy rates as polarised performance deepens

Vacancy rates among secondary UK shopping centres has risen to around 20%, while big centres in towns and cities is around 10%, according to data cited by UBS, illustrating the polarisation of the struggling sector.

UBS reports that across the retail sector more broadly, vacancy is around 13.7% of units.

The picture is better in major cities, which have just 12.3% of units vacant. At the same time, medium towns have around 15.6% of shops empty, citing data from CBRE and JLL.

Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“Ultimately, the UK has too much retail space considering the growth in online offerings. By the same token, retailers previously were thought to need around 200 shops to fully serve the UK, a figure of which is now thought to have come down significantly to possible low of 50. This means that even well-performing retailers are looking to reduce their store portfolios as many of the sites with lower sales volumes have now become surplus to requirements. As a result, development has largely reduced to nil and landlords have started looking to convert retail space to alternative uses.”

In the office sector, central London availability actually fell to 12.3 million sq ft in H1, which reflects an overall vacancy rate of 4.6%, according to UBS’ Real Estate Outlook report. Vacancy rates dropped in four out of the five submarkets with the West End being the only location to see a modest increase from 3.2% to 3.5% in the first six months of the year.

Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“The decline in vacancy rates can be attributed to the continuing steady flow of demand (albeit helped by continued expansion from serviced office operators). It can also be attributed to the relative lack of speculative office development in the near-time pipeline which will keep vacancy rates in check for the remainder of the year. With the market seemingly able to comfortably absorb the limited new development coming through we saw prime rental growth of 3.6% in the City and 2.4% in the West End in the first half of 2019. And, reflecting the resilience of the occupational market we have adjusted our forecast for average rental values from a minor decline in 2020 to a small increase in values, although we continue to expect prime rental growth to outperform.

“Prime rents were stable across all the regional markets in 1H19, but with tight supply conditions likely to persist for at least the short-term we would expect some upward movement over the short- to medium-term, with MSCI estimated rental values (ERV) following at a slower rate.”

The industrial sector has supply levels broadly in check, added UBS, although there has been a boost in development which has seen availability edge higher in the first half of 2019. “This has been fuelled by high levels of development, particularly in the South East and East Midlands,” addedRymell. “The majority of new supply is focused in the warehouse segment, above 100,000 sq ft in size. Industrial estates have seen much lower levels of development and as such are generally more dated and short in supply.”

UBS’ UK sector outlook will continue tomorrow.

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

Thorsten Herbert
Founding Partner, Managing Partner
Real Asset Media I Investment Briefings & TV
M: +49 170 47 98 793

Richard Betts
Founding Partner, Group Publisher
Real Asset Media I Investment Briefings & TV
M: +44 7557 37 31 34

UBS: UK office demand resilient in the face political drama, while retail struggles

With the exception of the struggling UK retail sector, occupational markets broadly held up quite well in H1, although investment markets are subdued as political uncertainty deters activity.

UBS predicts a bounce-back in investor demand should a deal be reached with the EU, “but the recent change of Prime Minister and confrontational rhetoric which followed has made that outcome increasingly unlikely”.

UK office occupier demand has remained relatively stable with aggregate take-up in H1 dropping by 5.3% year on year, according to CBRE data, despite the impact of political uncertainty on corporate sentiment. Central London saw activity levels drop by 8.8% however occupiers continue to be active in seeking high quality office space which is in relatively short supply, according to UBS’ Real Estate Outlook report.

Zachary Gauge, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“Serviced offices occupier demand appears to have plateaued, at between 15-20% of total take-up and after several years of exceptional growth, this now accounts for 3.7% of total stock. This has placed pressure on traditional landlords who are responding by offering more plug-and-play office space, more services and greater flexibility than traditional leases. Encouragingly, the feared Brexit finance exodus has shown no signs of emerging – in fact the finance sector has seen net job creation of around 8,000 jobs since the EU referendum, whilst the tech sector has added a further 72,000 jobs over the same period.”

