The 600,000 sq ft mixed-use Devonshire Square real estate project in London is all about opening up access to a previously closed-off area and creating a meeting place to draw the local community in
David Kaiser, Senior Director, Real Estate, WeWork, tells Real Estate Day about their 600,000 sq ft mixed-use Devonshire Square real estate project in London, which is all about opening up access to a previously closed-off area and creating a meeting place to draw the local community in
In this series, we explore the progress key ‘alternative sectors’, have taken towards asset class maturity. In part two, we continue our closer look at the UK BTR sector.
Fellow insurers Legal & General, Aviva,
AXA IM – Real Assets soon followed M&G’s lead, as did listed investors
including Grainger, PRS REIT. In mid-2015, private equity capital joined the
fray with Lone Star’s £700m acquisition of Quintain, one of the UK sector’s
early pioneers along with Sigma and Long Harbour.
Dan Batterton, Fund Manager BTR, LGIM Real Assets, explains:
“Relatively speaking, this market is in its infancy. For many institutions, in order to assess the risk and reward of their investment, they require access to high-quality data. For BTR, it’s the operational data which is the most valuable, so as more assets come into operation and the data becomes available we will see more deals emerge. But the reality is that we are five years away – maybe longer – from being able to provide data that can demonstrate a correct and fair assessment of value.
“For the large annuity and liability matching investors, like Legal & General, the credit rating will depend on the strength of income cash flow, so if the cash flow can be correctly rated then the size of the potential investor market will see significant growth. We need to show that this asset class can offer low risk and steady growth returns over the long-term.
“Along with access to high-quality data, in order for BTR to reach maturity and become a viable asset class there needs to be liquidity in the market. At the moment, there are buyers but limited sellers – we need a sufficient pool of assets to see regular deals.
“But ultimately, in this sector, operators will only really succeed if we can deliver on the quality customer service that the BTR model is built on. The customer experience is key.”
The liquidity issue remains a significant
draw back and best exemplified by Lone Star’s aborted sale of Quintain, in a
thin bidding process led by Delancey last September. Lone Star wanted £2.2bn
for Quintain, which owns one of London’s largest urban regeneration sites at
Wembley Park, but did not get close enough to close the deal.
Overall, the BTR sector remains immature but
it is developing fast. Operational BTR stock increased by 26% in 2018,
according to Savills, while the amount under construction has increased by 33%.
This rapid growth highlights the momentum of the sector which continues to attract significant investment, from both overseas and domestic institutional investors. Much more to be done, but as new players continue to enter the market, liquidity should increase, helping BTR transition to the next stage of maturity.
In tomorrow’s third instalment, we turn to another sector: healthcare.
Both domestic and international investors are broadening their horizons and having to work harder to find opportunities in an increasingly competitive German market
Both domestic and international investors are broadening their horizons and having to work harder to find opportunities in an increasingly competitive German market, experts agreed at Real Asset Media’s Germany Investment Briefing, which was held at MIPIM in Cannes.
‘You have to kiss a lot of frogs to find a good opportunity,’ said Thomas Kaechele, Director: Head of Germany, M&G Real Estate. ‘Investing has become harder in Germany, you really have to know your market and broaden your investment strategy’.
Competition is increasing from domestic as well as international players. ‘The context is much more competitive,’ said Arnaud Malbos, Vice President, Investments Europe, Ivanhoé Cambridge. ‘In some places you can be lucky and have rental growth, but you have to look at value-add, opportunistic strategies’.
Institutions like Union Investment are branching out into the student housing sector and others are actively looking at alternative asset classes.
‘We are widening our investment platform to student housing, all alternative sectors and value-add,’ said Kaechele. ‘We used to buy cheap, work hard, sell for a decent price. Now we buy expensive, work hard to justify the expensive price and then sell for a rather moderate deal. Value-add is the new core because after taking a lot of risk and doing a lot of hard work maybe you get 50-60 basis points more’.
