Rising wave hits Europe as real estate investment swells

UK was main winner as US and Asian investment in Europe surged in 2013, reports Jane Roberts

The tide of global capital gushing into real estate rose by 20% in 2013, but of all regions, investment is flowing fastest into Europe. Real Capital Analytics’ international deals database recorded €846bn of global investment deals in 2013 – excluding real estate debt sales. The Americas and Asia Pacific recorded strong growth during the year but experienced a slowdown in Q4, while Europe accelerated (see fig 1 below).

“The strong momentum in the US in 2012 is now being recorded in Europe, which had a storming year in 2013,” says RCA’s EMEA managing director, Simon Mallinson. While Q4 2013 was the strongest quarter in the US last year, volumes were lower than in Q4 2012. Over the pond, however, deals in Europe surged 51% in Q4 2013, compared with Q3, and 24% compared with Q4 2012. The €60bn of sales was the highest quarterly total since Q4 2007 and the strong end to the year lifted European investment volumes to €177.8bn for 2013 as a whole – 17% more than the previous year.

Around the world, the BRIC countries, notably Brazil and India, have been slowing down for a couple of years, but Russia (see table) and China attracted increased investment. In Europe, there was a notable rise in investors taking on country risks from mid year onwards. This fed through to deal volumes in southern European countries Greece, Italy and Spain, with deals jumping by more than 80%, though off a low base; investment in Ireland continuing to rise; and a strong rebound in parts of Central Europe, though not in Poland.

Both the UK and Germany registered very strong deal volumes, but investor appetite for other Western European markets such as the Nordics and Switzerland, which acted as safe havens during the financial crisis and subsequent eurozone turmoil, “diminished markedly in 2013”, RCA said.

Europe is magnet for global capital

The importance of global capital to Europe is hard to overstate and it isn’t a new trend. RCA’s analysis shows cross-border investment running at over 40% of the quarterly totals in Europe, while it is much flatter in the other global regions (see fig 2). “It did dip a tiny bit at the end of last year, from the mid 40% to the low 40%, but that is much more to do with domestic capital returning to investing in its home markets,” says Mallinson.

RCA says the UK experienced “a surge in interest from Asia Pacific and Middle Eastern investors as well as from domestic investors, leading to an 86% rise in Q4 2013 volumes, compared to Q4 2012”. Two domestic investors in particular – M&G Real Estate and Legal & General Property – feature in RCA’s list of most active buyers in Europe, even though L&G invested exclusively in the UK and M&G largely so. M&G Real Estate announced in January that it had bought a record £2.5bn of property and sold another £1bn in 2013.

In RCA’s ranking, M&G Real Estate was sixth, behind Deutsche Wohnen, Patrizia, Blackstone, the Qatar Investment Authority and the Kuwait Investment Authority; L&G was two places further down, in eighth, behind Singapore’s GIC. The three busiest cross-border routes for capital last year carried cash destined for the UK (see fig 3). For the second year running, there was more US investment into the UK than any other ‘global trade route’, at $11.4bn. The second biggest inward capital flow to the UK was Middle Eastern investment, up more than 200% on 2012, while the third largest was money invested by Chinese and Hong Kong investors, which tripled (see below).

“You have to go to 13th place to find a European country investing outside its region,” says RCA’s Mallinson, referring to the $2.5bn of German capital that was destined for the US. London registered a 35% rise in deal volumes last year, to €33.1bn. Joseph Kelly, RCA’s director of analytics, says: “London is the dominant European market by far in terms of investment volumes: it is as big  as the other top five cities – Paris, Berlin Moscow, Stockholm and Frankfurt –  combined,” (see fig 5, below).

Deal volumes grow in Germany

All German cities, with the exception of Stuttgart, experienced positive year-on-year growth in deal volumes, with Berlin the top investment destination, mainly because of investment in its housing stock, which doubled to almost €6bn. “The exceptions to the European recovery were the French and Nordic markets, which slowed through 2013,” RCA found.

Apartment and student housing deals was the fastest growing investment sector, with RCA calculating a 29% increase in capital deployed over 2012, to €27.7bn. For the first time, this makes residential the third largest sector for investment, overtaking industrial and logistics assets (see fig 4 below).

Nevertheless, industrial deals increased by 27%, to €17.8bn, which is back to 2007 levels. Although the European industrial market is more dominated by domestic investors than other sectors – they accounted for 61% of capital invested in 2013 – there were several very large cross-border deals.

These included Norges Bank IM investing in a €1.2bn portfolio with Prologis, and US opportunistic investor TPG Capital taking over developer P3, alongside Caisse de Dépôt. Generally, RCA also noted a particular increase in the number of portfolio deals transacted, “which tells us that a number of investors are willing to take multi-sector, multi-country risk”, Kelly says. The strong investment market looks set to continue in 2014, driven by global capital flows in major markets and the strong signals of domestic activity improving too.

Big investors set to prosper

Alex Jeffrey, M&G Real Estate’s chief executive, certainly believes so: “As the economy improves I would expect the coming 12 months to continue to provide further opportunities,” he says. “While competition for assets is growing, investors with scale and a proven track record will continue to prosper, both in attracting deals and client capital.”