Activity in the main regional markets was mixed, UBS reports. Birmingham saw a significant increase in activity in 1H19 supported by three large deals to WeWork which totaled 230,000 sq ft as they continue their expansion outside of Central London. Leeds, Manchester and the South East also saw demand levels increase in 1H18, but again supported by some large deals to serviced office occupiers. However, Bristol, Edinburgh and Glasgow all saw activity decrease.

Sean Rymell, European Real Estate Analyst, UBS-AM Real Estate and Private Markets, explains:

“The last 12 months have been very tough for the retail sector as valuations have finally begun to catch-up with the weakening outlook. Retail rents fell by -3.8% over the 12 months to 2Q19, with more severe declines coming in the shopping center and retail warehouse segments. Shopping centers have been particularly afflicted by weak demand due to the oversupply in most key towns in the UK.

“The larger, more dominant out-of-town schemes have remained in demand but are requiring ever-increasing capex to do so. Within the retail warehouse segment, standalone units have fared better as they tend to cater to more traditional warehouse occupiers (such as DIY, home furniture etc.). They have not seen the high rental growth of many managed schemes, particularly fashion parks with open A1 consent. These schemes saw very high rental growth over the past decade and are now very much correcting as fast fashion continues to be disrupted by online.”

Occupier demand continues apace on the industrial sector, which saw annualised growth of 3.6% to Q2, according to data cited by UBS, who warned that achievable rents are increasingly coming under pressure from ‘affordability concerns’.

Increased vacancy in Central London over the past two years coincided with a decrease in vacancy in the wide South East area, according to a recent report by Gerald Eve. “This indicates occupiers are struggling with costs and willing to incur higher transportation expenses,” added Rymell. “In spite of this, take-up has been reasonably robust, particularly from high street and online retailers looking to shore-up their networks to accommodate the growing e-commerce demand.

UBS’ UK sector outlook will continue tomorrow.

Preqin: growing proportion of global investors believe a market correction is imminent

A growing proportion of investors in the $9.5 trillion global alternatives sector believe the equity market cycle has peaked and a market correction is imminent, according to Preqin’s H1 investor sentiment survey, amid rising asset valuations and record levels of dry powder.

Even though performance has mostly met or even exceeded expectations, investors are concerned by asset valuations, and are exercising caution, Preqin’s survey found with only 18% claiming returns were below expectations. The majority (56%) reported returns met expectations, while more than one-quarter (27%) said return expectations were exceeded.

However, investors’ outlook on real estate performance is the most negative across the universe of alternative asset classes which Preqin monitors. More than one in 10 (11%) believe the asset class will perform better in the next 12 months, whereas almost one-quarter (23%) feel it will perform worse, as investors brace for lower future returns.

As a result, real estate investors are expected to be more cautious in the coming 12 months from Q3 2019: 27% are planning to invest less capital compared to the previous 12 months, whereas one year ago, the proportion looking to invest less capital was smaller at 17%.

Rising competition and an abundance of dry powder has kept valuations frothy for some time now, reports Preqin, however, asset prices cannot continue to increase indefinitely.

Investors believe we are at the peak of the cycle, respondents are divided across individual asset classes. In both private equity and real estate, a majority of investors believe that assets are overvalued, and 48% of investors in these asset classes feel a market correction will occur by the end of 2020.

Asset valuations rank as the biggest challenge for return generation among real estate investors (cited by 82%), according to Preqin’s survey, which added:

“Competition for assets is a challenge for 52% of investors; with so many active firms in the market with capital to put to work, and with prices at record levels, it is harder than ever for fund managers to find assets they can add value to.

“Value-added funds remain the most sought-after strategy among real estate investors, and 46% feel they currently offer attractive investment opportunities (Fig. 25). Investor appetite for opportunistic funds is on the rise again having dropped off over the past year: 44% of investors are planning to target the strategy in the next 12 months, up from 20% in June 2018 and 29% in December 2018.

“As with previous years, the established markets of the US and Western Europe (excluding the UK) are viewed most favourably among investors: 57% and 52% believe they are presenting the best opportunities at present. Emerging Asia is the clear favourite among real estate investors targeting emerging markets in the year ahead: a third of investors named each of China and India as presenting the best opportunities, and 31% feel the rest of Emerging Asia is attractive in the present climate.”