Emerging Trends in Real Estate - Creating an impact Europe 2019

Emerging Trends in Real Estate - Creating an impact Europe 2019
Emerging Trends
in Real Estate       ®

Creating an impact
Europe 2019
Emerging Trends in Real Estate - Creating an impact Europe 2019
                                                                                                                    Chapter 3
                                                                                                                    Markets to

                                                                            Chapter 1

               2                                                                                  18
               Executive                                                                          Chapter 2
               summary                                                                            Real estate
                                                                                                  capital markets

Cover image: Royal Exchange building, City of London financial district, UK (Alexander Spatari)

  2     Emerging Trends in Real Estate® Europe 2019
Emerging Trends in Real Estate - Creating an impact Europe 2019
Emerging Trends in Real Estate®
                         Europe 2019
                         Creating an impact
                         A publication from PwC and
                         the Urban Land Institute

             About the
                         “Considering the environmental
                         impact of investments is absolutely
                         becoming important. The more
                         institutional the money, the greater
                         the pressure on these kinds of
                         issues. In five years’ time, the big
                         listed property companies will have

70                       no non-environmentally labelled
                         real estate at all. Secondary real
Chapter 4                estate is going to have a much
Redefining               more difficult time.”
                         Director, Scandinavian advisory firm

                                     Emerging Trends in Real Estate® Europe 2019   1
Emerging Trends in Real Estate - Creating an impact Europe 2019
“Some investors are still looking at real estate
in Europe as capital preservation. They are not
looking for outsize returns, but security.”
Director, pan-European investment bank

2   Emerging Trends in Real Estate® Europe 2019    Image: Warsaw, Poland (The World in HDR)
Emerging Trends in Real Estate - Creating an impact Europe 2019
Executive summary

The search for secure, stable income in 2019 is paramount across                           Though there has been a lowering of
Europe’s real estate industry as it navigates the prevailing late-                         expectations around the availability of
                                                                                           equity and debt as the industry tries to
cycle market while embracing new ideas that seek to combine
                                                                                           assess the cycle, European real estate
long-term sustainability of financial performance with a greater                           remains highly liquid overall. More than
emphasis on its role in society.                                                           two thirds of survey respondents believe
                                                                                           investment from Asia will increase in
                                            Though the industry remains positive           2019 – boosted by an expected influx
                                            about business prospects the short-term        of new capital from Japan.
                                            outlook is more sober in most markets than
                                            this time last year, if only because they      However, with the price of core assets
                                            are “one year further into the cycle and       at record levels in many European cities,
                                            one year closer to the end”. According to      all investors face the challenge of how
                                            Emerging Trends Europe, there is clearly       to deploy capital effectively and achieve
                                            a late-cycle edge to familiar concerns         the “sustainable cash-flows” they cherish.
                                            around historically high values and the        Many are adopting “develop-to-core”
                                            scarcity of suitable assets.                   strategies as a means of generating income,
                                                                                           while a growing proportion of the industry
“Environment and                            Interest rates have also moved on to the       is looking beyond the cyclical mainstream.
                                            industry watch-list following the European     Alternative real estate and residential –
social values are definitely                Central Bank’s decision to end quantitative    in all its forms – dominate the sector
having an impact. In 50                     easing by the end of 2018. The prospect        preferences of survey respondents,
years’ time, it will be                     of modest rate rises is not considered a       marking a remarkable shift in industry
                                            threat to business in 2019 although real       sentiment over the past few years.
inconceivable to not                        estate leaders acknowledge that might
have incorporated these                     change if there is a geopolitical shock        In 2015, just 28 percent of survey
factors, because now                        to the monetary system.                        respondents said they would even consider
                                                                                           investing in alternatives. This year, almost
they are being measured.”                   Indeed, European and international political   60 percent of respondents are already
                                            instability are among the key concerns for     investing in alternatives in some way,
Director, pan-European investment manager
                                            the industry, and in that context, Brexit      and 66 percent wish to increase their
                                            is uppermost in the minds of many as the       holdings. Hotels, student housing and
                                            due date of March 29, 2019 approaches          flexible offices are the sectors where
                                            without any clear idea of the outcome.         current exposure is highest while student
                                            Emerging Trends Europe reveals that            housing tops the wish-list going forward.
                                            global investors are less bothered by
                                            Brexit than their European counterparts.       Emerging Trends Europe reveals an
                                            But the majority of interviewees and survey    industry coming to terms with the
                                            respondents nonetheless regard the             operational risk of alternatives but
                                            Eurozone as a safer investment destination     also questioning traditional investment
                                            than the UK in 2019.                           structures and looking at real estate in
                                                                                           a much broader context. Businesses
                                            Given that the industry prizes the safety      are taking a more “outcomes-focused”
                                            of scale, liquidity and growing economies,     approach to investment, breaking down
                                            it is no surprise that German cities,          the barriers between profit-driven
                                            once again, dominate the top 10 picks          decisions and environmental, social
                                            for 2019 despite continuing high values.       and governance issues.
                                            Yet it is Lisbon that claims the Number 1
                                            position for investment and development –
                                            widely viewed as a strong, late-cycle play.

                                                                                       Emerging Trends in Real Estate® Europe 2019   3
Emerging Trends in Real Estate - Creating an impact Europe 2019
Chapter 1

“The biggest challenge is finding quality assets.
If anything, it’s getting harder as core assets,
on the continent in particular, are tightly priced.
The temptation to stray from quality assets in quality
locations is there, but you have to stay disciplined.”
Director, global investment manager

4   Emerging Trends in Real Estate® Europe 2019          Image: Vienna, Austria (nogreenabovetwothousand)
Emerging Trends in Real Estate - Creating an impact Europe 2019
Chapter 1: Business environment

“We’re late cycle but that does not mean we’re at the precipice,”                                “As far as equity is concerned, there is
says a private equity investor. “It’s not late cycle 2007–08. We could                           still an over-allocation in global markets
                                                                                                 to real estate. There is still a large amount
be at a plateau of valuations for quite some time.”
                                                                                                 of that allocation coming to Europe,”
                                                                                                 says the CEO of a pan-European
                                    Europe’s real estate leaders remain                          consultancy.
                                    optimistic about their business prospects
                                    in 2019 albeit less confident than they                      The slightly more sober outlook for 2019
                                    were a year ago as an air of late-cycle                      is symptomatic not so much of wavering
                                    caution settles on the industry.                             confidence in the continental European
                                                                                                 economy but of the unusually protracted
“There is still an over-            Nearly half the property professionals                       property cycle and structural changes
                                    surveyed by Emerging Trends Europe
allocation of equity in             indicate that profits and headcounts will
                                                                                                 discussed elsewhere in this report.
                                                                                                 Some interviewees go as far to suggest
global markets to real              be static, while the proportion of those                     the relative strength of the major European
estate. There is still a large      thinking the business environment will                       economies – and with it, occupier demand
                                    improve in the year ahead has gone down.
amount of that allocation                                                                        – is prolonging the property cycle.

coming to Europe.”                  As has been the case over several years,                     Ten years on from the onset of the global
                                    the primary concern for the industry is the                  financial crisis this late-cycle mood is
                                    availability of suitable assets – cited by                   evident among all interviewees although
                                    over two thirds of survey respondents                        some are more apprehensive than others.
                                    this time – which serves only to underline
                                    the enduring appeal of European real
                                    estate on the global stage.

