Briefing New York Keynote: ‘You can always find a good asset’

The UK market offers some distinct advantages. Prime office yields in London vary between 3.75% and 4.50 per cent.

In today’s record low yield environment investors must focus on the asset rather than the market or the country, Alexander Fischbaum, Managing Director, AF Advisory, said in his keynote address to Real Asset Media’s European Outlook Briefing in New York last week. 

‘We have private equity firms and fund managers who ask for our services because they don’t know the context, they don’t have feet on the ground, their offices under staffed and so on and we put all this together for them,’ Fischbaum said. ‘In a very competitive market being able to source, structure and pre-analyze deals creates a lot of value’.

The country allocation is decided by the investor, but once that decision has been made ‘we start identifying the deals because at 3-4% yields it is not about the country or the market anymore, but it is all about the asset. Different investors have very different appetites and there will always be a niche for under-managed, difficult assets that have potential.’

Keynote by Alexander Fischbaum , New York, February 2019

AF Advisory, which advises on all real estate sectors, is present in four European markets, he explained: the UK, Germany, the Netherlands and Ireland. The Dutch and the Irish markets, have made dramatic recoveries from the crisis which hit them hard but they are quite small. Ireland in practice means Dublin, Fischbaum said. 

The UK market offers some distinct advantages. Prime office yields in London vary between 3.75% and 4.50 per cent.

‘If we look at the UK it is a very substantial deep market and it offers some rental growth but comparatively attractive yields and that’s the story I am trying to tell today,’ he said. ‘You come from the overall global view and then you look at the yields in that country then you look at the cities that you’re comfortable investing in and then you look at the parts of the city that you think are going to go somewhere and finally you look at the asset, that’s exactly the roads we travel down.’

Germany is an attractive but competitive market in which it can be difficult to make money. 

‘If you look at record low yields in prime offices you understand why capital flows go out of Germany. The German funds are suffering because in their home market of Frankfurt everything is around 3% so they have to go overseas to make money,’ Fischbaum said. ‘You can also borrow at ridiculous rates because the banks are under so much pressure, they have to live with the European Central Bank pushing rates into what I would argue is unsustainable territory’.

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Investment Watch: early 2019 UK investment volumes look weak

Investment activity in the UK has recorded a subdued start in early 2019, with preliminary figures at around £2.3bn, although revisions should see this rise to £3bn, according to Colliers International.

The slow start to the year contrasts sharply with December 2018’s revised monthly investment volumes of £8.5bn, with the bumper final month of the year driven by major investors closing out deals before year end. By contrast, the anticipated circa £3bn (if achieved) is 42% lower year-on-year compared with January 2018’s £5.2bn, according to Colliers International data.

Retail investment stood at just £150m, making it one of the weakest months in a decade. The largest deals in January reported so far include:

  • Davidson Kempner Capital’s £348m purchase of the Ei Property Portfolio, comprising 370 properties including public houses and other commercial property assets;
  • M&G Secured PIF agreed to invest £203m to fund the development of a 620-bed hotel in Paddington; and
  • LaSalle Investment Management bought a £120m mixed-scheme in Milburngate, comprising BTR flats, office space, retail and leisure units and a hotel.

In retail, consumer demand remains subdued and the Bank of England (BoE) commented in its latest agents’ summary of business conditions that “uncertainty related to Brexit and subdued housing market activity weighed on demand”. Latest ONS and KPMG data showed that retail sales improved in January, which should support GDP growth in Q1 2019.

Colliers explains:

“KPMG noted that a disruptive no deal Brexit could see January’s improved fortunes reversed. Consumer confidence is weak and there is a growing concern that business rates will squeeze retailers’ margins to unsustainable levels. Recent research from Altus Group found that around 8,000 properties in the West End are braced for major hikes to their rates bills in 2019. All retail rents have fallen 2.2% y/y in Q4 – the strongest decline since 2010, according to MSCI data.”

In offices, overseas capital accounted for around two-thirds of all investment volumes in January. The sector’s 2019 performance is set to be closely correlated to the nation’s immediate political and economic future, Colliers says. While uncertainty may be prolonged, the global real estate brokerage firm does not envisage any significant rental movements. Headline rents are stable, although net effective rents are still under modest downward pressure.

In the industrial and logistics sector, Colliers says further rental growth in 2019 is likely, although not to the extent seen in 2018, as some rents may be reaching a ceiling. Within the industrial tenant base, there are signs of some sector slowdown, notably in the manufacturing sector. Nonetheless, occupier demand remains strong.

