The opening of the Victoria & Albert Museum six months ago, the first outside London, has changed the face of the city and brought more visitors than forecast
John Alexander, Leader, Dundee City Council, tells Real Estate Day that the opening of the Victoria & Albert Museum six months ago, the first outside London, has changed the face of the city and brought more visitors than forecast as well as economic benefits such as new retail and hotels
Coworking’s rapid expansion has unsurprisingly raised questions over the sustainability of demand, particularly during stressed phases of the economic cycle, as well as concerns over the covenant strength of the operators themselves.
Heaton, analyst in Deutsche Bank’s research team explained in a recent CMBS
the business cycle turns, small tenants will reduce property obligations where
they can – but the landlords cost remain the same.”
While there is clearly a major structural
shift among office occupiers under way, UBS-AM
Real Estate & Private Markets argues there are still some serious
unanswered questions related to the underlying business models of coworking operators.
the model works by the serviced office provider signing long dated lease
commitments with a landlord, and then effectively sub-leasing the space to
companies and individuals on short term contracts. This clearly works well in a
growing economy, but what happens in a downturn? Serviced office operators
typically claim to be recession proof by pointing out that in a downturn
occupier would actually want even more flexibility so are more likely to look
at serviced offices than traditional leases.
is a major flaw in this claim however, which is that the vast majority of
companies now taking space in serviced offices also have traditional leases in
place which won’t necessarily end or break at the right time to give them that
option. To give an example of how this might actually play out – a major bank
takes 500 desks as expansionary space to house a creative team, on a rolling six-month
lease with a serviced office provider. But in two years’ time there is a
significant slowdown and the bank cuts 10% of its workforce.
the environment that is likely to surround the slowdown, the bank would almost
certainly exercise its flexibility with the serviced office lease to take the
creative team back into the empty space in the HQ, and save costs. The serviced
office provider however still has contractual obligations to pay their
landlord, at a rent which will have been fixed during the economic growth era
and therefore above the prevailing market rent at the time. It is potentially a
huge mismatch of liabilities which could have severe consequences for the wider
The positive momentum driving demand for coworking
should not always guarantee success for providers.The discrepancy between credit spreads of certain operators, which
have expanded rapidly, and the lack of a discount on buildings occupied by such
operators, is a noteworthy concern, addsUBS-AM Real Estate & Private Markets.
appears real estate markets are not reflecting risk perceived in the debt
market; in the long term one or the other has to be right.”
A further $2.5 trillion of fresh capital could be invested in real estate by 2020 as private investors increase their exposure
A further $2.5 trillion of fresh capital could be invested in real estate by 2020 as private investors increase their exposure, delegates heard at Real Asset Media’s Emerging Hotspots Investment Briefing, which was held at MIPIM last week
‘Over the next three to five years we will see sources of capital changing from institutional to private wealth,’ said Damian Harrington, Director, Head of EMEA Research, Colliers International.
Family offices, High Net Worth Individuals, foundations and private sector pension funds will become more active in the market. At the moment institutions’ allocation to real estate is 10.4% of a total pot that globally amounts to $165 trillion, but there are no figures for private investments.
‘If private wealth were to match the allocations from institutions, the amount of capital looking at property could hit $2.5 trillion by 2020, so there is a lot more money coming to the market,’ said Harrington. ‘If you put that in the context of the total spent last year, which was $1.5 trillion, then you realise that $2.5 trillion is a big number’.
In order to deploy that huge amount of capital, investors ‘will have to diversify and more across markets, across geographies and across sectors to try and find opportunities wherever they can,’ he said.
Looking at sectors, offices have stayed largely flat while retail started a comeback last year after a period of decline. The real momentum, however, is in logistics, up 89% since 2010, residential (+159%), hotels (+90%) and development sites (+659% off a low base). Investment in residential has so far been highly concentrated in Germany, the UK and the Nordics so there is a lot of potential elsewhere in Europe, Harrington said.
A lot of capital will target cities, following the urbanisation trend and the demand for residential. ‘If we look at cross-border capital going into cities we see that Europe is already very international, attracting investment from all over the world, but over the next few years we will see a lot more capital coming from Asia,’ he said. Cities will offer the most opportunities.