                                    Figure 1-1 Business prospects in 2019

                                    2019 25                            62                                                        13            %

                                          Business confidence

                                    2018 42                                            50                                              7       %

                                    2019 37                                       48                                           15              %

                                          Business profitability

                                    2018 51                                                       39                                  10       %

                                    2019 45                                                 46                                        9        %

                                          Business headcount

                                    2018 49                                                      43                                    8       %

                                              Increase      Stay the same        Decrease

                                    Source: Emerging Trends Europe survey 2019

                                                                                            Emerging Trends in Real Estate® Europe 2019    5
Emerging Trends in Real Estate - Creating an impact Europe 2019
“The pricing for every asset class is now
                                                 Figure 1-2 Issues impacting business in 2019
at historic high levels so we are outside
the comfort zone. It is not a very healthy
environment. We have decided to slow                21                         47                                                15               15                   3   %
down our investments and are selling             Availability of suitable assets/land for acquisition and development
more,” says one German institutional
investor. “We are at 97.5 percent                   20                     41                                               20                   17                3       %
occupancy, so there is not a lot we can do
                                                 Construction costs
to drive returns even in a robust economy.”

For most interviewees, however, the issues          12               40                                            25                       18                 4           %

related to availability and pricing are          Cybersecurity
tempered by the belief that the industry
is in good health and financial discipline          10              43                                              19                25                           3       %
is in place – at least, for 2019. “The market    Interest rate movements
is tough,” says a global investor, “and that’s
largely because valuations are very high
                                                    7          34                                   27                           23                    9                   %
right now in most places. The good thing is
                                                 Currency volatility
that the occupier market is fundamentally
still quite healthy, and that positive is
underpinning that strong valuation;                 6          42                                             28                           21                      3       %
that’s the key.”                                 European economic growth

Though some express unease at rising                5      41                                            23                      28                                3       %
loan-to-value ratios in a particularly
                                                 Global economic growth
highly-priced German market, there are
no undue fears over leverage across
Europe as a whole.                                  5      23                          32                                  33                              7               %
“Real estate has grown as a proportion of
the balance sheets of many institutional            4     15              12                43                                         26                                  %
investors because it has provided the yield      Availability of finance
and returns that other asset types have
not. In that sense, they are more exposed.              Very concerned              Somewhat concerned             Neither/nor
But the good thing is that if leverage levels           Not very concerned             Not at all concerned
remain modest, the debt providers really
                                                 Source: Emerging Trends Europe survey 2019
shouldn’t be bearing that much risk in the
next downturn. The equity providers will
be holding that risk, and that’s arguably
where the risk should be,” says one
global investment manager.

  6   Emerging Trends in Real Estate® Europe 2019
Emerging Trends in Real Estate - Creating an impact Europe 2019
Chapter 1: Business environment

“There is an enormous       Some in the industry draw comfort from           Indeed, the geopolitical backdrop to
                            a market with “more equity in the system”        investment is hard to ignore. According to
amount of risk in the       than at the previous peak and, equally           one global investor: “There is an enormous
system. Geopolitical risk   important, the restraint shown over              amount of risk in the system. Geopolitical
is everywhere; there is     speculative development during the               risk is everywhere; there is no safe haven
                            past decade. “The market is balanced             today.” Others see geopolitical events as
no safe haven today.”       in most European countries,” says a              putting a “periodic safety valve on the
                            Belgian interviewee.                             market that pulls everybody’s risk-tolerance
                                                                             back”. That is certainly true of the UK where
                            The signs are that restraint will continue,      Brexit remains a matter of growing concern
                            not least because the second biggest             as the due date of March 29, 2019 draws
                            concern for 2019 is construction costs           closer without any clearer sense of the
                            – labour and materials. According to one         outcome. As a consequence, the UK
                            pan-European adviser: “Construction              represents the one major exception to
                            capacity and construction prices are a           the economic equilibrium ascribed to
                            major risk factor now for developers in          Europe generally.
                            several countries. Capacity decreased
                            after the global financial crisis, and now       Despite investment volumes holding up
                            more people want to build and material           well in 2018, the industry believes the
                            costs are increasing.”                           UK economy is destined to underperform
                                                                             the Eurozone following its departure
                            Here again, the late cycle is informing          from the European Union (see page 13).
                            sentiment. As one German developer               “That doesn’t mean it’s bad, just that it
                            explains: “In previous years you could           underperforms,” says one private equity
                            be sure that your cost overruns would            player. “Whether it’s 50 or 100 basis
                            have been compensated by higher                  points of GDP, that underperformance
                            sales pricing and yield compression.             is significant. Therefore, in terms of
                            Going forward, that may not be the               investment decisions and underwriting
                            case anymore. You have to watch                  in the UK, you’re looking at a relatively
                            construction costs more carefully.”              weaker-performing economy.”

                            One pan-European fund manager
                            concludes: “For most of the bigger
                            markets we are one year further into
                            the cycle and one year closer to the end.
                            But I believe we have another good couple
                            of years to go until things correct and it
                            will not be a severe correction like the
                            financial crisis. The market has matured,
                            and you see the shift [by investors] from
                            sectors like office to residential. It will
                            not be too severe unless there is a major
                            geopolitical incident.”

                                                                          Emerging Trends in Real Estate® Europe 2019   7
Emerging Trends in Real Estate - Creating an impact Europe 2019
Political risk rises                            Figure 1-3 Social issues in 2019
Brexit is doubtless one reason why
European political instability is a key
                                                    20                       60                                                             12             6               2   %
social/political issue for the industry in
                                                International political instability
2019, rating the second-highest level of
concern (69 percent) after international
stability. At the same time, the survey             16                  30                             16               24                            13                       %
indicates that national political instability   National political instability
is not considered to be quite so acute
as previous years when there were
                                                    13             41                                         22                       20                          4           %
widespread fears over the threat of
                                                Housing affordability
nationalism. Those fears have been
allayed – at least until the next round
of general elections – although the                 12             57                                                        15                   14                   3       %
interviews reveal lingering political           European political instability
concerns, notably with the governments
of Italy and Turkey. “There are general
                                                    12             45                                              26                            15                    3       %
issues with political unrest around Europe
                                                Environmental issues
and concerns over the viability of Italy in
the Eurozone,” says one pan-European
investment manager. “Turkey is a small              9         36                                       27                         22                           6               %
market and not really an investment             Mass migration
destination for us, but it has the capacity
to be destabilising for Europe generally.”          7        34                                   28                         23                            8                   %
                                                Social equity/inequality
Others are pressing on, regardless of the
political noise. “In Italy we have a Milan-             Very concerned            Somewhat concerned        Neither/nor
focused portfolio, and we are not seeing                Not very concerned           Not at all concerned
it being affected at all by the political
situation there,” says one global private       Source: Emerging Trends Europe survey 2019