Overall, Colliers International says its market view for the year is unchanged. “Without the Brexit uncertainty, another £50bn of transactions would seem very likely in 2019.”

Briefing Bucharest: ‘Romania’s regional cities offer opportunities’

Bucharest as the capital is the natural first port of call for foreign investors but Romania’s regional cities also offer opportunities.

Bucharest as the capital is the natural first port of call for foreign investors but Romania’s regional cities also offer opportunities, panelists agreed at Real Asset Media’s CEE Outlook briefing, which took place in Bucharest last week.

‘We strongly believe in the regional cities,’ said Laurentiu Lazar, Managing Partner, Romania, Colliers International. ‘We will see many more transactions this year, and bigger tickets than ever before’.

Romania is more in line with Poland than Hungary, he explained: while Budapest has an extremely dominant position and accounts for 60% of the country’s GDP, Bucharest represents 28%, a similar percentage to Warsaw’s 30%. The capital city’s expansion is therefore not stifling growth and opportunities in the so-called secondary cities.

Outlook 2019 CEE panel, Bucharest, February 2019

‘If you look at the numbers to attract investors in the office sector, Iasi has a vacancy rate of less than 1% and Cluj-Napoca of less than 5%, so there is a lot of room to grow,’ said Lazar. 

Romania’s regional cities are dynamic and creating new opportunities. ‘I am a fan of Timisoara and Cluj-Napoca,’ said Lavinia Ioniță Rasmussen, Partner, NNDKP. ‘These cities are competing with Bucharest for the first time not just in sophistication but also in the size of the projects. In Timisoara, for example, we are seeing some mixed-use projects with office, retail and residential that are really challenging the capital in terms of what they offer and how attractive they look’.

The urbanisation trend which is increasing population in the capital will also in time benefit regional cities, said Lazar: ‘Timisoara, Iasi and others will see migration from smaller towns and from the countryside, especially if hubs are formed and jobs created. A lot depends on much-needed infrastructure and roads to be built’.

‘I share everyone’s views on the growth potential of Romania’s regional cities, we firmly believe in the opportunities they present but for us as a value-add, even opportunistic investor, it is all about pricing,’ said Dimitris Raptis, Deputy CEO and CIO, Globalworth. ‘So at the moment if I had to choose between 7% in Krakow or 8% in Cluj-Napoca I would opt for Krakow because it has a population of 1 million so the size, dynamics and liquidity of the market are very different’. 

Liquidity is an issue, said Sergey Koynov, Director Investment & Asset Management, Lion’s Head Investments: ‘Romania’s secondary cities are very active, they have good universities, excellent buildings and a lot of potential, but the markets are not liquid yet so newcomers will focus on Bucharest first and only look for other opportunities at a later stage’.

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Briefing New York: Logistics

The Logistics sector has been investors’ darling but the interest it has attracted may have been too much of a good thing

The Logistics sector has been investors’ darling but the interest it has attracted may have been too much of a good thing, experts agreed at Real Asset Media’s European Outlook Briefing, which took place in New York last week. 

‘A lot of capital has been allocated to logistics,’ said David R. Hodes, Managing Partner, Hodes Weill. ‘I think there is a growing concern among investors not that funding new logistics is a good thing, but that it may be too much too soon. Those awful-looking warehouses in Romania are a bit of a concern. There is a huge amount of demand, so differentiation continues to be a key element.’

Many investors are opting for logistics ‘because they have plenty of offices  and they don’t want retail so they are looking to see what else there is out there,’ he said.

Accessing the market panel, New York, February 2019

Logistics is keeping investors happy because, despite its rapid growth in the last few years, development is still not keeping pace with demand and rents are still increasing. But to avoid problems down the line it is important to be selective and opt for quality assets in the best locations.

‘We are being much more cautious and to us rental growth is key,’ said Adriana De Alcantara, Managing Director, Portfolio Management Real Estate Americas, Nuveen. ‘But the reality is that is still rental growth in industrial and logistics and there is not much supply. Now more than ever you cannot compromise on location’.

Hodes said that his ‘top investment choice would be the best logistics assets in the best locations. My advice is improve your asset and don’t be so quick to sell it because once you have them it’s the devil you know. The asset you know is better than the one may find around the corner’. 

