In search of the summit
The appeal of commercial property investment continues undimmed. In core Western European cities – London, Paris, and large German urban centres – yields are at or below the previous records set in 2007*. Thanks to increasing competition from new overseas buyers and domestic redeployment of capital towards property, finding value in property investment is becoming increasingly challenging.
For the first time in years, competition is fierce across all property investment strategies. Core investors compete for ever fewer opportunities with ever more investors. Value-add players hike ever higher up the risk curve to avoid a bidding war. Cognitive dissonance is working hard to justify the opportunistic purchases of opportunistic investors, telling themselves their purchases are safe, merely ‘emerging’ core acquisitions.
The first hiccups of the market were triggered by the political uncertainty in Europe, which saw overall investment volumes fall around 10% in 2016 relative to 2015, according to data by CBRE. Beyond politics, the downturn in emerging economies and the continued low price of oil added to the gloom of many investment managers. Paradoxically despite the downturn, vast sums of money continue to flow into property, adding to the frustration of many managers who are finding it exceedingly difficult to deploy an ever greater amount of money in the right deal.
AEW raised a record €8 billion for real estate in 2016. Aviva recently announced a new €1 billion real estate debt fund. Prologis and CBRE Global Investment Partners are launching a new, joint venture targeting UK logistics development. After their latest capital raise, Blackstone have a record amount of capital to spend - €30 billion – a significant chunk of which is targeting real estate. The Japanese Government’s pension fund is gearing up to broaden its footprint in property, having recently announced that it intends to rebalance some of its €1.2 trillion of assets towards property (aiming to have circa 5% of its assets held in infrastructure, private equities and property). Much of this capital will be bound for Europe.
Many of these investment mandates come with a strict investment timeline. This increases the risk that, under pressure from capital providers to deploy and start returning the capital, investors may become more tolerant to risk and deliver investments that are not necessarily in the best interest of shareholders. A further challenge for shareholders is the investors’ preference to deploy capital predominantly with investment managers that have a long history of managing capital – regardless of their long-term performance. This is at the expense of smaller, more dynamic outfits that may offer a better, risk-adjusted investment proposition.
Although it may be too late to ensure a soft landing for some investors in the current property cycle, it is reasonable to recognise that a successful, long-term property investment strategy will require diversification across strategy but also across the investment process.
*Cushman & Wakefield, JLL