‘Strong fundamentals behind renewal of investors’ interest in Spain’

Strong economic fundamentals are at the root of investors’ renewed love affair with Spain

Strong economic fundamentals are at the root of investors’ renewed love affair with Spain, delegates heard at the Iberian Investment Briefing, organised by Iberian Property and Real Asset Media, which was held at the Spanish Embassy in London recently.

‘The renewal of investors’ interest in Spain has been remarkable and shows no signs of faltering, while economic growth has been accelerating,’ said María Jesús Fernández, Executive Director, ICEX – Invest in Spain.

Spain’s economic growth is well above that of the Eurozone: GDP grew by 2.6% in 2018, against a Eurozone average of 1.8%, while the forecast for this year is +2.2% for Spain and +1.3% for the Euro countries as a whole. Spain’s strong economy has created 2.5 million jobs since 2014 and there has been a current account surplus for six years in a row. 

Last year foreign direct investment rose to nearly €53 bln, a record increase of 31.6% on 2017’s €40 bln  and the first time ever that FDI flows had broken through the €50 bln barrier. Spain is now the second largest recipient of greenfield investment in Europe after the UK and the 5thamong developed economies in the world after the US, the UK, the Netherlands and Australia.

Investments in real estate were over €10 bln last year, and property, logistics and tourism combined accounted for over €25 bln or half of total FDI. 

‘Real Estate certainly is one of the most attractive sectors and last year accounted for over €20 bln of capex, 61% of which came from foreign capital, mainly from North America, the UK and France,’ said Fernández. ‘Companies like Cerberus, Lone star and Blackstone have been very active, but recently we have seen increasing interest by newcomers like Mexico, China and Brazil, as well as by sovereign wealth funds from the Middle East, China and Singapore’.

Confidence is high: all major credit rating agencies have raised Spain’s ratings, and companies that have invested feel they have made the right choice. According to a recent survey conducted by Invest in Spain among over 520 companies present in the country, 93% of respondents said that they are planning to maintain or increase their investment in Spain

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Aviva: The changing role of cities

The role of a city is vastly different to 50 years ago. In a wide-ranging report by Aviva Investors examining the evolution of cities, the long-term insurance investor identifies how the three characteristics that make a city successful have changed entirely.

Many of Europe’s great cities grew up in an era of industrialisation when competition was heavily driven by input costs, writes Aviva Investors’ Chris Urwin, director of research, real assets, and Vivienne Bolla, analyst, real assets research and strategy. They wrote:

Locations benefited from qualities such as a natural harbour, access to a navigable river, proximity to sources of fuel (usually coal) and access to labour, suppliers and consumers. With such qualities, cities enjoyed a durable comparative advantage.

But as global markets opened up, the pace of transportation accelerated, and the cost of communication fell, such qualities no longer provided cities with a competitive edge. Global sourcing rendered the old notion of comparative advantage less relevant.

Yet location matters no less than it did in the past. Today, a city’s success is driven by its ability to facilitate knowledge exchange and information sharing to nurture idea creation. Competitive advantage no longer rests on access to inputs but on making more productive use of inputs and this requires continual innovation.

Aviva Investors says the characteristics that make a city successful have changed entirely. In an era of knowledge capitalism, Aviva Investors says cities need:

1. Talent – cities need deep pools of highly skilled labour to thrive. As the urbanist Richard Florida says, access to talented and creative people is to modern business what access to coal and iron ore was to steel-making. Large agglomerations of highly-skilled people are therefore critical to a city’s prospects.

2. Clusters – established clusters of high value-add economic activities. Being part of a cluster provides companies with easier access to information and technology, while providing efficiencies in sourcing inputs such as labour. This enables a city’s firms to be more productive.

“3. Scale – agglomeration effects are the benefits that arise when firms and people locate near one another. Co-location makes the exchange of goods and ideas easier and cheaper. The larger the agglomeration, the greater the benefits. Indeed, these benefits tend to increase at an exponential rate as cities increase in size. So larger cities are more productive simply because they are larger.”

“Such characteristics are the most important drivers of cities’ success. Of course, in an era of globalisation, cities that have an ability to attract global talent and capital will also benefit from an international profile and global connectivity. An appropriate level of autonomy combined with visionary leadership can also improve a city’s prospects.”

Overall, Aviva has identified 12 European cities that the insurance investor is strategically committed to over the long-term.  These comprise two megacities; three international business hubs; three regional powerhouses; and four tech cities.

Aviva’s analysis continues throughout this week.


