Short and long-term European rates are expected to be benign for the foreseeable future limiting any negative impact on property markets, despite news of the recent bond sell-off in the US which could signify an end to the very low interest rate environment that has dominated the current property cycle. Strong occupier expansion, low vacancy rates and limited development pipelines have supported a gradual shift in market conditions to favour landlords, resulting in rental growth and stability across the majority of European markets during 2018. This has supported property values and returns, despite yields being at their cyclical peak, a situation likely to continue into 2019. That’s according to Colliers International’s latest Capital Flows Report, released at Expo Real.
“Despite the typical late market property cycle conditions, we expect 2018 will be another strong year for real estate investment in Europe. There are a number of broader macro concerns impacting global investor decision making, including rate rises in the US, global trade disputes, low growth in Europe and the fear of a ‘Hard Brexit’ or a ‘No Deal’. Although it’s more apparent that investors are more cautious about the quality of income, genuine rental growth and active asset management initiatives, the willingness to target real estate and diversify global portfolios continues,” said Richard Divall, Colliers’ Head of Cross Border Capital Markets I EMEA.
Colliers’ Capital Flows Report highlights include:
- UK, France and Germany lead on investment activity, with France up 30 per cent compared to 2017. UK volumes remain static.
- Germany is trading above the five-year average, and provisional results point to an increase on Q3 2017, despite some pricing challenges and a lack of quality product resulting from limited development activity between 2013-15.
- The Netherlands, Benelux, Finland, Ireland and Poland have seen increased investor attention with late property cycle improving fundamentals as investors chase yield and returns and diversify their portfolios
- Asian markets have continued to witness expansionary investment activity in 2018 year-to-date (YTD), far outstripping activity in the Americas.
- A more balanced picture is reported between cross-border and domestic capital, with each accounting for 50 per cent of activity YTD.
- Investment into residential assets now counts for 16 per cent of all activity in the past 18 months, compared to only six per cent 10 years ago
Capital flows
On a global scale, investment transactions YTD depicts a continuation of the trend witnessed at the end of 2017. According to Colliers’ research, investment volumes for AsiaPac are forecast to reach $808 billion before the end of 2018 (up 13 per cent YOY). Meanwhile, the EMEA region has seen investment volumes drop by 10 per cent YOY; although, this represents an improvement on much weaker Q1 results, which were almost 30 per cent down YOY. Investment volumes in the Americas remain similar to the previous year.
“Markets in Asia have continued to witness expansionary investment activity in 2017/2018, whilst the rise in interest rates, strength of the US$ and property market cycle peaking has seen less activity in The Americas,” said Colliers’ Richard Divall. “We expect EMEA investment volumes to be lower than 2017 with current pricing, lack of product and political uncertainty causing some investors to stand on the sidelines in the short term”.
“It is worth noting, however, that these overall volumes mask big differences in activity within regions. Within AsiaPac, for example, activity is dominated by PRC Real Estate companies and around 10 per cent of overall activity is a result of these companies’ land-banking for housebuilding projects. Equally, activity has been very concentrated on Hong Kong during the first half of 2018, currently accounting for more than Japan and China combined,” Richard Divall added. “Closer to home in Europe, the UK, Germany and France continue to lead on activity overall since 2017, matching their five-year trading average. The Netherlands, Benelux, Finland, Ireland and Poland are seeing increased attention, with the late property cycle improving fundamentals as investors chase yield and returns, which is increasingly difficult to find in the Tier 1 markets in UK, Germany and France.
“Despite the fall in activity overall, 2018 will be another strong year for investment in Europe. More markets feature on the upside than the down and we are seeing the wave of money looking for a home continue to ripple out from Europe’s core with the Netherlands, Spain, Finland and Denmark benefitting and even Tier 2 markets like Hungary, Portugal and SEE showing some of the strongest growth markets YTD – all these countries have seen investment rise as a result of their belated, but rapid, economic uplift in recent years and/or significant turnaround in real estate market fundamentals.”