Even cautious Asian investors are taking the plunge, said Christian Kadel, Managing Director, Head of Capital Markets, Colliers International: ‘I have seen an interesting change in their risk profile. Asians who in the past were very conservative have gone up the risk curve, while US investors, who by nature were more on the opportunistic side, have moved to the core sector’.
Some markets have really ‘dried out’, he said, so ‘you need to be much more creative to find sites to develop conversion schemes, from retail to office’.
Development has been made harder by scarcity of land and rising construction costs. ‘On the development side all the low-hanging fruit has been picked, you now you have to work that much harder to find profitable projects, but they do exist and they are worth finding,’ said Melike Wirth, Executive Board Member, Projektentwicklung.
Investors can also find opportunities in less obvious sectors like energy, exploiting the trend for the decentralisation of energy systems and new stricter laws that are being introduced, said Peter Mussaeus, Partner, Energy Law, PwC Legal.
‘It is in the DNA of Germans to regulate everything, but the good news for real estate companies and managers is that is easier to make money with a highly regulated, standardised commodity business,’ he said. ‘Big housing companies already make money by offering their tenants energy supply contracts.’
Matt Partridge about his plans as the new chair of the UK Proptech Association, a non-profit organisation, to create a forum, to introduce free membership for companies and investors and promote the UK’s advantages as the place to be
Matt Partridge, Founder & CEO, Infabode, tells Real Estate Day about his plans as the new chair of the UK Proptech Association, a non-profit organisation, to create a forum, to introduce free membership for companies and investors and promote the UK’s advantages as the place to be
Emerging real estate sector, the often dubbed ‘alternative sectors’, have experienced rapid growth in recent years, driven by a range of structural forces driving demand in markets where supply is constrained.
Over the course of this week, we will take
a look at what it means for emerging property sectors to become mature or
institutionalised, with a focus on three standout nascent sectors in
particular: Build to Rent (BTR), healthcare and retirement living.
Each of these sectors are at a different
stage of maturity and benefit from different structural drivers. So, what makes
an asset class institutionalised? Here are an outline worth considering:
Attract institutional capital (equity investors, debt providers & financial intermediaries);
Professional management of assets, including:
Research-driven investment strategies;
Asset management and portfolio management;
Data, including frequent independent valuations, transparent performance measurement, and a liquid transactional market;
Investment reporting (including leasing, transactions, financing, market value accounting, etc); and
In this first article we start to consider
to what extent each of these alternative sectors have reached maturity and how
much further each need to go before they can be considered truly ‘institutional
Institutional investment in the UK
residential property market was a slow burn for decades and then, since 2012 has
gathered incredible momentum. It has been driven by declining home ownership,
as changing lifestyle choices and tightened mortgage regulation have supported
rental demand and, in turn, residential capital growth.
Strong price has further been supported by
the demand and supply imbalance, historically cheap mortgages and in population
growth forecasts, entrenching the structural tailwinds supporting the sector.
Seven years ago, the market was held back
by the lack of “oven-ready” portfolios of scale, the challenges of developing
without recognition or support from housing and planning policy, the
granularity of the asset management and the need for new finance models.
But then M&G’s acquisition of the Berkeley residential portfolio in 2013 was evidence that UK institutional investors were in the game. “It was a way to get into the sector, even though the portfolio was not purpose-built,” explains Lawrence Bowles, associate director, residential research at Savills. The institutional investors realised that they had to build product themselves, which subsequently drove the trend in forward funding in the sector.
Tomorrow, in the second instalment in this new series, we continue to explore the BTR sector.
Foreign investors understand that in Germany there is no Paris or London dominating the country, but that each of the top cities is ‘a little cosmos in itself’, that allows for good diversification
Germany is a tale of two markets, with clear differences between residential and commercial and also between primary and secondary markets, delegates heard at Real Asset Media’s Germany Investment Briefing, which was held at MIPIM recently.
‘Two-thirds of commercial transactions take place in the top 7 cities, but then it comes to residential the picture changes dramatically,’ said Marcus Cieleback, Chief Economist, Patrizia Immobilien. ‘Around half of all transactions take place outside the top cities, underlining the importance of Germany’s federal structure’.