equity player. “We are selling assets in
Milan at sub-4 percent yields – there is
a huge buyer universe out there.”               “There are significant risks if the trade                      Most interviewees believe a global trade
                                                war escalates. You can see pockets of                          war is potentially damaging to business,
When it comes to social/political issues in
                                                that effect already in certain trade flows,”                   but its impact is difficult to quantify at the
2019, however, the threat of international
                                                says a global investment manager. Another                      moment and will most likely materialise
instability is by far the biggest concern
                                                global manager adds: “We’re watching                           after 2019. Like Brexit, the uncertainty
among survey respondents, just as it
                                                carefully to see what happens in the major                     over the outcome is the biggest frustration
was last year. This time, the interviews
                                                ports – whether tariffs have an impact                         for the industry. “You need to have a little
were conducted in summer 2018 when
                                                on the traffic coming in and out of ports.                     visibility, and it’s like being in the middle of
the imposition of tariffs between the US
                                                The ports facilities also happen to be                         a storm,” says one French CEO. “I have
and China was high on the news agenda.
                                                some of the more tightly priced logistics                      no clue where it is headed, no clue.”
Not surprisingly, the threat of trade wars
                                                assets. It’s easy to see how terrorism and
is now on the industry agenda, too.
As one German interviewee observes:             or trade wars could impact the facilities.”
“It seems far away from continental Europe,
but it will have an impact in Germany as an
exporting country and may be quicker than
we think. It will affect general sentiment,
and general sentiment is the main condition
for a good business environment.”

 8    Emerging Trends in Real Estate® Europe 2019
Chapter 1: Business environment

Interest rate caution                           Figure 1-4 Interest rates and inflation in 2019
There is, at least, more clarity around
interest rates following confirmation by the                     3%    3%                             3%      4%                       3%      7%
European Central Bank (ECB) that it will                                                                                       16%
end its €2.5 trillion stimulus programme by                                             29%
the end of 2018 with the proviso that it will   33%
keep base rates at record lows until the                                                           Short-term                          Long-term
middle of 2019. The decision had been                                                             interest rates                     interest rates
well-trailed, and unsurprisingly Europe’s
real estate industry overwhelmingly
expects the loss of the quantitative                                                                                  64%

easing prop to the economy to feed                                                                                                              74%
through to a rise in short- and long-term
                                                        Increase significantly       Increase somewhat         Stay the same
interest rates at some point in 2019.
                                                        Decrease somewhat            Decrease significantly

Yet for most interviewees, the prospect         Source: Emerging Trends Europe survey 2019

of mainland Europe following the UK and
the US and raising interest rates is not a
threat to business in 2019. Many believe
that increasing interest rates will be offset
                                                In effect, interest rates have moved on to                 “We consider that an
                                                the industry watch-list. Many interviewees
by growth in rents, or as one French            agree that a geopolitical shock to the                     increase of another 200
interviewee puts it: “We consider that an       system would accelerate rate rises                         basis points in interest
increase of another 200 basis points in
interest rates can be absorbed without a
                                                and, as one German fund manager                            rates can be absorbed
                                                acknowledges, “could cause some trouble
big hit on valuations.”                         so that alternative investments become                     without a big hit on
                                                more attractive [than real estate] and                     valuations.”
In short, there is an expectation of modest,    we see outflows of money”. At the same
containable rate increases. In that respect,    time, some of the specialist bankers
Emerging Trends Europe reflects little          canvassed this year report a brisk trade
change from last year’s report in its           in prudent property clients refinancing
immediate outlook. Longer-term,                 loans at favourable rates while they can.
it is another matter. Some interviewees
ponder the idea of Europe charting a            On an altogether bigger scale, one German
Japan-esque 10- or 20-year path of low          banker warns: “I worry about the impact
inflation and low interest rates, but that      of the ECB ending its bond-buying
is a minority view. Some 60 percent of          programme. When that happens, countries
survey respondents believe interest             like Spain, Portugal, Italy and Greece
rates and costs of finance will worsen          will have to fund themselves in the
over the next five years.                       capital markets, which is something
                                                they haven’t really done since 2008.
                                                If they can’t sell bonds at interest rates of
                                                less than 5 or 6 percent, then essentially,
                                                they can’t fund themselves.”

                                                                                                      Emerging Trends in Real Estate® Europe 2019     9
Figure 1-5 Returns targeted in 2019              Figure 1-6 Time horizon for holding                Figure 1-7 Returns targeted in 2019
           compared to previous year                        investments
                       2% 2%                                                    5%                                                           21%

     30%                                              34%                                              19%

                                      47%                                                                           0-5%        5-10%
                Significantly higher                                                                                10-15%       15-20%
                                                                 1-3 years      3-5 years
                Somewhat higher                                                                                     20%+
                                                                 5-10 years      10+ years
                                                                                                    Source: Emerging Trends Europe survey 2019
                Somewhat lower                   Source: Emerging Trends Europe survey 2019
                Significantly lower

Source: Emerging Trends Europe survey 2019

Searching for income                             One pan-European investment manager                According to successive Emerging Trends
                                                 stresses the importance of “sustainable            Europe surveys, return expectations have
The combination of the late property cycle,
                                                 cash-flows” and “ensuring we get the               been progressively scaled down over
the geopolitical uncertainty and the rising
                                                 buying decisions right”, adding: “At this          recent years, and once again, some 30
interest rate environment has reinforced
                                                 stage in the cycle, a lot of risks are on the      percent of respondents say they are
the need for secure, long-term income.
                                                 downside, not the upside. The challenge            targeting lower returns in 2019. In doing
For many, the search for income is the main,
                                                 now is assessing those risks and adding            so, they still maintain that real estate
guiding narrative for European real estate
                                                 value, and so outweighing some of those            has an edge over other investment asset
investment in 2019. “Many investors will
                                                 potential, wider market risks and the risk         classes. But as one private equity investor
trade capital growth, which almost certainly
                                                 of rates increasing, yields moving out.”           says: “We are just a little more cautious
is finished, for rental stability and growth,”
                                                                                                    about where we are in the market cycle.
says one investment banker. “Any asset
                                                 Though there are “endless amounts                  What we don’t want to do is invest in the
getting a predictable level of income is
                                                 of money”, adds a German interviewee,              final piece of the cycle with twice as much
in demand, and real estate is in that role.
                                                 investors are nonetheless careful about            money and the same return targets.”
The demand side is still good; the ability
                                                 where to invest and at what level:
to satisfy that demand is more variable.”
                                                 “Capital is looking more on downturn
                                                 scenarios than ever before. Investors are
                                                 looking at assets which are replaceable,
                                                 where you have a high level of sustainability
                                                 in terms of prices and rents.”

