Regional riches: Europe’s non-capital cities are drawing in ever-greater investment

Investment into non-capital European cities has spiked in the first half of 2019, to reach 43% of all cross-border investment, according to Savills, including in cities such as Stockholm, Manchester and Lyon.

Investors are attracted to the extra yield for often marginally increased risk and often better growth potential. Eri Mitsostergiou, European research director at Savills, says the trend towards non-capital cities has been a decade in the making:  

“The share of real estate investment activity in non-capital cities has been a trend that has taken a few years to catch on in some countries. Turning the clock back to 2009 and it was clear that capital cities were still the order of the day with the likes of London, Paris, and Madrid catching the attention of investors from across the globe.

“Coming back to the present day however and there is a change in the air. Investment into non-capital cities which, at the end of 2018 sat at 36% (in line with the long-term average), has sprung up to 43% according to figures from Savills recorded at the end of H1 2019. Looking at where this investment is going and there are certainly some countries that stand out from the rest.

“France, whose share of regional investment has stood at an average of 16% in the last five years, has seen investment outside of Paris jump to 28%€ – a rise of 77%. A lack of stock in Paris and its outskirts as well as a compression of yields (now at 3% in the offices market in the heart of the capital) has meant investors are looking further afield for their returns. Areas such as Marseille, Bordeaux and Lille have become increasingly popular with investment levels standing at €662m, €263m and €255m respectively in 2018 and already on track to have an equally successful 2019 with Lille already boasting €456m at the end of H1 2019. “

There is a similar pattern in the UK where investment into the regions now stands at 55% compared to the five-year average of 35%. Standout places such as Edinburgh, Glasgow and Leeds have seen high investment volumes already in H1 2019 (£483m, £451m and £280m) in line with the year before.

Like France, this is the result of high competition for core/core plus product in the capital and record low yields. Likewise in Spain, this figure has jumped from 53% to 65% as investors turn to the likes of Seville, Bilbao, Valencia and Murcia. Savills Aguirre Newman recently announced its third office in Spain in Valencia in response to growing client demand across a diverse range of asset classes.

So, what next? Mitsostergiou explains:

“We believe that secondary cities will remain on investors’ radars (especially the ones with core+/value add or opportunistic strategies), as pricing and activity in the core segment remains extremely competitive. Several of these secondary cities are also supported by positive economic fundamentals and offer a good quality of life at a lower cost.

“According to Oxford Economics five out of the top ten cities with the strongest office-based employment growth forecasts for the next five years are secondary cities including Manchester (2nd), Lyon (4th), Malaga (5th), Gothenburg (8th), Malmo (9th). What remains to be seen is whether there will be even more cities joining them as investors look beyond traditional prime CBD opportunities.”

Patrizia: unlevered European residential annual returns to average up to 6.5% over the next five years

Total unlevered annual returns across the European residential market of between 5% to 6.5% are expected over the next five years, forecasts Patrizia, of which 2.5% to 3.5% is expected to be income.

Patrizia emphasis the defensive qualities of residential asset class amid protracted geopolitical volatility and also argues that the trend of urbanisation, driving the sectors, strength, is here to stay.

In the absence of a Europe-wide professional benchmark index, Patrizia has undertaken its own bespoke analysis of the European rental cycle data using online portals and other market sources.

Patrizia’s research shows that since the millennium, rental income has remained on an upward trajectory and displayed low volatility throughout the global financial crisis (GFC), underpinning the fact that the multi-family asset class remains a stabiliser for any portfolio.

Patrizia’s key residential market insights include:

  • Demand for residential investment remains strong with investment volumes growing from €5 billion in 2009 to €50.8 billion in 2018;
  • Downside protection from residential investments can be seen when comparing the residential income return post-GFC with the corresponding numbers for offices and retail;
  • German investors are the most active players across the European residential market followed by Nordic players; German and Nordic investors are investing €15.1 billion outside of their domestic markets on an annual basis;
  • Cross-border capital targeting European residential, particularly in Spain and Southern Europe, is dominated by US and Canadian investors mostly seeking M&A deals;
  • Luxembourg, Belgium, Sweden and Germany are dominated by domestic investors, whilst a blend of domestic and international investors is active in the Netherlands, France, Finland and the UK; by contrast, international capital constitutes most of the investment in Denmark, Spain and Austria.

