Markets OverviewKey Themes Office
As 2018 ended, office take-up performed as expected, with employment creation and demand for well-designed and suitably located offices responsible for the activity. The take-up was also partly boosted by high levels of activity in some of the smaller markets in Europe such as Vienna, Dublin and Barcelona.
However, supply shortage has led to a reduction in leasing activity. Vacancy rates are low and new supply is unable to meet the demand with Paris CBD, Berlin, Munich, Cologne and London WE experiencing some of the lowest availability.
As companies are unable to find preferred office spaces, they are opting for temporary or flexible spaces, which have witnessed a jump compared to the previous year. Owing to an ever-increasing demand, pre-letting is also on the rise.
A rising demand for tech-enabled high-amenity buildings can be seen in a number of recent deals in this space, especially in German cities.
Paris, Barcelona, Warsaw, Stockholm, Vienna and leading German cities are all experiencing similar trends - an increasing rent due to supply shortage and a low vacancy - pushing occupiers to the outer limits of these cities.
Dublin witnessed a high number of pre-lets, even as Brexit uncertainty and new leasing accounting standards are encouraging flexible office take-ups.
Amsterdam is also facing a supply shortage resulting in a fall in take-up activity due to scarcity of office spaces and a steady increase in rents.
City of London take-up has been high with the West End office demand being largely boosted by the tech and media sector during 2018, which accounted for 45% of total...Residential
For the year ending Q3 2018, residential investment in Europe totaled €35.8 billion, a 21% increase over the 2017 investment. There is still a large amount of capital targeting this sector
The German residential market remained very active throughout 2018, with properties worth €15.1bn changing hands, the third highest volume in the last decade
France’s pro-business agenda and tax reforms have placed it as a preferred destination for business and investment. This has led to residential prices, especially in prime locations, reaching record highs in the previous year, along with transaction volumes being the highest since 2011
With the Brexit deadline looming, the average growth rate in housing prices in the UK for most of 2018 was between 2 and 3 percent, but December showed a decrease of 0.5%. Prime regions are still showing a growth rate above 3%, with Edinburgh clocking the fastest growth in EuropeRetail
The UK market has been fairly quiet due to political and economic uncertainty. Demand is greater for repriced quality assets. The prime to secondary spread is 500bps, but yield gap with other asset classes is at a historic high
Despite negative news in the sector, investments in continental Europe are still strong and above historical averages. However, investors are becoming more selective in choosing assets
A divide can be seen in western and eastern Europe, with construction subdued in the west but going strong in the eastern European capitals.
With the rise of e-commerce, physical stores are showing innovations to attract customers, and adding value to make their shopping experience more fulfilling.Hotel
Cities like Amsterdam, Barcelona, Madrid and Venice have put restrictions on new hotel developments to curtail adverse effects of excessive tourism, but development in the economy and midscale tiers of Europe is increasing
In terms of investment activity, UK remained the most active market. Year ending Q3 2018, the UK hotel deal volume increased nearly 15 per cent, accounting for around 30 per cent of all capital invested into European hotels. Spain is in the second place, with 23% of the investment, and Germany in the third place with a share of 17.8%.
German cities saw a yield drop (19.5% y-o-y) which could be attributed to supply-side constraints. In the 5 major cities, hotels subject to a hotel management contract or vacant possession experienced a yield decrease of-25bps quarter-on-quarter
Focus of the MonthEuropean Logistics and Industrial Market
The European logistics real estate market remained strong in 2018, with increase in take-ups and low vacancy rates across Europe. However, several markets such as Spain, the Czech Republic and the UK witnessed a modest rise in vacancy in the second half of 2018 due to increase in speculative development. The beneficial combination of economic growth and expansion of online sales continues to drive occupier demand and boost logistics market performance. In Europe, 2,300 billion tons per kilometre of goods are currently being transported per year and a major part of this freight is carried by road. As e-commerce is growing, the total freight volumes are also increasing, creating more demand for logistics properties.Market Dynamics
Growing rent : 2018 saw rental growth across Europe in line with the forecast rate of 2.5%, although this was also a reaction to a marked rise in construction costs. In the first 6 months of 2018, some of the best performers in terms of rental growth for city warehouse space included Venlo (10%), Munich (9.4%), Greater London (8.0%), Birmingham (7.4%), Rotterdam (7.1%), Madrid (6.3%), Prague (5.9%) and Barcelona (5.9%). In the logistics and distribution segment, the top performers included Venlo (11.1%), Rotterdam (7.7%) and Stockholm (5%).
Other than demand and supply, factors such as last-mile location and proximity to infrastructure continue to influence pricing. Taking the UK as an example, major infrastructure developments are having an impact on rents, even during the planning stages. In London, Crossrail and Crossrail 2 are already impacting industrial rents in places like Woolwich and Tottenham. Similarly, due to the proximity to Gatwick airport and a chronic lack of Grade A supply, prime rents in Crawley also grew by an impressive 33% to £14 per sq. ft. over the 12 months from July 2017 to June 2018.