10     Emerging Trends in Real Estate® Europe 2019
Chapter 1: Business environment

Even so, many interviewees and survey          Others favour allocating more capital to             Broadening investment
respondents believe there are plenty of        less cyclical alternative real estate sectors,
                                                                                                    The interviews go further, indicating that
value-added opportunities around Europe        which has been one of the significant
                                                                                                    the coming five years will be a pivotal
– with ample debt finance available to         trends of recent years and is clearly
                                                                                                    period for the industry, the challenges
boot – although they are evidently not in      gathering pace. “We see demand for
                                                                                                    going much deeper than the conventional
the sustainable cash-flow camp. And at         alternatives remaining very strong because
                                                                                                    supply/demand dynamics of commercial
this stage in the game, according to one       of yields, compared with the more mature
                                                                                                    real estate, or even a market downturn.
pan-European institutional investment          sectors,” says a pan-European institutional
manager, a value-added strategy risks          investor. According to another institutional
                                                                                                    Though social inequality is not the main
“promising the moon and delivering             investor, higher returns may have been an
                                                                                                    concern for 2019 in the survey, some
something different”.                          initial attraction of alternative real estate but
                                                                                                    interviewees refer to it as one of the
                                               more importantly “we have started to really
                                                                                                    biggest issues facing the industry over
But if sustainable income is paramount         understand the operational risk and we are
                                                                                                    the medium term because it will set the
for the majority, there are numerous           now more capable of analysing it properly”.
                                                                                                    political agenda across Europe. Others
ways of achieving it. A growing number
                                                                                                    cite the pressure on the built environment
of market players are what one global          It used to be the custom that as each
                                                                                                    brought on by urbanisation. Many refer
fund manager calls “exit yield agnostic”.      market peak was passed, the enthusiasm
                                                                                                    to the risk of obsolescence as real estate
They are focused entirely on income –          for alternative sectors waned and investors
                                                                                                    struggles to keep up with technology and
in other words, “the return component          reverted to the traditional sectors: office,
                                                                                                    rapidly changing consumer behaviour.
investors can control”. This approach          retail and industrial. That no longer appears
implies investors will target good-quality     tenable. All the signs are that the need
                                                                                                    “Real estate provides the places where
assets – essentially sticking to core or       for sustainable income and the push into
                                                                                                    people work, live and play, receive
core-plus – with strong income streams,        alternative real estate – or “demographic
                                                                                                    education and healthcare. It’s the backbone
almost irrespective of pricing.                investing” as some call it – will continue
                                                                                                    of society, and it’s very difficult to get
                                               long after 2019. Nearly half the survey
                                                                                                    comfortable if society on the whole is
One investment manager with exposure           respondents expect the availability of
                                                                                                    on the verge of very significant changes,”
to logistics in Germany is less concerned      suitable assets to worsen over the next
                                                                                                    says one global fund manager. “How we
with the high prices in that sector –          five years.
                                                                                                    invest pension fund capital and get it
and in that country – than with the strength
                                                                                                    to continue to grow is affected by all
of covenant. The argument here is that the
                                                                                                    these things.”
equity and corporate bond yields in listed
logistics operators are still less than the    “We see demand for
yields they produce as tenants. “But it’s      alternatives remaining
the same counterparty. When clients think      very strong because of
about allocating to real estate and what
they expect to get out of it, it’s much less   yields, compared with
about the market going up and down and         the more mature sectors.”
much more about what is the counterparty
risk? What is the cash-flow and am
I exposed to geopolitical risk?”

                                                                                               Emerging Trends in Real Estate® Europe 2019   11
Figure 1-8 European business environment in the next 3–5 years

        22                 21                     18             15               14              13              13              12              10

                                                  35             37
%       39                                                                                        38
                                                                                                                  49              47


        39                                        46                             61
                                                                 48                               49
                                                                                                                  38              41

     Inflation        Interest
                        rate                 Construction
                     movements                  costs       Cybersecurity        Cost         Availability     Currency         Global         European
                                                                                  of          of suitable      volatility      economic
                                                                               finance         assets/                                         economic
                                                                                                                                growth          growth

    Improve      Stay the same       Get worse

Source: Emerging Trends Europe survey 2019

                                                            One investment manager’s answer                  As one property company CEO concludes:
                                                            involves re-allocating capital “in a material    “We have to make sure our buildings are
                                                            way towards social infrastructure, assets        flexible enough to cope with whatever is
                                                            that are required by society and down-           coming in 10 years’ time. We have no
                                                            weighting in conventional sectors,               control over that, but it will drive what we
                                                            particularly retail, which is about trying to    do. We have to look at the megatrends
                                                            be in highly desirable assets and avoiding       that are driving human behaviour – ageing
                                                            assets that will become obsolete”.               population, growing population, structural
                                                                                                             shortage in housing, structural oversupply
                                                            If anything, the blurring of boundaries          in retail property, a younger generation that
                                                            between traditional and alternative real         is completely digitally enabled. We will
                                                            estate – as predicted in previous editions       have to be much quicker in evolving our
                                                            of Emerging Trends Europe – is now a             product. The future will be much more
                                                            fact of life in the industry.                    about mixed-use communities.”

12      Emerging Trends in Real Estate® Europe 2019
Chapter 1: Business environment

UK faces Brexit reality check
More than 70 percent of Europe’s senior property professionals believe the UK’s ability to attract
international talent will fall following March 29, 2019, whether it is a soft, hard or no-deal Brexit.

As many as three quarters of survey
                                                Figure 1-9 Business impact of Brexit in 2019
respondents believe that business
relocations will increase to continental
Europe in 2019 as a result of Brexit while
similar numbers predict a decline in UK         relocations
                                                                                                                   1 3   20                       68              8
investment and values.                          to the rest
                                                of Europe

For the UK, these are bleak numbers
given that the survey was conducted             The UK’s ability
                                                to attract
in mid-2018 when there was evidence             international
                                                                               18               53                       26    3
that investment volumes and occupier            talent
demand for offices in London were
holding up well.
                                                                          Decrease             Decrease             Stay the           Increase         Increase
                                                                          substantially        somewhat             same               somewhat         substantially
The interviews indicate that non-European
investors are less bothered by Brexit than      Source: Emerging Trends Europe survey 2019

their European counterparts. Even so,
an overwhelming 83 percent of respondents
expect a divergence in economic growth
between the UK and the European Union           Figure 1-10 Impact of Brexit on real estate in 2019
in 2019.

