European Real Estate Snapshot

July 2019

Focus of the Month

Blockchain in Real Estate

The financial services industry has always been a frontrunner in embracing technology to generate better bottom line profits (think algorithmic trading) and is still undergoing seismic changes, far ahead of real estate, which has remained relatively unchanged. However, application of blockchain is slowly changing the real estate investment and transaction landscape. Dedicated organizations like International Blockchain Real Estate Association (IBREA) are bringing the technology and real estate communities together to use blockchain. One can now conceivably set up a blockchain-based land register, design smart contracts and digitize financing and other transactions.

What is Blockchain technology?

A blockchain is a continuously growing list of records, called blocks, which are linked and secured. Each block typically contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to modification of the data. It is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Simply put, it is an open, distributed ledger that can record transactions between two parties efficiently in a verifiable and permanent way.

Applications in Real Estate

Due to technological advancement and disintermediation by start-ups, more information on comparable lease rental rates, property prices, and valuations is making its way to the public domain. As a result, property-related information is increasingly available in a digital form. However, a significant portion of the digitized information is hosted on dissimilar systems, which results in a lack of transparency and efficiency, and a higher incidence of inaccuracies which need to be streamlined. Blockchain technology could enable the CRE industry to address these issues.

Specific areas addressed by blockchain

• Multiple listing services (MLS) - Fragmented listings data often lead to inefficient property search processes. However, with the advent of blockchain, the lessor and the lessee or their respective brokers can list their requirements on the MLS. A transparent MLS system enables all parties to view the available listings based on their requirements and smoothens the search process.
• Smart contracts - The existing due-diligence process tends to be time-consuming and paper-based. If the key terms of the agreement are recorded on the blockchain, it becomes a smart contract. These contracts initiate payment of security deposit either through Bitcoin wallets or bank accounts using a payment interface. The lessor then transfers the possession of the property to the lessee. Furthermore, smart contracts can initiate the regular lease payments from the lessee to the lessor, after paying the outstanding maintenance expenses to the contractors, using the preferred mode of payment. On completion of the lease term, the smart contract initiates the transfer of the security deposit to the lessor.
• Distributed ledger technology (DLT) – Blockchain’s distributed ledgers can disrupt things at the transactional level with title verification, valuation, diligence, insurance payment, settlement, construction monitoring and material verification. Further DLT can be applied to create public, state and federal government blockchains for all types of real estate-related databases, which increases accessibility, reduces rework, simplifies transactional procedures and reduces time frames.
• Fractional Real Estate (FRE) and Tokenization – FRE opportunities will be able to unlock the liquidity for smaller investors by democratizing access. Tokenization is a process whereby real estate is converted into tokens which can be moved, recorded or stored on a blockchain network. Investors who purchase these tokens become partial owners of that asset, which further allows them to be involved in cash flows and asset appreciation. Tokenization of investment grade assets into FRE significantly lowers the barrier of entry (previously accessible to HNIs, REITs, opportunity funds) with no traditional minimum investment limits or lock-in periods.
• Real time data analysis - Absence of real time rich data tends to hamper management’s decision-making capability. However, with the advent of blockchain, several payments and transactions can be recorded on the blockchain along with the digital identities of individuals, properties, and organizations; the lessor can thus perform real-time data analysis using appropriate analytics tools.
• Digital identity - A blockchain-based digital identity of a property may include its history, location, and title details. Usually, buyers and banks can potentially rely on this digital identity of the property for title assessment, as any change to existing data would have to be made through a consensus across several blockchain nodes. The distributed, tamper-proof, and encrypted nature of blockchain is likely to make it difficult for perpetrators to commit fraud related to liens, easements, air and subsurface rights, titles, or transfers.
• Cross border transactions – Transactions, especially cross-border ones, tend to be slow and expensive, and have opaque financing mechanisms and payments. Blockchain can provide a common network for the transacting parties to interact and share information without intermediaries such as correspondent banks. The information shared on the common network can include details of sender and receiver, transaction fees, foreign exchange rates, delivery time, and many others. Furthermore, blockchain can help simplify the financing process during the loan application, documentation, due diligence, and servicing stages. The smart loan contract would be accessible to all legal parties involved.

Recent Updates

• In June 2019, Peakside Capital Advisors launched a real estate fund for the German market using blockchain technology. The fund, which focuses on assets between €15 and €75 million, plans to raise a total of €200 million in equity.
• In June 2019, Coinsbit announced to hold EU's first Initial Exchange Offering or "IEO" (which in contrast to Initial Coin Offering or "ICO" is administered by a crypto exchange), that seeks to tokenize the real estate market in Poland.
• In June 2019, AnnA Villa became the first ever European property to be sold entirely via blockchain transaction powered on the Ethereum token to French real estate companies. It involved transferring ownership of the building to a joint-stock company and then dividing the company into 100 tokens which are further separable into 100,000 units which can be exchanged as low as €6.50 per share.
• In December 2018, seven EU countries — Malta, Italy, Spain, France, Portugal, Cyprus and Greece — signed a declaration agreeing to cooperate on blockchain and DLT technologies. Switzerland also provided a dedicated framework for cryptocurrency.