From a global perspective, Europe looks like a good end of cycle yield spread option. ‘If you look at EU sectors relative to Asia and America on a yield spread basis, Europe actually offers the best spreads,’ Harrington said. ‘Particularly European logistics, but also retail and offices. This is going to continue bringing the money in’.
Unprecedented surge in coworking adoption across Germany highlights the ongoing challenges the modern working revolution has brought to bear on the traditional landlords, says Colliers International.
Landlords have never been under such
scrutiny. Tenants want more flexibility, increasingly diverse locations,
heightened service levels and a culture that puts their business needs at the
heart of their real estate choices.
Wolfgang Speer, Head of Office and Occupier Services,
Colliers International, Germany, explains:
has long been one of the more conservative European markets, yet the last three
years has seen an unprecedented surge in coworking spaces throughout the
country. Tenants are themselves more under pressure that they have arguably
ever been due to changing markets and customers habits evolving thanks to wider
trends such as ongoing digitalisation. Property owners are facing ever
increasing demands and competition over what they can provide to their tenants,
which has led them to evolve their proposition or face being left behind
large co-working providers found a gap and have successfully, smartly exploited
it in Germany. Providing tenants with the flexible space they need to operate,
paired with a level of service that one might expect in a hotel has left landlords
who are late adopters scrambling to adapt.”
Colliers says investors are increasingly
working to be more in tune with their end users, tenants. The traditional
relationships between landlords and tenants left some occupiers feeling
Campkin, EMEA head of corporate capital solutions, Colliers International, explains:
of co-working and flexible office space has put an onus on tailoring specific
solutions to each individual tenant. It’s good to see more landlords now
considering tenants as customers, heightening their service levels and efforts
to accommodate a business’ bespoke requirements.
are in an ongoing war to attract the best talent to their businesses and smart
businesses are sweating their building’s capabilities to offer the best
experience to their end users, as well as maximise the value they can create from
their tenancy and covenant strength.
owners and operators succeed when they understand what their guests want. It’s
a similar situation with Landlords and tenants with landlords needing to
provide the right product both from a physical perspective, but also deal
creativity to provide businesses with the right environment to face their own
challenges and requirements.”
PMA estimates that serviced office
providers accounted for 15% of take-up in the UK in 2018 and 11% in the rest of
Europe. This is a phenomenal rise from a sector which just four years ago
accounted for less than 1% of the total market. However, this rapid expansion
has raised questions over the sustainability of demand as well as concerns over
the covenant strength of the operators themselves.
We consider these arguments closer in
In the fast-changing world of e-commerce Amazon’s unquestioned dominance of the market in the UK and Europe could be challenged in the not-too-distant future by Alibaba.
In the fast-changing world of e-commerce Amazon’s unquestioned dominance of the market in the UK and Europe could be challenged in the not-too-distant future by Alibaba, another giant who is poised to expand well beyond China, experts agreed at Real Asset Media’s Two sides of the coin investment briefing, which was held at MIPIM last week.
‘Until now we have said that A stands for Amazon, but if we are sitting here in five years’ time A could well stand for Alibaba’, said Andrew Creighton, Head of Real Estate Continental Europe, Aberdeen Standard Investments.
The Chinese giant would have to adapt its business model to fit the European story, but underestimate them at your peril, said Ingo Steves, Managing Director, Northern Europe, Gazeley: ‘Just to give you an idea, Alibaba sends 750 mln parcels out every 24 hours. The entire German market is 3.2 bn parcels, and Alibaba does that in one day. That kind of business is now coming to Europe. So far they have settled in Brussels, but we hear a lot of rumours about them wanting to expand’.
The UK and Europe are too attractive a market for them to ignore. ‘We know Alibaba are interested in entering the UK and they probably have similar aspirations in Europe,’ said Sally Bruer, Head of Research, Tritax. ‘So far they have done some toe-dipping, taking some space through their third-party logistics providers, but they haven’t dived straight in quite yet’.