One private equity player suggests that
until Brexit, the UK represented 25 percent                          UK                   22                   56              17         5
of European GDP while attracting a              Real estate
disproportionate 40 percent-plus of capital                          Rest
                                                                                                               2     9         46                      41         3
flows. “We’ve just said to our clients,                              of EU
that’s gone now. The UK has lost a big
piece of its competitive advantage.”

According to most pan-European                                       UK               14                  63                   19         3
investment managers canvassed for               Real estate
this report, their institutional clients are                         Rest
                                                                                                          1 6                  63                       29        1
“nervous about their allocations to the                              of EU
UK” going forward, despite capital and
rental growth. “They just look at the UK
and think it’s fraught with risk,” says one.                              Decrease             Decrease             Stay the           Increase         Increase
                                                                          substantially        somewhat             same               somewhat         substantially
A good number of interviewees equate
                                                Source: Emerging Trends Europe survey 2019
such risk with opportunity. For the majority,
however, the Eurozone is seen as a safer
and more fruitful investment destination
than the UK in 2019.

                                                                                                      Emerging Trends in Real Estate® Europe 2019                13
Top trends
Working around                                  In response, the industry is seeking its         “The late cycle could
                                                “sustainable cash-flows” in a variety of
income creation                                 ways. Many of those who are sticking             go some time still.
This late in the cycle and with commercial      with commercial real estate have adopted         But in terms of any cap
real estate values already very high, the
common goal for many in the European
                                                a build-to-core strategy. Debt is increasingly   rate or yield shift, that
                                                regarded as a sound, defensive means
property industry is secure income.             of exposure to the sector. There is also         is no longer going to be
                                                a marked shift of capital into residential       what drives real estate
Interviewees are reflecting much more on
the “downside risks” than in last year’s
                                                and alternatives – the late cycle lending        values, and so we’re
                                                an urgency to long-term demographic
Emerging Trends Europe although the             influences.                                      going to work around
mood is lightened by a widespread belief                                                         income creation.”
that supply and demand at the occupier          It seems highly likely the interest in
level remain balanced in most cities.           residential and alternatives will grow,
                                                given the pricing and availability of suitable
“The late cycle could go some time still,”      core assets. “There is still an opportunity
says one pan-European private equity            to buy under-managed real estate,” says
partner. “But in terms of any cap rate or       one pan-European fund manager. “It is
yield shift, that is no longer going to be      about how quickly interest rates rise and
what drives real estate values, and so we’re    how robustly rents grow at the same time.
going to work around income creation.”          There will be growth on the rental side,
                                                but the best may now be behind us.”
Another pan-European player is more
cautious: “Capital growth has mostly played
out, and the areas that are performing in the
UK now are being driven by income growth.
We will increasingly see that in continental
Europe too. In some segments,
decompression in yields will moderate
returns over the next 18 months.”

14    Emerging Trends in Real Estate® Europe 2019
Chapter 1: Business environment

Where’s the risk?                              Others are going down the value-added,            “The biggest change
                                               build-to-core or development route.
The consensus from Europe’s real estate
                                               “What we are doing more of, is things             that we have to
industry is that it is coming towards the
end of a good run: almost all of its major
                                               that are growth-orientated and taking             accommodate will be
markets have recovered from their
                                               development risk or lease-up risk in              the end of substantial
                                               markets where supply is tight and rents
2008–2009 downturn; for their commercial
                                               are growing so we can make returns by             quantitative easing,
property, supply and demand are pretty
much in balance, if not tight; and investors
                                               taking on risk,” says a global investor.          negative interest rates
and lenders do not appear to be heading                                                          and high liquidity,
                                               Development in certain sectors is definitely
for a feeding frenzy, piling large amount
                                               on the increase – JLL's forecasts indicate        which have boosted
of debt on slim equity underpinnings.
                                               that office completions over 24 European          all asset classes in
So where is the risk hiding? Investors
                                               cities will increase significantly in 2019        the last few years.”
                                               and 2020 before dropping back in 2021.
complain that quality, core assets are
hard to come by and point to “over-priced”
                                               But the risk is hard to judge. As a percentage
markets. But the signals from our
                                               of existing stock, the supply coming in the
interviews are that European real estate
                                               next few years is not, in most major markets,
leaders are treading cautiously and
                                               overwhelming: mostly in the 1-2 percent
resisting the temptation to continue
                                               range. Interviewees say that banks have
bidding up prices. Indeed, some have
                                               been reluctant to fund speculative projects,
been selling – to an increasing array of
                                               insisting on pre-lets. Alternative lenders
non-European investors with different
                                               may be more open-handed, but they are
return/risk criteria.
                                               still a minor part of the debt market.

But the search for yield and income is now
                                               “The ability to find value and deploy
edging the industry out of its core comfort
                                               capital is extremely challenging,” says a
zone. Some are moving into alternative or
                                               pan-European investor with a stellar track
niche areas, like student accommodation,
                                               record of calling the market’s twists and
which require more operational expertise.
                                               turns. “The biggest change that we have to
“If you're not able to raise the income on
                                               accommodate will be the end of substantial
your asset and yields blow out you’re
                                               quantitative easing, negative interest rates
exposed. If you have assets where you
                                               and high liquidity, which have boosted all
can grow the income, or you’re in a sector
                                               asset classes in the last few years.”
where income is growing then you’re less
exposed,” says a global investor.

                                                                                            Emerging Trends in Real Estate® Europe 2019   15
Affordable housing                              The fundamentals look even better against
                                                                                               the cyclical uncertainty surrounding
                                               in demand                                       commercial real estate. As one global
                                               “Every major city in Europe has the same        investor says: “We are focusing on those
                                               issue: lack of affordable housing, lack of      sectors where we think income might be
                                               social housing and lack of senior care …        more resilient, which is often residential,
                                               the problem is just getting worse and           student housing or senior living.”
                                               worse,” says a partner with a pan-European
                                               private equity firm.                            Housing is also integral to the industry
                                                                                               discussion around mobility of companies
“We are spending an                            For many in the real estate industry,           and their employees. In Munich, for instance,
                                               the corollary of this widespread problem        one investment manager says: “Residential
increasing amount of                           is a reallocation of capital to residential,    prices are so high that it becomes hard for
our time on residential                        which has been reflected in Emerging            companies to relocate there, they can’t
around the world, and                          Trends Europe for some time. But this year,     find the workers. That is a real issue.”
                                               the interest in housing has reached a
that includes Europe –                         higher level.                                   So far, the very specific response to
anywhere we can get                                                                            demand from the millennial generation has
access to housing at scale.                    The same private equity partner believes        come in the form of micro-apartments and
                                               Europe’s private rented sector (PRS) has        co-living – the latter, says a German fund
The fundamentals in these                      undergone “a critical change from niche         manager, is “one way for people to afford
markets are good.”                             to institutional” – in other words, similar     to live in the biggest cities”.
                                               to the US multi-family sector.
                                                                                               However, the lasting solution to housing
                                               At the same time, more than half of the         affordability will surely come simply from
                                               survey respondents are concerned about          building many more homes of all types.
                                               housing affordability as a significant social   According to Emerging Trends Europe,
                                               issue in 2019, which is around the same         the industry is ready and willing.
                                               proportion as previous years. Yet as
                                               each year goes by without any tangible          “The last few years have seen an
                                               improvement in housing affordability,           increasing institutionalised investment
                                               so the supply/demand dynamics seem              market in the accommodation space,”
                                               more compelling to the industry.                adds one pan-European private equity
                                                                                               player. “It includes multi-family, student,
                                               “We are spending an increasing amount           and senior. It is a big market, but it is in
                                               of our time on residential around the           its infancy, and it is not capitalised with
                                               world, and that includes Europe –               the right long-term capital. So, it’s a
                                               anywhere we can get access to housing           trend that has started but will continue.”
                                               at scale,” says one global private equity
                                               player. “The fundamentals in these
                                               markets are good.”

