Expo Real: Reasons to be cheerful?

Despite issues such as Brexit, the trade negotiations between the US and China, potential technical recessions for several countries looming and the late stage of the current property cycle making it difficult to find investment gems, an air of positivity prevailed at Expo Real last week. The ongoing low interest rate environment and low returns on government bonds compared with the spread of real estate yields continues to drive investors towards the sector and it is that which is maintaining optimism. “The key is investing in opportunities that can provide the liability-matching income streams that insurers and pension funds are looking for – or for assets that can be repositioned to provide the same characteristics,” said Michael Neal, chief investment officer real estate, Europe & Asia Pacific, at Nuveen. However, most agreed that with few property owners inclined to sell, knowing that they will have to find a way to reinvest themselves, a mountain of money is piling up in Europe. With a host of high-level investors, developers and funders at the event, EG asked for their views on the state of the market. Michael Neal, chief investment officer real estate, Europe & Asia Pacific, Nuveen “The idea of interest rate normalisation any time soon looks distinctly remote and the spread of real estate yields to government bonds is optically appealing. Real estate has an increasingly important role to play in portfolios as an income diversifier. “We need to remind ourselves that interest rates and bond yields are low for a reason – the economic growth outlook is moderate at best. The occupier markets remain surprisingly resilient but widespread rental growth is preserved for sectors or locations with favourable structural and demographic change. We are focused on investing our clients’ money into these parts of the market.”   Jonathan Hollick, chief investment officer for EMEA (ex CH), UBS-AM real estate & private markets “European industrial and residential continued to dominate the majority of discussions and irrespective of the political turmoil, there was certainly more investor interest in the UK, and particularly London, compared to previous years at Expo Real, which I imagine is largely due to the sharpening of cap rates that we’ve seen across Europe alongside the weakened sterling currency. “However, I do think that the political backdrop together with the cost of hedging is causing European investors to question whether now is the right time to pull the trigger on capital deployment.”   Clemens Schaefer, head of real estate, Europe, DWS Group “Negative interest rates will very likely push real estate yields further down in the coming 12-18 months. The current cycle will be prolonged yet again for at least another two to three years. The risks to the UK real estate market are limited to the next two to three years in our opinion and in the medium term, places like London may actually look cheap compared to Paris and the top seven German cities. This is why we are looking for overly mispriced assets which offer opportunities for some of our less risk-adverse investors.”     Sophie van Oosterom, chief executive and chief investment officer, CBRE  Global Investors “Capital continues to flow into EMEA, looking for yield differential between negative bond rates and property yields while, at the same time traditional real estate drivers provide no real support for continued rental growth. There’s an intense focus on having the right real estate experts on the ground to source and asset manage investments in core locations to the required returns – and not to chase yield in secondary markets.”   Chris Bennett, managing director, head of London branch, DekaBank “In 2019 our business activity was heavily skewed towards refinancing. The volatility in the capital markets translated into reduced acquisition activity to that seen in the recent past – we expect this trend to continue until there is greater clarity on the future relationship between the UK and the EU and the likely implications for the UK economy. “Clarity is likely to stimulate acquisition activity, providing the opportunity for DekaBank to provide acquisition finance. In the interim, we expect that our focus will continue to be on the selective refinancing of core assets with robust income streams.”     Charles Balch, head of real estate finance, international clients, UK, CEE and USA, Deutsche Pfandbriefbank “The current low interest rate environment leads to a strong demand for real estate properties as such investments continue to provide an attractive yield gap over government bonds. At the same time – and for the same reason – supply from divestments is scarce so there is more money chasing less properties, resulting in further increasing real estate prices and lower yields. “Demand in the rental markets may be constrained for structural and macroeconomic reasons and, as such, would not warrant the reduced yields implied under the above scenario, leading to a further divergence between the property fundamentals of capital value and rent per square metre and the investment yield.”   Russell Banham, head of UK, Commerz Real “We still view the UK as a good place to invest but we are cautious, and Brexit does need to be settled before we can invest further. However, we are opportunity-driven and will look at core-plus and value-add opportunities, particularly in the London office market, when they arise.”     Charles Weeks, head of real estate Europe and Asia, Barings “Assuming the UK economy remains flexible and open – and it will need to be – then the long-term structural drivers (demographics and technological innovation) will remain supportive. Therefore, the case for investing in the world’s most transparent and liquid real estate market surely remains. “However, in the near term, Brexit uncertainty prevails. Current softness in UK headline all-property capital values has been mainly about structural weakness in physical retail to date, not Brexit. That will continue and we maintain our long-held heavy underweight position to the retail sector. However, a hard Brexit could result in some price dislocation and we are poised to selectively take advantage of that potential scenario for our clients. “In our view, that window of opportunity might well be short, as the risks must be assessed in the knowledge that the UK’s commercial property sector is largely deleveraged and, therefore, the full downside potential scenario is mitigated as a consequence.”   Troy Javaher, managing director, Europe, Lincoln Property Company “We are particularly bullish about the UK market right now, while others may be approaching the UK with caution given the political uncertainty. We are targeting development projects which will take three to five years to realise. We are confident that occupier markets in the UK will continue to hold up in this time. We want to focus on ground-up opportunities which enable us to merge our mixed-use, high-quality design and placemaking specifications on top of a residential product appropriate for the rental market.”   Gunther Deutsche, head of transactions Europe, Barings “Having seen record numbers of visitors at Expo Real shows that the German and European markets are still very hot and lots of capital and product is available. The sheer number of developments that are increasingly in ‘B cities, may create some oversupply if the economy takes a stronger-than-anticipated dip due to the ongoing global trade war.  “In anticipation of this, one way Barings might react is by shortening our business plan and hold periods for value-add transactions to minimise that risk exposure. The Barings European market strategy foresees an expansion into the Benelux by early 2020 which will further broaden our European profile.”   David Kellet, senior director, hotel transactions, Invesco “Coming out of Expo we remain positive on the long-term fundamentals of the hotel sector, but see new supply growth in several markets as the key risk. Our investment strategy remains highly selective, with a focus on being innovative and proactive to create value in our future deals.” Simon Price, real estate partner, Linklaters “While the volume of deals in the UK is still well down on last year, there were signs that some investors were willing to commit to deals now. There are investors looking for opportunistic acquisitions in the London office market and still a supply of Asian capital looking for longer-term income for new buildings. Many deals are being quietly discussed off-market.”   To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette