‘Brexit is a buying opportunity’

There is a huge range and number of international investors in the UK, from US pension funds to Asian family offices to Middle Eastern sovereign wealth funds to ultra-high net worth individuals from across the globe.

When the Brexit cloud that is hanging over the UK dissipates, investors will wish they had deployed their capital in the British market when the time was right, delegates heard at Real Asset Media’s European Outlook Briefing which took place in New York last week. 

‘Brexit is a buying opportunity,’ said Alexander Fischbaum, Managing Director, AF Advisory. ‘My advice is look at the underlying factors and don’t get too scared about the noise. The UK is a strong nation that will bounce back.’

Outlook 2019 Europe Panel, New York, February 2019

Political risk will undoubtedly manifest itself over the next two to three years and it will have reverberations across Europe, not just the UK, he said. ‘Even if you don’t want to commit capital in the short term because of the uncertainty, watch the market very closely. It will be a bumpy ride for a while, but it will present very nice opportunities.’

There is a huge range and number of international investors in the UK, from US pension funds to Asian family offices to Middle Eastern sovereign wealth funds to ultra-high net worth individuals from across the globe. But the current uncertainty over Brexit has led some investors to pull back which creates openings for eagle-eyed investors, especially in the core and core plus sectors.

‘London has the Brexit problem, but Asian investors are heavily invested there so they are clearly not afraid,’ said Carsten Loll, Partner, Linklaters.‘Europeans, including Germans, are much more cautious and I tend to share that view. But there are still opportunities to be found in the West End, for example, while I would stay clear of Canary Wharf.’

The UK capital also has an advantage over most other European cities, he said: ‘London is a fantastic city where people want to be. From a lifestyle point of view, somewhere like Frankfurt cannot compare.’

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Briefing: ‘Germany will remain a hot spot’

Europe’s share of global capital dropped: it was above 60% in 2017 but it fell to just over 50% last year.

Germany will remain a great target destination for cross-border capital, a ‘real hot spot’, Robert M.White Jr, Founder & President, Real Capital Analytics, said in his keynote address to Real Asset Media’s European Outlook Briefing in New York last week. 

‘Going forward, what you learn in textbooks is that capital should flow to the greatest spread so if you look at the long-term range of real estate spreads compared to local 10-year Government bonds it clearly says Germany is going to remain a hot spot and a great target destination for cross-border capital,’ he said.

Accessing the market panel, New York, February 2019

Next on the list of popular destinations is the US, which because of strong economic growth compared to most other markets ‘will be a rich target similar to Germany,’ White said. ‘That’s as far as I can make predictions for this coming year, considering how volatile the markets have been’.

America has already shown it has ‘added sparkle’, the stats show, as it is the only geography where megadeals increased in 2018 and investment volumes rose both in the year and in Q4. In all other places investment momentum slowed in Q4 across many markets, he said: ‘Japan was a big surprise with 60% decline, Hong Kong which had been on fire really stumbled and it’s too soon to say if it’s a trend or an aberration, the UK had a really significant negative which we expect to continue and even the Netherlands, which also has been one of the most popular markets in Europe, saw a very weak fourth quarter.’

Europe’s share of global capital dropped:  it was above 60% in 2017 but it fell to just over 50% last year. Asia Pacific was flat but America saw a big spike to over 30%, especially directed to the US, partly due to the fact that ‘Canadians shifted a lot of their capital from Europe back to the US last year,’ White said. ‘Canadians almost doubled their cross-border investments but most of that was directed to the US rather than Europe’.

So looking at cross-border investment volumes North America dominated, with the US increasing by 3% and Canada up 96%, followed by Germany with +30% and the UK +9% while China, South Korea and the Middle East all fell back significantly, particularly China and Hong Kong which recorded a 60% decline.

‘The Chinese have started selling assets and they are close to being net sellers in the US,’ White said. ‘Many of our clients are certainly looking at old assets held by Chinese investors as potential acquisition targets’.

At a global level cross-border investments continue to rise and have reached a 32% share. London, despite Brexit and other challenges, remains the n1 city in the world for cross-border players, ahead of New York City, Paris, Amsterdam, Los Angeles Metro and Hong Kong.

‘Each of the top ten cities had at least $5 bn of cross-border acquisitions in the past year and looking at the list it’s actually a well distributed group of markets, with four cities in Europe, three in the US and three in Asia’. 