16   Emerging Trends in Real Estate® Europe 2019
Chapter 1: Business environment

                                                                                                              As it turns out, the survey puts health
Figure 1-11 Factors influencing real estate strategies over the next 3–5 years
                                                                                                              and wellbeing almost on a par with such
                                                                                                              long-established influences on the industry
14                 43                                         36                                 7       %    as sustainability and energy efficiency.
Shorter and more flexible leases
                                                                                                              But importantly, the driver here is not
                                                                                                              regulatory force but occupier demand.

14                 41                                        38                                  8       %
                                                                                                              For many interviewees, occupier
Technology readiness – broadband capacity and performance                                                     wellbeing falls into their Environmental
                                                                                                              and Social Governance policy. It is also
12            31                              49                                                9        %    an example of property as a service,
Promoting health and wellbeing                                                                                which Emerging Trends Europe has
                                                                                                              highlighted in recent years.
11            37                                     45                                          7       %
                                                                                                              “Occupier views on health and wellbeing
Improving sustainability/energy efficiency/reducing carbon emissions
                                                                                                              are increasingly important,” says a fund
                                                                                                              manager. “They are certainly a feature of
7        23                      53                                                    17                %    our investment decision-making process.”
Certification of digital infrastructure
                                                                                                              Many of the interviewees talk about the
6       22                     53                                                    19                  %    “demand for more flexibility” among
Implications of International Financial Reporting Standard 16 (tenants capitalising lease liabilities)
                                                                                                              occupiers so that they, in turn, can
                                                                                                              respond to the needs of their workforce.
    Very significant impact     Significant impact        Moderate impact   No impact                         “If people are not happy and satisfied with
                                                                                                              their business environment,” says a global
Source: Emerging Trends Europe survey 2019                                                                    institutional player, “then it becomes
                                                                                                              difficult for the companies that are the
                                                                                                              tenants. Then they can make the decision
                                                                                                              to leave, and when the notice comes,
                                                            Happy tenants                                     it’s too late. That’s where intensive asset
“We have to be ahead                                        Not so long ago, the idea of promoting            management is very important.”
                                                            health and wellbeing would have been
of the game as far as                                       dismissed as irrelevant to the real estate        Another global player concludes: “You’ve
possible in thinking                                        industry, yet nearly half the survey              got to stay ahead of the trends and respond
about the happiness                                         respondents believe it will have a                to them. Fundamentally what it means is
                                                            moderate impact on strategies over the            that you need to invest more. The days of
of tenants. In the end,                                     coming five years. More tellingly, perhaps,       buying real estate, holding it for 20 years
they pay the rent and we                                    43 percent acknowledge it will have a             and doing nothing, are long gone.”
want to find the highest                                    significant impact.

rent and the most loyal                                     “We have to be ahead of the game as far
tenant in the long term.”                                   as possible in thinking about the happiness
                                                            of tenants,” suggests one pan-European
                                                            fund manager. “In the end, they pay the
                                                            rent and we want to find the highest rent
                                                            and the most loyal tenant in the long term.
                                                            And then the cap rate is the outcome.”

                                                                                                         Emerging Trends in Real Estate® Europe 2019   17
Chapter 2

 Real estate
 capital markets
 “Investors are lowering their risk-adjusted returns
 or keeping them the same, and everybody is trying
 to get longer-dated, annuity-style products out there.
 Bonds still look unattractive, stock markets are
 volatile, you’re getting nothing on your cash,
 and you are getting a decent yield on real estate.”
 Director, pan-European investment manager

18   Emerging Trends in Real Estate® Europe 2019          Image: Hamburg, Germany (Alexander Spatari)
Chapter 2: Real estate capital markets

“There remains a significant                   Figure 2-1 Availability of equity and debt in 2019
amount of capital interested in
property in all shapes and sizes,”                                   Equity for refinancing or new investment
says one global investment                                                  Decrease significantly 1% Increase significantly 1%
manager. “The biggest challenge                                  Decrease somewhat 17%

is finding quality assets and                                                                                        Increase somewhat 27%
portfolios in which to invest.
If anything, it’s getting harder
as core assets, on the continent
in particular, are tightly priced.”

This is a common sentiment among
Emerging Trends Europe’s survey                                            Stay the same 54%
respondents and interviewees, reflecting
the fierce competition for assets arising
from the sheer weight of capital bearing                             Debt for refinancing or new investment
down on European real estate.                                               Decrease significantly 1% Increase significantly 2%

                                                               Decrease somewhat 21%
Against that backdrop, the outlook for
capital markets in Europe in 2019 remains                                                                             Increase somewhat 30%
positive although there has been a lowering
of expectations around the availability of
equity and debt as the industry tries to
read the cycle.

Some 28 percent of survey respondents
believe the amount of equity available
for refinancing or new investment will                                        Stay the same 46%

increase, compared with 50 percent last
year. The figures are similar for debt.                             Debt for development
                                                                          Decrease significantly 4%    Increase significantly 3%
While that indicates less confidence in the
capital markets than last year, it is coming
off a very high base. With few exceptions                  Decrease somewhat 23%

– notably retail in the UK – real estate                                                                               Increase somewhat 31%

markets remain highly liquid despite some
nervousness that pricing of prime assets
is high by historic standards.

