The hectic investment party continued unabated over the summer and into the autumn, fuelling fears over where the market is headed.

The hectic investment party continued unabated over the summer and into the autumn, fuelling fears over where the market is headed.

Ned Stark, a character in the fantasy drama Games of Thrones, was a glass-half-empty type of person. While his friend the king devoted himself full-time to amorous pursuits and hunting in the sunny south of the realm, Stark spent his time guarding the colder north and telling anyone who’d listen that ‘winter is coming’. Given that Stark was beheaded and his family torn apart during a courtly coup, it would in hindsight be harsh to dismiss him out of hand as just a chronic pessimist.

Transposing this story to European commercial real estate, what to make of the reports of ever-rising volumes and general good news emanating from just about every corner of the market? The cynics and incurable optimists are keeping each other more or less in check on the future direction of the market. Many brokers claim European deal volumes will surpass 2007 levels and that yields have room to fall further (ie the party is set to continue). Others – still suffering from the shell shock of the 2008 boom-to-bust era – are not so gung-ho.

The Expo Real of that year, coloured by the near melt-down of the Hypo Real Estate bank, was a pretty grim affair. What came in the years after was not much fun either. Nevertheless, the majority of buyers in the current market – with cross-border players approaching a 50% share – seem to feel that the only way is up. If there are any bubbles in sight, they will come from the champagne quaffed in Munich to celebrate the new business ventures and investment transaction records of the last nine months.

Attendees will no doubt take a moment to lift a glass to the number 1 financier, pbb Deutsche Pfandbriefbank (Hypo reborn), which staged an oversubscribed flotation in July. There is also a huge party bag of investment deals to cheer. Figures published by CBRE show volumes in the UK reached €25 bn in Q2, a 57% increase year-on-year. Germany saw €12 bn of deals, a 72% hike, while the credit crunch-mauled markets of Spain and Portugal, albeit bouncing back from lower baselines, notched up Q2 volumes of €5.5 bn (up 131% year-on-year) and €751 mln (+794%) respectively.

No trading holiday
Trading continued unabated over the traditional quiet holiday months of July and August. PropertyEU Research recorded no less than 50 investment transactions of €100 mln or above in Europe over the first two months of Q3. The top four were each well above €1 bn.

The largest was an infrastructure platform acquisition, with a sizeable alternative real estate component (350 petrol and 390 service stations). The infrastructure investment arm of insurance group Allianz led the consortium re-acquisition of German motorway service station group Tank & Rast for an estimated €3.5 bn, making this one of the largest infrastructure deals ever in Germany.

The investment volume was three times the amount Terra Firma and RREEF paid for the business 10 years ago when they picked it up from Allianz and two partners. The mark-up might make a mere mortal’s head spin but Allianz and its partners, Borealis Infrastructure Management, Meag and Abu Dhabi Investment Authority, weren’t at all fazed. ‘As market leader in Germany, Tank & Rast is an attractive investment for all of us due to its long-term and stable investment characteristics and its stable regulatory and contractual environment,’ they said in announcing the deal.

Blackstone increased its footprint substantially in the Nordics through its latest pure real estate transaction in July-August. The private equity firm’s Real Estate Partners Europe IV fund agreed to acquire a huge Nordic-focused portfolio of commercial and residential property held by 10 funds managed by Oslo-based Obligo Investment Management for NOK 22 bn (€2.4 bn). Blackstone also bought a 34% interest in subsidiaries of listed Norwegian investment manger Agasti, of which Obligo is a part. ‘We have had a long-standing ambition to increase our presence in the Nordics,’ James Seppala, Blackstone’s European real estate acquisitions boss, said at the time. ‘Following the acquisition of the real estate portfolio managed by Obligo, we will have a real estate portfolio in the Nordics which fits our investment strategy well.’

Growing footprints
TIAA-Cref, another US-based heavyweight, also teamed up with a Nordic partner – or two to be exact – to expand its already impressive presence in Europe. In late-August TIAA-Cref and Swedish national pension fund AP1 and AP2 revealed they were working together to build a €4 bn-plus office platform in western Europe. In the first step they pooled €2.2 bn of core office space. Phil McAndrews, senior managing director and chief investment officer at TIAA-Cref Global Real Estate said: ‘Our investing partnership with AP1 and AP2, like-minded investors who share our long-term investing horizon and focus on high-quality assets, enables us to further diversify TIAA’s existing European office portfolio across asset, tenant and market exposures, while establishing a broader platform to expand our European investments.’ (see page 25 for more on the deal)

Aside from billion-euro deals, London-based Round Hill stumped up an estimated €500 mln for the largest Czech private landlord RPG, and Moscow, which has not seen much property trading action of late, also got onto the scoreboard. US player Hines partnered with Czech investment group PPF to acquire the Metropolis Office Buildings I and III. The investment volume is estimated at an impressive €330 mln, but this is not surprising as it gives the partners control of 56,000 m2 of prime office space in an important global city, regardless of perceived weakness in the Russian economy and the country’s geopolitical involvements.

Europe also saw a spate of €50-€100 mln deals during the summer, with Spain, Portugal, the Czech Republic and Poland featuring prominently on this list. But is it wise for investors to be ploughing so much equity into European property and venturing beyond the ‘safe-haven’ core markets of the west? Economic and fundamental property data would seem to suggest it is. For instance, Cushman & Wakefield notes that Spain is one of Europe’s fastest growing economies.

The Iberian country recorded quarter-on-quarter growth in Q1 of 0.9% – the third-best result in the EU after the Czech Republic and Poland. This economic growth is said to be broad-based, with investment continuing to rise at a particularly fast rate, followed by consumer spending. ‘Spain is on track for one of the strongest economic performances in recent years,’ C&W said. ‘Although it is unlikely that GDP growth will reach the rates seen in 2005-2007, growth estimates have been revised upwards and currently point to a 3% expansion this year.’

Bullish players
Investors are bullish on Central and Eastern Europe, and regional Poland in particular. Although yields are tightening, they are still attractive relative to other European markets. Yields for prime office projects in Krakow, Wroclaw, Tricity, Katowice, Lodz and Poznan range from 6.25% to 7.5%, according to Tomasz Puch, head of Polish office and industrial investment at JLL. ‘The limited supply of prime product available for sale in Warsaw, regional markets offering increasingly more modern office buildings, and the need for investor risk diversification are encouraging the search for attractive options to purchase outside the capital,’ Puch said.

The same investor confidence is palpable across the Continent. Cross-border investment increased in nearly all countries, with a concentration in peripheral markets. For instance, Portugal recorded a 720% rise in H1, driven by an influx of US capital in Q2. ‘Despite all of the economic uncertainty caused by the Greek crisis, the commercial property market activity across Europe has proven resilient,’ concluded Savills’ European head of investment Marcus Lemli. ‘We are therefore forecasting an increase of at least 10-20% in investment activity this year and further yield compression for two-thirds of our markets. I have no doubt that, despite current unease surrounding the economic slowdown in China, investor appetite will remain high in H2 2015 as Europe continues to recover and remain an attractive place for investment.’

Cormac Mac Ruairi
Deals editor