Re-investment is seen as a risk, he said, which is why ‘people tend to hold on to their assets for longer. But if everybody holds on to assets for longer at some point there are going to be fewer things to buy’.

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Macro Watch: muted start to UK economy in 2019

Colliers forecasts annual GDP growth for the UK at between 1.2% to 2.2%, with the variation reflecting outcomes for the economy over whether a deal is struck with the EU or not, while a rise in the UK bank rate in H1 2019 is deemed unlikely.

Oliver Kolodseike, Senior Economist, Colliers International, explains:

“The UK economy was off to an uninspiring start to the year. Business survey data suggested that the economy came to a standstill and political uncertainty continued to dominate the media. There was better news from the ONS. Retail sales volumes increased surprisingly strongly on the back of discounting as inflation moderated.  Wage growth also continued to outstrip inflation by a growing margin, supporting a modest recovery in consumer demand. Nonetheless, economic forecasts for this year remain subdued.  The UK may struggle to match 2018’s growth of 1.4%.”

“Revised investment volume data points to a strong end to 2018, with December’s figure of £8.5bn highlighting the best month since mid-2015. It may be too early to comment on 2019, but preliminary figures suggest that the UK is down on 2018 volumes, but pre-Brexit Day activity levels are promising.  Despite fears of redemption pressure after negative outflows in December, UK institutions are net buyers so far.”

The ‘no deal’ Brexit harbinger which looms over the economy grows ever more real. It is not clear what would be the best means to support the UK economy in the event of a no deal: stimulate demand or boost supply?

The answer depends on which part of the economy is damaged most, according to Capital Economics, which adds thatpolicymakers would face three problems:

  • identifying the greater problem of the likely shocks to both supply and demand;
  • responding to the timing of those shocks, as they would be different (demand, near-term; supply, delayed); and
  • responding to the unfolding economic challenges without being able to identify what is happening in real-time.

Paul Dales, Chief UK Economist at Capital Economics explains:

“Given all this, to avoid doing the wrong thing it may seem that policymakers should do nothing!  Our view is that as the decline in demand would last longer than the reduction in supply, the initial policy response to a ‘no deal’ Brexit should focus on stimulating demand. And when policymakers are unsure in the first few weeks and months, it makes sense to lean towards looser policy rather tighter policy.

“At a time when the reputations of policymakers will be on the line and after they have persistently warned about the perils of a ‘no deal’ Brexit, it would be very brave for them to do nothing or even tighten policy.

“That’s why if there is a no deal Brexit, we expect the Bank of England to cut interest rates from 0.75% to 0.25% and the Chancellor to implement a discretionary loosening in fiscal policy worth about 0.5% of GDP.”

Briefing Bucharest: ‘A broader range of investors interested in Romania’

Romania’s real estate market is attracting an increasing number and a greater diversity of investors.

Romania’s real estate market is attracting an increasing number and a greater diversity of investors, delegates heard at Real Asset Media’s CEE Outlook Briefing, which was held in Bucharest last week.

‘There is a real vibe here,’ said Laurentiu Lazar, Managing Partner, Romania, Colliers International. ‘I see newcomers arriving, I see a lot of investors interested in what we have on the market.’

Outlook 2019 CEE panel, Bucharest, February 2019

In addition to South African capital which is still coming in there is ‘an increase in investments from Israel and Austria, both from established players and new entrants to the market,’ said Lavinia Ioniță Rasmussen, Partner, NNDKP. ‘Western European capital is still under-represented, as some investors were looking at Romania but did not manage to transact.’

Private equity is still driving transactions in Romania, but as more assets come to the market institutions’ interest will be sparked. ‘Product availability was a real issue, but now there are core products in the market. There are some mandates, on the seller side we see an aggregation strategy, so it will be interesting to see how investors react to this,’ she said.

‘Romania has a great potential, but there are no Germans yet,’ said David Hay, Partner, ADD Value Management. ‘We don’t see the institutional investors you have in Poland or even Hungary.’

CEE cross-border capital and domestic investors are also playing a bigger role in the market, which is a healthy development, panellists agreed. 

‘CEE capital has been increasing,’ said Lazar. ‘We don’t have the Hungarian REITs here but Czech and Slovak funds have been pretty active.’

Domestic investors have also stuck their heads above the parapet. Last year The Bridge office complex in Bucharest was sold for around 200 mln euros to the local Dedeman Group belonging to the Paval brothers, Romania’s largest employer. 