                                                                                Stay the same 39%

                                               Source: Emerging Trends Europe survey 2019

                                                                                                    Emerging Trends in Real Estate® Europe 2019   19
“There’s just so much money in the world
Figure 2-2 Real estate investment in European countries Q4 2017–Q3 2018 (€ bn)
                                                                                                                                           that has to get invested, so as soon as
                                                                                                                                           something falls in value, everyone piles in
               Other                                                                                                                       and that raises the price again,” says one
                       4                                         Norway                               Finland                              investment banker.
                                                                                      Sweden                     7
                                              UK                                                                                           “A lot of sovereign wealth funds but also a

                                                                                                                            Russia         lot of wealthy individuals see a generational
                                                                                  6                                                  2
                                       5                                                                                                   opportunity to buy a trophy asset and take
                                                                     Germany                     Poland                                    a very long-term view,” one agent adds,
                                                           Netherlands                                    7
                                                                 4        21                                                               picking up on a big theme this year –
                                   France                 Belgium                                                                          increasing inflows of equity from wealthy
                                              39                          1
                                                                                                                                           individuals rather than just institutions.
                                                           Luxembourg                           4     1
                                                                      5               Austria                 Hungary
                                                                                                                                           “The interesting thing we’re seeing –
                                                                                                                                           and Asia is a part of this – is increasing
            Spain                                                                      Italy
                                                                                               7                                           capital from high-net-worth individuals,
Portugal                                                                                                                                   not only directly into real estate trophies
           3                                                                                                                               but into funds and real estate across the
                                                                                                                                           board,” says one private equity investor.
                                                                                                                                           “We’re seeing an increased flow from
                                                                                                                                           high-net-worth or super-wealthy individuals
Source: Real Capital Analytics
Note: Figures are provisional as at 22nd October 2018                                                                                      who view the equity and bond markets
                                                                                                                                           as no longer offering them return and are
                                                                                                                                           therefore looking at real estate as a place
                                                                                                                                           to get return. It’s pretty significant.”
Figure 2-3 Eurozone property yields and interest rates, 2009–2018
                                                                                                                                           As for the lowering of expectations
      6                                                                                                                                    around capital availability, the difficulty
                                                                                                                                           in putting money to work at this point in the
                                                                                                                                           cycle is clearly a factor. “With this kind of
      4                                                                                                                                    investing environment, raising capital for
                                                                                                                                           new funds is certainly not getting easier,
%                                                                                                                                          because investors aren’t stupid,” says one
      2                                                                                                                                    global fund manager. “They see what’s
      1                                                                                                                                    going on in the underlying market and how
                                                                                                                                           challenging it is to find good investments.
                                                                                                                                           So, they’re more cautious about where
      -1                                                                                                                                   they want to commit their money.”
           2009            2010        2011        2012       2013            2014       2015         2016           2017      2018

                EURIBOR                Eurozone bond yields               Eurozone property yields                   Five-year swap rate   At the same time, there is very little fear
                                                                                                                                           that debt will precipitate another downturn
Source: CBRE, Datastream, European Central Bank
                                                                                                                                           in the short or medium term.

 20     Emerging Trends in Real Estate® Europe 2019
Chapter 2: Real estate capital markets

“Financing is stable and supportive
                                                 Figure 2-4 UK property yields and interest rates, 2009–2018
of transactions without posing a risk,”
one global private equity investor says.
“The pricing of debt, both senior and
mezzanine, feels appropriate,” another says.           7
“One thing that happened in the previous               6
crisis is that debt became very mispriced.
We think the returns you can generate are
                                                 %     4
appropriate for the amount of risk you
have to take. We don’t see a credit bubble,            3
and we are in a functioning market.”                   2

About the same proportion of survey
respondents think debt for development                     2009    2010       2011    2012     2013     2014       2015       2016        2017   2018
will increase as those who think it will
increase for refinancing and new investment,                  LIBOR         UK Government bond yields        UK property yields       Five-year swap rate

34 percent versus 32 percent, and this           Source: CBRE, Datastream
figure is down from 46 percent last year.

By contrast, interviewees report more
caution about deploying equity and debt in       Prime assets are over-priced
the UK compared with major continental
European markets, given the uncertainty
around Brexit.                                    24%                     46%                   20%                 9%               1%

Direct investors from Asia and the UK                                                                              Disagree       disagree
                                                   Strongly                                  Neither agree
are still buying core property, and the             agree                     Agree           nor disagree
UK saw the highest investment volumes
of anywhere in Europe in the first half
of 2018, according to Real Capital
Analytics. But for anything below prime          “One thing that happened
property, the situation is less easy to          in the previous crisis is
justify, with economic fundamentals
weaker but asking prices still high.
                                                 that debt became very
                                                 mispriced. We think the
“We’re not doing anything in the UK              returns you can generate
at the moment,” one investment advisor
reports. “There are some capital raises
                                                 are appropriate for the
going on, but they will find it hard. It would   amount of risk you have
be difficult for us to take on a value-added     to take. We don’t see a
fund in the UK. Speaking to managers
that deal with core-plus vehicles, they’ve
                                                 credit bubble.”
had a hell of a job finding opportunities
because the pricing is so hot, still,
which amazes me.”

                                                                                                   Emerging Trends in Real Estate® Europe 2019          21
Debt evolution                                  Figure 2-5 Sources of debt in 2019
The debt world is evolving in terms of the
sources that borrowers can tap. Banks still
                                                    18                   55                                                22            4       1   %
play a significant part in the market, but
this is diminishing while alternative lenders   Alternative lending platforms

continue to grow.
                                                    13              45                                          34                   6           1   %
In the UK, for instance, data from Cass         Debt funds / Other non-bank lenders
Business School show that banks now
hold 74 percent of the £164 billion of
                                                    9          52                                                    30              8           1   %
debt outstanding against commercial real
                                                Non-bank institutions
estate, compared with 98 percent in 2007.

This shift is likely to continue. Some 55           3 35                                     50                                 10               1   %
percent of survey respondents believe           Commercial mortgage-backed securities
lending from non-traditional debt providers
will increase in 2019. Just 27 percent          2 25                             44                                       26                 3       %
predict lending from banks will rise,
compared with 42 percent last year,
while 29 percent forecast a fall.                       Increase significantly   Increase somewhat        Stay the same
                                                        Decrease somewhat        Decrease significantly
For insurance companies and institutional
                                                Source: Emerging Trends Europe survey 2019
investors, debt is increasingly viewed as
a way of investing defensively at the top of
the cycle, whether it is being undertaken
directly or through investments with debt       “There is a lot of liquidity targeting the                   “I see us being far more
fund managers.                                  market, which creates risk, and loan-to-
                                                values (LTVs) are increasing, and we don’t                   conservative on the equity
“I see us being far more conservative on        really want to increase our LTVs too much,”                  side and far more focused
the equity side and far more focused on         one banker says. “We are holding firm                        on income return, and that
income return, and that takes us down the       on our LTVs and our pricing. A lot of our
debt route as a debt provider,” one global      competitors are not, so we are losing                        takes us down the debt
institutional investor says. “This year,        business, but we don’t want to take on                       route as a debt provider.”
more than 70 percent of our flows will          more risk.”
be in commercial real estate debt.”
                                                But it is also a secular trend, the result
“We have finished raising capital for a         of regulation that is designed to limit
[pan-European] mezzanine debt fund,”            systemic risk in the banking sector as
a global fund manager says. “We closed          prices in real estate markets increase.
that with a little over $1 billion of
commitments, and it could have been             “The European Central Bank regulates
more. My preferred investments in this kind     this market very heavily, every lender
of market are debt and develop-to-core.         has to fulfil strict capital criteria and hold
That’s where I see, from the investment         more equity against real estate loans,”
side, the best risk-reward balance.”            another banker says. “As values get
                                                higher you have to put aside more equity,
For banks, that reduction, if it comes to       so those requirements will always limit
pass, will be partly attributable to not        the volume of new loans.”
wanting to be burned again, with the
memory of 2008 still fresh.