Key Themes

Retail parks in Europe

• The increasing trend of online retail sales will have a positive impact on the out-of-town retail market, but retail warehousing remains relatively less exposed than other sub-sectors. Affordability, flexibility, convenience and accessibility have become the main attractions of new retail parks for shoppers as well as occupiers.
• European retail park floorspace increased by 2.2% in 2018, reaching 50.1 million square metres. Overall, 995,000 square metres of new retail park space was completed, 15% less than in 2017.
• 1.45 million square metres of new retail park space is scheduled for opening over the next two years, which will increase the overall retail park floorspace by 2.9%. However, the delivery of new retail parks stands at a negative y-o-y growth of 27.3%.
• In Western Europe, total retail park floorspace amounted to 44.4 million square metres at the start of the year. 1.3 million square metres of new retail park space is to be delivered over the next two years, with France expected to witness the strongest development. In 2018, 776,000 square metres of new retail park space was delivered to the market, with France, Spain and the UK being the most active countries, accounting for 82% of new space. And the combined share of these countries is expected to stay the same for the next two years.
• In Central and Eastern Europe, the scope for higher levels of retail park development activity has increased as a result of demand-supply mismatch. Retail park floorspace summed up to 5.7 million at the beginning of the year. 167,000 square metres of new retail park space is expected to open over the next two years with Poland accounting for 44% of the total space. In 2018, 219,000 square metres of new retail space was delivered, with the highest development activity in Romania.
• Overall, retail development is decreasing. In 2008, 2.5 million square metres of new retail park space was built, whereas 1 million square metres of space was delivered in 2018. In some countries, lease lengths are decreasing from 10-15 years to 6-7 years. As retail park development is reaching maturity, innovative schemes have to be introduced to be successfully developed. The inclusion of facilities like leisure and F&B make new retail park schemes more attractive as retail destinations.

European Data Center Market

• The commercial data centre market is growing at an exponential rate across Europe, in both new growth regions like Scandinavia and Ireland and traditional markets like the UK, Germany and the Netherlands where capacity is increasing faster than ever. According to a CBRE report, the commercial European “FLAP” market (Frankfurt, London, Amsterdam and Paris) has doubled in size in four years, with an average annual take up of 150MW in 2018 as compare to 63MW in 2015.
• A Gartner report says, cloud services are being used by 70% to 90% of organisations, whose 18% CAGR primarily comes from migration and new applications. 47% of the global market is consolidating around the large US providers with the top four hyperscale. Also, 80% of enterprises are expected to shut down on-premise data centres by 2025 in favour of outsourcing to third party providers, which would allow many to consolidate their estate and reduce energy consumption and other operating costs.
• The enterprise companies are migrating significant amounts of their IT footprint to the cloud and these smaller individual requirements are being wrapped up together as one large cloud requirement and the demand is coming directly – and indirectly – from the hyperscale operators. The ten largest individual transactions collectively exceeded 65MW in Q1-3 2018; but it took over 150 transactions to reach the annual total of 63MW in 2018.
• According to data released by Synergy, hyperscale operators’ capex grew 48 percent to nearly $120 billion, which helped the colocation market in growing by 10 percent during the year to $34 billion in 2018. Equinix and Singapore’s GIC will launch a $1 billion joint venture to build hyperscale data centres in Europe in which GIC will own an 80% stake in the joint venture, with Equinix owning the remaining 20%.
• Anecdotal reports suggest the hyperscale entry into the European markets over the last three years is definitely having a disruptive effect: escalating growth rates to new levels, changing business and operating models and influencing the character of even the mature markets.

European CMBS Market

• Two profitable deals have been recorded so far this year and four more deals are in the pipeline amounting around € 1.2 billion. The highest-rated tranche of the Taurus 2019 FR transaction, a € 237.1 million deal issued by BAML against French property, priced at 90 basis points, and the Kanaal CMBS Finance transaction, a € 278.4 million Dutch securitisation issued by Goldman Sachs was priced at 100bps.
• Among the upcoming deals, a noticeable one is from Goldman Sachs. Goldman Sachs recently announced that it is arranging a £282.8m CMBS named Cold Finance, a refinancing of a single loan to warehouse specialist Lineage Logistics. The deal has five rated tranches including a triple-A rated senior tranche.
• Despite higher pricing now as compared to H1 2018, the spread between the average loan margin and weighted average note coupon in the deals priced this year was 59bps, which suggests issuers can still benefit from profitable transactions. The recent deals have attracted investors looking for security while seeking relative value against other fixed income assets.
• The volume of CMBS deals is expected to touch €5 billion, slightly higher than 2018’s volume if the current growth rate is maintained, and the revival of Europe’s CMBS market will be continued.

Funds in the Market

Recent Transactions

Snapshot of Key Deals Direct Acquisition

• Direct Acquisition
• Property Financing