Residential property and hotels will likely provide the type of strong rental growth necessary for investments in Europe to out-perform, according to Invesco Real Estate (IRE).
Supported by this assessment the global real estate investment manager is looking to grow both its European residential ($720 mln / €631 mln) and hotel (US$462 mln) portfolios to $2 bn, respectively, over the next three years.
On 17 July, IRE announced the launch of an open-ended fund to invest in hotels across Europe, with an initial equity commitment of €179.5 mln from 10 institutional investors. Targeting a 6%-7% per annum gross income return, the fund is launching with a €200 mln seed portfolio of four assets in the Netherlands and Germany, with a view to growing the fund to €500 mln in the first two years. It will not invest in the UK.
IRE is also actively buying for its various strategies. One of the latest transactions came at the end of May when IRE agreed a £54.5 mln (€63 mln) forward funding investment in a Build-to-Rent (BTR) residential development in South London.
The 180-unit 'East Tower' scheme comprising 1, 2 and 3-bedroom apartments and penthouses, is being developed by London-based CNM Estates at the Sutton Point mixed-use development.
This follows IRE's recent investment of £116 mln and management of a portfolio of 580 PRS units in Southern England in conjunction with joint venture partner platform in addition to residential projects in Spain and Germany.
London remains a key target for international real estate capital now that the initial shock of last year’s Brexit referendum result has worn off, according to Andrew Hills, senior director of Client Portfolio Management at IRE.
Underscoring this point IRE agreed in April to pay £150 mln for a 50% stake, alongside Land Securities, in Southside Shopping Centre in Wandsworth, one of the largest retail destinations in London.
That transaction was on behalf of IRE's pan-European core strategy. The purchase of Southside can be seen, IRE said at the time, as is a vote of confidence in both the resilience of the UK retail market and overall UK consumer spending.
Global player
IRE started its real estate business in 1983 in the US and is now one of the top five real estate investment managers in the market, and (one of the) largest residential property owners and has transacted c.US$19bn of assets in that sector globally.
Invesco expanded to Asia in 2006 and acquired AIG’s real estate business there in 2010.
‘The European business, dating from 1996, has been very active in last years on behalf of European, US and Asian institutional capital,’ Hills said. With a portfolio of €6.8 bn at end-2015, IRE featured in 60th place in PropertyEU’s last Top Investors ranking based on AUM.
IRE now manages about $66 bn of assets globally across a wide range of risk strategies and asset types.
‘2016 was another very busy year for us in Europe as we transacted €2.5 bn across 65 acquisition and disposal deals for a range of strategies and funds,’ Hills noted.
(One of) the largest was the sale of a portfolio of seven hotels from its second pan-European hotel strategy to Swedish hotel specialist Pandox for €415 mln. The properties are located across Austria, Germany and the Netherlands, and part of the NH, Radisson Blu and Park hotel brands. The sale generated a return above the original target of a net IRR of 12%, prior to the formal end of the fund’s life.
There have been 27 deals so far this year for US$1.6bn. Including those for the residential strategies, notable transactions were the acquisition of Holiday Inn Düsseldorf City, Sheraton Grand in Krakow and the opening of the first Adina Apartment Hotel in Nuremberg.
A key support for IRE’s core, value-add and opportunistic real estate strategies are its network: 451 employees and 21 regional offices across the US, Europe and Asia. Another is firm’s global research capacity, which generates twice yearly Outlook reports on the regions.
European Outlook
The European Market Outlook report states that rental growth will be more important than ever over the next few years as economic forecasts point to an increasing convergence among the majority of European markets.
This movement follows on from a similar trend at the continental level as a synchronised global upswing is resulting in a similar outlook from a GDP perspective, said Kim Politzer, Senior Director, European Research at IRE.
Even the political volatility created by the UK’s pending exit from the European Union and the potential for short-term inflationary ‘pulses’ across the continent have not fundamentally changed IRE’s economic assumptions compared to a year ago.
‘The European numbers point to broad-based growth but the forecasts for individual markets are becoming less differentiated,’ Politzer said. Forecasts for rental growth in the IRE H1 2017 European Outlooremain clustered and are expected to be in line with inflation.
While the spread between real estate yields and government bonds is seen narrowing as bond yields begin to rise the spread should ‘stay within normal bounds’.
A more granular analysis of the potential rental growth, based on asset and micro location characteristics, will therefore be more important for real estate investments rather than generic market selection for core investment strategies.
The report suggests focusing on ‘emerging sub-markets within gateway cities’ benefiting from infrastructure investment or existing good public networks. Sales, the report says, should be considered for assets that are unlikely to deliver NOI growth, particularly in ‘hot’ markets such as Sweden.
Firm economic fundamentals over the next few years, IRE believes, should make it possible to undertake higher risk strategies in the value-add opportunistic space, by acquiring short-term leases or vacancy in markets like Stockholm and Dublin, that have shown rental growth in the last 24 months, or undertaking refurbishment or development in supply constrained markets.
Pictures: Andrew Hills, Kim Politzer
