PropertyEU sets out to identify the cities moving up the line for the biggest bowl of the €135 bn direct real estate investment soup in Europe

PropertyEU sets out to identify the cities moving up the line for the biggest bowl of the €135 bn direct real estate investment soup in Europe

Oliver Twist who was originally deprived and eventually prospered comes to mind when looking at how individual countries and cities fare in terms of direct real estate investment in Europe. There is a definite pecking order: a handful of primary or ‘Super’ cities get the bulk and the smaller, second-tier locations have to make do with the leftovers. This was particularly the case in the first post-crisis years when investors clung to the perceived security of the ‘Big Three’ country markets (the UK, Germany and France), giving them up to 80% of the overall volume. Within this group most of the euros invested in the UK and France was claimed by the capitals. In Germany, the spoils were divided up slightly more evenly between the ‘Big Six’ cities (Berlin, Hamburg, Munich, Cologne, Frankfurt and Düsseldorf).
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The rest of Europe’s markets, classed as second tier and lower, had to make do with more modest-sized or even empty bowls of the investment soup. More recently, as sentiment is picking up across the sector and market after market reports increasing volumes and new records in terms of property investment there are numerous signs the best of these ‘Oliver Twist-cities’ are moving up the food queue, albeit with the primary cities such as London and Frankfurt still firmly at the front. The trend appears to be a global one. In a recent report, Jones Lang LaSalle revealed that just 30 cities claimed half of the €3.4 tln of direct real estate investment worldwide over the past decade. JLL goes on to argue that with an estimated 10 dollars chasing each dollar of prime assets, the property sector is no longer considered a consequence of city success, but is actively employed to drive it. JLL’s chief executive Colin Dyer said that the increasing demand for the limited stock of prime assets is compelling investors to look further afield. ‘Investors are moving along the risk curve into second-tier markets, which are becoming more conscious of how real estate can make them attractive to investors. The move to secondary cities is also a major theme of the 2014 edition of the Emerging Trends in Real Estate Europe report published by the Urban Land Institute and PwC. Simon Hardwick, real estate partner at PwC Legal, said: ‘Intense competition for the limited supply of suitable property will inevitably continue to have an impact on prices – particularly in global gateway cities, including London. This will result in investors having to look at other opportunities and to accept more risk.’ London tops JLL’s list of the top 30 cities with almost $25 bn of investment for the first 9 months of 2013. Paris is in fourth place on $10 bn-plus, while Stockholm, Moscow, Munich, Berlin and Frankfurt make up the rest of the European contingent. In order to get a better picture of who their lesser peers and second-tier rivals are in the European region, PropertyEU Research is working on an analysis of the top deals and locations which will be presented in a separate publication in March. The publication will be based on a combination of the European property transaction data compiled by PropertyEU Research on a daily basis; a survey of the most active real estate investors of recent years, and our experience with City Leaders, the guide to Europe’s top investment locations which was published in 2013 in cooperation with the MIPIM real estate fair in Cannes. The upcoming publication in March will seek to identify the top dealmakers of 2013, which city markets attracted the most attention and why. Of course, each city is a coalition of sub-markets: some like the City of London or Amsterdam’s Zuidas district act as powerful magnets for investment spend, while others are less successful. The following pages provide a brief sketch of four city types as defined in the City Leaders publication. The pages are based on our preliminary deal data, supplemented by information from Bulwiengesa AG and Savills. An overview of the performance of some 50 markets will be presented in the March publication, complete with a ranking of the top dealmakers and their top deals per market/sub-market and the investment volumes for the city set against those of comparative locations. This will be supplemented by yields and rent statistics as well as information on key drivers shaping each market’s track record.