Sources of capital
Colliers’ research shows a more balanced position between cross-border and domestic capital, with each accounting for 50 per cent of investment activity YTD. However, when reviewing the activity of cross-border capital, Colliers highlights a rapid rise in the market share of Asian Capital – from below 5 per cent to over 15 per cent today.
“Although there has been a balancing of investment activity between European and Global capital, the composition of this capital is consistently changing. Between 2012-2017 we witnessed North American, Chinese, Hong Kong and Singaporean capital very much at the forefront of activity,” said Colliers’ Richard Divall. “In 2018, although Singaporean capital remains very acquisitive, Chinese buying activity has curtailed with Korean capital taking over the reins for core product in the traditional property sectors and we are starting to see a re-emergence of Australian and Japanese capital making bidding in-roads into the market.
“Looking ahead, we expect a continuation of this shift in capital and perhaps a resurgence from China. However, their strategies will be in a different guise to what we’ve seen over the last few years. Major global funds will remain active, but for those that consolidated in the last 12-18 months, there may be a reduced level of activity until existing assets and portfolios are asset-managed to reflect what they want to hold longer term, at which point we may see some assets coming back to the market.”
Where is the capital going?
“Following the demographic trends of Europe and with the current pricing of offices, logistics and the restructuring of retail, the alternatives sectors are proving attractive to global investors as they offer income with higher yield,” said Richard Divall. “One of the main issues, however, is the larger groups are often unable to find any national or regional platforms available in these sectors to buy and will be relying on building portfolios up, which takes time and is hard to find scale.”
Colliers’ research highlights a significant increase in investment into residential, with the sector now accounting for 16 per cent of all activity in the past 18 months, compared to only six per cent 10 years ago. Meanwhile, industrial activity has risen by three per cent. Conversely, investment into the retail and office sector have seen a decline over the last 10 years of 5 per cent and 6 per cent, respectively, with hotel investment remaining flat.
“If there is one increasingly clear theme showing through in transaction activity over the last 18 months, relative to the previous cycle of 2007/8, it is the expansion of investment into residential-based assets,” said Colliers’ Head of Research & Forecasting for EMEA, Damian Harrington. “North American capital is particularly active in this space, and when reviewing Europe compared to North America, there is a clear growth opportunity – residential investment accounts for around 27 per cent of activity over the past 10 years.”
As a ‘cradle to grave’ asset class, the sub-sectors of Residential which include social rented, private rented, student housing and senior living, present a range of opportunities in which to invest. At one end of the spectrum, student housing accounted for €40 billion over the last 10 years, only 1.6 per cent of total investment activity. Investment activity into student housing during this time has been dominated by the UK (63 per cent), followed by Germany (10 per cent), Spain and The Netherlands (both 6 per cent), and then France (5 per cent).
Meanwhile, at the other end of the spectrum, senior living accounted for €32 billion of investment with the UK again dominating activity (40 per cent), followed by Germany (20 per cent), France (11 per cent), the Netherlands (8 per cent) and Spain (6 per cent).
Geo-political environment
Colliers’ Damian Harrington went on to explain: “The impact of all the geopolitical manoeuvring we are currently seeing is different to the changing nature of politics that we saw in 2016/17, in that trade disputes have a very direct and immediate impact on economies.
The trade disputes between the US and China look set to rumble on for some time, and is likely to result in a re-globalisation of Chinese trade mid-term. This will spur the creation of an Asian trading bloc as regional supply chains are created from China to several other Asian nations, and China’s trading partners in East and Southeast Asia will reap the positive benefits of this shift.
Meanwhile, Brexit and a general decline in confidence across the Eurozone has caused all key European economies to report declines in their PMI/confidence index levels, relative to 12 months ago and economic growth rates are creeping inwards. For now, European employment intentions remain strong, sustaining demand for office/industrial space. Yet the Eurozone unemployment rate keeps dropping, falling to 8.4 per cent in May 2018, which represents the lowest rate since December 2008. We are going to face some capacity constraints in the near future, and we can see this filtering into market expectations across Europe which are pointing to a peak being reached in the office occupier cycle over the next 12 months.”
