PropertyEU held its bi-annual series of Outlook Investment Briefings in London, Hamburg and New York in recent weeks. Here is an overview of the three different regional perspectives.
The US view: Real estate will ‘shine brighter than ever’
The pressure to invest capital, the search for yield and the relative attractiveness of real estate are stronger than any fears over Brexit or Europe, Adam Handwerker, managing director, Hodes Weill & Associates, told PropertyEU’s Outlook Briefing in New York last month.
‘It is possible that, given the level of uncertainty, institutions may want to pause and catch their breath, but it is difficult to stay on the sidelines until there is a resolution,’ he says. ‘It might be difficult in this climate to stick your neck out and make a decision, but the fact is that pension funds are under increasing pressure to invest due to falling interest rates, they are not allowed time out of the market.’
There may be less capital flow to the UK and Europe in the near term due to the uncertainty, but the initial shock will soon pass even if many questions investors have are likely to remain unanswered for quite some time. But in a context of falling or negative interest rates and volatile equity markets, the attractions of real estate will undoubtedly shine brighter than ever.
‘The increased appetite for higher-yield strategies should continue to support the sector, especially if equities were to decline further,’ he says. ‘We advise sovereign wealth funds and institutions all over the world and they have indicated they want to increase their allocation to real estate further to 10% of total AUM, so investments in the sector at worst will stay flat, but in our view they are likely to increase.’
Outbound capital flows from the Asia-Pacific region are expected to remain strong over the coming years, as institutions there are substantially under-invested in real estate and have been focusing on Europe and the US, he says.
Some are anticipating a ‘flight to safety’ following Brexit, and appetite for core certainly remains strong, but Handwerker says he has also noticed an increasing interest in higher-yielding strategies such as value-add and opportunistic.
Some brave institutions may want to capitalise on market volatility and illiquidity, as this high-risk strategy has served them well in the past. For example, the plunge in the value of UK bank stocks since Brexit could lead these institutions to liquidate assets and property portfolios to keep their capital adequacy ratios, he adds: ‘Bank shareholders will be less than thrilled, but distressed debt managers and private lenders in Europe certainly stand to benefit.’
CEE view: Poland and CEE ‘may not be main beneficiary’ of changes
Brexit and its ramifications could have a negative impact on the real estate sector in Poland and in the Central and Eastern Europe region, according to Piotr Mirowski, partner, director of Investment Services, CEE, at Colliers International in his presentation at the PropertyEU Outlook Investment Briefing which was held in New York last month.
‘The investment market recorded its best year ever in 2015, reaching €9 bn, with investors coming from all over the world and improvements in liquidity and pricing,’ he said. ‘However, now in a post-Brexit scenario a slowdown in growth is possible and so is a decline in investments. The CEE region is interdependent with Europe and a big recipient of EU structural funds.’
There are several concerns, about the EU and about the UK, he explains. A partial withdrawal of EU funding would be very damaging, but a restructuring is seen as inevitable, given that the UK is a big contributor to the EU budget. A mass return of Polish workers who have been living in the UK – up to 400,000 could move back – would deprive Poland of $1.2 bn of transfers of capital every year and put a serious strain on the labour market.
‘Our feeling is that Poland and the other CEE countries would not be the main beneficiaries of the changes ahead,’ Mirowski says. ‘More capital will move to Germany or France. For now it is business as usual, but we expect consequences later on in the year.’ This trend will be accelerated by the political situation in Poland, as the government has chosen ‘to stay out of the faster integration process and out of Europe’s inner circle.’
As for the UK’s role, it has played a meaningful part in investment activity in the region in the last few years, accounting for some 13% of capital, says Mirowski, but this is likely to diminish following the referendum result and the decision to exit the EU.
However, he adds, the real market makers in the CEE region have been US and German investors, accounting for 60% of all investments between them. There are also encouraging signs that the withdrawal of UK capital could be compensated by capital coming from ‘new’ areas like Asia and South Africa. The €900 mln acquisition of a Polish office and retail portfolio by South Africa’s Redefine Properties was the largest transaction in Europe so far in 2016.
UK view: Europe’s nascent problems increase UK’s draw
The UK post-Brexit is an even more attractive long-term investment destination and offers good opportunities, Charles Ostroumoff, director, Arca Property Risk Management, told delegates at the PropertyEU Outlook Investment Briefing in New York.
‘If you think problems in the UK are bad, the problems in mainland Europe are just beginning, so the UK will look more attractive relative to Europe over the next 18 months,’ he predicts. Accelerated integration in the EU is being made more difficult by factors including elections coming up in France and Germany, political uncertainty in Spain and a possible new bailout for Greece.
By contrast ‘the long-term benefits of investing in UK real estate have not gone away,’ Ostroumoff says. ‘It is a safe, secure market and it will continue to be so. Right now, with the weakening of sterling, investors can be opportunistic with pricing and put in cheeky bids.’ Yield spreads on bonds have contracted and equity markets have been volatile, so relative to bonds and equities real estate has become even more attractive.
This year there has been ‘a drought’ as everyone was waiting for the referendum to be out of the way, he says, but now the answer is clear so ‘investors have to decide if they want to sit and do nothing for who knows how long, or if they want to commit to deals and carry on with business as usual. I think the latter will be more likely.’
It will be similar to the period right after the general election in the UK last year when, after weeks of stalling and uncertainty, there was a rush of deals as soon as the results of the vote were known.
It will not be plain sailing, he warns: ‘There is a lot of risk out there but there are also a lot of opportunities, but in the end people have to do deals otherwise they are not going to have jobs.’
Ostroumoff presents the case for investing in IPD futures, which allow flexibility and speed of transactions and ‘guaranteed cash at maturity, a great liquidity bonus that other products on the market do not give you.’
IPD property futures contracts are traded on the Eurex Exchange and other advantages, he says, are the low transaction costs, ‘a less than 50bps round trip.’ Direct property investment is like a traditional oil tanker, he concludes, while IPD futures ‘are the speed boats of investment: smaller but fast and flexible.’