‘The Bridge was a very interesting development because it was the first time that we have seen a domestic player working towards a core strategy,’ said Rasmussen. 

But ‘the real game-changer would be to have institutional domestic capital in Romania,’ said Dimitris Raptis, Deputy CEO and CIO, Globalworth. ‘Unless there are changes in domestic legislation across the region to encourage pure institutional players and to allow the establishment and development of REITs then we cannot really talk about substantial domestic demand’.

There are legal restrictions in Romania, Rasmussen explained, as local institutions cannot invest in real estate and this makes a noticeable difference compared to the Czech Republic where one-third of investment is done by local institutions.’

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Briefing New York: Beware the ‘unknown risks’ of the new economy

Technology is a great opportunity but also a risk, so investors must be on their guard

Technology is a great opportunity but also a risk, so investors must be on their guard, delegates heard at Real Asset Media’s European Outlook Briefing, which took place in New York last week. 

‘The real risk in the market right now is the general belief that technology is going to somehow lift values, operationally and financially,’ said David R.Hodes, Managing Partner, Hodes Weill. ‘Investors are really attuned to the known risks, but what I have observed is that if you throw a technology wrapper around a more traditional real estate investment, then a lot of risk gets waved through. A new economy wrapper may hide some of the unknown risks, so investors have to be careful.’

Accessing the market panel, New York, February 2019

Institutional investors are generally very aware of risk, which ensures that ‘wherever we are in the cycle, we are not in a bad place,’ said Robert M.White Jr, Founder & President, Real Capital Analytics. ‘But I agree that all proptech spaces present an element of risk. If there is a bubble coming, it may well be there’.

In general investors are now more risk-averse, said Hodes. ‘There continues to be a pretty wide range of what investors are prepared to do, so there is still some money out there for highly opportunistic platform transactions, but I would say not a lot. The deepest vein of capital is for assets that are demographically driven’.

These can range from ‘regular apartments and housing, as there is a shortage everywhere, or more specific and nuanced asset classes like student accommodation, senior housing, co-living and everything in between.’

There is less risk in the market also because banks have changed their behaviour as a result of the last crisis, said Alexander Fischbaum, Managing Director, AF Advisory: ‘It has been a positive effect of regulation. The lender universe creates a lot of discipline in the investment decision simply by not lending money. In a downturn, this will help contain the damage.’

However, an awareness of risk should not become a paralysing force, he said: ‘If you are really, really prudent then you are never going to buy anything.’

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Brexit ‘no deal’ risk spikes investors’ jitters

The UK’s failure, to date, to agree its exit from the EU is causing angst amongst investors either seeking to sell or acquire assets, warns Cushman & Wakefield.

The global real estate brokerage firm said baseline predictions suggest weak or negligible economic growth for several quarters in the event of a no-deal Brexit, with some forecasters predicting that the UK will enter into a recession. The wide variation in forecasts underlines the uncertainty in the market, Cushman added.

Elizabeth Troni, head of EMEA Research and Insight at Cushman& Wakefield explains:

“Growing prospects of no deal and a weaker economic outlook have continued to send equity markets lower, with UK REITs falling more than the wider market. With the exception of logistics and alternative sectors, most REITs trade as significant discounts to NAV. Brexit and political uncertainties has led to gilt yields falling from 1.57% to 1.28% over the quarter.

“Five-year swaps also fell over the quarter as prospects of a hard Brexit imply rates will remain lower for longer. Whilst lower rates may benefit investors, the most recent Bank of England credit conditions survey showed historic and forward-looking indicators were sharply negative in Q4 2018 pointing to a reduction in the availability of credit and expectation that levels of trading will remain weak in the near term.”

Negative sentiment has impacted inflows into funds. In the year following the vote to leave a net £1.5bn was withdrawn from funds, according to the Investment Association. Since then, less than a net £100m has been added. Whilst funds are holding positive cash reserves, any spike in outflows could place pressure on funds to sell.

Cushman added that a gap between buyer and seller expectations on pricing has emerged amid continued uncertainty, which is causing deals to take longer to close. Many investors are unwilling to sell at lower prices and instead hold off from bringing assets to the market, despite active demand. Pricing is expected to stabilise with softening in some segments, according to Cushman, as activity is expected to remain weak in the first half of 2019 with some upside if news flow on Brexit improves.