Cushman: London office market facing stock shortage and protracted decision making

London’s office market is retaining its global appeal as a destination for investment and occupiers, but the capital remains challenged by low availability, according to the latest Cushman & Wakefield research.

Preliminary data suggests that the availability of office space in central London is now at one of its lowest levels since the EU Referendum in 2016. The vacancy rate of office space in central London at the end of the second quarter was 4.5%, compared to 5% last year.  Consequently, prime rents in several of the capital’s submarkets saw positive growth, with the areas surrounding the traditional core returning the strongest performance.

The prime rent in Clerkenwell is now estimated to be £72.50 per sq ft, 8.2% higher than this time last year. In Shoreditch and SE1, the prime rent is now £70.00 per sq ft, indicating growth of 6.1% over the last 12 months.

Although office take-up fell back to 2.3 million sq ft in the second quarter, Cushman & Wakefield anticipates a recovery in activity in the second half of the year, with 3.4 million sq ft currently under offer.

Alistair Brown, Head of London markets at Cushman & Wakefield, explains:

“Falling supply levels are limiting options for prospective occupiers, which is driving office rents upwards. In addition, the supply pipeline of office space looks unlikely to keep pace with demand, which will continue to place upward pressure on the prime rent going forward.”

Patrick Scanlon, Head of UK Offices Insight at Cushman & Wakefield, added:

“The increase in rental values in the second quarter demonstrates London’s strong fundamentals such as access to talent, best-in-class buildings, and restricted supply, all of which have helped maintain the city’s appeal as a global business hub.”

Investment volumes have remained relatively subdued across Central London with approximately £3.4 billion expected to be transacted in the second quarter of 2019, taking the year to date total to £5.5 billion. This represents a fall of 37% on the volumes seen in the first half of 2018, and has been driven by a distinct lack of supply. Demand however, remains buoyant and there is £2.1 billion currently under offer in 20 deals across London, which is more than double the amount seen this time last year.

The most active investors in H1 2019 have been from North America, representing 35% of all investment to date, closely followed by UK investors representing 32%. This is in sharp contrast to the first half of 2018 where Far Eastern investors accounted for 48% of all investment activity. 

Martin Lay, Co-head of London Capital Markets at Cushman & Wakefield, said:

“Whilst transactions are generally taking longer to get across the line, our recent sales have proved that there remains a significant weight of both domestic and overseas capital looking to enter the London market, which is looking attractively priced against most of the other global gateway cities. Activity however is continuing to be held back by a lack of available opportunities, as reflected by only 14 assets with a total investment volume of £639 million being brought to the market so far in June, compared with £2,724 million in 37 deals this time last year.” 


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Savills: a closer look at the student housing, build to rent and retirement living sectors

The sub-sectors of the UK’s operational real estate – purpose-built student accommodation (PBSA), Build to Rent (BTR) and retirement living (RL) – are at different stages of maturity. Here we take a closer look at Savills analysis of each in turn.

Student housing – at full maturity?

The purpose-built student accommodation (PBSA) sector is the most mature and liquid of the operational real estate markets, worth £51.2 billion today, Savills estimates.

Brexit concerns are weighing on activity. Investors placed £3.1 billion in UK PBSA in 2018, 19% down on 2017, but the price per student bed remains high, at £90,000. Some 35,000 beds are expected to trade this year, with a total value of £3.5 billion.

Total stock levels stand at 640,000 beds, against a total student population which has grown 9.7% over the past five years to around 1,844,500, despite Brexit concerns and competition from apprenticeships. EU students represent only 7% of student numbers, and recent rhetoric on immigration suggests the potential for demand from places such as the USA, China and India could mitigate any fall in EU student demand.

Portfolio consolidation over the past five years means that the sector is dominated by a few specialist players. With parts of the UK PBSA market looking fully supplied, Savills expects to see larger investors turn their attention to less mature markets across mainland Europe, such as Italy, Spain and Portugal, where demand is expected to be fuelled by growing numbers of students choosing to live away from home.

Build to Rent – huge growth potential

Build to rent (BTR) is a much newer sector, with enormous growth potential and many opportunities for new entrants. Currently valued at £9.6 billion, Savills projects it will be worth almost £550 billion at maturity, providing homes for over 1.7 million households.

The current value is less than 1% of the total of privately rented housing in the UK, which Savills research puts at £1.5 trillion. The majority of this value is owned by individual buy to let landlords, a sector coming under pressure from recent changes to tax and regulations.

Large-scale, institutional investors have only begun to make their mark on the sector over the past few years, Savills says. Despite similarities between PBSA and BTR, relatively few investors are active across both sectors, so there is huge opportunity for crossover, Savills notes. Goldman Sachs, Legal & General, M&G, Greystar, and Aberdeen Standard are among the few to have invested in both.