It is only a matter of time, she said: ‘There is an aspiration there because they can see the great opportunity. They have been able to innovate in Asia and bring new things to an active market, but it is difficult to assess what impact they would have on the European market, which is fairly diverse and exciting. It remains to be seen what they can contribute, as there is so much going on already in Europe’.
Alibaba’s business model is very different from Amazon’s, pointed out Steves, as ‘they are not real estate-driven but rely on supply chain software. They are also less open and transparent than Amazon’. Alibaba is doing a vertical integration of its business and owning the delivery companies directly.
Secondary shopping centres that cannot renew themselves and offer the experience customers want will become redundant and be repurposed.
UK retail is not in a happy place, but it would be wrong to tar everything with the same brush, panellists agreed at Real Asset Media’s the ‘Two sides of the coin: Retail vs Logistics’ Investment Briefing, which was held at MIPIM in Cannes.
‘We have a huge challenge in the UK’, said Andrew Creighton, Head of Real Estate Continental Europe, Aberdeen Standard Investments. ‘We own a lot of shopping centres like Brent Cross, Wimbledon and Brighton and the value and over-rentedness is scary. The underlying value and the rents that retailers have been prepared to pay prevent the owners from getting a return on that investment to make things happen’.
Change will have to come but it will probably be imposed from the outside rather than coming from within, he said: ‘I think valuation declines will force the issue and force change on the sector’.
Secondary shopping centres that cannot renew themselves and offer the experience customers want will become redundant and be repurposed. But other forms of retail are being successful and click and collect, which relies on the integration between online shopping and physical stores, has been particularly popular in the UK.
When it comes to shopping centres the Australian example could come in useful, said Lachlan Macgillivray, Head of Retail Investment, Australia, Colliers International: ‘Our shopping centres are in a very different position. They are in the middle of big population centres, not in out of town locations, and they are anchored by supermarkets, not department stores’.
The upshot is that customers will visit a major shopping centre that has a $1 bn turnover at least once a week, often more, while in the UK it will be every two to three weeks.
The continuing success of shopping centres in Australia, where footfall continues to increase, is also due to the fact that e-commerce has had some challenges. ‘We don’t have the infrastructure in place to get the same delivery time-frames as the UK and speed of delivery is key’, he said. ‘Habits are also different and 95% of households have at least one car and tend to drive to do their shopping’.
Investment in London commercial property in February was shy of £1 billion across 15 deal in the City of London and the West End, according to new data by Savills.
Figures from Savills shows turnover in the
City of London in February reached £535.9 million across eight deals – the
highest turnover for the month since February 2015 – while £345 million was
transacted in the West End office market across seven deals.
Savills suggests this shows some Brexit resilience,
but nationwide the UK market saw £5 billion in the first two months across all
The first few months of every year tend to
be quiet, but Savills is confident that appetite for London real estate remains.
Overall, since the beginning of the year volumes are down on the long-term
The City sees a total of £647.2 million,
marking a 4% decline on 2018 figures, and 29% down on the long-term average
(£918 million) for the first two months of the year. In the West End, total
turnover for the first two months of the year reached £475 million, in line
with 2018’s performance but down on the long-term average (£1.03 billion).
UK investors account for the largest share
of investment in the City in 2019 (63%), while European buyers account for the
lion’s share (62%) of activity in the West End, says Savills.
Down, head of Central London investment at Savills, said:
the first quarter of any year tends to be quieter, there is undoubtedly a
degree of caution in the market at the moment because of Brexit. However, there
are a number of investors that see this as an opportunity.
“Those deals that are offered to the market still seem to draw in a healthy level of prospective buyers particularly in the development, opportunistic and core plus space. There has been an element of repricing in core assets recently, but marginally so, and where properties have struggled to sell it is more to do with over ambitious pricing expectations from the outset than a lack of interest from buyers. We continue to receive regular fresh enquiries through our overseas offices and assuming we have an acceptable solution to Brexit by the end of March then we expect investors to return with greater desire to transact in the second half of the year.”