Will Rowson, European chief investment officer for CBRE Global Investors, says CBRE GI has capital coming in from many sources and for a range of risk appetites, from core to opportunistic – the fruit of 18 months of intensive equity raising. He says the firm has raised around €1bn of new equity from existing mandates “re-upping”, or increasing existing allocations.

In the past six months CBRE GI has won pan-European mandates from two German pension funds, including BVK; a US pension fund for a value-added strategy targeting an 8-12% return; and a Korean client with $500m to invest in Europe and the US, in both equity assets and mezzanine debt.

“This hasn’t happened since 2007,” he says. “There was six years almost of silence and now the allocations are going back up again. It is happening for all sorts of reasons, depending on the clients, but most of them like the income-element of the property return. There is an increasing allocation by institutions around the world to real estate per se and to European real estate.”

In an eye-catching announcement, CBRE GI said in January that it has increased its transaction target for 2014 to €6bn, because it believes there are a broad range of sale and acquisition opportunities across Europe as the region’s economies recover. About €4bn of that target could be acquisitions and €2bn sales, although it is double the investment manager’s activity last year. Rowson admits: “It is a tall order in a market getting so competitive and it may spill into a second year.”

The primary conclusion of a survey of the property strategies of 198 investors, carried out by Cornell University and investment advisory boutique Hodes Weill, was that “institutions are poised to allocate significant capital to new real estate investments.

Weight of capital has big implications

“The weight of this capital can be expected to have broad implications for the industry, including with respect to transaction volumes, fund raising, lending activity and property valuations,” the capital allocations survey said. About half of the responding investors were based in North America and the remainder in EMEA and Asia.

Rowson says he cannot see values “going any other way than up”, while RCA’s Mallinson points out that the general picture of improved pricing in Europe “is broadly supportive for banks’ efforts to slim down their balance sheets by divesting property loan portfolios, or through disposals of direct real estate owned properties”.

Debt market liquidity is improving, and while it is patchy, 51% of respondents to January’s ULI/PwC European Emerging Trends report said there will be more available this year. But might anything upset this benign scenario? One thing, Mallinson agrees, is the fate of the Euro project, an issue which “has disappeared for the moment but is still effectively unsolved”. RCA is also monitoring potential changes to the US foreign investment in real property tax act (FIRPTA), which, if implemented, could suck investment away from Europe and into the US.

“There are lots of ways to get into the US via funds and other structures,” he points out. “However, a lot of investors want to own property directly and that is currently very restricted by the FIRPTA Act. There are rumours of it changing and we are watching that carefully.” Then there is the $64,000 question of whether the rapid recovery is based on sound property market fundamentals, or is being driven purely by the weight of capital.

On the plus side, the economic indicators in the Eurozone are more encouraging. “Although it was mostly weak, most Eurozone member states enjoyed at least some degree of economic growth in Q3 2013,” according to Capital Economics. “Even conditions in the periphery appear to be on the mend. Spain exited recession and is estimated to have gained further traction in Q4, while Irish growth accelerated strongly.”

Labour market data has also improved, pointing to “an improvement in underlying occupier demand”. The downside is that interest rates are still artificially low and debt historically high. The critical issue will be the response of markets when central banks start to withdraw quantitative easing and raise interest rates.

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Mall deals are the ING thing as investors go shopping in Italy again

ING Insurance is one of those investors that has both increased its allocation to property – from 5% to 6% – and widened the range of European markets it is investing in afresh. At the end of last year, the group sold Westend Duo, a tower in Frankfurt’s business centre, which it had owned since 2006, for around €240m, to Deutsche Asset & Wealth Management. The gross yield was 5% and ING’s adviser, CBRE Global Investors, reinvested most of the money in two Italian shopping centres, including €140m in Carrefour Limbiate, in the Limbiate area north of Milan. The scheme is 97% let and the attraction was the higher net yield of about 7%.

“You could say that this is core money taking what could be seen as a core-plus  or even a value-added strategy by buying into Italy, a market that the majority of investors had been shying away from,” says Will Rowson, chief investment officer at CBRE Global Investors. “But we had been talking to them about the pricing of northern Italian shopping centres for some time, and we saw this sub-sector as good value. It is the country risk, not the asset risk, that dictates the yield. Northern Italy is stable, as long as you pick the right assets.”

The pair knew the assets because CBRE GI manages the two funds that previously owned them: the Italian Retail Fund and the Retail Property Partnership Southern Europe, and ING is an investor. The shopping centres had been marketed for 12 months “with some interest, but not interest that matched the investors’ expectations” Rowson says. “ING Insurance saw the market showing signs of improving and started talking to the other fund limited partners. They put in a higher bid and the fellow LPs agreed it.”

ING’s headline strategy is now to invest directly, rather than through funds, for better liquidity and more control, although it hasn’t ruled out investing in funds altogether. Several of the biggest opportunistic investors and banks began investing again in Italian retail assets in the second half of last year. Blackstone snapped up Franciacorta Outlet Village near Brescia from Aberdeen Asset Management, with debt from Goldman Sachs. The US investment bank also underwrote Morgan Stanley’s purchase of a 50% stake in hypermarket giant Auchan’s €600m Gallerie portfolio. That debt was securitised in the last CMBS deal of 2013. GWM, meanwhile, bought the Da Vinci Market Central retail park near Rome in August, at a 9% yield.

 

 

 

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