Europe continues to attract vast amounts of capital from abroad, but the dynamics of the market are changing, delegates heard at PropertyEU's Global Capital Flows & Investment Roundtable, which was held on Thursday at Colliers International’s London offices.
‘There are real structural changes at play, the fundamentals are changing now that we are near the end of the cycle,’ said Damian Harrington, director and head of EMEA research at Colliers International.
US funds are less active in Europe and investments from the Middle East are also down, but this decline is compensated by new money coming from Australia and most notably from Asia, including South Korea and Japan.
Traditional investors are playing a lesser role, but ‘they are being replaced by high net worth individuals investing in core-plus funds, often open-ended funds,’ said Jonathan Lurie, managing partner of Realty Corporation. ‘From a supply of capital perspective Europe is still being buoyed by plentiful fresh money but by new, less price-sensitive retail capital that is not as focused on interest rate increases.’
Asian capital
HNWIs, South Korean insurance companies and Singaporean REITs are pushing into the European market, replacing 'sovereign wealth funds that have gone very quiet and also the Chinese, who I believe will come back with a different, more focused strategy following the one road, one belt theme,’ said Richard Divall, head of cross-border capital markets for EMEA at Colliers International. ‘Australian and Japanese investors are also coming in, as well as the second wave of Canadian pension funds.’
European real estate has waited a long time for the expected wave of Japanese investment to materialise, but now it’s finally happening, panellists agreed.
‘The arrival of Japanese capital will have the biggest impact on Europe over the next 12 months,’ said Eduardo Gorab, associate director of research & strategy at LaSalle Investment Management.
It will a long-term trend, said Nic Fox, partner and head of Middle Europe at Europa Capital: 'I absolutely believe that Japanese capital will come in enormous quantities and that it will be a 10 or 15-year story rather than just for the next 12 months.’
Game of Thrones cycle
Everyone agrees the end of the cycle is near, but this has not led to a marked slowdown in activity. ‘We call it the Game of Thrones cycle, because for years we have been saying that winter is coming,’ said Lurie. ‘Yet there is still an enormous inflow of private capital into real estate.’
Foreign investors are acutely aware of the cycle and this makes them less adventurous and more likely to stick to the markets they know. ‘They tend to diversify more by sector than by geography at this late stage of the cycle,’ said Luca Giangolini, partner, Europe, Capra Global Partners. ‘It has to do with liquidity and exit risk, which is why we haven’t seen a huge amount of interest for places like Greece.’
Residential attracting interest
The residential sector has been attracting a lot of interest and now accounts for 16% of investments against 6% at the beginning of the cycle. It also offers the most untapped opportunities, said Harrington: ‘Resi will make the market interesting, as the urbanisation trend will continue and demand will grow, but investors must be aware that it is a capex and management-intensive sector.’
The residential sector is extremely promising across Europe but investors should be aware of the risks, warned Lurie: ‘Many PRS schemes that are being delivered now are achieving higher rents than what was originally underwritten years ago, but the ones being built now that rely on unabated future rent growth are unlikely to achieve their targets. Salaries are not going up in line with rents and at some point there will be an affordability crunch. I think many people may end up being disappointed with their PRS investments if rents flatline.’
Giangolini agreed: ‘There will be many opportunistic investors looking to develop resi schemes and charge premium rents who will be disappointed.’ The future belongs to longer-term investors who develop affordable PRS and settle for less than spectacular returns, he said.
A changing office sector
The office sector is also undergoing major changes, experts agreed, mainly due to the disruption caused by the growing demand for flexible workspaces. WeWork has gone from nowhere to being the single largest office tenant in London and New York, and European cities are slowly but surely following that trend., while traditional landlords are reacting and establishing their own flexible offers.
‘WeWork and other leading co-working providers are offering a compelling product that resonates well with the occupier market, because few companies now aspire to sign a restrictive 15-year office lease,’ said Lurie. ‘This is not just about start-ups but also large corporates that can’t robustly forecast staffing levels. This sector has a lot of runway ahead.’