Peter Allen, Head of Savills Operational Capital Markets, explains:

“Given the similar challenges in development and management, we would expect to see more investors expanding their capabilities to cover the full spectrum of operational residential assets. Student housing investors have the potential to extend their brands into build to rent and use a strong track record in a very established sector to secure favourable finance terms to maximise opportunities in a newer, less mature sector.”

Retirement living – housing an ageing population

Retirement living is also expected to expand rapidly, both as a tenure and asset class. Institutions and REITs are already active in the care home market, but the scale of activity is growing rapidly. A market for retirement housing investment is now emerging, worth £120 billion today.

The bulk of the existing 730,000 retirement housing units across the UK is sheltered housing for social rent, built using grant funding in the 1970s and 80s. Much of the balance is made up of owner-occupied homes, built by specialised housebuilders such as McCarthy & Stone, who have recently started to offer rental options within their developments.

Craig Woollam, Head of Savills Healthcare, explains:

“Rules are still being written across this sector and a more investible market is beginning to emerge. Broad demographics, and an ageing population with vast stores of housing wealth, will underpin demand for well-managed, tailor-made housing options.”

Accounting just for today’s over-75 population, Savills anticipates that the retirement living sector could grow to 1.7 million homes at full maturity. This is an increase of 138% over current stock. Accounting for the tenure of this additional stock, the UK’s retirement housing sector could more than double in value to £260 billion at full maturity.

To put this figure into context, Savills has calculated the value of housing owned and occupied by the over 65s to be more than £1.6 trillion.


JLL: central London H1 investment volumes tumble 39% but leasing remains resilient

Investment in central London offices has fallen an estimated 39% in H1 to £5 billion, compared to the same period last year, according to preliminary JLL data, while leasing remains resilient, at 4.3 million sq ft.

Political uncertainty is continuing to impact investor confidence, which is most acutely felt by institutional investors who are particularly cautious due to uncertainty and understandably, risk, according to JLL’s head of central London capital markets, Julian Sandbach.

The latest research from JLL has indicated that UK investors are largest source of capital in the central London market, accounting for around one-third of all transactions. In the occupational market, the volume of central London office space let in H1 is forecast to reach 4.3m sq ft, only 6% below the 10-year average.

In the first six months of 2019, a number of global operators from all sectors such as Facebook, Glencore, Milbank Tweed, Sony Music, ERBD, Brewin Dolphin and G Research all committed to significant amounts of office space in the capital as they continue to compete for the best quality buildings.

Dan Burn, head of City agency at JLL, explains:

“London has a dwindling supply pipeline and although many cranes can be seen across its skyline a number of these developments have been pre-leased, with broadly 48% of the buildings under construction already let to future occupiers. The squeeze is more acutely felt with 2019 product where 59% of speculative construction is now leased.

“In addition, as occupiers vie for the best space, there is a significant amount of space currently under offer, totalling 3.8m sq ft which we anticipate will push leasing totals for the year towards 10m sq ft, in line with 2018. Looking ahead, the low levels of speculative pipeline combined with the sustained occupier demand, will continue the upward pressure on rental growth, especially as the vacancy rate on brand new buildings is 0.5%.”

“Undoubtedly the health of the leasing markets will provide an underlying level of confidence to investors, albeit much of this capital is sitting on the side-lines awaiting further clarification on Brexit outcomes. In 2018 inward investment was heavily dominated by Korean and Singaporean capital and whilst we have seen Korean investment recede from London this year, due to concerns from the securities firms to sell down their positions, we are yet to see a new international capital source emerge. Instead we have seen enhanced numbers of private individuals and family offices become more active, particularly in the West End, as a result of a reduction in levels of competition and a less crowded market and for the first time in many years UK buyers have been more active than any other group.

“Whilst investment transactional volumes are down, pricing levels have not suffered and yields have remained firm. The ever-decreasing supply pipeline coupled with strong levels of pre-leasing has led to intense competition for development and refurbishment opportunities across the capital. There is strong appetite from REITs, development managers and property companies seeking to reposition assets that will capitalise on the robust occupier demand and low future supply with pricing being driven hard by the strong competition.

“Furthermore, with London prime yields at an average of 4%, the arbitrage available over prime European cities at 3% is plain to see and for best in class assets, strong competition still exists.”


‘Having a Sustainability strategy is now a must’

The important institutional investors will never buy from small asset managers because they lack ESG and they lack transparency and reporting standards

All investors now ask what your sustainability strategy is, delegates heard at Real Asset Media’s European Outlook H2 Investment Briefing, which was held in Frankfurt recently.