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On-demand warehousing will become ‘the coworking for logistics’

On-demand warehousing, the logistics equivalent of office coworking, is anticipated to accelerate in prevalence over the next five years, according to more than six out of 10 respondents to Aberdeen Standard Life’s wide-ranging survey on the state of the European logistics market.

According to the survey, conducted by Transport Intelligence, 62.3% of respondents said they anticipate that operators will increasingly turn to on-demand warehousing to better balance the peaks and troughs of demand, driven by fluctuations in consumer-driven e-commerce.

For growing online retailers, the expansion of fulfilment capacity to accommodate demand is a precarious balance: too little limits potential which could backfire on consumer-facing brands if orders are unfulfilled but too much could be profit erosive. Intrinsically, large-scale expansion is expensive which tends to push operators towards the conservative end of the spectrum.

Aberdeen Standard Investments’ research team, led by Lars Flaoyen, writes:

“Warehousing is rarely operated at full capacity. Not only is the under-utilised space not visible to other customers but, in any case, there is no traditional method of making it accessible. The modern supply chain is designed to be agile and flexible, dealing effectively with risks such as falling/increasing demand, trade wars and natural disasters.”

Stowga is an an example of how the market may support on-demand warehousing. It is an online business-to-business digital marketplace that allows warehouses with spare capacity to be matched with businesses looking for short-term storage. Stowga, backed by propetch investors including CBRE, is a kind of Airbnb for on-demand warehousing, with more than 4,000 warehouses in 10 countries listed on its platform. The platform is an example of how technology can simplify through bringing together counterparties to transact directly.

Shared warehouse agreements provide companies with an opportunity to reduce their logistics costs by as much as 12 to 15%, according to the World Economic Forum.

Aberdeen Standard Investments’ research team, led by Lars Flaoyen, writes:

“Much of the cost saving will come from rental and property cost reduction, further reinforcing the importance of investing in well-located units close to end-consumers.  For landlords, the implications are interesting. Tenants offering some space as flexible warehousing might ensure more stable cash flows through quieter times while allowing them to charge a premium for spare capacity at the busiest times.  However, the more efficient use of space could ultimately reduce the overall need for redundant or under-utilised floor space and this could result in the sector becoming modestly less supply constrained.”

james.wallace@realassetmedia.com

Briefing: Too much choice: Europe ‘is not easy’

A lot of capital is targeting Europe but it is not an easy place to invest and investors need discipline and a clear strategy, experts agreed at Real Asset Media’s European Outlook Briefing which took place in New York last week.

A lot of capital is targeting Europe but it is not an easy place to invest and investors need discipline and a clear strategy, experts agreed at Real Asset Media’s European Outlook Briefing which took place in New York last week. 

‘Europe really is not easy,’ said Carsten Loll, partner, Linklaters. ‘It is becoming more and more difficult to know where to invest, you need local knowledge and boots on the ground, so domestic players have an advantage.’

Accessing the market panel, New York, February 2019

When overseas investors look at Europe, they see a multitude of markets, each with its opportunities but also its drawbacks. The Nordics are stable and attractive, but they are a very small market. The UK has Brexit uncertainty hanging over it, France has had some social unrest, Spain and Italy attract mainly opportunistic investors and Germany has become expensive and competitive.

‘I think it’s easier for Europeans to invest in the US than for Americans to invest in Europe,’ said Adriana De Alcantara, Managing Director, Portfolio Management, Real Estate Americas, Nuveen. ‘There are too many countries with different markets and different regulations, so getting money out of the US into Europe it’s extremely difficult’.

For Europe’s real estate sector complacency is a real danger after a good run that has lasted ten years. Players should keep their eye on the ball and focus on quality.

‘Real estate has been too successful for a decade and I can see the warning signs,’ said Loll. ‘It is like the German car industry before diesel came along, successful but too arrogant. There are too many buildings that are not great or are downright ugly but they still sell. The sector should focus instead on really good products that people really want.’

Realism and discipline are good guides to investing in any country in Europe, said Alexander Fischbaum, Managing Director, AF Advisory: ‘Go to a country that is stable and that you have confidence in, be realistic about what you can buy, have a clear strategy and be very disciplined in implementing that strategy. If you stick to those principles you can make a lot of money in almost any market’.

