From macro-economics and geopolitics to the quest to deploy capital, these are some of the topics that dominated discussion at this year’s Expo Real. October 11, 2019
It wasn’t just the latest political developments around Brexit and the ongoing global trade wars that were among the big discussion points at this year’s Expo Real.
For many of the 45,000 real estate professionals gathered in Munich, their focus was equally on seeking out opportunities as the long real estate cycle rumbles on and investors seek to tread a fine line between caution and confidence.
“There’s a certain feeling of déjà-vu at this year’s Expo,” says Timo Tschammler, CEO of JLL Germany. “Little has changed on a large scale since last year with longer-term trends, such as Proptech and disruption to established business models, remaining constant. Equally, many political questions from Brexit to the rental market in Germany are yet to be conclusively answered – and nothing irritates investors more than uncertainty.
“On the economic side, the latest signals from the ECB have confirmed expectations. Institutional investors therefore have few options other than real estate for stable returns, which will continue to drive large sums into the market.”
Here are five of the biggest talking points from Expo Real:
1. Finding a good home for investment
Given the scale of some of real estate’s ‘mega funds’, such as Blackstone’s record-breaking US$ 20 billion ninth fund, they’re having to look at a wider range of transactions to deploy capital efficiently than in previous years, according to Fraser Bowen, head of international capital at JLL.
“Operating partnerships, platform deals, recapitalisation of existing assets and taking public companies to private, are all proving to be feasible routes into real estate,” he says.
While closed-end funds remain a preferred route for institutional investors, Bowen says there is more appetite for joint ventures and club deals.
2. Capital raising
For the world’s investment managers, raising capital is also becoming an increasingly competitive game.
“Mega funds are competing even more intensely for the attentions of a wide range of investors, from pension funds to sovereign wealth and high net worth, private capital,” Bowen says. “Being able to offer scale and size is a big drawing point.”
3. Yield compression: the end in sight?
A growing assortment of international and domestic investors has driven yields down across Europe but the question is how low can they go? In France, yields have hit a new record low in Lyon of 3.5 percent, explains Stephan von Barczy, head of capital markets, JLL France.
“Demand from investors has always been strong,” he says. “We see more capital being pushed into the French regions and yields compressing. As well as Lyon, cities such as Lille and Bordeaux are also benefitting from this trend.”
At a panel on German real estate investment, most of the audience expected prime yields to stay around three percent.
Yield compression driven by attractive, record low interest rates is a potential long-term concern, according to Marcus Lütgering, head of German office investment.
“Interest rates as a driver for real estate pricing is not something I am comfortable with,” he says. “When rates eventually move from being negative to positive, that will, 10 years from now, have an impact on the cost of loans for both investors and high street borrowers.”
4. Beyond the core
The yield compression in European cities that are traditional favourites with investors have brought other markets and sectors into play. The living sector in Poland, for example, offers net yields of between five and six percent in Poland’s residential sector and between six and seven percent in the country’s student housing.
“Yields in western European markets have been driven down and comparatively, the CEE region offers huge growth potential,” says Maximilian Mendel, JLL Head of Residential Investment, Poland. “There’s opportunity for value-seeking investors both across the wider CEE region and in Poland, where there’s greater choice due to its polycentricity than in some more centralized countries where pricing is higher.”
5. Disruption and dislocation create opportunity
With new business models coming to the fore and changing expectations about how we live and work, there’s widespread disruption across Europe’s real estate sectors from retail to offices.
“The rise of disruptive forces like flexible office space is undoubtedly a positive for the office market,” Lütgering says. “But investors need to decide to what level it forms as part of their office portfolio amid ongoing strong demand from companies leasing space.”
Meanwhile, the logistics sector is “the sector in Europe where investors can see the full impact that disruption has, and continues to have”, says Bowen.
“Disruption means challenges for investors by requiring them to adapt existing ways of working, but it will create opportunities,” he says. “It may not be long before we see, for example, UK retail parks become more multi-use, with residential and urban warehouses adding to the mix. That will require some brave and bold decisions from investors as to how and when to repurpose real estate to stay ahead of the curve.”