Investor interest reawakens

Investors are ready to spend again when restrictions ease, reports Nicol Dynes.

As the Covid-19 pandemic continues, investors are likely to focus on their home markets or adopt a wait-and-see attitude, at least in the short term. But things could change at the beginning of 2021, especially if restrictions on travel are lifted.

“Capital flows from outside Europe have dropped significantly and are down to 2014 levels,” says Doris Pittlinger, managing director, fund management Europe, at Invesco Real Estate. “It’s mainly European investors that are active in the market now, but we are seeing some careful interest coming from the US, looking at investing in Q1 2021.”

“There is a pause among international investors because of travel restrictions and practical hurdles that need to be overcome,” adds Claus Thomas, CEO of BNP Paribas Real Estate Investment Management. “But there’s appetite out there, returns are still good and people are interested in looking at potential opportunities.”

Over the medium term the recession will have a harder and more significant impact than the health crisis, he adds.

“Everyone still supports real estate investments, but everything is harder and restrictions on travel are the biggest logistical barrier,” says James Farmer, director, acquisitions, at Europa Capital. “We are active in the market because we are lucky to have partners on the ground in every country we operate in.”

UK private equity firm Maven Capital Partners and Hong Kong-based property investment manager IP Investment Management are in partnership to develop Manchester’s first Hampton by Hilton, a 221-room, nine-storey hotel on the city’s Rochdale Road

The lack of foreign competitors presents an opportunity for local investors to step in, however. “The market is not as busy as it was last year, when we were battling South Korean or US capital for every asset,” says Farmer. “So we try to take advantage of that.”

Many investors are wary of the UK because of the combination of Covid-related economic slowdown and Brexit uncertainty, while Germany still seems to attract foreign capital.

“Germany seems to be in a better position, with international as well as domestic capital looking at assets, which makes for a very competitive environment,” says Thomas. “The market has picked up considerably, especially the core segment, and prices are holding up.”

However, transaction volumes do not reflect the way the market has changed and become skewed.

“Looking at the figures Germany and Denmark are the two big winners in Europe, with the highest capital flows, but that masks the fact that we’ve had a few huge transactions but not that many smaller transactions,” says Pittlinger. “You have to look at context. But looking ahead, the wall of money is still there so there will be a lot more investment in real estate.” 

Invesco Real Estate has invested in Paris high street retail – “It’s resilient and it will come back”, says Doris Pittlinger (Image: Adobe Stock/Alliance)

The crisis has forced most investors to reassess their allocations in 2020. Logistics has been the clear winner, but some have made more surprising choices.

“The pandemic has changed things and our pie chart looks different now,” says Farmer. “We’re usually big investors in offices, around 35-50%, but we’re likely to invest less in future. Retail is off the menu completely, but we will invest more in resi and logistics.”

Risk diversification

Risk diversification is the priority for many, for others it is making contrarian choices with an eye to medium-to-long-term developments.

“We haven’t changed our allocation because of the crisis, we like the same things and are wary of the same things as before,” says Pittlinger. “Logistics is in such demand that it’s difficult to make money out of it, but we will increase our allocation to residential, which we call creative living: anything with a bed in it.”

There are also opportunities in sectors that many stay clear of, she adds. “This year we’ve invested a lot in Paris high street retail, because it’s resilient and it will come back. We believe in the future of travel and the joy of shopping in Europe’s capital cities, but we stay away from shopping centres, because they need a lot of investment that eats away at your returns.”

‘The wall of money is still there so there will be a lot more investment in real estate.’

Doris Pittlinger, Invesco Real Estate

Leisure & hospitality is another sector that has been battered by the crisis, but it is now seeing some activity. “Capital is being raised in the market for leisure & hospitality opportunities that will come up in 2021, because people can see the recovery coming,” says Pittlinger. “As owners and landlords we need to come to the table, we can’t just watch people become insolvent.” 

It is likely to be a case of survival of the fittest, however, as only the best hotel operators will weather the storm.

“Travel is a megatrend that will thrive again once the current difficulties have been overcome,” says Thomas. “We recently bought a hotel in Munich and we’re convinced we will not lose money on it. We see it as a good long-term investment.” 

Europa Capital exited its last hotel position in December 2019, says Farmer: “It was well-timed. But I agree that the medium-to-long-term fundamentals of the sector are strong.”