What that points to is ‘that there is a market out here and that’s the story not often told,’ he said. ‘There are a lot of opportunities for international investors, provided you have the local knowledge and understand what’s going on’. Until now the residential sector has been dominated by domestic investors, who account for 67% of transactions compared to 55% in the commercial sector.
Berlin is the big exception to the rule, as there has been a lot of international activity in the residential sector. Because of foreign investors’ continued interest in the German capital, ‘the Berlin market is the most liquid resi market in Europe’, Cieleback said.
So far, however, foreign capital has focused on commercial assets in the big cities. ‘There is a concentration of activity in a few regions and cities and that creates a lot of competition and has a huge impact on prices,’ Cieleback said. ‘The largest share goes to offices and the figures are skewed by the large flagship towers being sold in Frankfurt’.
Foreign investors understand that in Germany there is no Paris or London dominating the country, but that each of the top cities is ‘a little cosmos in itself’, that allows for good diversification, he said. They gravitate to commercial real estate also because ‘there is a lot more transparency on yields, rents and other data’, and less specialised local knowledge is required.
Despite high prices and intense competition, Germany is set to attract more investment because it is neck and neck with the UK as the biggest market in Europe so ‘all investors have to have a view on Germany’, Cieleback said.
The other positive factor is that the looming threat of interest rate rises has now effectively been removed by the European Central Bank, so the market can get on with deal-making without having to worry about what impact higher interest rates would have on the real estate sector.
Huge demand and scarcity of supply in the Logistics sector are leading to rental growth in all key markets, which is a new thing for Logistics and which as fund managers they intend to capitalise on for their investors
Nick Preston, Fund Manager, Tritax Eurobox, tells Real Estate Day that huge demand and scarcity of supply in the Logistics sector are leading to rental growth in all key markets, which is a new thing for Logistics and which as fund managers they intend to capitalise on for their investors
The UK on balance is still expected to avoid a ‘no deal’ Brexit, with either Theresa May’s deal or the Common Market 2.0 deal, tipped as most probable by Instinctif Partners.
do not see the numbers in the House of Commons to get a Second Referendum, but
maybe as a dark horse there could be a referendum on the deal once the deal is
done, a confirmatory referendum,” explains Warwick Smith, managing partner at
Back to sedate world of property. Why have
things held up as well as they have in commercial real estate markets?
Troni, head of EMEA research and insight at Cushman & Wakefield, explains:
“Labour market resilience has been remarkable. Unemployment rate in the UK is currently below 4% for the first time since 1975. To be honest this chart (see below) is genuinely hard to explain. In my view, when you look into the components of GDP, the impact on GDP and the decline in the trend growth rate has largely been driven by a decline in business investment. When businesses does that, it hampers productivity but not spending on plants and equipment, they become less efficient. And that means we likely have to hire more workers… we do that because it is cheaper and more flexible. Businesses who are concerned about the outlook can hold onto employees as a cheaper, more flexible way of maintaining operations. And of course, bums on seats is a key driver of occupational demand in commercial real estate.”
There continues to be much chatter in
respect of Brexit challenger cities. Anecdotally, the impact remains very
little in terms of Brexit being the deciding factor in company relocating away
from the UK, argues Cushman’s Elizabeth
Troni. Since the EU referendum in June 2016, office take-up in London has
been broadly flat – at -1.2%, compared to Frankfurt which has increased by
65.1% over the same period, according to Cushman & Wakefield data.
Frankfurt is followed by Amsterdam, up 28.7%, and Dublin and Paris, up 19.4%
and 9.3%, respectively.
is quite hard to clear-through and understand if this leasing performance are
in fact broader recovery stories in those office markets post the financial
crisis or whether they are attributed to some notional Brexit activity. From
our brokers on the ground, we have not heard of specific Brexit conversations
happening around those office moves.
the statistics, Frankfurt clearly stands out the most in terms of the alleged
Brexit star performer. If you go to Frankfurt, they will tell you ‘London’s
financial sector is flooding to Frankfurt’ and if you ask people in London,
they will tell you ‘we are al still here and nobody has left for Frankfurt’. The
reality is that at the time of the EU referendum in the UK, the Frankfurt
office market was going through a going through a general recovery from a
pretty low base and so while Brexit may have helped in some notional searches
and inquiries into office space, the market is more generally getting back on
track rather than any specific Brexit impact in our view.”
slow-motion train wreck is starting to build up some speedbumps, which is starting
to have an impact on confidence in the UK, we can see this in sentiment indicators.