Low vacancy rate : In the first half of 2018, the average vacancy rate across markets was reported at around 6%, however, below 3% rates were reported in a range of locations including Lodz, Belfast, Munich, Copenhagen, Vilnius, Riga, Prague, Barcelona and Milton Keynes. The percentage of markets registering vacancy declines was up by 2% to 58%, while the number of markets reporting vacancy rate rises dropped to 22% from 24% at end of 2017.
Strong take-up : Overall the market remained strong in 2018, with the take-up in the first half of 2018 (~14 million sq. m.), staying above its 5 years average. Although, it saw a dip of 14% as compared to the corresponding period in 2017, as record volumes of take-up were achieved in Europe over the past three years. Milan, Madrid, London, Greater Prague, Warsaw and Barcelona were among the top logistics locations by take up.
Investment volume : The market for logistics and industrial market reached its second highest mid-year volume of investment in the first half of 2018 (14 billion euros). Logistics prime yields reached their lowest level in most countries but were still well above the 10-year government bonds which bottomed out to historic lows in 2016. Logistics prime yields remain attractive compared to other assets. The UK market maintained solid activity with 4.3 billion euros invested in H1 2018, despite the scarcity of products and a context of political and economic uncertainties. Logistics prime rents remained fairly stable overall whilst prime yields stabilized at 4.25%. In the Netherlands, industrial and logistics investment increased sharply to 2.1 billion euros in the first three quarters of 2018. This asset class is particularly strong in the Netherlands, representing 15% of total commercial real estate volume in the first three quarters of 2018.Some factors impacting the Logistics and Industrial market
Rise in E-commerce : E-commerce activities stimulated market growth in the main European logistics hubs. Take-up continues to be positively impacted by the rise of e-commerce fuelling business-to-consumer distribution across Europe. Online sales as proportion of total retail sales has increased from c.7% in 2015 to c.9% in 2017, on average for the EU. Countries such as the UK are ahead of the average with a c.18% share of online sales, above Germany at c.15%, France at c.10%, Spain at c.5% and Italy at c.3%.
Shrinking labour market : Falling labour market capacity is one of the challenges faced by the industrial and logistics market. In a number of locations, the undersupply of labour is starting to act as an inhibitor to growth, or as a driver of relocation decisions. As a counter to this, some manufacturers are increasingly resorting to automation. On the brighter side, falling unemployment is boosting wage growth, which in turn is driving consumption and domestic demand. This is driving the industrial and logistics market, counter-balancing capacity constraints.
Construction activity : The scarcity of industrial sites and planning constraints is pushing developers/investors into more creative development solutions. In some cases, outdated office parks are being transformed into modern logistics and business parks. In Poland, the vast majority of newly delivered supply in H1 2018 originated in the inner region of Lodz, where space under active construction (570,000 sq. m) represented 28% of total modern stock in H1 2018. The pipeline was slightly above the 5-year average take-up level, but against a backdrop of extremely low vacancy of 0.79%. In other major markets such as Stockholm, Berlin and Munich, pipelines remained very low in H1 2018, at sub 100,000 sq. m. In Munich and Berlin, one of the considerations for construction was the obstacles to planning. In Munich, for instance, municipal authorities are reluctant to give planning permission for industrial developments, because they are associated with an increase in traffic, noise and pollution.Logistics and Industrial market performance by geography
In 2018, the sector showed strong performance in Netherland, Spain, Germany and Poland
In Netherlands, take-up displayed a healthy annual growth of 14%, based on the 12-month rolling take-up to end Q2 2018. Activity was driven by industrial hotspots. The Schiphol-Rijk region, located outside Amsterdam and near the airport, continues growing as an industrial hub, with year-on-year (yoy) take-up growth of 178%. In Rotterdam, y-o-y take-up expanded by 99% on the back of trade around the port.