22    Emerging Trends in Real Estate® Europe 2019
Chapter 2: Real estate capital markets

Pricing problems                                  Figure 2-6 Access to senior debt in 2019
With the price of core assets at record
highs in almost every market bar those
                                                   6       29                              47                                           16                 1    %
with major macro issues like Moscow
or Istanbul, investors are presented with         Value-added real estate

the challenge of how to hit return targets.
For some in the industry, this means               6       27                             58                                                       8       1    %
targeting value-added real estate, and            Core real estate
indeed marginally more survey respondents
(35 percent) expect to be able to secure
                                                   4     30                               53                                                  12           1    %
senior debt here than for core assets
                                                  New investment
(33 percent). However, twice as many
people think debt for value-added will
decrease compared with core – 16 percent           4     25                         50                                             18                  2        %
against 8 percent – and so this is a mixed        Development finance
picture. It is worth noting that in interviews,
the value-added contingent say they do            2 20                      66                                                                11           1    %
not want to take on too much extra risk.

A key element here is the move of core                 Increase significantly     Increase somewhat        Stay the same
investors towards “develop-to-core” or                 Decrease somewhat          Decrease significantly
“manage-to-core” strategies. Rather than
                                                  Source: Emerging Trends Europe survey 2019
heading to secondary markets or buying
in secondary locations, such investors are
increasingly comfortable taking leasing risk
in strong locations in core markets, either       Investors are taking on more risk to achieve target returns
through refurbishment or even ground-up
development. The develop-to-core
movement helps explain the relatively high
29 percent of respondents who believe              26%                          53%                    11%                 9%           1%

access to development finance will                                                                 Neither agree      Disagree     disagree
increase in 2019.                                      Strongly                                     nor disagree
                                                        agree                     Agree

“The build-to-core idea applies almost
universally, and it is a function of the
fact that development financing has               (Re)development is the most attractive way to acquire prime assets
been restricted – more so in Europe
than in the US,” one global fund manager
says. “There just hasn’t been enough
development to satisfy demand. It depends
                                                   22%                     48%                        21%                  9%           0%

on which pot of money, but a good chunk                                                                                Disagree    disagree
                                                    Strongly                                       Neither agree
of our value-added money is going into               agree                       Agree              nor disagree
refurbishment of older assets. We’re also
doing ground-up development in Europe.”

                                                                                                           Emerging Trends in Real Estate® Europe 2019         23
Figure 2-7 Cross-border capital into European real estate in 2019

                2%     4%                                  8%    3%                              1%    5%                         9% 1%
                                                                                         15%                                                      18%

33%                                  27%
            The Americas                                    Europe                             Middle East                         Asia Pacific
                                                                                               and Africa          38%

                                               56%                                     40%

       Increase significantly     Increase somewhat        Stay the same
       Decrease somewhat          Decrease significantly

Source: Emerging Trends Europe survey 2019

New sources of equity                                      “The Japanese are coming; that door               Liquidity is expected to remain high from
                                                           has just opened, mandates have been               this domestic investor cohort, with more
When it comes to equity, European real
                                                           awarded,” one global fund manager says.           than half of survey respondents expecting
estate is like a busy nightclub – as soon
                                                           “But for most Japanese institutional              them to maintain current levels but a third
as one group leaves, another seems to
                                                           investors they are not investing directly         predicting an increase in 2019.
be ready to take its place.
                                                           but via funds and multi-managers.
                                                           Most market participants won’t see it             The third largest investor group is North
Chinese capital has been severely reduced
                                                           as Japanese capital, but just in deals            Americans with €20 billion invested over
because of capital controls introduced by
                                                           by investment managers. But it is very            the same period, and again survey
the government to control capital flight –
                                                           significant in volume and will help mitigate      respondents expect this to continue,
as highlighted in last year’s Emerging Trends
                                                           the fall in volumes from Chinese investors.”      with a third expecting levels to increase.
Europe. But the expectation is that Asian
                                                                                                             Though US investors have focused on
investment into European real estate as a
                                                           Another says: “They are increasingly              opportunistic and value-added assets in
whole will continue to grow – 69 percent
                                                           showing up on managers’ radars.                   Europe, interviewees say they are now
of survey respondents think investment
                                                           They have a lot of capital to deploy.”            moving down the risk curve.
from Asia will increase, the highest
proportion of any region.
                                                           However, there may be something of a              “Some of the opportunistic US investors
                                                           gap between perception and reality with           are now looking at European core, which
Koreans and Singaporeans are investing
                                                           capital flows. Asian investors might grab         is quite unusual because they’ve always
now, but there is a lot of excitement among
                                                           the headlines, but they only accounted            said they wanted a premium in Europe,
interviewees about an influx of capital from
                                                           for €9 billion of the €124 billion invested       to offset currency and tax,” one US-
Japanese pension funds, notably Japan’s
                                                           in Europe up until mid-September 2018,            backed fund manager says. “But I think
Government Pension Investment Fund
                                                           according to Real Capital Analytics               that’s now going away, and because
(GPIF), which has $1.2 trillion of assets.
                                                           although this does not take into                  we’re late cycle they want to de-risk.”
GPIF has been permitted to invest in
                                                           account commitments to funds,
global real estate for the first time and
                                                           only direct investment.                           “We’ve had a significant increase in
has recently awarded its first real estate
                                                                                                             interest from the US in our core-plus
fund of funds mandate. Japan Post,
                                                           Western European players were by far the          product,” one pan-European fund
which has more than $500 billion of assets,
                                                           largest group, investing €63 billion, followed    manager adds. “US investors still need
is also looking to diversify beyond its
                                                           by UK investors, who deployed €21 billion,        something for currency risk because it
domestic market.
                                                           albeit mostly in their home market.               costs to hedge that risk, but they don’t
                                                                                                             need 500-700 basis points of incremental
                                                                                                             return over core.”

24     Emerging Trends in Real Estate® Europe 2019
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