GLOBAL - Pension funds were behind two of the three largest European property transactions in the fourth quarter - an indication that intense competition in the €30m-100m bracket is making smaller assets less attractive to scale investors.

With pension schemes crowding in on assets worth more than €100m, fourth-quarter data published this week by CBRE show commercial real estate investment activity increased 57% over the previous quarter to €38.6bn.

Investors closed more €500m-plus deals over the period than in the previous three quarters. Among them were a UK supermarket acquisition by the Tesco pension scheme and a UK shopping centre acquired jointly by Canada's CA$140bn (€103.7bn) CPPIB and the €231bn ABP.

Although Michael Haddock, director of EMEA research at CBRE, acknowledged there had been a seasonal effect in the fourth quarter, he said the increase at year-end was "about more than that".
"It was out of proportion to the usual increase in activity at that time of year," he said.

Haddock acknowledged that some of the increase had been opportunity driven.
"Not many investors can invest on that scale, and there's a yield premium for investing a large amount of capital," he said.

"I'd expect investors with the scale to be able to invest in large transactions to do so. A number of our clients say that, for core assets, they have effectively been priced out of the market for relatively small lot sizes."

An increase in direct institutional acquisitions in the European market to just over 20% will drive the continued divergence between prime and secondary - a structural shift the CBRE said would be sustained for some time.

Haddock told IPE Real Estate pension schemes had three options: they could take on more market risk by investing in Spain - especially Madrid and Barcelona; accept shorter lease terms; or go after bigger assets.

"To be honest, all three seem to be happening in the market, with different pension funds adopting different solutions," he said.

Whereas yields in the rest of Europe might be 4.5-5.5%, he said, investors   could expect 6% in Madrid or Barcelona - reflecting market risk for peripheral European economies.
Although cross-border investment accounted for 34% across Europe over the year, cross-border buyers accounted for 65% of transactions in Spain - and six of the eight deals worth more than €100m.

Non-European sovereign wealth and pension funds still account for most of the 46% of the investment in European real estate market from outside the region, but the report claimed they increasingly face competition from property companies, funds and private capital.

Meanwhile, with European real estate debt totalling around €1trn, pension schemes - already active in property debt markets - have been mooted as potential lenders.

"In monetary terms, they could fill the lending gap - the question is whether they would," said Haddock.
"It's a question of matching capital requirement with the availability. Pension funds tend to operate at the safer end of the real estate market, and poor secondary-quality assets are the ones with the worst debt problems, which is why it is particularly problematic to work them out."