Editor's Choice: Don’t turn a blind eye to risk

As 2015 comes to an end, PropertyEU can look back on a year brimming with good news stories.

Our recent Outlook Briefing tour of the leading capitals of Europe generated a seemingly unending flow of upbeat messages as the signals turn to green for most markets on the Continent. There were several hints that the champagne will be flowing freely as we head into the festive season and investment volumes approach or break previous records.

Investment in European retail real estate, for example, is set to surpass previous records in 2015 on the back of a large number of sizeable portfolio sales. ‘This year will be the best year ever ever,’ Jan-Willem Bastijn, head of capital markets at Cushman & Wakefield, told PropertyEU. The large number of chunky retail portfolios that has been sold in recent months or are still on the market is a game changer, he said.

We had seen this in the office sector but not yet in retail. The size of the deals is also getting bigger, he added. ‘There’s a lot of money trying to find a home…it’s absolutely mind blowing and keeps on accelerating.’

Outlook 2016
While brokers and other advisors gear up to congratulate themselves for a job well done, our editorial team has been drilling deeper into all that was said during a series of Outlook panel sessions which encompassed our traditional stops in London, Paris, Frankfurt, Madrid, Amsterdam and Cannes and extended further this year for the first time to Stockholm and Warsaw.

Our panellists indicated that the much anticipated interest rate increase by the US Federal Reserve, which was announced this week, would not have a significant effect on capital flows from the US to European real estate. Any negative pressure from the 0.25% hike – the first in almost a decade - may well be offset by the favourable dollar to euro exchange rate, Philip La Pierre, head of investment management at Union Investment Real Estate said in Stockholm.

And, an extended period of low interest rates in Europe, new waves of capital and freely flowing debt are conspiring yet again to make real estate the poster boy for the year ahead. At the same time, prospects for rental growth remain patchy across Europe and various markets find themselves in different parts of the cycles. In central London, for example, there is a lot of profit-taking with private equity companies becoming net sellers and asset flipping back to 2007 levels.

European financial stability
Last week it emerged that European regulators are watching commercial property markets more closely as sharply rising valuations has increased potential risks to general financial stability. Speaking to the European Parliament in his capacity as deputy chair of the European Systemic Risk Board (ESRB), Mark Carney, governor of the Bank of England, said huge inflows of cross-border equity was pushing up pricing considerably and this was leading to commercial real estate valuations moving 'quite notably' in a number of markets.

Carney said no action was planned yet in the UK, but added that monitoring developments 'makes sense' from an ESRB perspective. 'We are watching some developments, including the developments in effectively the publicly traded commercial real estate markets to ensure that is not a potential amplification channel of financial stability.'

In many ways it is comforting that regulators are watching developments so closely. Back on the ground, a combination of yield compression and high equity funding are making investors more discerning, noted Peter Schreppel, CEO of Germany at CBRE, at our Frankfurt event. While debt is readily available for prime asset deals, it hasn’t gone up the risk curve as much as it did in the previous boom, he noted.

Beyond core
That said, many of our panellists are predicting that the struggle to deploy capital in the year ahead will prompt investors to venture beyond core and also to turn to alternative asset classes such as student housing, hotels and data centres. In the Netherlands, student housing platform Class of 2020 has approached non-listed funds body Inrev to create a student housing index as a way of benchmarking the sector’s performance. This is a sign, according to Henri Vuong, director of research and information at Inrev, that ‘institutional investors are serious about staying in the sector’.

We certainly don’t want to put a damper on the optimistic sentiment that we encountered in all of these cities but as we move towards another year of growth in 2016, we feel a note of caution may be opportune. Union Investment’s La Pierre put it this way. ‘Don’t turn a blind eye to risk and go into everything.’

In addition to this piece of advice, I would like to extend a word of thanks to all our valued readers who have continued to follow us in the past 12 months. On behalf of the editorial team, warm wishes for a healthy and happy festive season and we look forward to hearing and reporting your stories in 2016!

Judi Seebus
Editor in chief

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