Diverging real estate strategies in an uncertain world
A variable that is rarely factored into western European investment calculations – politics – has had sudden prominence in the European property press in recent months. Many fear how a multi-national shift to the political right could impact decision making in investment, through a deterioration of trade and restrictions on international capital flows, while others hope that populism will boost the economy through a renewed focus on domestic investment. The only shared certainty is uncertainty.
Whilst such uncertainty held back investment in 2016, investors’ appetite for real estate, relative to other assets, remains unfazed. Between the investment activity of German closed-ended funds, Asian sovereign wealth managers, UK’s cash-rich insurance companies, and US and European REITs and private equity outfits, the property investment landscape is as busy as ever. Acting as if politics didn’t matter, these capital-raising machines are more concerned with where to deploy capital rather than how to recoup it.
Investment strategies come in as many flavours as there are properties Europe. The common thread is the investor’s perception of – and response to – uncertainty. For most German investors, there is a clear mandate to safeguard capital, so low-risk core strategies dominate. Deka’s recent purchase of Facebook’s new London HQ is a good example. For private equity powerhouses, the dilution of risk through scale remains the preferred solution: the top 10% of assets of billion Euro portfolios should return more than the worst 10% will lose. Onyx’ (JV between Blackstone and M7 RE) recent purchase of Hansteen’s European platform for a reported €1.3 billion should, on balance, provide a reasonable alpha. On the more naïve end of the spectrum, overseas investors with a relatively short track record in Europe, continue to come into the market with equally clear and diverse mandates. Most new Asian investors, for example, do not look far past central London, and South African investors keen to protect their wealth from further currency depreciation are keenest on high-yielding opportunities in Central and South Eastern Europe, as witnessed by their activity in Poland (Echo’s retail spending spree), Croatia (Nepi’s record-breaking purchase of Arena shopping centre in Zagreb), and Macedonia (Hyprop’s €90+ million shopping centre purchase in Skopje).
Whether due to the changing political landscape, or the fear that a market peak is near, the fall of investment activity in Western Europe may soon be mirrored in Central and Eastern European markets. Property pricing is increasingly diverging from property fundamentals as exuberance and the ‘race to the bottom’ takes hold. Yet the current economic and political volatility may make property a Giffen good of sorts: an impending stock market readjustment may lead more capital to move into property, regardless of price.
The perceived absolute security and safety of property notwithstanding, delivering the right value-enhancing strategy is key. With ever more capital pouring into property, observing property fundamentals beyond location choice and macroeconomics is both challenging and important. That means working with the right teams, being open to non-traditional collaborations outside the realm of real estate investment management, aligning interests with all stakeholders, and adopting the best available technologies and processes. All these must be at the core of any successful real estate strategy in the years to come.