Will Robson, global head of real estate research at MSCI, said:

Although real estate investors have historically focused on their domestic markets, investors are continuing their gradual shift away from this home bias. Many real estate investors who have diversified globally are encountering geopolitical risk, however: 2018 was a year of political discord in both developed and emerging markets, with continued uncertainty in the UK arising from the Brexit referendum, the nationwide protest movement in France, the longest government shutdown in U.S. history and ongoing U.S.-China trade tensions.

“The increasingly international nature of real estate capital markets means that investors may not be able to escape these global risks. Global Gateway Cities are particularly exposed to such capital flows. In this context, we anticipate that political uncertainty will likely remain a top risk for real estate investors in 2019.”

Briefing: Germany still a magnet for investors

Investors with a short to medium-term horizons should take heed, but investors with a long-term horizon can invest with confidence because Berlin has a great potential

Germany is still a magnet for investors despite high prices and scarce product, delegates heard at Real Asset Media’s European Outlook Briefing, which took place in New York last week. 

‘Germany has become so expensive that it is crazy,’ said Carsten Loll, Partner, Linklaters. ‘And even if the investor is willing to accept those prices, there is no product to buy. Despite this, there is still huge interest in Germany from foreign investors.’

Outlook 2019 Europe Panel, New York, February 2019

Despite the recent economic slowdown Germany is seen as a safe haven mainly because, as Loll put it, ‘its politics are so boring and they have no impact on the market’.

There are some concerns that Berlin has become excessively popular with foreign investors and that its star, which has risen so fast, could crash and burn. ‘I don’t see any German companies moving there, no bank has moved there,’ Loll said. ‘That would be a real game-changer for Germany as well as for CEE, because if you look at the map Berlin is closer to Warsaw than it is to Brussels.’

Investors should be cautious, agreed Guillaume Turcas, Managing Partner, Faro Capital: ‘Berlin is a great city, but if you look at the office tenants they are Zalando or WeWork and you think that if the downturn comes then you are not going to get the rent paid by these guys’.

Investors with a short to medium-term horizons should take heed, but investors with a long-term horizon can invest with confidence because the city has a great potential, Loll said.

‘Berlin is the only German city with the capacity to become a London or a Paris over the long term,’ he said. ‘It is not there yet, not by a long way, but it is changing fast and moving in the right direction.’ On the plus side, ‘it is the most international city in Germany, everyone speaks English, there is a strong tech sector, it has a great vibe and a lot of potential.’

On the minus side, ‘rents are high and getting higher, there is a lack of space, although there is some development coming. So I would be sceptical about the next five years, but beyond that Berlin could really work’.

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Briefing: ‘Offices are becoming more like hotels’

Location is becoming increasingly crucial, because people want to be in city centres and providing good service is also key.

Flexibility has become a buzzword but investors must tread carefully in the co-working space, experts agreed at Real Asset Media’s European Outlook Briefing, which took place in New York last week. 

‘There is a lot of co-working popping up but there are also a lot of smaller players going out of business all the time,’ said James Duong, head of business development, Spaceflow. ‘That is why it is important to know the market and have accurate information and data on the consumers’.

Accessing the market panel, New York, February 2019

The sector’s rapid growth has led to an oversupply of operators, ‘some good and some less good,’ Alexander Fischbaum, Managing Director, AF Advisory, said. ‘As soon as the economy turns, there will be consolidation.’

Flexibility is also more expensive, he pointed out: ‘It will cost you more to fit the office out, so it needs a higher investment, and financing will also be more difficult because a lot of banks will say no so your costs will go up.’

There is a cost to flexibility but ‘it is better than being locked in a ten-year contract, because in the end you will make savings,’ said Guillaume Turcas, Managing Partner, Faro Capital. There is no turning back, as tenants now demand flexibility.

Contrary to what most people assume, he said, ‘the main tenants for co-working are not start-ups or young tech guys, but 60% are big corporates that are seeking to attract the best talent from universities and they know that they wouldn’t want to be in some campus miles from the city in the middle of nowhere.’ 

Location is becoming increasingly crucial, because people want to be in city centres and providing good service is also key. Investors must keep up to date with evolving trends, such as offices ‘drifting into hotels,’ Turcas said. ‘There is change coming, and investors must be careful in choosing not just their tenants but also their operators, just like in a hotel’.

Social interaction is what is really driving and sustaining the co-working phenomenon, Duong said: ‘You must create a community. In order to build stickiness, you must really curate the experience within the building, but also think beyond the building to the block and the neighbourhood. It is always work in progress’.  

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