Undeterred by the ongoing Brexit-vote hangover and a raft of contentious elections, global investors spent 2017 buying up larger and larger chunks of European property.
What started as an awkward transitional phase has taken on a lasting and dominant character that will shape the European real estate sector for years to come. If 2017 began as the Year of Uncertainty, it gradually morphed into the Year of the Mega Deal.
Several volume records were broken, some more than once, as European and global investors dug deep into their vaults to snap up the scarce commodity of super-prime assets, big portfolios and whole asset and management platforms. Pricing at the top end of the market has climbed as aresult, compelling some buyers to move into secondary markets and ‘alternative’ segments.
The net effect of all this investment will hopefully be positive, but only time will tell. As some observers have warned, nonprime assets acquired too dearly at the top of the market tend to become ‘the bleeders’ in the next downturn.
Pillars and pitfalls
On the face of it, 2017 entailed a mix of upsides and downsides for commercial property.
The upside included strong economic recovery across most of continental Europe (2.3% GDP growth) and low interest rates, thanks in no small part to continued Quantitative Easing. The rationale of real estate investment is also finally expanding beyond capital value growth. ‘The real estate investment cycle has been roaring for the past three years, but now the rental cycle is taking off as well,’ says Peter Papadakos, analyst at Green Street Advisors.
The rosy fundamentals have helped attract increased capital flows from all corners of the globe. According to Cushman & Wakefield, cross-border investors spent €132 bn on European real estate in the first half. The largest portion (69%) involved European investors buying outside their domestic market. About €39 bn came from the US, followed by Apac and the Middle East.
The risk side of the ledger featured rightwing political movements threatening election breakthroughs in a number of Western European countries. Victories by ‘soft populist’ Emmanuel Macron and the ‘establishment’ in Germany and the Netherlands have at least temporarily halted the threat.
In any event, most investors appear to see continental Europe as a safe haven politically compared to other parts of the world such as the Korean peninsula. The most obvious potential 2017 pitfall was the hangover from the UK public vote the year before to leave the European Union. Real estate investors largely hit the pause button on dealmaking in the UK in the run-up to the referendum in June 2016 and afterwards.
Mega deals
This appeared to change in the second quarter of 2017. A flurry of large transactions in central London, mainly by Asian investors, restored the UK as Europe’s largest property investment market. The UK consolidated this lead in Q3, turning in a 12-month total of €70 bn, compared to €59 bn for Germany.
Rather than a broad-based buying spree, the UK’s ‘recovery’ largely comes down to Hong Kong players, in particular, picking up trophy assets in central London. In Q1, for instance, TH Real Estate sold One Kingdom Street in London for £292 mln (€344 mln) to Hong Kong investor CC Land Holdings in an off-market deal.
Weeks later CC Land agreed to buy the Leadenhall Building, known as the ‘Cheesegrater’, from developers British Land and Oxford Properties, for €1.3 bn. At the time, this was the largest single-asset real estate transaction ever in the UK. This record lasted all of three months until LKK Health Products Group, another Hong Kong-based group, acquired the Walkie Talkie tower for the equivalent of €1.4 bn.
Continental records
Korea was among a wide range of international capital sources that brought the mega deal roadshow across the English channel. Marshalled by Amundi Real Estate, a consortium of the Korean Federation of Community Credit Cooperatives and Meritz Securities agreed in April to acquire the renovated and expanded Atrium office complex in Amsterdam.
The investment volume of over €500 mln trounced the previous Dutch record of €350 mln for a single-asset deal. Towards the end of the year, another Dutch record was tested as CBRE Global Investors led an institutional consortium to take control of a €1.6 bn domestic department store portfolio. While the actual investment volume was not disclosed, this was likely one of the largest real estate and retail property transactions ever in the Netherlands.
Central and Eastern Europe
Real estate records also tumbled under the huge weight of capital in other parts of Europe.
CPI Property Group, an investment and development company majority-owned by Czech billionaire Radovan Vitek, acquired 11 retail centres across Central and Eastern Europe for €650 mln in March, while the South African-backed Chariot Top Group picked up 28 retail assets in Poland for about €650 bn and sold on 12 to Echo Polska for €692 mln.
As Richard Divall of Colliers International notes: ‘It used to be mainly German and UK institutional money coming to CEE, but now we are seeing capital from the Middle East, South Africa and Asia.’