Established capital London
The first port of call for overseas sources of equity, the UK capital confirmed its number one position in terms of European real estate investment in the latter part of 2013 with a string of deals by Middle Eastern and Asian sovereign wealth funds. The largest transaction of the year saw Kuwait’s investment vehicle St Martins Property acquire the More London office-led scheme on the south bank of the Thames for over €2 bn. Eleven months earlier St Martins kicked off its 2013 investment programme by purchasing the office scheme at 5 Canada Square in Canary Wharf from clients of Evans Randall for almost €450 mln. Other SWFs also struck in Q4, propelling Greater London to its highest-ever quarterly volume (just over £9 bn) as a flurry of year-end transactions increased activity throughout Europe. The figure is even higher than the peak levels in 2007. ‘London’s popularity among domestic and overseas investors continues to accelerate,’ according to CBRE’s Simon Barrowcliff. ‘Investor perception has changed significantly during 2013, which began with London being seen as a “safe haven” and ended attracting further and more diverse capital as the rental growth story took hold and appetite for risk increased.’ In the March publication we will look at what this means for major markets such as the City and West End.

Knowledge hub Dublin
Emerging from a long and deep recession, Irish eyes are smiling again at the prospect of increasing foreign investment in 2014. The capital, a knowledge hub, is the main beneficiary. One of the first indications of the turnaround came in 2011 when Google splashed out €100 mln on Dublin’s tallest office building. American property investors, who have a knack for spotting potential upside in markets others see as risky, were not far behind. They have focussed on assets in Dublin’s office and residential sectors being offloaded at enticing prices by receivers. Among the largest Irish deals of 2013, two were carried out by US player Kennedy Wilson (the Opera CMBS portfolio and the Clancy Quay residential scheme acquired for a 9% yield). In all Dublin saw €1.3 bn of deals last year and the outlook points to increasing investment in 2014. Enda Luddy, managing director at CBRE Ireland, said: ‘2013 marked a major turning point for the Irish economy and, in turn, the property market. Transactional activity in all sectors of the market was up year-on-year. Although there are several legacy issues still to be tackled and our economy remains susceptible to macroeconomic developments, 2014 is shaping up to be an even busier year than 2013, fuelled to a large extent by an improving domestic economy and by greater availability of debt funding’.

Reinvented capital Warsaw
The Polish capital has long been a darling with international real estate investors. Last year was no exception as players such as CA Immo, Hines, Union Investment and Deka Immobilien all invested in the office sector. Yet, unlike other capital√s that take the lion’s share of investment, leaving little for the secondary cities, Warsaw helps channel a large portion of this foreign equity into other Polish cities because of a perceived shortage of the right assets in its own market. This is most apparent in the retail sector. IKEA acquired Wola Park in Warsaw, but Katowice secured the largest shopping mall deal of the year with the sale of Silesia City Center to an Allianz consortium for €412 mln. The Warsaw office sector, by contrast, seems to have a better pipeline of office properties. JLL reported a 13-year high in completions (300,000 m2), record gross take-up for 2013 totalling 633,000 m2, and net take-up of 451,000 m2. JLL’s Anna M³yniec notes that an even higher completion volume is on the cards in 2014, with nearly 320,000 m2 to be delivered over the next 12 months to the Warsaw market. Over 35% has already been secured with pre-lets. This will be music to the ears to the likes of Tristan Capital Parners which is on the record as saying it would buy more in Warsaw if it could find the right product.

Modern industrial centre Stuttgart
The capital of the southern state of Baden-Württemberg earned the dubious distinction, along with Berlin, of being the only two members of the ‘Big 6’ German cities to record a drop in real estate investment volumes last year. According to JLL, Stuttgart saw €860 mln in deals – a 16% drop on 2012. Berlin dropped 11% to €3.5 bn, while the country as a whole celebrated a volume of €31 bn, its best since the boom year of 2007. Stuttgart’s tumble can perhaps best be explained by the fact that the 2012 volume was inflated by Hamburg Trust’s €400 mln acquisition of the Milaneo shopping centre. In contrast, the largest deal PropertyEU Research recorded in Stuttgart last year was Württembergische Lebensversicherung buying the Killesberghöhe quarter for €165 mln. The jury is still out on 2014, but Colliers says investors are being tempted to move beyond Germany’s Big 6 to the mid-sized cities to avoid the ongoing yield crunch in the core metropolitan areas. Colliers compiled data showing 45% of the €19.1 bn that flowed into German real estate in the first nine months of 2013 went into property in top locations in mid-sized cities. ‘Prices have risen higher than rents in the core markets in the past years, generating increasingly lower yields for investors’ money,’ Colliers’ Andreas Trumpp said.

by Cormac Mac Ruairi