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Slow but steady – despite Brexit uncertainty

by Damian Harrington

As we look ahead to the closing end of the year, geopolitical uncertainty, cooling economies and a lack of available product (at the right price) all point to a slowing investment market… yet thankfully not one that’s falling off a cliff, despite some scaremongering headlines. While we don’t expect to match 2018 investment levels at such a late stage of the cycle, investment demand remains high from domestic, intra-regional and global domiciles. Investment volumes vary tremendously across EMEA by geography – for example Germany, the UK and Denmark are down while Finland, Sweden and Spain are significantly up year-on-year – but a much better H2 is predicted for most capital destinations.

Sector Preferences

While a shortage of availability is curtailing investment demand, the same can be said for office leasing. Strong levels of latent office demand is being converted into pre-lets. Conversely, developer caution is maintaining tight vacancy and availability, thus landlord favourable conditions are expected to prevail for the next 12 months. This is providing prospects for rental growth or rental stability across markets, so only 5% of EMEA markets forecasting small prime rental declines, despite the cooling economic landscape. For a more in-depth analysis of office market conditions read more here. It is no surprise to see offices remain in favour for investors, and it is offices that have been driving the big-ticket investment activity over the past 12 months, maintaining its share of investment activity in 2019. While office investment has been positive, the big momentum is clearly with the beds (residential and hotels) sectors, both of which are up by a few percentage points despite an overall decline in activity year-on-year.

The logistics sector continues to see strong investment into pan-European portfolios and platforms, with Allianz and VGP entering a new €1.7bn European logistics partnership one of the lead stories.  Although the laggard sector is retail, with investment 60% down across EMEA, it is worth tracking the devil in the detail. When we look at the actual investment figures and strip out activity in large dominant shopping centres – which tend not to trade very often due to their defensive qualities and scale – the remaining segments of the retail market look good. High streets, convenience retail and even retail parks have continued to trade on a similar level year-on-year. UK retail investment figures may be down across the board but it is at the forefront of the structural changes impacting the retail sector, where a marked consumer shift towards omni-channel needs and conscientious / experience retailing is impacting how and where retail should be provided. Additionally the UK market has to contend with over-supply/retailing and punitive business rates, exacerbating the challenges which are being felt. While there is little doubt Europe will start to feel the same pressures, upcoming challenges should not be as acute as in the UK.

Diverse Investor Base

Many of the bigger ticket deals (£1bn+) closed so far in 2019 have been closed by investors from North America, depicting their return to Europe on a net investment basis in 2019. This follows three years of divestment as the US$ appreciated against a basket of European currencies. South Korean and Singaporean investors have been the most active net APAC buyers in 2019, having taken a much more diversified approach to buying in terms of sectors and locations – the likes of Hana Financial Group have worked in separate partnerships to acquire Vienna Hilton for around €370 million and Trianon office building in Frankfurt for €670 million. Despite the growing interest of international investors, intra-regional European buyers – notably German and UK-based investors – have been the most active. The biggest net investors have been German domiciled players, who have been very active in the UK, Nordics and Austria.

A continuation of this investor diversity trend is expected throughout the rest of 2019 and beyond with new fund raising expanding the weight of capital looking at real estate.. As core product dries up, strategies deploying capital into development and value-add/opportunistic plays will be increasingly visible, and there are clear signs that this has been happening in 2019.  Finally, Europe remains very attractive to a range of global investors given the positive yield spread and hedging benefits available, creating a very competitive landscape and so sign of any impending downturn in activity.

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