“Perhaps this is a time to buy trophy assets,” posited Paul Clark, head of real assets, Europe at Australian superannuation fund AustralianSuper, one of the institutional investors on stage at this week’s PERE Network Europe Forum in London.
As it turned out, he was not the only participant at the two-day event to reconsider returning large offices or high-profile retail properties to the investment thesis. There were meditations on the subject from others on his panel and the wider conference program.
Investors at PERE Europe, some of which are finding their real estate coffers now thawing amid abating denominator effects, are now contemplating how to gain advantages in a private real estate market still largely inactive before the next cycle starts in earnest.
These investors are cognizant herd appetite is making property sectors with strong secular tailwinds – like residential, logistics and data centers – uncomfortably competitive. They spoke – notionally, at least – about buying prime properties in the currently more unpopular sectors.
According to the latest data from broker Savills, the prime average commercial property yield in the UK was 6.15 percent, almost 100 basis points over the country’s base rate currently. Such margins there and in other gateway cities in Europe could be sufficient for investors to put down – even temporarily – their secular growth theme-driven hymn sheets in favor of attractive prices for assets that have rarely been made available.
There is logic here. As Ian Kelley, managing director at manager Columbia Threadneedle Investments said on a different panel, with luxury retail and CBD offices in Paris demonstrating 2 percent vacancy and Munich even lower, anyone getting their hands on these assets stands a very good chance to “outperform your underwriting.”
Based on strong tenant demand and little capital expenditure requirement, there was a growing sense of anticipation at the conference that certain trophy assets could be dislodged from the hands of owners feeling the impact of today’s restrictive capital markets environment. Of course, this did not apply everywhere. Jonas Andersson, deputy managing partner at manager Slättö, said it would be unlikely many trophies in the Nordics would come loose.
And not all investors at the event will be tempted to try prying them away, either. Lucy Fletcher, global head of portfolio management at QuadReal, said while the Canadian institution would be “opportunity led,” it would not deviate from long-term demographic and technological drivers. “We are not trophy hunters,” she declared.
The debate is currently academic, and there is little evidence of a growing trend in trophy buying. According to deal data firm Real Capital Analytics, there have been 169 single-asset property trades in Europe valued at €300 million or more in the last five years. Unsurprisingly, since 2019, when there were 57 such trades, the number of such transactions has fallen year-on-year to just 18 in 2023.
As per broker CBRE’s research, this is now a market of cyclically low trading generally: the $647 billion of commercial real estate that changed hands in 2023 represented a 47 percent year-on-year decline. The European element within that total included office investment decreases of 60 percent, retail investment decreases of 40 percent – hardly signals of trophy trading.
But whichever side of the debate individual investors land, there was a clear keenness to discuss the concept at PERE’s conference. Moreover, investors are voicing their temptation. “Not everything needs to be thematic,” said Alek Misev, head of property at Aware Super, another Australian institutional investor. “Some things are done opportunistically, and we are getting ready to do that too,” he responded to Clark’s suggestion that an opportunity to buy trophies might be around the corner.
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