As is the annual custom, the property world booked out the hotels of Cannes as MIPIM came to town. Real Estate Capital’s editor, Andy Thomson, noted some of the main talking points.
The weather at this year’s MIPIM real estate extravaganza in the South of France in mid-March neatly demonstrated the vital point made at a Colliers International presentation on one of the many impressive boats lining the Cannes jetty – namely, that some things are very finely balanced and a sudden (and unwelcome) change of direction can happen at any time.
On day one, the hordes meandering along the famed Croisette were bathed in warm sunshine. The mood was light-hearted and relaxed. But drawing back the curtains on the morning of day two revealed a potent mix of swirling wind and incessant rain. In the afternoon, the crush in the Palais des Festivals “bunker” was swelling by the hour as the rain fell heavier and the multitudes sought refuge from the elements.
All this brought to mind Colliers reference to the ‘tightrope walk’ being undertaken by the European real estate market at the current time. On the face of it, according to Walter Boettcher, Colliers’ director of research and forecasting, “a lot of things are unchanged and so the bull market rumbles on”.
There is still a weight of capital targeting the asset class, interest rates remain at historic lows, the asset class offers the Holy Grail of yield, and on a relative basis against other low-return investment options, looks highly attractive. For pension funds coming under increasing demographic pressures, real estate is a no-brainer.
And yet…Colliers also acknowledged that talk of a continuing bull market was “brave” in the face of gathering clouds that appear even more threatening than those that deposited their contents over Cannes.
Notably, the UK European Union membership vote has caused a material pause already. Referendum clauses are being seen in some contracts and much activity is being put on hold until the uncertainty is over. Europe’s migration crisis is also furrowing brows – especially in the logistics sector, where the apparent erosion of principles enshrined in the Schengen agreement is a major worry given the effect it could have on the free flow of traffic between countries.
Such political and economic risks are certainly having a dampening effect in the first half of this year, as many investors and lenders decide to sit tight. Into the second half, much depends on the outcome of the UK vote – a “remain” verdict and the consensus view is that the market will rebound strongly. But a “leave” vote would create a whole new level of uncertainty around what happens to the UK and its relationships with other countries, and would probably encourage a continuing migration of capital to continental Europe, especially France and Germany.
In France – and particularly in Paris, which accounts for around three-quarters of the country’s deal volume – a further influx of capital would add to already considerable competitive pressures. According to sources in the market who REC spoke with in Cannes, a good asset in the core space will generally attract between 10 and 20 bids. Furthermore, core and core-plus assets are very easily financed, with the only possible financing gap being on the development side. A Brexit would “have a positive effect on the flow of money into France,” said one professional. Then he paused for thought before adding: “But then we already have lots of money.”
In Germany, meanwhile, one delegate expressed the view in relation to lending in the country that things have gone “crazy” amid enormous competition. It was at REC’s recent Germany Forum in Frankfurt that reference was frequently made to a margin at 80 basis points [over Euribor] – now there is talk that an even lower number might be feasible, perhaps as low as 60 basis points. “But many people still have a strange idea that Germany is some kind of safe haven,” said the source.
In Italy, the view was that the real estate market has never truly adjusted in light of the Crisis. With a plethora of small banks determined to cling onto their under-performing loans rather than offload them at a large discount and get wiped out, there has been none of the dramatic restructuring characteristic of Spain for example.
But while the lack of a proper reorganisation may not do Italy any favours in the long run, some of those present in Cannes expressed the view that Italian banks may have successfully ridden the immediate storm. With the value of many loans edging up, and investors predicting rents will move up as the economy improves, Italy is increasingly seen as a counter-cyclical opportunity – beginning to pick up speed as cycles in other European markets reach the outer limits of maturity.
Viewing the European real estate market for new loans, many expressed the view that levels of activity would be slightly more subdued in 2016 than last year. However, following such a strong 2015, this is only a relative decline and would still indicate a healthy climate. Real estate is considered a safe haven and, after all, where else does capital go today in the hunt for yield?
When it comes to sales of existing loans, there is a feeling that the various political and economic uncertainties bedevilling the market may dissuade sellers from getting new processes underway – instead, they will sit on their hands to see how things unfold in the first half of the year. But in those situations where some progress towards a sale has already been made, sellers are likely to push on to the finishing line.
There is also an expectation that loan sales may increasingly take the form of mixed performing and non-performing elements, with bidders teaming up to target the part of the portfolio that makes sense for them. This is not a new trend – it was seen, for example, in the Project Octopus sale of Spanish and Portuguese loans a couple of years ago – but an acceleration of the trend appeared to be a hot tip this year.
As the event drew to a close, networking intensity gave way to partying. Not even the pouring rain could extinguish the spirit of MIPIM.