Europe's Skyline: Real Estate in Europe - Annual Review 2015
This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
This article is taken from our Annual Review 2015.
City by city, building by building, the continent's real estate landscape is changing and throwing up distinct opportunities in each market.
Roundtable experts -
Jonathan Lewis, UK
Emeline Peltier, France
Florian Rösch, Germany
What is the current state of the market?
Jonathan Lewis:Overseas investors and sovereign wealth funds have pushed up London prices, making it hard for private-equity investors to achieve high returns. Buyers are looking at the south-east of England and, outside the UK, at Spain, which is perceived to be at the bottom of the market. But opportunities do exist, even in a heated market, for property companies that have the experience to build better returns into a less attractive, more complicated asset.
Florian Rösch:Germany is still one of the preferred real estate markets. It's seen as stable, making it relatively easy for fund platforms to raise capital. At present, we are seeing a yield compression, with high demand pushing prices up and yield down. In particular, private-equity buyers are pushed into riskier investments, such as distressed assets and locations outside Germany's five main cities, and into other asset classes such as retail boxes, logistics and hotels.
Emeline Peltier:France remains by far the third-largest investment destination - after the UK and Germany. The combination of a greater availability of financing and an improvement in European economies has fuelled a greater appetite for risk compared with the situation a year ago.
What about availability of capital?
FR:Bank financing is still good and terms are even improving. Loan to value ranges between 60% and 80% depending on asset class and location. But it is still mostly the German banks that are active - in particular Pfandbriefbank - whereas five years ago we saw UK and Irish banks, too.
EP:There is greater availability of financing and banks seem to be more willing to lend to investors acquiring property. Alternative financing is also on the rise. However, it is not always easy to raise finance and French banks are notoriously reluctant to offer finance unless it's for a core prime asset in Paris. I see more German banks financing French real estate deals.
JL:What's driven the market in the past year or two is the absence of debt, but there's a huge amount of equity from UK institutions and funds, high-net-worth people and highly publicised overseas investors coming into the UK market.
Are any particular asset classes becoming more prevalent?
EP: Logistics is one of the most attractive and therefore active sectors. Working together with our German and UK offices, we have just closed a €472m pan-European logistics deal for Tristan Capital Partners, involving multiple assets in Poland, Germany and France, and there are other logistics deals in the pipeline.
JL: Shopping centres. They don't necessarily appeal to investors coming to the UK for the first time, but to clients with experience who can see opportunities. Those who bought shopping centres in the past couple of years have done very well. We have set up an asset management service in Reading that is helping clients to deal with the high volume of work the centres create.
FR: Some private-equity buyers are looking into development - both residential and office. It's riskier than investing in an existing building with clear cashflow, but it does provide better returns.
Who are the main players in the market and how does their presence impact on your service?
FR: We are seeing more foreign institutional investors attracted by pan-European deals. They have the capital available and there is less competition oncross-border deals. As Emeline mentioned, our combined European offering was demonstrated in the Tristan logistics deal. We also did a large logistics deal for AEW where we cooperated with Paris and the UK. This is a big focus of ours.
JL: Five years ago, we were acting for many of the highly leveraged investors; now, the client base is primarily a mixture of UK and overseas funds. The US funds tend to have investment committees, so decision-making is slightly different, and there are more compliance-type procedures we need to be familiar with. Alongside real estate, we're often quite heavily involved in providing corporate and tax services, particularly structuring investments in a tax-efficient way. I also think the influx of Far Eastern capital is only just beginning. We've been to Malaysia, Hong Kong and Singapore, and investors there are interested in the UK and London as their first port of call, but also in Germany and France.
What does the future hold?
JL: We'll continue to see funds being the main purchasers, but we're already starting to see more debt coming into the market and this will maintain activity levels. We expect there to be more development, in terms of both residential and offices. There's been increased letting activity, which is the best sign that the real estate market is really picking up. The past few years have seen foreign capital driving yields down, with no real letting activity. But more occupational activity is a good sign of substance, and is a reason to be optimistic in the medium term.
EP: Competition on prime assets means that the main markets will soon reach maturity, and we can expect more activity in the secondary markets, in and around Paris. Distressed assets will present good opportunities for investors. However, we are awaiting details of new regulations - environmental and on commercial leases - which is creating uncertainty because we cannot yet predict the financial impact of having to comply with these new rules.
FR: The German investment market will remain strong in the near future as investors continue to be attracted to its stability. Capital markets in the real estate sector will be interesting. I think our focus will be transactions, capital markets, developments and forward deals over the next few years.
Click here to view an electronic copy of our Annual Review 2015.