Paris and Berlin
Paris claimed the largest single-asset deal in Europe as Amundi and two French peers acquired the Coeur Défense for €1.8 bn in October. The mega deal capped a 10-year period during which Europe’s largest office complex (159,000 m2) experienced the rise and fall of both the CMBS structure and Lehman Brothers, before being acquired at a steep discount by Lone Star.
With only slightly less dramatic effect, Oxford Properties, part of Canadian pension investor OMERS, entered the German market in early October via the joint acquisition of the Sony Center in Berlin from Korea’s NPS for €1.1 bn. This was the third trade of the 112,000 m2 mixed-use complex in 10 years.
Oxford’s Paul Brundage explained the Sony Center will allow the investment company to establish a platform in Berlin with an ‘onthe- ground’ team and allow it to build credibility in the market.
Platform proliferation
Oxford Properties’ strategy was to carry out a mega deal with partner Madison International as a basis for building a larger investment platform. Several other investors took the opposite approach: completing massive mergers and acquisitions (M&A) to place a lot of capital in one go and to acquire instant scale in the European real estate arena.
Chinese sovereign wealth fund CIC completed the largest real estate transaction ever in Europe by buying Blackstone’s logistics platform Logicor for €12.2 bn in June. CIC’s whopper deal is part of China’s ‘One Belt, One Road’ initiative to gain control of key infrastructure networks around the world. Interestingly, CIC has reportedly sold 10% of the business back to Blackstone and hired the US private equity giant to manage the logistics warehouses.
Asian capital flows into European logistics property did not end with Logicor. Earlier in the year GIC, Singapore’s main sovereign wealth fund, completed the acquisition of P3 Logistic Parks for €2.4 bn and in October Singapore-listed Global Logistic Properties entered Europe with the acquisition of Gazeley for around $2.8 bn (€2.4 bn).
Car parks received a major boost in their drive to move from a niche to mainstream investment sector when US private equity firm KKR won the bidding for Q-Park with a €2.95 bn all-share offer.
Company combines
Consolidation in the French real estate investment sector continued apace in 2017 with Gecina acquiring Eurosic; Icade taking over ANF Immobilier and China’s Fosun adding Paref to its portfolio of companies.
But the real action did not come until December when three major M&A deals were announced. It was left to Paris-headquartered giant Unibail-Rodamco to unveil the ‘mother of all mergers’ when it announced a €21 bn cash and share takeover bid for Sydney-listed Westfield. The tie-up gives Europe’s largest shopping centre landlord entry to, and instant scale in, the US and the UK, as well as a signifi cant pipeline of projects.
The deal far outshone a retail transaction announced just days earlier which saw UK retail REIT Hammerson make a €3.9 bn recommended offer for smaller peer Intu.
Investment managers
Patrizia, a German listed company and fund manager, revealed in November that its AUM was set to grow 50% to €30 bn with the acquisition of institutional fund manager Triuva. The purchase of Triuva from the restructured IVG Group places Patrizia amongst the top 10 European investment managers.
Around the same time, a new name appeared in the firmament as Principal Global Investors (PGI), the asset management arm of US-based Principal Financial, acquired Internos Global Investors in a bid to gain European exposure. The Internos team will stay the same, but the company will be renamed Principal Real Estate Investors Europe.
Rankings and rebalancing
PropertyEU’s own highlights during 2017 included the relaunch of EuroProperty, the longest running pan-European property publication, as our weekly news and analysis bulletin, and the Deal of the Decade Awards ceremony in April that celebrated our own first 10 years of reporting on European real estate.
Patrizia won the overall award and Barbara Knoflach, global CEO of investment management at BNP Paribas Real Estate, was named the Most Infl uential Real Estate Woman of the Decade. This ties in with a welcome trend in 2017 which saw more women rising to top management roles. Examples include Méka Brunel becoming CEO at Gecina; Isabelle Scemama leading AXA IMRA; Anne Kavanagh’s appointment to head investment at Patrizia; and Sonja Wärntges taking the helm at DIC Asset.
PropertyEU would like to echo Scemama in her bid for more diversity: ‘I’m 100% sure that the rebalancing will continue. Women will continue to be more prominent in the real estate sector and greater diversity will happen.’