Australia’s shopping centres are seeing footfall increase and are experienceing some of the same trends as the UK, such as the growth in food & beverage from 10% to 40% of gross floor space
Struggling European retailers could take a leaf out of Australia’s book. The retail market is buoyant and footfall is up, Lachlan Macgillivray, Head of Retail Investment, Australia, Colliers International, told Real Estate Day at MIPIM.
The two markets have some similarities and some differences.
One key trend has made a difference in both markets: ‘We are seeing a lot of Food & Beverage and entertainment-lead retail development at the moment,’ he said. ‘It is about re-inventing shopping centres, making them more relevant and promoting repeat visits from your catchment area’.
Statistics show the change: ten years ago, the percentage of F&B was 5-10% of gross floor space in shopping centres, while now it is 30-40%, so ‘there has definitely been an evolution’, Macgillivray said. ‘We saw that trend emerging in Asia first, in Singapore and Hong Kong in particular’.
Asia is a good place to learn from, he said, because they are good at re-inventing themselves: ‘They do it better in Asia than anywhere else because they have land constraints and it is worth looking at some of those multi-purpose developments there that have got hotels, office, residential, retail, even hospitals and international universities.’
Another clear trend in shopping centres is for carving up the space into smaller units. Where once there was a big department store, now ‘we bring in mini majors who want smaller portions of space but pay more per square foot than for a big space, they have a high turnover and they bring new customers in who were not coming previously,’ Macgillivray said. ‘It is all about driving repeat visits’.
Catchment sizes is what really makes the difference between the UK market and Australia’s. ‘If you look at a £1 bn turnover shopping centre in the two countries, Westfield London has a catchment area of 3.6 mln people, while Westfield Bondo Australia has the same turnover, but a catchment area of 450,000 people’, he said.
Australian shopping centres are getting a lot more repeat visits from their customers, who are making the trip one or two times a week, rather that once every two or three weeks like in the UK.
Part of the reason is down to inescapable social, cultural and geographical differences. London is urban while Australia has a more suburban landscape, he said, but part of the reason is that shopping centres in Australia are supermarket-anchored, which encourages frequent visits.
Co-existence is the name of the game now, as the binary division between physical retail and e-commerce is long gone
Co-existence is the name of the game now, as the binary division between physical retail and e-commerce is long gone, delegates heard at Real Asset Media’s the ‘Two sides of the coin: Retail vs Logistics’ Investment Briefing, which was held at MIPIM in Cannes.
‘There is a fusion going on,’ said William Kistler, Executive Vice President & Managing Director EMEA, ICSC. ‘We need to think about the collective that we call retail which is a valuable part of the property ecosystem.’
Logistics, the supply chain, traditional stores, showrooms, click and collect, must combine their efforts to respond to customers’ changing demands, said Sally Bruer, Head of Research, Tritax: ‘It is not one or the other but a combination of all of them working together to ensure that everything functions well and delivers what the customers wants at the right time’.
Consumers’ changing demands are shifting the dynamics of retail, but as stores evolve they need the support logistics and a fully-functioning supply chain can provide.
‘I believe it is all about co-existence. Retail has never been more exciting than it is now,’ said Lachlan Macgillivray, Head of Retail Investment, Australia, Colliers International. ‘If retailers get that logistics supply chain right, enhanced with online and in store, they have an ability to be much more profitable.’
Great real estate in the right locations will always present opportunities for flexibility and re-invention, he said.
‘The majority of sales are still done in stores,’ said Bruer. ‘Logistics provides servicing, not just to the online consumer delivering to a home or a locker, because the majority of goods are still going to the stores which need a logistics network’. It is the engine that allows such an increasingly complex machine to work.
Investors and developers should ‘think holistically’ about the positive impact that a retail project can have not just on a neighbourhood but on an entire city, said Kistler. In the past ‘we have sliced real estate into asset classes like offices and resi but now they are coming together again’.
A new urban shopping centre can lead to residential and office development as well as retail, bring jobs to the area and create a community.
‘Physical retail has been at a disadvantage and I think we will see a pushback coming,’ he said. ‘There is an evolution towards omnichannel and click and collect and other things which will help sustain and showcase retail environments, but there is a real challenge ahead. It is a battle for the future’.