MAGAZINE: Sovereign money is king

Sovereign wealth funds were behind four of the five largest European investment transactions in November and December

Central London’s real estate investment market topped a bumper year by clinching the top three deals recorded by PropertyEU Research during the last two months of 2013. All involved sovereign wealth funds as buyers of office-led schemes. The largest of the trio – and the year – involved St Martins, the UK property arm of Kuwait’s sovereign wealth fund, acquiring the ‘More London’ estate on the south bank of the River Thames for a reported £1.7 bn, or just over €2 bn. The next two transactions by volume after ‘More London’ share common elements. Both were acquisitions by sovereign wealth funds and both shared the same vendor, Blackstone Real Estate, seeking to earn a neat package as it exited two of its earlier opportunistic/value-add office ventures in London.

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At year-end, the US private equity player sold its 50% stake in the Broadgate Estate held by Blackstone Real Estate Partners Europe III and Blackstone Real Estate Partners VI to GIC, formerly the Government of Singapore Investment Corporation. Neither side revealed the financial details but the investment volume was widely reported to be €2 bn, just under the amount paid by St Martins for ‘More London’. The third-largest transaction of the review period involved Chinese sovereign wealth fund CIC and underscores the emergence of China among the top ranks of big-ticket Asian investors targeting London. CIC, which is charged with managing part of China’s foreign exchange reserves, reportedly paid in the region of €940 mln to acquire the 120,000 m2 Chiswick Park office centre in west London from Blackstone. To put this deal into perspective, CIC shelled out in one stroke the equivalent of almost 31% of the €3.05 bn in European commercial property transactions carried out by the Chinese in 2013, according to data compiled by RCA. The 2013 volume recorded for the Chinese marked a 211% increase on their transaction level of €978 mln the year before, RCA said. The upshot of this was that investment turnover in Central London rocketed almost 40% compared to 2012. Savills reported a total volume in excess of $20 bn (€15 bn). The main investment group came from Asia, accounting for $5.8 bn, an increase of 99% on 2012. UK buyers were just behind at $5.6 bn. Not surprisingly, the City of London, the capital’s financial centre, was the favoured location. It captured $12.2 bn of investment, while the West End raked in $8.4 bn. Stephen Down, head of Central London investment at Savills – which was involved in over 30% of Central London deals – said 2013 was a record year and pointed to capital flows from Kuwait, Singapore, China and Germany which were drawn in by the city’s appeal as a global platform. While the recovery in real estate investment is being most keenly felt in London, the trend is playing out across the globe. Jones Lang LaSalle reported that improving economic conditions pushed global volumes in Q4 to $183 bn, helping to drive the figure for the full year to $549 bn. This is an 18% increase on 2012. European markets, JLL said, saw some of the best results since the last boom year of 2007, recording growth of 14% overall in dollar terms. Full-year volumes came to €184 bn. The UK and Germany, two of the big three markets, recorded growth of 19% and 17% respectively. But in contrast to the lean years following the financial crisis, European transaction activity is increasingly occurring in smaller European markets. There have been some deals that deserve the title ‘mega’, given the relative size and strength of a particular market. On this measure the stand-out deal in our review period was the acquisition by Invel Real Estate Partners of 243 assets in Greece from the National Bank of Greece for €653 mln. Not a bad ice-breaker for what has been a no-go area for investors for about five years. Other notable deals during November and December 2013 include Generali Real Estate taking a 33% stake in Milan’s CityLife real estate project from Allianz Real Estate for €367 mln; a Latin American investor buying the Agbar Tower in Barcelona for €150 mln; and a Blackstone fund completing the acquisition of two shopping centres and an office property in Italy – which is not a popular investment location – for a total of €264 mln.

From Russia with love
Central and Eastern Europe experienced a big spike in investment activity last year. CBRE said volumes for the region topped €10 bn, around 31% higher than 2012 and the second-strongest year since 2008. However, this figure is distorted by the fact that Poland and Russia (which some classify separately to CEE) were the drivers for this growth. The two markets alone accounted for 80% of investment. The Czech Republic is the third most important market but it is a bit of an odd fish – in some years it has very strong volumes and in others it is relatively quiet. Last year was good as activity increased 68% year-on-year. Smaller markets Romania, Hungary and Bulgaria still have some way to go before they can talk of full recovery but the seeds are there. CBRE said Romania (€229 mln) and Hungary (€225 mln) saw volumes ‘increasing substantially’. Several markets and sectors deserve particular attention during 2014. One is Ireland, the poster-child for financial recovery. Speaking at the launch of CBRE’s Outlook 2014 report for the Irish market, Enda Luddy, managing director at CBRE Ireland, said: ‘2013 marked a major turning point for the Irish economy and in turn, the property market. Although there are several legacy issues still to be tackled and our economy remains susceptible to macro economic developments, 2014 is shaping up to be an even busier year for the Irish commercial property market than last year. During 2013, CBRE recorded 96 investments of over €1 mln, totalling almost €1.8 bn, compared to 35 deals totalling €545 mln in 2012.

Markets to watch
BNP Paribas Real Estate has singled out 10 secondary markets with strong potential which investors should watch in 2014: Warsaw, Dublin, Amsterdam, Milan, Barcelona, Rome, Madrid, Brussels, Luxembourg and Bucharest. Last year, these markets recorded an estimated total investment volume of €10.4 bn, up 73% on the previous year. The firm notes that the spread between office prime yields in the core markets of Paris, London and the big four German cities, and tier-two markets has never been so high, offsetting the risk for these less liquid markets. The gap between average prime office yields in core markets and tier-two markets stood at an historic high of 160 bp at end-2013 compared with 45 basis points in 2007. While several brokers predict 2014 will herald the best transaction volumes across Europe since the crisis, PropertyEU is continuing to drill down to see what this will mean on the ground in individual markets and property segments. This edition features a report on our investment briefing on the residential sector Long just a German portfolio game, investors are increasingly spreading their wings into the housing markets in France, the UK, the Netherlands and even Ireland. Another sector to watch is logistics, the theme of our second investment briefing of 2014 which is taking place in London on 6 February. The logistics sector is seeing increasing investment flows from a broad range of institutional and private equity investors. One of the latter who was inadvertent√ly omitted for our December Deal Watch is Delin Capital Management. Since its inaugural logistics fund was established in November 2012, Delin has completed a string of deals in the UK and the Netherlands. In early January it announced it had invested €98 mln in two UK deals and secured a €74 mln loan against its Dutch portfolio to help fund further acquisitions in 2014.

by Cormac Mac Ruairi