The Spanish market had a strong performance, displaying 12-month rolling take-up growth of 86% year on year. The logistics market has been thriving, boosted by strong GDP growth (around 3%). Both Madrid and Barcelona enjoyed positive market dynamics with record volumes of transactions during H1 2018. Consequently, vacancy rates went down to 5% in Madrid and 2.45% in Barcelona. E-commerce continues to be a major market driver
The Venlo region, located near the German border, displayed decent take-up growth of 20% (y-o-y). The Tilburg region registered take-up growth of 12% (y-o-y). The German volume of take-up also increased by 14% in H1 2018 compared to last year. New supply for the rental market is limited and users still opt for build-to-suit solutions
In Poland, tenants leased 1 million sq. m. of modern industrial space in H1 2018 across the country. Looking at the 12-month rolling figures, the fastest rate of take-up growth (56%), came from the traditionally industrial area of Lodz, in the Central Poland region – there has been around 1 million sq. m. of total take-up in this area over the last 12 months
Funds in the MarketRecent Fund Activity
Real estate debt fundraising showed a drop from $ 39 billion in 2017 to $ 20 billion in 2018. The 2018 number looked skewed primarily on account of exceptional level of fundraising in 2017. Other factors like small market size with few players and pending deployment of capital after record level of fundraising in 2017 also impacted the numbers
Corresponding to the downward trend in global debt fundraising, the European focused vehicles also experienced a significant dip. $5.74 billion was raised, which is nearly half of the 2017 fundraising. DRC’s UK Whole Loan Fund was the largest, with GBP 700 million raised
The growing focus on socially responsible investments has led to the set-up of real estate impact investment funds. The latest example being the $ 324 million first close of CBRE's UK Affordable Housing Fund which focuses on providing affordable housing in UK
Invesco Real Estate, which has a $500 million target for its hybrid debt-equity fund which will invest in distressed assets across the capital structure, has raised over $200 million. 60% of the total fund is dedicated to Europe and the remaining to the US. A net IRR of 14-16% is expected
|Strategy||Institution||Regional Focus||Asset Focus||Status||Fund Size (mn)|
|Core||Caisse Des Depots||Paris||Residential||First Close||€ 1800|
|Value-Add||AXA IM||Pan - European||Multi-Asset||Closing||€ 643|
|Core, Core-Plus||STAM Europe||Paris||Residential||Launching||€ 400|
Recent TransactionsSnapshot of Key Deals Direct Acquisition
|Asset Name||Buyer||Seller||Asset Type||Location||Price (mn)|
|Alvar Aallon Katu 3||M&G Real Estate||Ilmarinen||Offices||Helsinki||€ 116|
|Retail Portfolio||Generali RE||Monoprix||Retail||Pan-France||€ 600|
|Omega and Pallars Office||Starwood Capital||Socimi Autonomy||Offices||Barcelona, Madrid||€ 125|
|One Bartholomew Lane office||South African Investor||Korea Investment Corporation||Offices||London||£ 107|
|Warehouse Portfolio||Gramercy||Sligro Food, Borghese Logistics||Logistics||Netherlands||€ 40|
|Wallarkaden||German Pension Funds||Momeni||Retail and Office||Cologne||€ 140|
|Logistics Portfolio||Tristan Capital Partners||Oz Real Estate||Warehouses||Pan-Poland||€ 86|
|ElseBella||LaSalle||AXA Investment Managers||Offices||Munich||€ 169|
|Euston House||Eurazeo||Stenprop||Offices||London||€ 105|
|On-going Hotel Construction||Pareto Securities||Skanska||Hotel||Copenhagen||€ 90|
|Asset Name||Lender||Borrower||Asset Type||Location||Loan Amount (mn)|
|The Sanctuary Buildings||Rothesay Life||Hana Alternative Asset Management||Office||Victoria, London||€ 207|
|Mixed-Use Development Scheme||Octopus Property||Undisclosed||Residential||South West London||€ 36|
|Private Placement Issue||UK and US Institutional Investors||Howard de Walden Estates||General Purpose||UK||€ 322|
|Refinancing Facility||Barclays, HSBC, RBS||RDI||REIT||UK||€ 316|
|Sherbourne House||Lloyds Bank Real Estate||Riverside Capital Group||Office||London||€ 30|
|1,182 Bedrooms on the University’s Streatham Campus||University Partnerships Programme||Pension Insurance Corporation||Student Accommodation||Exeter, UK||€ 144|
|Residential Development||Urban Exposure||Strawberry Star Group||Residential||Luton, UK||€ 96|
|Apotekaren 22 in||Brunswick Real Estate||Fabege||Office||Stockholm, Sweden||€ 160|
|Loan for General Business Purposes||pbb Deutsche Pfandbriefbank, LBBW||Vonovia||Residential||Dresden, Germany||€ 500|
|Helix Office Building||Münchener HypothekenBank||Hana Financial Investments||Office||Eschborn, Germany||€ 74.3|
|High Tech Campus||ABN Amro, Helaba, Berlin Hyp||Ramphastos Real Estate||Office||Eindhoven, Netherlands||€ 500|
|Garden Tower||Münchener HypothekenBank||GEG||Office||Frankfurt, Germany||€ 159|
|MSCI World Real Estate||213.4||10.5%||0.1%||18.0%||23.7%|
|STOXX Global 1800 Real Estate||265.3||10.3%||0.2%||18.3%||24.1%|
|STOXX Europe 600 Real Estate||173.9||10.7%||(2.3%)||(0.3%)||26.2%|
|Dow Jones US Real Estate||329.5||11.3%||5.5%||16.5%||29.5%|
|STOXX APAC 600 Real Estate||253.5||9.5%||(4.4%)||26.3%||15.0%|
|Property REITS - Europe||31-01-2019||YTD||1-YEAR||3-YEAR||5-YEAR|
|Office & Industrial||265.3||10.3%||0.2%||18.3%||24.1%|
|Property REITS - US||31-01-2019||YTD||1-YEAR||3-YEAR||5-YEAR|
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material is not financial research and was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Oxane Partners has no obligation to provide any updates.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. The information contained in this presentation is not intended to be used as a general guide to investing, or as a source of any specific investment recommendation.Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Oxane Partners to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.Sources: PERE, Real Estate Capital, Gulf News, South China Morning Post, Savills, Knight Frank, Deloitte, JLL, Institutional Real Estate, Bloomberg, propertyfundsworld, Colliers International, PwC