#MIPIM TOP 100 INVESTORS, CITIES & SECTORS: Investors broaden their footprint

Cities and regions that have been off the radar in recent years are now back into focus for European real estate investors.

London remains the undisputed first port of call for most global real estate investors targeting the UK and Europe. Indeed, the UK capital accounted for no less than €34.4 bn of transaction volume in 2013, according to data from Real Capital Analytics. That is by far the highest figure for the 40-odd cities surveyed in this inaugural publication of Top 100 Investors, Cities & Sectors and almost on a par with the level recorded for the UK capital at the peak of the market in 2007.

After London, there is a huge gap in terms of total investment volume. The nearest competitor this year is Berlin with a total volume amounting to less than a third - or €9.7 bn - of the total invested in the UK capital. Nevertheless, that figure represents a record for the German capital in more than one respect. Not only does the figure mark a seven-year high; in previous years, Paris has been the perennial number two after London. Indeed, Berlin has convincingly edged Paris out of second position this year: real estate investment volume in the French capital amounted to just €6 bn, marking a gap of almost €4 bn with the new number 2. In the past 12 months, Moscow also gained on its French peer: the Russian capital recorded transactions totalling €5.9 bn last year, slightly short of the Paris figure.

PropertyEU’s overview of top deals per city for 2013 reflects the changes in the hierarchy at the top. London may have bagged the biggest transaction for the year – St Martins acquisition of More London for €2 bn – but Moscow is also making waves and ranked second in terms of the size of its biggest deal. Overall, the city generated two mega transactions last year including the Metropolis mall acquired for €1 bn.

Tier-two cities rise in the ranking
Together the UK, Germany and France make up the favourite destinations for most cross-border investors, but only the UK’s capital generated a deal in the top 5 in 2013. Indeed, Paris and Frankfurt come in at numbers 6 and 10 respectively. Meanwhile a lesser German city – Düsseldorf – made it into the top 5 with the acquisition of the Kö-Bogen mixed use development by Arte-Invest Real Estate. Other cities deserving a notable mention in the top 10 include Milan at number 3 with the acquisition of the Porto Nuovo development by Qatar Holding; Katowice at number 7 with the acquisition of the Silesia City Center by Allianz Real Estate, ECE and a Chinese investor; and Odense at number 8 for the purchase of the Rosengårdcentret by an ECE fund. Another regional city that made it into the top 10 is Birmingham with the acquisition of a 33% stake in the Bullring shopping centre by UK REIT Hammerson and Canadian pension fund giant CPPIB.

The rise of regional cities reflects a growing appetite for risk, according to Simon Mallinson, executive managing director EMEA of Real Capital Analytics. ‘In Germany we are beginning to see investors arbitrage on pricing between the seven Tier One cities – Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart – and the cheaper Tier Two cities, such as Dortmund. The average price per square metre for the top decile of transactions in Tier One cities was €7,000, whereas the equivalent in Tier Two cities is €2,000. It is a pattern that we have also witnessed in the UK and US markets.’

Indeed, there is a good case for investing in UK’s regional city office markets, according to a new report by Cordea Savills. Office markets in regional UK cities are set to benefit from rental growth due to the ‘ripple effect’ from London’s continued strong performance, the adviser concludes. Although prime office capital values in the UK’s ‘Big 6’ regional cities (Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester) are still 29% below their 2007 peak, investment volumes have started to pick up in the last few quarters as a growing number of firms move towards making strategic leasing decisions. Due to a lack of new construction in the regions over the past four years, quality space is limited which ultimately will fuel rental growth.

According to Jim Garland, research analyst at Cordea Savills, previous cycles reveal that regional rental recovery lags London and he believes that history will repeat itself this time around. ‘However, as occupier demand improves, the lack of new build space in the regional cities is expected to result in a stronger rental rebound for the best quality space. Although the weight of equity from overseas investors continues to flow into London, many UK institutions have been priced out of the capital and are already targeting higher yielding properties in the regions to get ahead of the curve.’

Beyond the 'big six'
According to Cordea Savills, secondary opportunities outside London can be found in key regional cities that have strong clusters of employment in the technology, pharmaceuticals, oil, insurance and finance sectors. In addition, pockets of stronger demand can be found in smaller university cities and South East towns with a high concentration of employment in growth sectors such as TMT.

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.’

Investors that look beyond prime assets in major European markets will find higher yields, the report notes. For example, office investors in Munich can achieve yields of approximately 4%, but those willing to invest in smaller German markets such as Stuttgart can achieve up to 6.5%. beyond the ‘big six’. According to Michael Fenderl, head of research at Düsseldorf based Aengevelt Immobilien, some investors are beginning to question whether core properties in the metropolitan cities still provide a satisfactory upside compared to German government bonds. More and more investors are saying ‘no’ and turning to mid-sized cities where higher returns can be found, he added. ‘Prime yields in Bremen, Dresden, Hanover, Leipzig and Nuremberg currently range between 6.4% and 6.8%, about 200 points above the Big Six,’ he pointed out.

A good example of the drive into the secondary locations is the acquisition last September of the Kröpcke Shopping Centre in Hanover by Union Investment Real Estate for its open ended real estate fund Uni-Immo: Deutschland from Düsseldorf-based developer Centrum Group. Even though the parties agreed not to disclose the purchase price, market watchers value the deal at around €180 mln. ‘It fits the picture, that this was the largest single deal in the third quarter exceeding in volume every other non-portfolio transaction including those in the big city markets,’ said Helge Scheunemann, head of research at Jones Lang LaSalle.

For Union Investment the Kröpcke deal is part of a broader strategy. ‘With our first investment in Hanover we have taken a further step to diversify the portfolio of the fund across mid-sized German cities,’ said Philip La Pierre, Head of Investment Management Europe at Union Investment Real Estate. In 2012, the Hamburg based fund provider already acquired the Shopping Centre S√ophienhof in Kiel for its UniImmo: Deutschland fund.

Now Union Investment wants to start a spending spree in secondary locations with a new €350 mln fund set up for institutional clients. ‘The UniInstitutional German Real Estate will focus primarily on commercial property in mid-sized German cities,’ said Fabian Hellbusch, head of marketing at Union Investment Real Estate.

By Cormac Mac Ruairi & Judi Seebus

Our new publication TOP 100 INVESTORS, CITIES & SECTORS provides an overview of the biggest investors and the biggest commercial real estate transactions in the top 40 cities in Europe in 2013. The publication also contains a ranking of the 100 Most Active Investors in Europe last year. The publication is available at MIPIM in Cannes where hostesses will be handing them out at the entrance of the Palais des Festivals. Alternatively, visit our booth at the Frankfurt stand at the Riviera hall R33.07 to pick up your own copy and speak to our team.[/]


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