Global investors consider new models in Europe
As cross-border capital continues to flow into Europe’s real estate, more investors are considering a joint venture, club deals and partnerships.
After an impressive 2018 for Europe’s real estate, a growing number of global investors are changing their approach in the face of continued competition in core markets.
Europe’s real estate was the largest beneficiary of global capital flows last year with US$11.7 billion. London and Paris, along with German cities, all recorded a higher proportion of cross-border investment than their respective 10-year averages according to JLL data.
Munich, for example, recorded 59 percent of cross-border investment in 2018, up from a 10-year average of 33 percent, while Paris saw over 41 percent last year, up from 35 percent and London posted a smaller rise of 66 percent up from 63 percent.
The popularity of real estate in major European cities is, says Bowen, leading international investors towards new investment vehicle structures.
“Competition for real estate across the continent is shaking up the way global investors – particularly Asian newcomers – behave,” says Fraser Bowen, head of international capital at JLL. “Investors are also considering new markets as they look for yield which they struggle to find in Europe’s more intensely sought-after markets.”
Equity needs experts
There’s no shortage of equity available, Bowen says. But the key is finding experts to deliver business plans.
“We expect more joint ventures, club deals and partnerships between Asian investors and European experts are likely in the coming year,” Bowen says.
While Asian capital continues to feature highly among global capital flows into European real estate, coming second to global funds last year, Canadian investors have also contributed to the overall investment in the region, according to JLL’s Global Capital Flows report.
“Canadians remain a leading light in cross border capital – last year was a record-breaking outbound year for them,” says Bowen. “Their model of partnering with local experts in JVs with pan European investment managers continues to be the preferred route and it works well.”
Domestic investors hold their own
While established markets such as Paris are proving immensely popular, with a record level of investment in the French capital’s office sector last year, Bowen says the presence of strong, domestic capital should not be dismissed – with both large French and German institutions continuing to invest in their own markets and across Europe.
“There’s a healthy mix of domestic and international capital in Germany’s major cities and of course Paris,” he says.
London, despite currently suffering from a “pause for thought” as negotiations over the country’s exit from the European Union continue, is still in favour among global investors.
“Driven by transparency, London – and indeed the big cities of the UK - remain high on investor wish lists,” says Bowen, highlighting that London was, for the second year in a row, the most liquid global real estate market with volumes up year on year.
“Aside from the classic real estate fundamentals, investors favour the UK because of its transparency at city and at country level. A lack of clarity and certainty, however, is a stumbling block right now – although through the eyes of investors in comparatively more volatile economies, Brexit is a small issue to contend with.”
More widely, Europe’s political uncertainty may seem off-putting. However, from a global perspective, the continent remains a sound choice, says Bowen.
“The US market is dominated by domestic investors, Asia’s yield levels make it hard to invest above anything more than the value-add strata, so Europe is still in vogue,” he says.
With core assets in Budapest, Prague and Warsaw now on the radar of global investors, Bowen says Europe is getting bigger. Last year, the Polish capital made its debut in JLL’s top 10 global cities for cross-border investment.
“Most investors who are now familiar with the likes of Munich or Berlin – but a short drive away from some of those markets and new opportunities exist,” he says. “However, for now, you’re unlikely to see global investors go beyond core, safe assets in those markets.
“The preference for top quality real estate – particularly offices occupied by stable companies employing talented staff – remains a key factor.”