Dr Marcus Cieleback, PATRIZIA’s Chief Economist and the author of the study, explains:

“The trend of urbanisation is here to stay, with population growth and, as a result, future housing demand surpassing macroeconomic or political volatility. Our latest European residential research demonstrates that multi-family assets continue to offer institutional investors an attractive investment product.”

“Many cities are struggling to meet the challenges of urbanisation with some governments responding with rent limits. However, history teaches us that this can negatively impact the quality of stock and, ultimately, the supply of rental housing. Despite this, we expect residential investments to remain high on the radar of institutional investors as an asset class that offers cash-flow stability and diversification.”

“Liquidity across many of Europe’s major urban areas has increased demonstrably since 2009, reflecting the maturing nature of this asset class and the vast number of opportunities available to investors. Sophisticated demographic analysis shows that the investible market for residential, at 25% of the European territory is quite significant. And so with such an opportunity, expertise and experience are absolutely critical to being able to identify institutional, quality products.”

Brexit ‘the cream on top’ for Germany

Even now that the economy is slowing down, investors do not doubt Germanys resilience or stability.

Brexit is just the ‘cream on top’ as there are other drivers behind Germany’s rising appeal in investors’ eyes, experts agreed at Real Asset Media’s Germany Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

‘Brexit has been an advantage for Germany and has led directly to an increase in demand and in prices, but it is just the cream on top,’ said Rainer Schorr, Founder & Owner, PRS Family Trust. ‘There are other factors at play, notably low interest rates and the safety issue. For pension funds and family offices all over the world Germany is a safe haven, not just in Europe but on earth. Their number one objective is capital preservation’.

Even now that the economy is slowing down, investors do not doubt its resilience or stability.

‘Stability used to be boring but at a time of insecurity it becomes an important asset,’ said Sven Henkes, CEO, ZIEGERT Bank und Immobilienconsulting. ‘Add to that a transparent market, great liquidity, clear regulations so that investors know exactly what they can and they cannot do, and you get the current situation where supply cannot keep up with demand and prices keep rising.

The residential sector is a safe haven within the safe haven, he said, because of the supply/demand gap, particularly in Germany’s main cities.

‘We see a very positive future for the residential sector in Germany,’ said Henkes. ‘Our new report focuses on Germany’s top 8 cities and it shows they are all developing strongly and growing faster than the rest of the country’. 

International investors’ interest is such that sometimes domestic capital chooses to take a step back. ‘In Germany often local investors will not compete with foreign investors,’ said Tobias Schulteiß, Managing Partner, Blackbird Real Estate. ‘The locals know the issues and the problems and they don’t want to pay too high a price, but foreign investors want to be in Germany at all costs and they are prepared to pay’.

They tend to stick to the main cities they know, but ‘in Germany there are many regional cities they have never heard of that actually deliver better returns,’ he said.

Savills: alternative investment volumes reflect almost 30% of YTD UK volumes

The proportion of investment volumes made up by alternatives amounted to 28% of the £29.4 billion, or £8.3 billion, invested into UK commercial real estate this year, according to Savills.

Savills says the increased appetite for the alternative sector reflects investors search for long-term, stable income streams supported by structural demand drivers, against a backdrop of political uncertainty and a maturing property cycle. A total of £8.3 billion has been invested into alternatives this year including PRS and student housing, Savills data shows.

Compared to other asset classes, London offices has recorded £6.4 billion of investment, while UK industrial stands at £3.9 billion and UK retail £3.1 billion, which serves to underline the mainstream credentials of the often-dubbed ‘alternative’ sector.

Savills says domestic investors have accounted for the lion’s share of investment into alternatives notes the firm, with just under £5 billion spent.

James Gulliford, joint head of investment at Savills, explains:

“Alternatives are rapidly becoming Conventionals as political uncertainty and Brexit continue to delay decision making in traditional markets. In response, investors are turning to assets with operating models that have both perceived structural support and more stable income prospects.”

The growth in the alternatives sector has also been supported by increased institutionalisation – and maturity – of the popular asset class, supported by ever-greater reams of data and analysis which supports due diligence, risk monitoring, relative value analysis and performance measurement.

There are two clear pools of capital chasing the sector: long-term liability-matching capital of pension funds and insurance companies, and private equity which are chasing the scale through building platforms – across the ‘beds and sheds’ sectors – for eventual exit to natural long-term owners and through IPOs.

