Europe is awash with capital, fuelling optimism that 2015 will be another good year and overriding concerns about overpriced assets.
Europe is awash with capital, fuelling optimism that 2015 will be another good year and overriding concerns about overpriced assets.
Equity-rich sovereign wealth funds (SWF) and pension funds from Asia and North America continue to target European real estate markets and will play an even bigger role in 2015, according to Emerging Trends in Real Estate Europe 2015, a report published jointly by the Urban Land Institute (ULI) and PwC. Indeed, Asian investors will enter the EU market permanently within two to three years, the report predicted. More change is ahead: as the wall of money grows, the established sovereign wealth or pension funds are no longer interested exclusively in trophy assets at top of the market prices. As one Emerging Trends Europe survey respondent put it: ‘Equity-rich investors can stomach the risk of less liquid markets.’
Thanks to the ever-growing wall of capital, Europe’s real estate industry expects to be busier and more profitable in 2015. Most of the respondents and interviewees anticipate an increase in both prime and secondary values as a result of greater liquidity and the need to deploy capital in this asset class. Sovereign wealth, superannuation funds and institutional investors of all stripes are ‘shifting from fixed-income to real estate’. ‘Real estate just looks so attractive to a pension fund. It is one of the highest yielding asset classes on the planet,’ says a fund manager.
FUNDRAISING IS EASIER FOR PUBLIC COMPANIES
Fundraising is also easier for public companies. Real estate IPOs in Europe have reached their highest level since 2007; last year in Ireland and Spain, these included ‘cashbox’ flotations of companies with no assets, raising funds to go out and buy opportunistically. ‘It has never been easier, we are back to the good times where equity raising is pretty simple,’ says a global broker. An institutional fund manager adds: ‘There have been successful raises by participants with poor track records.’
The ready availability of equity also extends to debt. Non-bank lenders, such as debt funds and insurance companies, are expected to raise their game significantly this year, providing much-needed diversification from the bank-dominated landscape of the last boom. In much of Europe, the markets are already much improved. Alhough there is still a large mountain of non-performing real estate loans to work through, banks are lending again. And new financiers – insurance companies and debt funds –are helping, even if they are still a very small part of the puzzle. Even commercial mortgage-backed securities (CMBS) are staging a comeback, with German housing, Italian offices and Dutch assets providing the backing. ‘Debt is not a problem for a grown-up business,’ says an interviewee.
It is not the same everywhere, however. The most liquid markets of Northern Europe expect the flow to swell further, as do those in Southern Europe. But in the Nordics and Central and Eastern Europe, respondents are a bit less exuberant in their expectations. In Turkey, monetary tightening, the fallout from conflict in neighbouring Syria and slowdown in the economy have dimmed the mood, while the economic sanctions imposed on Russia are clearly hitting home – 56% of respondents say there will be substantially less debt available in 2015.
AVAILABILITY OF DEBT DIFFERS PER COUNTRY
The availability of debt also differs per country. ‘Italian banks have cleaned up their balance sheets but they are not yet prepared to recommence lending to the real estate sector,’ says a local. And in Russia and Turkey, a significant proportion of survey respondents expect less debt to be available in 2015. For sanctions-strapped Russia, it is 70%.
There are also concerns that the debt market may have rebounded too far, too fast. ‘In Germany, the Landesbanken are acting on a level similar to pre-crisis.’ ‘The behaviour of the banks is quite worrying,’ says one pension fund manager. ‘They are back into relatively loose lending, based on volume targets. I am surprised that has happened quite so quickly. I don’t detect more discipline in terms of their behaviour compared to 2006.’
Other parallels with the boom years are being signalled. In most of Europe’s main markets, growth in values has far outstripped any rise in occupier activity. ‘Property prices are defined by the amount of capital that one can find, not value.’ ‘What’s really driving all this activity is the availability of capital rather than the underlying fundamentals,’ says a banker. ‘It just comes down to people needing to deploy capital.’
DISCONNECT PERSISTS BETWEEN VALUES AND RENTS
For some, the disconnect between values and rents is all too reminiscent of the pre-crash period. ‘We know how the story ends, we just don’t know when.’ ‘We’re selling because people are forecasting good rental rates and low cap rates. That sounds like the top to us,’ says a pan-European opportunity fund manager. ‘It is as if the credit crunch was never there, and that for me is a signal to go,’ says one REIT chief executive, who is ‘selling to third party money managers who are raising equity from pooled clubs and getting debt from banks.’
Shortage of acquisition opportunities remains a significant issue for Europe’s real estate industry, ahead of regulation or the cost of finance. Only 11% of the survey respondents expect this to ease in 2015. ‘Business is going tremendously; the problem is the supply of assets.’ ‘The only problem is that we have more money available than product to invest in across Europe.’ ‘If you have the capital, you should have spent it yesterday.’
That large quantities of capital are moving globally is now a given, and this cross-border cash can move markets. In core Europe, real estate has become a victim of its own success and its current attractiveness compared with other asset classes. ‘It’s pretty challenging. Europe has been found now by so many global investors. It’s very crowded. The number of global investors looking at Europe has an impact on prices.’
The high price tags and scarcity of acquisition opportunities for core assets is forcing some to consider taking on more risk, simply to participate in real estate investment. Competition for prime assets in Europe’s major real estate markets is leading property investors to continue their move into secondary assets and recovering markets, the report concluded. But capital nonetheless remains choosy, both about the kind of assets it wants and where it will go.