Panel of the European Outlook H2 – Frankfurt event: Thomas Veith, Partner Real Estate, PricewaterhouseCoopers, Dr. Carsten Loll, Partner Real Estate, Linklaters, Lars Schnidrig, CEO, Corestate Capital Group, Norman Nathan Gelbart, Partner, Israel German Business Group Leader, Pricewaterhouse Coopers, Tobias Schultheiß, Managing Partner, Blackbird Real Estate

‘Sustainability used to be a discussion but now it’s an absolute must’, said Lars Schnidrig, CEO, Corestate Capital Group. ‘30% of all Co2 emissions are produced by real estate, so what clients want to see is social and environmental governance. They want a clear ESG strategy with targets that are measurable and transparent’. 

This trend started in the Nordics, he said: ‘I think in Germany we are far behind, in all fairness, but we must move quickly because sustainability is the next big thing. The important institutional investors will never buy from small asset managers because they lack ESG and they lack transparency and reporting standards’.

The real estate industry has ignored megatrends and failed to realise that property is no longer just about bricks and mortar, said Carsten Loll, Partner, Real Estate, Linklaters: ‘Things have changed dramatically. The traditional real estate industry must catch up or it will end up like the German car industry, which was in very good shape until Tesla and electric cars showed up’. 

Corestate has spent the last year developing its own sustainability strategy, which is now up on the website, that commits the group to reducing Co2 and waste by 20% by 2025.

‘That is a commitment across our whole portfolio, which means we need systems, IT and processes to measure what is produced and assess progress,’ Schnidrig said. ‘But such a big undertaking is not my ambitious fantasy, it is what the clients want. We are just at the beginning: the ones who do not follow the trend will not be successful in this market’.  

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JLL: coliving trends from across the pond

Global funding in the coliving space has increased by more than 210% annually since 2015, totalling more than US$3.2 billion, according to JLL.

According to JLL, $800 million has been secured in the US, with $283 million in the pipeline which says rising prices in America’s major cities has seen dorm-like communal living become more commonplace well into adulthood, and investors are taking note.

The coliving concept has moved from a small group of apartments with rooms and common areas, to an asset class with amenities that resemble conventional class-A multifamily or student-housing sectors.

David Martin, who co-leads JLL’s U.S. multifamily investment sales platform, explains:

“In a very short period of time, a whole new class of multifamily residential assets entered the market. The sector is receiving a lot of interest. The coliving trend is absolutely tied to affordability in major markets. We see rapid growth in cities that are economically prosperous, particularly gateway and unaffordable markets. There’s a change in the ideology of residents there.”

Although coliving is deemed most suitable for young professionals, operators target a wide demographic. Ideally, tenants are between the ages of 25 and 50 and earn $40,000 to $90,000 a year, according to JLL’s Shawn Lambert, a research analyst. Crucially, they also may not be able to afford their own one-bedroom apartments in America’s increasingly expensive cities.

The lack of affordability is typically more acute for younger generations, the target demographic for coliving operators, JLL says.  Coliving operators are expanding in cities where average rents are far above average incomes. In the U.S., established operators like Common, Ollie, and Medici specialize in denser communities of comparable quality to the kind of class-A multifamily buildings in the same neighbourhoods that can cost up to three times as much.

Tenants have shown they are willing to pay a premium for the convenience of flexible lease terms, furnished units, housekeeping, fitness centres and coworking spaces, all one place and for one price. This means that floorplates are increasingly dense – bedrooms can be as small as 100 square feet, JLL says. And investors are seeing the benefits of the economy of scale.

At the moment, new ground-up coliving development accounts for about 60 percent of the market. That’s expected to rise given recent investments and desirability to build coliving at scale, according to JLL.

As coliving demand rises, “more tested coliving operators can get to the table with major developers in early stages of development and discuss what tenancy, floorplates and returns would look like,” Lambert says. “This is truly a consolidated market for investment grade product,” he says. “Investors are beginning to see coliving as a tested niche subsector, comparable to student housing.”


Savills: UK operational ‘beds’ sector will blossom to £880 billion by full maturity

The market for purpose-built student accommodation (PBSA), Build to Rent (BTR) and retirement living (RL) combined will be worth £880 billion at full maturity, almost four times its current £223 billion valuation, Savills estimates.

Savills – in a new report entitled UK Operational Real Estate: The Sky’s The Limit? – says the market for residential assets owned and operated by large-scale, professional investors is still in its early stages of development in the UK and represents a huge growth opportunity both for investors and developers.