Oxane Partners: real estate finance sector is primed for digital transformation, survey reveals

Approximately half the UK and European real estate debt industry is still reliant on Microsoft Excel for their work processes, despite awareness on its diminishing utility, a survey by Oxane Partners reveals.

Oxane Partners, a leading technology-driven solutions provider to alternative investments industry, has released its Real Estate Finance Technology Report 2019 which reveals that real estate debt investors in the UK and Europe are still evolving in digital maturity and technology adoption but there are good indicators that point to near-term, far-reaching progress and that the sector is primed for digitalisation.

In the report, Oxane Partners explored the digital ecosystems, awareness mapping, priorities and drivers for technology adoption that is underway in real estate finance. Oxane Partners surveyed 75 senior real estate debt professionals across the UK and continental Europe and found that while Microsoft Excel is still the mainstay with the majority relying on manual processes, the respondents tellingly admit that Excel has outlived its utility.

Kanav Kalia, Director at Oxane Partners, explains:

“The rise of real estate debt as an attractive investment option and the expanding universe of non-bank lenders means increased competition in the market which is driving the need for efficiencies in evaluating opportunities, deploying capital and managing investments. To address these challenges, we have seen start-up debt funds as well as large institutional managers inclining towards digitalisation to meet rising expectations of investors as well as to stay competitive.”

The survey reveals there is high awareness of technology solutions as well as consistency amongst respondents on solutions most valuable to them. Most respondents cite data aggregation, data management, and analytics – the foundation of all modern technology platforms as their top most priorities.

The responses reflect that the industry has begun contemplating about technology solutions more seriously and with rising expectations around compliance, transparency and reporting, is set to embark on its journey of digitalisation.

Vishal Soni, co-founding partner at Oxane Partners, explains:

“We have seen first-hand how firms are able to completely recalibrate their strategic and operational priorities and drive better performance with the use of technology. We believe the real estate debt industry is approaching an inflexion point and expect significant digital maturation over the coming 24-36 months.

“This will be driven by three intertwined forces – increased technology requirements of real estate debt professionals, increased transparency driven by continued institutionalisation of real estate debt as an asset class and a rapidly rising opportunity cost of simply maintaining the status quo. The challenge for technology solution providers is to build platforms which allow easy integration with existing systems and are flexible enough to host complex bespoke real estate debt transactions.”

Other key findings from the survey include:

  • Digital maturity remains low across the board: Over half the respondents rate themselves 5 or lower (on a scale of 10) in technology maturity, with the score dipping further as assets under management cross the £5bn mark.
  • But switch-over to technology tools is underway: Technology solutions have made significant impact into some of the critical business processes, notably: (i) pipeline management (36%); (ii) investor reporting (38%); and (iii) portfolio and risk management (40%).
  • Business-fit over off-the-shelf products: Business-fit is deemed most critical in the selection and adoption of a technology solutions with a near unanimous score of 87%.
  • Business automation and AI/ML trump blockchain: Artificial Intelligence (AI)/Machine Learning (ML) (60%) and business automation (56%) trump blockchain (29%) by a big margin.

Expo Real: ‘Capital is being re-focused on offices’

After a high volume of transactions in 2018, this year saw a significant slowdown in the first few months as fears of a late cycle and higher interest rates took hold.

Offices in Europe’s winning cities are still top of investors’ wish lists, delegates heard at Real Asset Media’s European Office Investment briefing, which was held at the International Investors’ Lounge at EXPO REAL last week.

After a high volume of transactions in 2018, this year saw a significant slowdown in the first few months as fears of a late cycle and higher interest rates took hold. Over the course of 2019 the tables have turned again.

‘In the lower for longer context, capital is being re-focused and investors are ready to deploy capital and make significant investments,’ said John Mulqueen, Head of Offices EMEA, CBRE Global Investors. ‘If you invest for the long term, you can fix very low levels of interest for long periods of time’.

Activity is picking up again and concentrating on the same top five countries, but in a different order. ‘The rankings have changed,’ said William Matthews, Partner, Global Capital Markets Research, Knight Frank. ‘Germany has overtaken the UK and is now the number one destination for office investment’.

What has not changed is the focus on the main cities that attract talent as well as capital.

Investors should look at cities with young populations, good universities and good prospects, said Andrew Westbrook, Partner, RSM: ‘Ask yourself where the workforce of tomorrow will want to be. The answer is that cities like Berlin, Munich, Paris and London will go from strength to strength’.

