The switch is definitely on for Europe, David Hodes, co-founder and managing partner of Hodes Weil & Associates, told delegates at our inaugural Outlook Investment Briefing in New York in June.

The switch is definitely on for Europe, David Hodes, co-founder and managing partner of Hodes Weil & Associates, told delegates at our inaugural Outlook Investment Briefing in New York in June.

‘Everybody likes a good narrative and the European narrative is that we’re two to four years behind the UK and the US, so therefore there’s opportunity,’ he told the audience at DLA Piper’s head office on the Avenue of the Americas.

A good number of American investors have already found that switch, Iryna Pylypchuk, Director of Global Research at CBRE, told our UK Outlook briefing in London. Just under €38 bn of US capital was invested in commercial real estate in Europe in 2014 - an all-time record high both in absolute terms, as well as in terms of the share of the overall European market, or 16.9%.

The previous record was set back in 2007 when US investors accounted for €34 bn and a 13.2% share of the market. 'Looking at the activity so far this year, the strength of US capital remains unprecedented, with a weak euro and pound sterling drawing further interest. In Q1 2015 alone US capital accounted for €8.3 bn of US capital, or 18% of the overall market total. The most interesting point is the increasing diversity of the US capital in terms of the investor types and strategies - it covers everything from core institutions and pension funds, right through to opportunistic players looking for a riskier play.'

That, in a nutshell, is why the PropertyEU team crossed the Atlantic this year. For the first time in our nine-year history, we held a one-day programme in New York, with experts from the major markets in Europe that we cover from our headquarters in Amsterdam and London. And judging from the enthusiastic response we received from both delegates and our expert panellists from the UK and the continent, the event is set to become a regular feature of our annual calendar.

Globalisation of capital flows and the new waves of equity targeting Europe were also a major focus of discussion at our half-yearly Outlook Briefings in Amsterdam, Hamburg, Paris and London. The highlights from those events form the basis of our multimedia edition that we are due to launch next week, alongside features on the key markets and regions – the UK, Germany, France, the Netherlands, Central and Eastern Europe and Southern Europe. We also drill down into individual sectors, in particular European residential and hotels, which we learned are particularly hot at the moment. And we provide comprehensive coverage of recent ULI Europe and RICS events, including ULI’s Trends conference in London and discussions on Megatrends at Provada in Amsterdam.

A clear pattern of consolidation
If we had to distil a single trend from the discussions we have moderated in New York and the major capitals of Europe, it would have to be that there is plenty of money sloshing around looking for a home. Closely linked to that trend is a clear pattern of consolidation across the continent and the key sectors. American heavyweights such as Blackstone and Brookfield have been at the forefront, but home-grown players like Klépierre, Deutsche Annington and Citycon have also made their mark in the past six months.

At our Outlook Briefings, panellists expressed concern about a disconnect in some markets where the fundamentals have not yet caught up with yield compression. There are other imbalances in cities like London and Paris, where investors are paying stiff premiums for liquidity, we learned in Paris. Moreover, a large number of statistics for European real estate are remarkably, possibly even ‘alarmingly’, similar to the situation in 2006, Jos Short, chairman of Internos Global Investors, said during our London briefing. ‘Investment volumes are up, yields are down and we’re seeing a big increase in M&A activity,’ he noted.

Short cited a range of statistics comparing key indicators between 2006 and 2014 from an overview drawn up for Internos’ in-house commentary Decisive Eye. In addition to total investment volumes, total returns, capital value growth, income returns and rental growth are also broadly similar for the two years.

There are also a number of key differences. Outstanding debt against property was 10% lower in 2014 than in 2006 and - more significantly - new debt originations in 2014 were substantially lower at £45 bn (€62.8 bn), almost half the figure for 2006 (£82 bn). Average loan-to-value (LTV) ratios for prime offices were also down in 2014 at 70% compared to 80% in 2006. Moreover, in 2014 the gap between prime and secondary yields was a healthy 300 basis points compared to just 100 bps in 2006.

But perhaps the most convincing statistic that shows that the current cycle is not in exactly the same place as in 2006 is the huge difference between the 5-year swap rate. In 2006 it stood at 5.5% while in 2014 it was just 1.9%. But this is not a normal rate, delegates at the ULI Trends conference in London heard last month. The shape and quantity of quantitative easing in Europe and other regions has been unprecedented in the aftermath of the crisis and bond yields and interest rates are currently at historic lows.

As Ellen Brunsberg, CEO of GE Capital Real Estate, put it, we haven’t seen a world like this. ‘I think we’re on a long track here, trying to figure out what normal rates and returns are. And’, she continued, ‘I think we will continue to see some recalibrating…it won’t be like a clock, I think it will be linear and it will go on.’

As the real estate industry comes to terms with the fallout from the Lehman crisis, the shattered confidence in structured products and greater regulation, there is reason to be bullish ‘in a weird way,’ to quote Brunsberg. For the time being, it would seem that real estate continues to benefit from being the 'least worst place' to invest. Jos Short summed it up neatly: 'Real estate is the tallest dwarf in the room.'

Judi Seebus
Editor in chief