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‘Investors are hanging on to their assets for longer’

David R Hodes, Managing Partner, Hodes Weill

David R Hodes, Managing Partner, Hodes Weill, tells Real Estate Day that in the old cycle people improved assets and sold them now but now they tend to keep them because re-investment risk is as big a challenge as finding new opportunities

David R Hodes, Managing Partner, Hodes Weill, New York, February 2019

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European logistics: stock shortage and rising demand to sustain rental growth

The twin drivers of a shortage of efficient warehousing stock and rising demand across the European logistics sector is supporting the outlook for continued rental growth, a new survey suggests.

More than two-thirds (68%) of logistics supply chain executives, surveyed on behalf of Aberdeen Standard Investments, claim a shortageof efficient warehousing restricted their growth ambitions to no more than a modest pace.

According to the survey, conducted by Transport Intelligence, 39% of respondents declared that a shortage of efficient warehousing was a barrier to their growth, while a further 35% claim their existing capacity only allows modest growth. 

Significant spare capacity for expansion was reported by just over a quarter of the respondents. Only 40% of those with significant spare capacity were logistics operators, suggesting they are running at a higher capacity than other respondent types, such as manufacturers and retailers.

Furthermore, only 12% of those with “significant” spare capacity were from the e-commerce sector, highlighting that this sector’s growth aspirations outweigh its existing capacity. Finally, more than three-quarters (76%) of supply chain executives, claim their businesshad grown modestly or substantially over the last 12 months.

The shortage of warehouse space is becoming a real issue in some markets. Vacancy rates are typically below 5-6% for good-quality, modern logistics space in most European cities, according to Aberdeen Standard Investments.

Aberdeen Standard Investments’ research team, led by Lars Flaoyen, writes:

“Development levels, on the whole, are still relatively constrained. A lack of good quality and efficient supply is more prominent in urban areas because of the diminishing supply of industrial land, a trend we see strengthening across European cities.

“The ever-widening low emissions zones in major cities and restrictive planning policies exacerbate the problem. This forces logistics to compete with residential and retail, both of which command higher rents. This is likely to restrict logistics facilities in major population centres, ultimately resulting in a limited supply and therefore competitive leasing conditions.

“This supports our view that income from logistics should become more robust, resulting in pockets of stronger rental performance, particularly in urban logistics locations. It is mainly online retailers and their logistics partners that will face a shortage of supply of warehouse space and incur higher property costs overall, so there are risks to this view too.”

At the same time, the three main drivers of logistics demand – trade, manufacturing and consumption – have been growing steadily over the last five to six years, increasing the need for the movement of goods.

Aberdeen Standard Investments’ research team, led by Lars Flaoyen, writes:

“The clear growth message from the survey reveals that stronger rental tension could be emerging. Demand reached a record high in 2017, with 2018 being the second-highest year. Roughly 80% of take-up was satisfied through pre-lets last year, suggesting there is a shortage of suitable standing stock to satisfy demand.”

Transport Intelligence surveyed 123 supply chain executives from 29 European countries between November and December 2018.

Disruption and long-term vision to take advantage of the changes

People are conscious of the rise of China and are trying to understand how they position themselves to take advantages of the opportunities but, at the same time, protect themselves from technology-led disruption.

Christopher Choa sees the market characterized by a great deal of uncertainty, not only local issues such as BREXIT in the UK but issues around trade imbalances embargoes. People are conscious of the rise of China and are trying to understand how they position themselves to take advantages of the opportunities but, at the same time, protect themselves from technology-led disruption. “There’s a part of my business that sees a great deal of defence needed to protect against disruption but also, how to take advantage of the opportunities and the benefits that may accrue if you have a longer-term vision about how you want to grow your company and take advantage of the change”

Christopher Choa, MD, Cities Advisory, AECOM interviewed at the ULI Europe Annual Conference in London, February 2019

Ian Mulcahey, MD, Gensler

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‘On resi there is a lot to learn from Germany’

Keeping your tenants happy means they stay longer and the landlord has less downtime, less capex and in general less expenses.

Andrew Allen, Global Head of Investment Research Real Estate, Aberdeen Standard Investments, tells Real Estate Day that the German rental market is more developed than that of the UK and is good at operational efficiency. Keeping your tenants happy means they stay longer and the landlord has less downtime, less capex and in general less expenses.