Businesses in the UK service sector are feeling particularly downbeat in terms
of confidence in terms of confidence falling to its second lowest point since
Net absorption weakened considerably in the
final quarter of last year, as the chart below shows. This is a harbinger of
weakened demand overall, which could impact values in future. Investment
volumes were slow in December, and low volumes have been recorded in January
and February 2019.
have potential signs of weakening in the occupational market, with net absorption
figures trending lower and we have some weakening in investment markets, with liquidity
also trending lower. Behind the scenes there are also the retail property funds.
We have evidence coming from those retail funds that they have seen hundreds of
millions of pounds in outflows in the months leading to year end and into the
Europe has become a magnet for tourists from all over the world and this trend is fueling investment in the hotels and hospitality sector
Europe has become a magnet for tourists from all over the world and this trend is fueling investment in the hotels and hospitality sector, experts agreed at Real Asset Media’s Hotels, Tourism, Hospitality & Accommodation Investment Briefing, which was held at MIPIM.
‘There is an enormous amount of private equity in the market, very actively looking, said Dirk Bakker, Head of EMEA Hotels, Colliers International. ‘Money is cheap, interest rates are low, and you can’t go wrong in a market where you see double-digit growth in tourism arrivals and such a strong demand for hotel rooms’.
The number of tourists arriving in Europe is increasing at a rate of over 8% a year and reaching double digits in many areas.
‘We are experiencing incredible growth in this industry in Europe,’ said Johanna Capoani, Deputy Director – Head of Hotel Competence Centre, Swiss Life Asset Managers. ‘France and Belgium are experiencing a strong recovery now that the terrorist risk is subsiding, while Southern Europe is still doing fantastically well but not growing so fast now that Northern Africa has come back into play’.
Finding land or product in the right urban locations can be a real challenge, so innovative solutions must be found. ‘Our competitive advantage is land in a central location where normally there are many restraints on building and development,’ said Sergio Salvio, CFO & CIO, FS Sistemi Urbani. ‘We get the change of destination from railway to hospitality, as we have done at Tiburtina Station in Rome, and create a brand new hotel’.
The industry is changing completely and it is all driven by consumer demand’, said Bakker. ‘We are getting a new type of consumer, a new type of hotel and new types of product. Looking five years into the future, we’re seeing a compounded annual growth of 4.4% in hotel rooms and that’s not including Airb’n’b. It is no longer all about location, you need services, experience and personalisation’.
Swiss Life has a bottom-up approach, said Capoani: ‘We are focused on the adaptability of the single asset and then see how the asset fits into our strategy. We look at cities rather than countries’.
The lines between leisure and business are blurring, said Alessandro Belli, Head of Tourism Real Estate, CDP Investimenti: ‘We look for opportunities not just in cities but in leisure destinations as well in Italy, attracting tourists and business travellers’.
Tourism in Italy is growing at all levels, from 4 star hotels to hostels to serviced apartments, said Giorgio Bianchi, Director, Head of Italy, PKF hotelexperts: ‘The market is moving fast, not just in the main cities but also in secondary cities like Bergamo or Padua’.
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Real Asset Media has launched Real Asset Insight at MIPIM. Real Asset Insight is a new print magazine with exclusive articles and interviews, 100% focused on thought leadership, analysis, trends, market intelligence and insight from across the industry: capital sources, fundraising, investment management, financing and development.
It is a new platform created to share ideas, strategy and industry-leading insight with peers from the global cross-border investment community. What are the key trends in each sector, which locations and investment strategies are likely to deliver the best returns?
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