Editor's Choice: Investment races on amid 'Brexit pause'

Global investors have continued to up their spend across markets in mainland Europe while the UK holds its breath ahead of the June referendum on European Union membership

A month’s worth of transaction data is only indicative at best, but PropertyEU’s analysis of real estate investment activity in Europe during February lends support to some of the key market trends discussed last week at Mipim in Cannes. One trend that has become visible in recent weeks is an investment slowdown in the UK ahead of a potential Brexit vote in June, counterpoised by higher investment volumes in continental European markets.

Another trend that we already signalled last month based on our January deals data was the rising popularity of alternative real estate assets.

Firstly, the situation in the UK – the largest market in Europe – was encapsulated by Richard Divall, head of cross-border capital markets EMEA at Colliers International, when he spoke to PropertyEU TV at Mipim last week. ‘There is a large pause in the UK markets due to all this uncertainty,’ he noted. ‘A lot of UK institutions are just sitting back and watching, and that of course affects what the internationals do.’

Divall also revealed that investors who are willing to go ahead with transactions now are increasingly seeking the protection of opt-out clauses in contracts as a hedge against the British public voting in June to leave the European Union.

Post-referendum bounce back
A number of advisors believe, however, that the situation may reverse quickly once the issue is resolved. 'While some investors are exercising caution before the outcome of the Brexit vote is known, the combination of high allocations to UK real estate, strong sentiment amongst investors, record levels of occupier demand, falling supply and rental growth could all combine to see investors return to the UK market with a bang post referendum,’ said Mark Ridley, CEO Savills UK & Europe.

For the moment, however, real estate markets in continental Europe appear to be benefiting from the ‘Brexit pause’. Looking at the volumes per country in February, some €2.3 bn of large deals (over €20 mln) were announced in Germany during the month, while France and the UK were tied in second place with €2.2 bn, according to PropertyEU Research. Sweden also performed well, attracting some €1 bn of large deals, while down in southern Europe about €900 mln of assets traded in Spain, and the small Portuguese market chalked up an impressive volume of €480 mln.

The year is still young, but so far the investment pace in continental Europe remains strong. While a number of advisors expect investment volume in the UK to drop significantly compared to the record level of some £70 bn in 2015, for now nothing is stopping the party in Mainland Europe. In Germany, for example, JLL’s country head Frank Pörschke expects investment volume this year will stabilise at last year’s level of €55 bn. The figure may be slightly lower, but the market will continue to be strong, he told PropertyEU in Cannes.

Continental Europe as a whole continues to sit in a sweet spot, Tom Leahy, director of market analysis, EMEA, at Real Capital Analytics told PropertyEU’s Global Capital Flows Investment Briefing at the JLL Marquis at Mipim last week. Europe’s geographical position is also a positive, as investors from both East and West looking to diversify their holdings find it convenient to invest in the centre, he added. ‘Europe sits in the middle, so it benefits from the twin capital flows from Asian institutions and US players.’

Capital will continue to flow into European real estate despite a new-found caution and less optimism in the market, fellow-panellists agreed. ‘There is still such a significant amount of capital waiting to be deployed that I expect investors that have eased off to be replaced by many other investors from Asia and the US that have yet to enter the European market,’ said Rob Wilkinson, CEO of AEW Europe.

‘We do not see this continuous flow of capital as a transitory phenomenon,’ said Arthur de Haast, head of International Capital Group at JLL. ‘We think this situation will continue for a long time, especially as low interest rates are here to stay and we have negative bond yields in many markets.’

Search for real assets widens
The leading advisors agree that the search for real assets will continue to widen under the weight of capital targeting the sector and that alternatives like hotels, healthcare and student housing will become increasingly popular. Interestingly, one of the biggest deals PropertyEU Research recorded in February was the acquisition of Gecimed, the healthcare property business of French REIT Gecina, by French asset manager Primonial REIM for €1.35 bn.

Another sign that the definition of real estate is widening came this week from the European Outlet Conference in London where we learned that a much broader spread of institutional capital is targeting this sector. Speaking at the ICSC conference, Timon Drakesmith, CFO of Hammerson and managing director of Premium Outlets said: ‘Outlets have become more institutionally acceptable in the last 12 months. The sector is no longer limited to big funds and operators.’

It was also revealed that IKEA Centres has conducted a review of its real estate portfolio and is looking to sell up to 20 retail parks at a value that could be up to €900 mln. Gerard Groener, managing director IKEA Centers, told the conference: ‘We want our shopping centres to be meeting places and having reviewed our portfolio retail parks are not suited to this concept. We will officially approach potential buyers by mid-spring and early summer.’

One of the reasons put forward for the new popularity of a previously niche retail sector is that retail sales across outlets have grown about 10% per annum since around the financial crisis, with 8% rental growth. That is far higher than the modest levels of rental growth seen in other more traditional real estate asset classes.

All in all, this sounds like an attractive case for getting into outlets.

Cormac Mac Ruairi
Deals Editor