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) is all pointing to a slowing investment market… yet thankfully not one that’s falling off a cliff despite some scaremongering headlines. While we can’t expect to match 2018 investment levels, demand remains high, from domestic, intra-regional and global investors – and for many locations a much better H2 is predicted. But the levels do vary tremendously across EMEA – Germany, UK and Denmark are down but Finland, Sweden and Spain are up.
Offices Remain Robust
A number of big-ticket deals have been closed at over €1 billion, almost all of which were office-led and mixed use portfolios. Across EMEA a shortage of availability is curtailing leasing activity. Strong levels of latent demand is being converted into pre-lets. Conversely, developer caution is maintaining tight vacancy and availability, thus landlord conditions are expected to prevail for the next 12 months. This is providing prospects for rental growth or rental stability across markets with 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.
While offices are driving big-ticket activity, maintaining its share of investment activity in 2019, the big momentum is clearly with the residential and hotels sectors, both of which are up by a few percentage points despite overall activity dropping by around 15% year-on-year – look out for our report on the European residential investment market, which will be launched around Expo in October.
The logistics sector continues to see strong investment into pan-European portfolios and platforms, but the laggard is clearly retail. The sector has seen a big hit in 2019, with investment 60% down across EMEA. The UK is at the forefront of the structural changes in 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 globally. While there is little doubt Europe will start to feel the same pressures, traditional shopping centres are holding up well, and 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, notably Blackstone and Cerberus. This depicts a return of North American capital to Europe on a net investment basis in 2019, following 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, having taken a much more diversified approach to buying in terms of sectors and locations, with the likes of Hana Financial Group working 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 – who have been most active, although the biggest net investors have been German domiciled players.
Vonovia have been particularly active, buying Swedish company Victoria Park AB and their mixed portfolio in Sweden for €1.6 bn in addition to their acquisition of the Austrian company Buwog and their predominantly Residential portfolio for €3bn. Vonovis recently secured an extra €1billion through a new bond issue, adding to their future buying power. 2019 has also seen newer fund mangers come to the fore, such as Henderson Park – a European real estate asset management platform launched in 2016, targeting value-add and opportunistic real estate investments. They are the fifth busiest UK-based buyer to date in 2019, picking up a range of assets including a Parisian hotel from GIC, for €550mn.
Despite clear cyclical weakness and the impact of Brexit, the European and global economy may be cooling, but overall both continue to witness growth. The UK is clearly feeling the impact of Brexit, and the Q2 -0.2% q/q contraction could spill over into Q3 19 creating a shallow two-quarter ‘technical recession’ – something that Germany may also witness unless the industrial PMI stabilises. Other major European economies (bar Italy) look set to maintain more positive growth over the course of 2019, and well into 2020 sustaining occupier and investment demand. Meanwhile, the increasing range and diversity of investors engaging in the European market – from both a risk appetite and sector selection perspective – will be working to sustain the investment cycle.