Editor's Choice: Talk of the town

Inevitably, the potential election of the Republican candidate Donald Trump as president of the US was a key talking point. At one of the panel discussions, delegates heard that the global economy might not only survive a Trump victory, but that it might be the best outcome for the real estate industry.

'I'd like to remind you of the fact that Trump was a real estate person,' Lorenz Reibling, chairman and senior partner at Boston-based Taurus Investment Holdings, said during a discussion about the cyclical nature of real estate investments. 'We should be proud of the fact that a real estate person might become president.'

He added that corporate taxes would fall if Trump is voted in. ‘If Trump becomes president, shares will go up and real estate is likely to be affected.'

This sanguine approach was not confined to the only American member of the panel. Gertrude Traud, chief economist and head of research at German bank Helaba was equally cavalier. ‘Buy American’ was a real thing back in the 1980s when Traud was working in the US and Trump is now trying to bring that back, she said.

'The situation isn't so different today. While the markets would prefer a Democrat, I'm not actually worried if Trump gets in. Once someone gets into a responsible position they can't always do exactly what they want or what they promised.'

Max Otte, economist and founder of the Cologne-based IFVE Institut fur Vermogensentwicklung, went a step further and said that he would even vote for Trump if he were an American. 'I would never do business with him, but he is an opportunity for long-lasting peace. Trump has said he wants to find a way to get along with Putin long term. Up until now, the US has always stirred up feelings against the Russians, even in times of peace. So Trump could change all that.'

Brexit blues
The other hot topic this week in Munich was Brexit. So far there has been limited progress on the timing or shape of the UK's exit from the EU, but the evidence is starting to trickle in that the pending Brexit is resulting in a marked slowdown in real estate investment volumes. A report released on Tuesday by Real Capital Analytics shows that transaction volume in the UK plunged by as much as 40-60% in the three months since the June 23 vote compared to the previous three years.

'Amid much of the breathless Brexit commentary from the media, this is a clear indication that real estate investors are more wary of what the future holds than they have been for a number of years,' the report says.

The London office market is the sector seen as most vulnerable to a 'hard Brexit' – ie. a complete severance from the single market – and this sector has fared worst, recording the largest shortfall between current and long-term average volumes. That said, the UK market was already into a downswing before the referendum, with yields and transaction prices flat-lining and transaction volumes falling from their peak in Q3 2015.

The good news is that investment volumes across most of the major markets in Europe have held up well in Q3. In fact, the impact of Brexit will be smaller in Europe than in the UK, was the view expounded by US star economist Nouriel Roubini during a keynote speech. He advised European countries to stick together: 'Either you swim together or you are going to sink together,' he said.

C&W's latest survey of lending trends in the UK also provided some positive input: so far the Brexit vote has had little negative impact on lending conditions in the UK, the report found. Lenders may have become more cautious and are shunning speculative development, but 95% of those polled indicated they are still willing to finance investments in the UK, Nigel Almond, head of EMEA Capital Markets Research, told PropertyEU. 'And thanks to lower financing rates, banks have been able to increase their margins across the board, not just in the UK but also across Europe.'

Yields trending downwards
On a real estate level, the discussion invariably focused on yields and the ongoing compression in markets across Europe, with the possible exception of London. Broadly speaking, the consensus was that yields for the best properties will continue to head downwards for the foreseeable future given the current low interest rate environment and the sheer weight of global capital targeting the real estate sector.

In Germany, widely seen now as the safe haven in continental Europe, prime yields are falling well under 4% in the big cities, according to Gunter Deutsch, head of European transactions at Barings Real Estate Advisors, formerly known as Cornerstone. 'The way the market is developing, prime yields are moving from 4.5% to 3.5%,' Deutsch told PropertyEU.

Indeed, a research report from German Property Partners published at Expo Real shows that prime office yields in Munich already averaged 3.5% in the third quarter and are now set to compress further towards 3.25% in the final three months of the year. In fact, yields as low as 2% have already been recorded in Munich on an incidental basis, the advisor said.

Paris has recorded yields of under 4% for some time for prime office assets, but the gap is narrowing between the French capital and the big German cities, Deutsch said. However, Germany offers a far broader range of cities to choose from, he added. 'It's still possible to find less expensive assets in the B and C cities in Germany with yields between 100-150 basis points higher. France on the other hand does not have many alternatives.'

The yield compression is by no means confined to the big German cities and Paris. Prime yields in the leading markets in Central and Eastern Europe are also moving towards - or even under - pre-crisis levels, Arpad Torok, CEO of Budapest-based developer Trigranit, told PropertyEU. 'We just completed the largest-ever real estate transaction in Hungary, both by size and value. And in Krakow, we sold a large regional shopping centre to Rockcastle for a record yield for the city.'

The same applies to Spain, Humphrey White, managing director of Knight Frank Spain, told PropertyEU. 'There's a healthy balance of supply and demand, very little has been developed since 2008 so supply is fairly contained across the board. Yields have already compressed significantly across all commercial sectors.'

Logistics comes of age
As at Mipim earlier this year, the PropertyEU investment briefing on student housing again attracted a large audience to our joint stand with ULI, RICS and Holland Metropole. But our logistics briefings were equally well attended. In fact, logistics is currently the best-performing asset class in the real estate sector with rental growth at 6% or above across Europe, delegates heard at the Let's talk Logistics panel discussion hosted by PropertyEU publisher Richard Betts.

'We are no longer the underclass of real estate,' said Ian Worboys, CEO of P3 Logistics Parks. 'Investors have woken up to the benefits, which are low capex, good returns and rental growth, so demand is booming.'

The numbers speak for themselves. In the past 15 years, annual turnover in Europe has soared from €1 bn a year to €30 bn in 2015, representing 11% of all commercial property investment. You do not need to have a crystal ball to predict that growth will continue, said Logan Smith, head of logistics at BNP Paribas: 'Europe is six to nine times underserved compared to the US, so that gives an idea of the level of growth of warehouse space that is needed to keep up with the e-commerce boom.'

It’s not so long ago that logistics was one of the few asset classes that offered the promise of higher yields and returns across many markets in Europe, but that window is closing, Jack Cox, director for CBRE's EMEA Capital Markets, confirmed during CBRE’s annual global investment briefing.

'Logistics has moved from being institutionally accepted to institutionally preferred with a further downward impact on cap rates.' Little wonder that rumours were circulating around the Messe München that Singapore’s sovereign wealth fund GIC is interesting in buying Prague-based logistics developer P3.

Judi Seebus
Editor in Chief