EXPO REAL 2018: which topics will keep the halls buzzing?

EXPO REAL will kick off again in Munich in a few days’ time. As conversations at the fair are a reliable barometer for investment in months to come, REFIRE asked some of Europe’s major players which topics we can expect to dominate this year.

One investor who is jauntily heading off to EXPO REAL is Tim Horrocks, head of Continental Europe at TH Real Estate: ‘I think everyone at EXPO REAL will be in a pretty good mood,’ he told REFIRE. ‘The majority of markets are in good health, in a ‘sweet spot’, you could say. The challenge for everyone is to find value.’

Massive uptick in private equity fundraising

Finding value is a pressing concern, in particular, for private equity groups. Indeed, the massive uptick in private equity fundraising will be the talk of the fair, Chris Bell, managing director, Europe, at Knight Frank, told REFIRE. ‘You just can’t ignore them,’ he said.

‘Collectively, they’re sitting on $280b of dry powder to invest in global real estate - a lot of which will be earmarked for Europe. Remember, some of them are investing in deals that as big – or bigger – than the size of the average UK REIT.’

Last year, private equity funds invested $440b globally in real estate, almost double the $240b they invested in 2014, according to Bell. ‘This year, it could be even more. The tricky thing will be placing it all,’ he warned. Horrocks agrees: ‘In the short term, I doubt they could place that amount of capital. They would love to see a correction in the market.’

Jesse Freitag-Akselrod, senior vice president at Green Street Advisors, is also concerned about the wall of capital out there: ‘The gigantic weight of money is quite worrisome. For private equity players looking, for example, at Continental European shopping centers, it can be hard to find the returns they want. For such centres to become attractive you’d need an outshift of between 80 bps and 100 bps. We cover €100b worth of European shopping centres and an outshift of 80 bps would equate to a 15% drop in value, which is a lot.’

Rise of HNW investors

Another topic expected to dominate at EXPO REAL this year is the growing dominance of high net worth investors. They accounted for 27% of commercial real estate investment in Europe last year (or $240b), up from just 6% in 2012, according to Knight Frank. ‘Look at Amancio Ortega (the founder and former chairman of Spain’s Inditex fashion group),’ said Bell. ‘He’s just bought the Adelphi building in central London (for around £600m) and owns around €3b of property across Europe. And he’s not the only one. High net worth investors love property. That’s not going away,’ he added.

However, the kind of high-octane competitive tenders that lure HNW investors are not appealing to all investors. ‘If possible, we prefer to avoid competitive tenders,’ Horrocks said. ‘Other sources of capital such as HNW investors may have a subjective link to a building or may be interested in buying liquidity outside their home market. We’re investing mainly in core but we also look at ‘enhanced’, even opportunistic, niches and pockets in which to invest, such as our China Outlet Mall Fund, where Allianz were our lead investor.’

Over in the UK, there have been a recent spate of IPOs, many of which were HNW retail focused, according to Freitag-Akselrod. ‘Tritax was an interesting one,’ he said. ‘Many of them have the potential to become institutional grade.’

Brexit

Whilst most Brits, not to mention Continental Europeans, have had enough of gridlocked Brexit negotiations, it remains the elephant in the room that will not go away.

‘Will we see a wave of capital into the UK? No,’ said Horrocks. ‘A lot of European core capital is taking a ‘wait and see’ attitude to the UK until Brexit uncertainty has been cleared up. Retail is facing particularly challenging times in the UK with oversupply, retailer administrations and the online impact pushing down rental values; depending on who you talk to it feels pretty dire from a Continental European perspective.’

Charles Balch, head of real estate international finance at pbb Pfandbriefbank, is also concerned as to how the UK retail market will perform post-Brexit, he told us.

Moreover, the UK market is two-to-three years ahead of its continental European counterparts, according to Bell, who noted that the UK is coming to the end of the current cycle. ‘We’re struggling to see where value is in the UK,’ he said. ‘And while a lot of investors are still targeting London, particular Asian investors who “see London as London”, Brexit is making Continental Europe look increasingly attractive.’

‘Value-add’ is the new core

‘Value-add’ is becoming the new core, Thomas Landschreiber, co-founder and CIO of Corestate Capital Group, told REFIRE. ‘Institutional investor interest in value-add product has definitely soared,’ he said. ‘They are very ready to take on more risk to secure yield in the low interest rate environment. But are they really betting on the right asset manager - a specialist that is actually able to manage such investments in a value-accretive way? It’s an exciting subject and I am looking forward to gaining some interesting insights into the risk shift.’

As such, value-add strategies are likely to feature heavily at EXPO REAL, according to Martin Schellein, head of investment management Europe at Union Investment Real Estate: ‘Value-add is an investment strategy at Union Investment to increase our scope for action in Europe but always with a view to keeping stabilized assets in our portfolio,’ he told REFIRE. ‘However, we are not cutting back on the quality of properties or locations in our value-add strategy. Instead, we invest even earlier and more intensively in development projects or in properties with larger letting tasks if we are convinced of a sustained positive development of the respective letting markets.

’International investors navigating the US investment market under Trump

Understandably, international investment into the US against the chaotic backdrop of Trump’s government is also expected to be a major discussion point this time. ‘It will be exciting to see how international investment managers now assess the real estate markets in the US,’ Schellein said. ‘The US has become Union Investment's second-largest real estate investment market and we plan to make further acquisitions in the coming months, even though investment conditions have become somewhat more difficult due to increased hedging costs.’

Focus on ‘safe haven’ markets: homing in on smaller deals

Continental Europe continues to offer a wide range of attractive investment opportunities, although the spectrum has narrowed recently. Large institutional investors in particular are increasingly concentrating on core markets such as the DACH region, France, the Benelux countries and the Nordics, which are seen as safe havens, not least from a global perspective, according to Schellein.

In addition, some large investors are increasingly turning their attention to smaller lot sizes. ‘In Germany in particular, in addition to large lot sizes, we are increasingly focusing on smaller properties with an investment volume of €10m to €50m,’ Schellein said. ‘This strategy helps us to meet the high and diverse demand of our real estate funds for German properties. We are looking forward to discussions with portfolio managers and developers who offer us properties in this volume segment that are in line with our quality expectations.’

Asset management consolidation to ramp up

Increased consolidation between smaller asset investment managers has also got investors talking, according to Dr. Michael Bütter, CEO of Corestate Capital Group: ‘The asset management segment is facing a phase of consolidation. Large and mid-sized investment managers such as ourselves have the potential to grow significantly through internationalization, smart diversification and constant evolution of profitable niche products. Meanwhile, smaller managers will face the wave of consolidation(s), fuelled by rising cost pressure and increasing regulatory requirements. Best processes and digitized platform excellence will play an important role going forward. I am curious how the industry is going to position itself under these circumstances.’ (ssk)