Editor's Choice: Keen but cautious

2015 has been a peak year: global real estate investment volumes reached their highest levels since 2008, driven by investors searching for income in a low-yield environment. But there are signs the cycle may be entering a new stage, characterised by increasing caution.

Final transaction volumes for the full year have yet to be released, but provisional data indicates that the total will be up 20% compared to the $600 bn (then €490 bn) in 2014, which was already a very strong year.

December 2015 alone saw half a dozen transactions over €400 mln complete in Europe, led by the €1.3 bn acquisition of the Potsdamer Platz portfolio in Berlin by US asset management giant Brookfield Property Partners, which was acting in a joint venture with an Asian sovereign wealth fund, believed to be the Korea Investment Corporation.

This sort of activity makes clear that Europe today remains one of the hottest destinations for institutional capital from all over the world in search for value. But record high prices in prime markets, as well as the prospect of global interest rate rises and concerns over China’s faltering markets, suggest the continent may lose a little steam in 2016.

Brokers are warning of a slight slowdown in real estate transactions in some markets, and the general expectation is that overall European transaction volumes for this year will be similar to 2015 levels, ending a run of three consecutive years in which volumes have risen by more than 20% annually. In the world of real estate, there is no such thing as perpetual growth.

Taking longer
A recent research carried out by BNP Paribas Investment Partners for the European Public Real Estate Association (EPRA) shows that the time it takes to sell a large €1 bn global portfolio of good quality direct assets has increased slightly compared with two years ago, even though the occupier markets are much stronger now.

This suggests that investors are getting cautious and coming to the conclusion that the market is entering the latter stages of the cycle, according to Jan Willem Vis, CIO of global listed real estate at BNP Paribas IP in Amsterdam. ‘There is still a lot to play for, given the attractive spread of real estate yields over government bonds, but investors should consider increasing liquidity while maintaining their real estate exposure through the listed route,' added Vis.

Against this background, global interest rate rises are currently at the forefront of investors’ minds. The decision by the US Federal Reserve in December to lift interest rates for the first time since 2006 has already raised uncertainty on the future direction of global real estate yields. The Bank of England may follow suit. In the wake of global interest rate rises, bond yields could rise and the margins between property yields and bond yields may be gradually eroded.

In general, market experts seem to agree that 2016 will be a very different year for commercial property investors than 2014 and 2015, with the strong capital value growth story of recent years starting to tail off. ‘We expect to see an increased investor focus on rental growth and income returns, as well as on value-adding strategies such as refurbishment and development,’ Savills said in a recent research report.

Investment fundamentals are expected to become paramount in 2016, with much greater focus being placed on the income-producing potential of the various asset classes and the ability to unlock the latent value of individual assets through management action.

This is confirmed by a recent survey published by INREV showing that investors’ preferred investment style in 2016 will be value-add, at the expense of both core and opportunity styles. Institutional investors are increasingly focused on the income-producing aspects of commercial real-estate as an asset class, and market experts expect to see a rise in demand for longer-income, asset management and alternative asset classes in 2016.

We’ve already started to witness the gradual transformation of niche sectors – including hotels and student homes – into mainstream investment asset classes. Major asset managers of the ilk of L&G or AXA Real Estate have been beefing up their alternative platforms quite aggressively over the past few months.

For those looking for value in the mainstream commercial real estate asset classes of office and retail, the regional cities still represent a viable option. But even in the prime markets, returns will still be high enough to ensure that real estate outperforms many other asset classes.

Virna Asara
Southern Europe Correspondent