An almost universal complaint that comes from investors in Europe at the moment is the difficulty that they have in sourcing investment product.
In our last Investor Intentions Survey (carried out in January this year) 91% of respondents cited availability of assets, pricing or competition as the biggest obstacles to acquiring assets and things have not got any easier since.
This issue is resulting in a number of different strategies from investors to satisfy their investment requirements:
One of the clearest trends in recent times has been for investors to look outside the ‘normal’ office, retail, and industrial sectors for investment product. At the previous market peak (the four quarters to Q3 2007) 83% of all CRE investment was in these three sectors. In the last four quarters this had fallen to 75%.
Sectors such as Hotels, Student Housing and Nursing Homes have been among those being targeted by investors. For example, the value of hotel assets traded over the last four quarters was double that in the four quarters to Q3 2007. There also seems to be a much greater willingness to consider mixed-use properties.
An important factor in the difficulty in sourcing investment opportunities has been the lack of development in recent years. Development fell in the aftermath of the global financial crisis, not that surprising considering what happened to employment growth. This is restricting the amount of investment product that developers are bringing to the market.
Over the last eighteen months (2014 and H1 2015) the biggest source of investment product has been fund managers. They provided 27% of the property sold in Europe over that time (against a long-term average of 20%). Fund managers tend to be active managers of their portfolios at all times and the strong market is providing opportunities to take profits or even exit positions entered into before the financial crisis.
Property companies, particularly listed property companies and REITs which provided 12% of the stock sold (broadly in line with their long-term average) over the last eighteen months have also been a significant source of investment product.
Repossessions are declining as a proportion of the total, but still provided over €16 billion of investment sales in 2014/H1 2015 (5% of the total). However, more indirectly, the acquisition of debt is a route that some investors (mainly US private equity) are taking to access the real estate market. The value of commercial real estate debt trades in Europe jumped to €49 billion in 2014 (from €21 billion in 2013) and has continued to rise, albeit more slowly, in 2015.
Sales by occupiers are relatively scarce. These were a feature of the market in the last cycle, accounting for 15% of all transactions in 2007. However, over the last year and a half only 5% of the investment stock sold has been sales from private sector occupiers.
A response to the difficulty in making acquisitions has been to target portfolio acquisitions rather than acquire properties one by one. This potentially reduces the amount of time spent on failed bids (or at least increases the amount of property acquired per successful bid).
Historically portfolios have accounted for about 30% of the European market on average. However, this has been a highly cyclical part of the market. In 2007 portfolios made up 38% of the total value of CRE real estate traded, but this fell back to just 21% in 2012. As the market has recovered the proportion of the market that has been made up of portfolios has been rising, reaching 31% in 2014 and 33% in the first half of 2015.
A corollary of the trend for investors to look at portfolio acquisitions is the trend to look at markets outside the absolute core of the European market. This trend has followed almost the same pattern as that described above.
In 2012 42% of the value of all the CRE investment transactions in Europe was in the seven most liquid markets (London, Paris, Stockholm and the top four German cities). Over the last few years this has fallen back steadily and these seven cities accounted for just 31% of the market in H1 2015 (against a long term average of 33%) indicating investors willingness to look more widely for opportunities. Regional UK markets were particular beneficiaries of this trend, but it was evident in a number of other European countries as well.
By Michael Haddock, Senior Director, EMEA Research, CBRE.