What a difference a year makes. I can recall few examples of a market so swiftly changing its mind and back again in such a short space of time. After 12 months of extreme volatility, it is refreshing to now be able to say ‘no news is good news’.
Take London as an example–in 2016 investment volumes were marred by deep set uncertainty in light of the close referendum vote. As tensions mounted, investors’ confidence in the UK ebbed away and investment volumes fell from £3.8 billion in Q1 2016 to £3.0 billion in Q2 2016 as the uncertainty set in. Once the shock result was confirmed, coinciding with the already quieter summer months, activity plummeted; transactions totalled just £1.3 billion in Q3 2016.
Central London Office Transaction Volumes, 2015 and 2016
But then, suddenly, investors gathered their collective nerve, dusted themselves down, and got back on the horse–transaction volumes in London bounced back to £4.1 billion in Q4 2016, in line with the total seen in Q4 2015. It is remarkable to consider how swiftly investors regained their confidence, and in a very short space of time London CRE has become extremely attractive again.
Momentum from the end of 2016 has spilled over into this year, with high profile purchases by CC Land and DEKA a testament to the enduring popularity of the London office market. As a result, Prime City yields, which moved out to 4.25% in the aftermath of the referendum, are now back at pre-vote levels, at 4.00%. Meanwhile, prime office yields in Paris and Berlin are now 3.0% and 3.4% respectively, making London look comparatively good value, especially coupled with the currency devaluation.
So why has there been such rapid flux? Certainly, nothing seismic has changed in the London market, relative to 23 June, to justify a trebling in investment volumes. Spreads relative to Gilts are slightly lower but not much. Yields relative to other European markets haven’t changed significantly–that is to say, lower than some, higher than others.
The falling pound has helped overseas investors but the market is still in a mature phase of its cycle, with limited expectation for rental value growth, at least at the prime end.
One argument might be that focus has temporarily shifted from London and onto other markets, in particular France and Germany who are facing major elections.
However, I would argue that it is the sheer volume of capital trying to enter the real estate market at the current time that is causing these volatile, short-term shifts in sentiment.
The spread between property yields and bond yields remains close to historic highs and is one of the primary motivators attracting investors to the sector. Furthermore, in an environment of continued economic and political uncertainty, the defensive characteristics, capital value growth and attractive income profile offered by real estate, makes it an even more compelling investment strategy. Consequently there are unprecedented levels of capital looking to enter the market from both established investors and new entrants.
According to CBRE’s Global Investor Intentions Survey 2017, there is $US1.7 trillion of ‘dry powder’ available to deploy into real estate across the globe, $475 billion of which is targeting EMEA. The report also highlights that investors are showing a greater propensity to buy than they were 12 months ago. In CBRE’s EMEA Investor Intentions Survey 2017, launched at MIPIM, 85% of investors intended to spend at least as much in 2017 as in 2016 with 41% expecting to spend more.
So, in a world where huge volumes of capital can be recycled into and out of markets with staggering rapidity, we should not be surprised that the outlook for markets can similarly be transformed. The power of these capital flows is so significant that markets are changing more quickly than before and seemingly seismic market events swiftly fade to memory.
For now, the market is back on an even keel – but it’s difficult to know how long this will last. It is therefore more vital than ever to have a well-researched and grounded view of the long-term prospects for all markets, and of target exposure to those markets. This will enable investors to see the signal through the noise, and to take advantage of the buying opportunities presented by temporary shifts in sentiment.
By Richard Dakin, Managing Director, EMEA, Capital Advisors, CBRE.