Editor’s Choice: Russia has returned - and so has the puffing and preening

A new air of confidence permeated the halls at this year’s edition of Expo Real in Munich, linked, no doubt, to expectations that investment volumes in Europe this year will break the all-time record reached in the previous boom.

‘The market is bigger than last year and values for prime property are higher than in the last cycle,’ confirmed Jonathan Hull, head of capital markets EMEA at CBRE.

Savills is forecasting that European real estate transactions will soar to €230 bn this year, up from just above €200 bn last year. Germany is seen hitting around €50 bn of the total, with the UK accounting for an additional €90 bn.

France lags in third place with BNP Paribas projecting a figure of between €24-27 bn but improved office take-up in recent months should give the market an extra boost by year-end, the company’s CEO Thierry Laroue-Pont said.

Another sign of the buoyant state of the European market is JLL’s prediction that CEE regional investment volumes could reach €8 bn this year after a near record-breaking third quarter. That would mean the CEE region is on course for its strongest year since the economic downturn.

Rob Bould, vice-president of Bilfinger GVA, put it this way: ‘If you’re not making money in this market, you shouldn’t be in real estate. It's a cliché but at this moment in time, there is such a weight of capital that is looking for investment opportunities. That is creating a very positive background for advisers.'

Puffing and preening
Other signs point to the strongest fundraising year for opportunistic funds in the region: €45 bn has already been raised from investors in the first nine months. ‘Not surprisingly, therefore, there was a lot of talk (at Expo Real, ed.) of a new-found buzzyness, the puffing out of chests, and an awful lot of preening,’ noted Joe Valente, head of research at JP Morgan Asset Management in a commentary.

Euphoria and buzzyness call for enlarged marketing budgets, he added. ‘Evidence of those were everywhere. The stands were larger and plusher. There was an abundance of plate spinners and trapeze artists, fancy dresses as well as an entire line of top-of-the-range cars that apparently emit no carbon dioxide.’

Markets in mainland Europe are also being buoyed by new product coming to the market. The liquidation of German open-ended funds will continue to offer investment opportunities across Europe through 2017, according to research by Cushman & Wakefield.

C&W said €1.7 bn of property assets were sold by GOEFs in liquidation in H1 2015, following a record volume of €5.1 bn in 2014. A further €9 bn will be sold by end-2017, mostly in Germany, the Benelux and France, Magali Marton, head of EMEA research at Cushman & Wakefield, said.

‘German open-ended funds have clearly benefitted from the current booming investment market in Europe and therefore have managed more successfully their assets sales in 2015 so far. We expect sales to grow in the rest of the year and in 2016 and GOEFs should continue to demonstrate some proactivity in their liquidation process in order to optimize their sales prices strategy.’

Blackstone and other bellwethers
But perhaps the clearest signal is being emitted in London where the real estate market is set for a wave of profit-taking as US private equity giant Blackstone and other vendors including Malaysian investors bring a clutch of assets to the market.

‘For the first time in a long time there’s a lot of product in the City,’ Richard Divall, head of EMEA cross-border capital markets at Colliers International, told PropertyEU.

Divall sees the trend towards selling spreading out towards the regions. In Birmingham Colliers International is acting as advisor on the sale of Brindley Place by US owners Lone Star and Hines.

Blackstone is often seen as a bellwether for the rest of the market in Europe, but in this case its sell-off of assets largely involves one of its funds that is coming to the end of its life, Divall said. Nevertheless, there are signs that conditions in London are ripe for a sudden downturn which could materialise next year, experts warned during a special Investment Forum at Expo Real.

‘There are still large amounts of capital targeting central London, and this year is still a good year with returns of 20%, but the risks are building up,’ said Simon Wallace, head of research for Europe at Deutsche Alternative Asset Management. ‘The downturn could be sudden and capital values could fall by 20-30% very quickly. I think now is a good time to exit the market.’

Johannes Haug, senior vice-president and global head of acquisitions at Pembroke Real Estate, agreed: ‘We are bracing ourselves for a correction, even if the facts do not point to an immediate downturn, and there are deals still happening at astonishing prices. But it has been a long run, we are six-to-seven years into the cycle, so it definitely is a time to be cautious.’

'Crazy' money
Alarm bells are also sounding on the Continent where 'crazy money' is driving the Berlin investment market, according to Steffen Pulvermacher, associate director of investment at Savills in Berlin. 'There is just so much capital chasing investment opportunities in Berlin.’ Savills is forecasting around €7 bn in deals in Berlin in 2015, he added. 'This shows just how far the market has come because now we are back to 2007 levels.'

But perhaps the best measure of where the European real estate market is headed is the accelerated pace at which it is diversifying. Not only are the sources of capital targeting properties in this part of the world more exotic than ever before, so are the actual assets.

To quote Valente once more, the Romanian city of Cluj-Napoca had to vie for investor attention at this edition of Expo with Tula in Russia and Kujawsko-Pomorskie in Poland. ‘And they had to fight hard for shelf space from all manner of new funds pushing sub-Saharan opportunities, parking garages and petrol stations,’ he added.

Even Russia has made a comeback – albeit that it is still being pitched as a long-term play. The country’s economic slowdown, uncertain prospects and the fall of the rouble have been a deterrent to many and foreign investments have declined sharply, but it may be time to look at the flip side of the
coin, according to Vladimir Sergunin, partner at Colliers International. ‘Everything is twice as cheap,’ he told PropertyEU’s Russia Investment Briefing in Munich.

After all the basking in the sun in Munich, I’m already looking forward to the next charm offensive from Russia at Mipim.

Judi Seebus
Editor in chief