LaSalle forecasts European deal volume of ‘at least’ €160b

Real estate investment management firm LaSalle Investment Management is forecasting a bumper year for European real estate in 2014.

According to Mahdi Mokrane, head of European research and strategy at LaSalle in London, deal volume will increase ‘at least’ 15% on the €140 bn transacted last year. That would bring the total to €160 bn.

The direct investment deal volume in the first quarter is already significantly up on last year, according to Mokrane. The main driver is two-fold: there is an extended interest on the part of investors in different geographies as well as an increased interest in having a broader real estate portfolio, including logistics, residential, hotels and student housing.

Also, there has been a big increase in the number of large transactions, according to Mokrane: ‘The sheer average deal size has increased. What’s more, since early 2014, direct real estate deals have once again topped the billion euro mark, and we’ve seen several multi-billion loan portfolio sales. The most significant is undoubtedly Ireland’s IBRC sale of five loan portfolios to a number of investors for a combined face value of more than €19 bn.’

Rewarding assets
LaSalle Investment Management completed €4.2 bn of deals in Europe last year and expects ‘a further strong performance this year’, according to Mokrane. In particular, LaSalle is very interested in the UK, Germany, France, the Benelux region and the Nordics ‘because we find rewarding assets there’, he said. ‘In addition to investing directly we are also interested in commercial debt, including whole loans, stretched senior debt and mezzanine debt. We’re also interested in assets with distressed capital structures. We buy from both traditional - institutional - sellers and relatively distressed entities. Off-market deals are even better, when you can get them!’

LaSalle’s strategy is also to seek out opportunities near prime assets that offer better returns, said Mokrane: ‘We like CBD offices but they are ‘keenly priced’, so we prefer to look at offices on the edge of the CBD, such as just west of the CBD in Munich or parts of Paris. This gives you an attractive initial yield premium of between 100 and 250 bps. For example, a prime office in London’s West End might generate an initial yield just north of 4% but an office in London Bridge or Hammersmith, the so-called Edges of the CBD, could get you 5.5% to 6%,’ he said.

Sizeable warchest
Fresh from a bout of capital raising which netted the firm $7 bn last year - a large portion targeting European markets - LaSalle has amassed a sizeable war chest to enable it to seek out good investment opportunities. ‘We think this year will be strong because there is more coming up for sale - sentiment has improved significantly,’ Mokrane said. At one session at Mipim earlier this year, 72% of participants polled said that they thought the market was much better than a year ago. ‘Buyer and seller expectations are also more closely aligned today than a year ago,’ Mokrane said.

While European real estate markets are recovering, despite capital markets being slightly ahead of the fundamentals, the fear of deflation is still spooking some investors. However, that fear is more of an issue in markets such as Spain and Italy and is essentially linked to the euro’s strength. For Mokrane, however, the threat ‘is a bit overblown’. ‘There is no fear of deflation in countries such as the UK and Sweden. We’re in a low-inflationary environment but that won’t last. The fear of deflation is a fear of the moment. It would be devastating if it happened but we’re attaching a low probability to it.’

Alternative assets
Moving away from prime assets to alternative assets is also a smart move in an increasingly competitive climate, Mokrane warned: ‘The biggest challenge for investors today is to avoid undue competition for assets that tick all the boxes, such as trophy assets. Competition for very prime assets is fierce, often garnering a dozen or more bids on a prime deal. We think our investors should avoid these overly competitive auctions and look more at alternatives, such as the offices on the edge of the CBDs that I mentioned.’

Another challenge is Europe’s exceptionally low bond yield environment, according to Mokrane. ‘The right question is: how will our look-back returns stack up five or seven years from now when interest rates will have normalised? Our goal is to add value to properties despite the low yield bond environment - and that’s a challenge. We like to find value where other people don’t see it!’