The demand for good quality buildings in those cities is already strong and will intensify further, said Boudewijn Ruitenburg, COO, EDGE Technologies: ‘The future is winning cities and losing regions, because talent is concentrating in a few areas’.

Start-ups and tech companies are flocking to Berlin, where ‘rents have gone up but are still half of those of London or Paris so from our point of view it still has a long way to go,’ said Mulqueen.

Follow the growth of tech to determine a city’s attractiveness, said Ruitenburg: ‘The tech sector can produce double digit numbers with no correlation to the country’s GDP, so that is what we look at rather than the cycle. It is true in Berlin and it is true in London, where the banks may be down but tech is still going up and up’.

CBRE: UK investment returns at 1.9% over first three quarters

Capital values across UK commercial property decreased -0.4% in September 2019, according to the latest CBRE Monthly Index, while rental values were flat. Total returns were 0.0%

In the third quarter of 2019, UK commercial property capital values decreased -0.9% overall, the fourth successive negative quarter and the weakest of 2019 so far (Q1 2019: -0.6%, Q2 2019: -0.6%). Rental values increased by 0.1% over the quarter, up slightly from the -0.1% recorded in Q2 2019. Total returns for Q3 of 0.5% at the All Property level bring returns to 1.9% for 2019 so far.

Retail capital values fell -1.7% in September, pulled down by Shopping Centres (-2.6%) and Retail Warehouses (-1.8%). Rental values decreased -0.6% over the month. In Q3 2019, capital values in the Retail sector decreased -3.6% (Q2 2019: -2.2%), with Shopping Centres reporting a decrease of -4.6%. Rental values fell -1.2% for the sector over the same period (Q2 2019: -0.8%).

The Office sector recorded capital value growth of 0.4% and total returns of 0.8% in September, out-performing Industrials for the third month this year. Central London offices out-performed the sector average with an increase of 0.6%. Rest of UK Offices pulled down the sector average, increasing 0.1%. Rental values rose by 0.4% over the month, pulled up by growth of 0.6% in Central London Offices. Office capital values increased 0.6% in Q3 2019 while Office rental values rose 1.1%.

Capital values increased 0.3% in September across the Industrial sector pushing total returns to 0.7%. Industrials in the South East reported capital value growth of 0.4% over the month, compared with growth of 0.1% in the Rest of UK. Rental values increased 0.3% over the month. Industrial capital values rose 0.7% in Q3 2019 (Q2 2019: 0.6%) while rental values increased 0.8% (Q2 2019: 0.7%). Total returns in Q3 2019 were 1.9% (Q2 2019: 1.8%).

Robin Honeyman, Senior Research Analyst at CBRE UK, explains:

“All Property returns in the third quarter were again dampened by continued poor performance in the Retail sector where returns were down on the previous two quarters and on the same period last year. However, performance in the Office and Industrial sectors remains steady. Our index shows total returns of 1.9% for the year so far, compared to the IPF’s August Consensus Forecast of 0.9% for 2019 as a whole.”

RCA: logistics sector and secondary markets favoured by South Korean within Europe

South Korean investors have spent more in the logistics sector and in secondary markets in Europe than ever before, RCA data for the first nine months of the year shows

Central and Eastern Europe has attracted $1.2 billion in spending while Luxembourg, Ireland and Belgium have also been targets. In total, South Korean investors have invested around $10 billion (€9.1 billion) on European real estate in the year to-date, dwarfing the $6.5 billion in investments in 2018.

Tom Leahy, RCA’s Senior Director of EMEA Analytics, explains:

“South Korean cross-border real estate investments in Europe and globally are already at an all-time peak, but this doesn’t mean that the main focus of these flows won’t switch again. Mirae Asset’s victory in the bidding war for Chinese insurer Anbang’s luxury U.S. hotel portfolio, and other deals in the pipeline, might signal the U.S. market is back in play as viewed from Seoul.

“Brussels, a market not often on the radar of global investors, has proved more compelling to South Korean player due its relative stability and an occupier base oriented towards the public sector.” 

The latest such deal in the Belgian capital, which is still in contract, is the acquisition for $1.4 billion of the Finance Tower, a 2.4 million sq ft (220,000 sqm) office let to the Belgian government until 2031.  The buyer is a join venture between a U.K. investment manager and two South Korean firms, AIP AM and Meritz Securities. If and when this deal completes, it will be by far the largest ever single property trade in Belgium.