Lawrence Bowles, Savills research analyst, explains:

“Common to all these sectors is the recognition that investing in where people live has great potential for investors, particularly those seeking long term income streams. The fundamental demographic and economic changes supporting these sectors are difficult for investors and developers to ignore. Institutional interest will continue to grow as these asset classes mature and can increasingly demonstrate their track record.”

Many aspects of operational real estate are still emerging, and there are challenges still to face, says Savills, which cites the PBSA sector as the most mature, followed by BTR and then RL.

Lawrence Bowles, Savills research analyst, added:

“As a more mature sector, opportunities for growth in PBSA will likely be by outperforming the competition on brand differentiation, rather than through innovation. Organic growth will largely be limited to growth in the full-time student population, rather than increasing penetration.

“Capacity for new entrants is limited, with firms such as Unite, UPP and GCP REIT maintaining their hold on the majority of the market. We estimate the UK’s PBSA sector is worth just over £50 billion.

“BTR is still evolving. There is plenty of space for new entrants, and the competitive landscape is likely to look very different in ten years’ time. Opportunities for growth in BTR will be driven by developing new stock and delivering innovative new products and tenure structures. While the BTR stock completed to date is worth less than £10 billion, at full maturity, we estimate the BTR sector could grow to £550 billion in today’s values.

“Institutions have invested in UK care homes for many years, but the scale of that activity is growing rapidly. By contrast, retirement housing has been a slower burn, with institutions only recently entering the sector. Retirement living (care home and retirement housing) is, therefore, an emerging sector where many of the rules are still being written.”

“The scale of investment in these asset classes is growing. Whether it’s the recapitalisation of the Chapter student housing portfolio, Goldman Sachs’ £2 billion investment in retirement housing developer Riverstone, or Greystar’s recently launched £2 billion BTR fund, investors are increasingly confident pouring large amounts of capital into operational real estate, often across multiple asset classes.”

Tomorrow, we take a closer look at Savills’ analysis of these three sectors in turn.


‘New regulations in Germany create uncertainty for investors’

The Federal Government and the Berlin authorities in particular are seeking to impose heavy-handed regulations and sending the wrong signal to investors

The Federal Government and the Berlin authorities in particular are seeking to impose heavy-handed regulations and sending the wrong signal to investors, experts agreed at Real Asset Media’s European Outlook H2: Germany Investment Briefing, which was held in Frankfurt this week.  

Panel of the European Outlook H2 – Frankfurt event: Thomas Veith, Partner Real Estate, PricewaterhouseCoopers, Dr. Carsten Loll, Partner Real Estate, Linklaters, Lars Schnidrig, CEO, Corestate Capital Group, Norman Nathan Gelbart, Partner, Israel German Business Group Leader, Pricewaterhouse Coopers, Tobias Schultheiß, Managing Partner, Blackbird Real Estate

‘The big picture is that Germany is and will remain a hot spot for international investors, but there are developments in the residential sector that I find frightening,’ said Norman Nathan Gelbart, Partner, PricewaterhouseCoopers. ‘The Federal Government and Berlin’s State Government are creating an unfriendly atmosphere for investors, spreading rumours about confiscation and rentals freezes and creating a crisis that doesn’t exist’.

The problem the authorities are trying to solve is the lack of affordable housing, but the approach they have chosen is misguided, he said, and freezing rents while leaving construction and labour costs to rise creates an imbalance.

‘National politics can have a big impact on what is happening in the real estate market,’ Gelbart said. ‘Talking about rental freezes sends a message that the Government wants to solve the problem for one group at the expense of another group and also it creates uncertainty for international investors, as they don’t know where this is going to end’. 

In addition the measure does not solve the problem because there are no guarantees that the people who really need affordable housing will get it, as the landlords are not required to rent the rent-controlled apartments to those most in need, he pointed out. 

‘I share the view that what is happening in the residential sector in Berlin is completely mad and very unfriendly to investors’, said Lars Schnidrig, CEO, Corestate Capital Group. ‘Politicians can promise rental caps but at the end of the day they  have to provide land plots in the top 7 or top 15 cities where people cannot afford to live anymore’. 

It is right to address the needs of the many who feel left behind, said Carsten Loll, Partner, Real Estate, Linklaters, but what is happening in Germany is ‘pure political propaganda. The City and the State have land, so if they really want to solve the problem they should get together with developers and build social housing. Taking it away from people who have paid for it is not going to work’. 

We’ll have to wait and see if and when the new regulations will become reality, Loll said, but at least they will not have an impact on the commercial real estate sector.

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