Ian Mulcahey, MD, Gensler

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European logistics: headline survey findings on the changing face of the sector

A new wide-ranging survey by Aberdeen Standard Investments and Transport Intelligence into emerging trends within the Europe’s logistics sector.

The findings revealed dramatic shifts in technological influence across the supply chain, a surprising level of engagement in environmental, social and governance (ESG) initiatives, and results that reinforce the structural shift of demand towards the consumer and urban locations.

These trends, Aberdeen Standard Investments observed, create substantial tensions between policy, the environment, competing uses, and the need to satisfy last-mile parcel delivery on a scale never seen before in Europe.

Transport Intelligence surveyed 123 supply chain executives from 29 European countries between November and December 2018. Key findings include:

  • Evolution of the operating environment. 76% reported their logistics businesses had grown in 2018, 42% of them “substantially”, with cyclical and structural factors supporting growth;
  • Supply of warehouse and distribution facilities. 34% state that they do not have enough existing spare capacity to fulfil their growth targets, while 39% of respondents said there was a shortage of efficient space to expand into;
  • Occupiers are adapting to structural changes to risks. Respondents scored “changing technology” and “purchasing habits” as the two biggest risks to the success of their business;
  • “On-demand” warehousing increasingly relevant as technology improves. 62% of respondents believe on-demand warehousing will be increasingly common in the logistics industry;
  • The changing drivers of location. More than 50% of respondents believe the location of their logistics facilities will become a more important factor for consideration over the next five years;
  • The impact of autonomous vehicles on location and design. 60% of respondents see autonomous trucks influencing supply chains in terms of warehouse design or location;
  • Increased focus on labour. Labour is the largest operational cost according to 48% of respondents, supporting a push towards mechanisation, robotics and digitisation, which ultimately affects location;
  • Warehouse requirements and technology focused on efficiency. Automated technology was rated as the most important feature required in a warehouse facility. 25% have invested in warehouse automation, while a further 43% intend to invest in it in the future.;
  • Environmental, social and governance (ESG). 71% stated that their business is undertaking initiatives to reduce or offset environmental effects in their logistics facilities – through choice and not because of immediate necessity; and
  • Brexit. Only 11.3% of respondents believe Brexit will improve business activity, but the message from the survey is not clear-cut.

Tomorrow, we will take a closer look at two of the above major themes: the evolution of the operating environment and supply of warehouse and distribution facilities.

james.wallace@realassetmedia.com

Briefing: Operational efficiency the key to a successful strategy

Wise investors should learn from Germany’s example, get the design of the building and the product right and then prioritise operational efficiency over short-term rental gain.

Student housing and micro-living may be an easy choice for investors who see the supply/demand imbalance, but they are complex sectors to understand and operate well, panellists agreed at Investment Briefings’ European Student Housing & Micro Living panel, which was held in London last week.

The biggest supertrend in the sector is that ‘product matters’, said Samuel Vetrak, CEO of Bonard, formerly known as StudentMarketing: ‘There is an increased demand for amenities and communal areas are very important to ensure full occupancy.’

Panel discussion, Student Housing & Micro Living Investment Briefing, February 2019, London

To be attractive to different kinds of students, the accommodation must be in a convenient and outstanding location, it must have a state of the art building and inside a gym, a games room, bike storage, a cafeteria, laundry room, TV room and other shared facilities that create a sense of community.

If these criteria are not met, international students will stay away, even in places where there is a lot of demand for accommodation. One example is Vienna, said Vetrak: ‘There is a big supply/demand imbalance in the Austrian capital, yet some student housing complexes are not fully occupied because they do not satisfy the criteria.’

Micro Living is dealing with the same issues, said Christian Scheuerl, Managing Director, MPC Microliving Development: ‘Sometimes it is difficult to get small developers to get to grips with what is needed for the product. It must be a home for the tenants, but it must also be investor-ready and allow us to cut down on operating costs.’ 

Wise investors should learn from Germany’s example, get the design of the building and the product right and then prioritise operational efficiency over short-term rental gain, said Andrew Allen, Global Head of Investment Research Real Estate, Aberdeen Standard Investments.

‘In the UK the typical landlord has been chasing rental growth very hard, but what we have learnt from Germany is operational efficiency, which is demonstrably better,’ he said. ‘If you keep your tenants happy they will stay longer, which means less downtime, less capex, less agency and management costs. These efficiency gains maybe haven’t been fully understood by the Brits yet.’ 

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