The South Koreans’ shift into global markets first started in 2011-12 after rising allocations towards real estate by institutional investors had driven prices and volumes in their local market to record highs.

The move overseas was led by pension fund NPS which initially purchased assets in the U.S. and U.K. – the traditional first ports of call for Asian capital going global. However, flows really picked up in 2015, when South Korean investors spent more than $3 billion in the U.S. and over $2 billion in Europe, primarily in Germany and Austria.

This first wave was led by public money and then by the larger institutional investors, primarily the insurance funds run by the likes of Samsung, Hyundai and Hanwha. The investor base has since broadened markedly, reflecting the depth of capital in South Korea, the scale of demand and the drive to diversify.

Real Capital Analytics has recorded 22 South Korea-based investors who have spent more than $1.0 billion in the global real estate markets in the last five years.

‘Food retail properties in Germany are a sure bet’

Generate income by focusing on micro-locations across the country, as German food retailers are financially strong

John Wilkinson, CEO, Greenman, tells The Real Estate Day that as a buy and hold fund they believe they can generate income for their investors by focusing on micro-locations across the country, as German food retailers are financially strong and online shopping in this sector has not taken off

John Wilkinson, CEO, Greenman

Savills outlines retailers’ blueprint to survive and thrive in age of digitalisation

The rise of online sales in Europe does not mean the end of the physical store, Savills argues in a new research report, insisting the focus should turn to restructuring the product range with e-sports, virtual reality and wellness becoming increasingly popular, especially among younger generations.

E-commerce, which has become one of the biggest challenges the retail sector has faced, is fast gaining momentum and according to current estimates 28.5% of fashion sales in Western Europe will take place on the internet by 2023; a growth rate of 87%.

Nevertheless, online retailers recognise the great advantage of a physical store. A US study by the International Council of Shopping Centres in 2018 showed that the number of visitors to a website in a catchment area increases by 37% when a brand opens a new shop.

In addition to the costs of shipping and marketing in pure online trading, there are other reasons for a physical presence. Furthermore, according to GlobalData estimates, 29% of online sales in the UK come into contact with a store, either through Click & Collect or when the customer first inspects the product in the store.

Marie Hickey, Savills Research Director, explains:

“Across Europe, prime retail destinations and strong convenience-led locations with robust footfall will be less exposed to the challenges facing retailing, however they will not be totally immune. A greater focus on experience, both in terms of occupier profile and of place, as well as an intensification of uses that help to boost footfall will be the key to mitigating some of these challenges. For the really innovative landlords, adopting a mindset that is more service orientated and flexible may also offer a point of difference.”

Germany stands out as following in the footsteps of the UK.

Jörg Krechky, Head of Retail Investment Services Germany at Savills, explains:

“There are some indications that our market will develop similarly to that in the UK. Our online trading growth rate is rising steadily but that’s nothing new. What’s more important is that customer preferences, namely those of the core target groups ‘millennials’ and ‘baby boomers’ are changing. We are facing the biggest change of the century in the strategic development of retail real estate.

“Retailers are already restructuring their space concepts and portfolios. Demand for premium locations is increasing as investors seek to secure strategically important locations. At the same time, demand for secondary and tertiary locations is declining: they will be less lucrative in the future and may have to be restructured and revitalised by other uses.” 

As well as millennials and baby boomers, the future of retailing is strongly influenced by Generation Z (those born between 1997 and 2012). They are so-called ‘digital natives‘ who grew up with the Internet and network quickly and everywhere. Environmental awareness, personal health and social responsibility play a central role in their world view. According to a recent survey by Eventbrite, 78% of respondents stated that they prefer to spend their money on experiences rather than on material things. 

The selection of the brands represented in the city centre locations should also include local, independent retail stores of good quality, helping to make a decisive difference to the competition. Another aspect is the combination of different uses, where viable. According to Savills, the integration of coworking and coliving concepts in combination with retail is a promising synergy, offering the customer multiple uses in the immediate environment as well as improving footfall for the retail and leisure offer.

Krechky added:

“Retail is experiencing the greatest change within a generation. We don’t see the end of the physical store, rather the industry is experiencing an evolution of its offering. The exciting task for investors, portfolio holders and operators is to anticipate the consequences of these developments and to invest accordingly.”