European real estate is enjoying its time in the sun among American investors. Commercial property investment volumes in the region have risen 23 percent to $274 billion over the past 12 months, according to a recent report from global real estate service provider DTZ and one of the primary factors for this rapid growth is an influx of capital from the US.
According to multiple European investment managers, the trend shows no signs of slowing either.
“With the exchange rate in the Eurozone having adjusted progressively, and then substantially, post-quantitative easing, the Eurozone is much more accessible to US investors than it was five years ago,” says Simon Marrison, LaSalle Investment Management’s chief executive in Europe.
General positive sentiment towards Europe’s macroeconomic story has been reflected in the region’s various property markets which are regarded as being at varying stages in their own cycles but all behind the US cycle.
“You have seen capital allocators in the US targeting the later cycles in Europe allowing them to compliment core returns focused in their domestic market,” says Jonathan Hull, managing director of property services firm CBRE’s EMEA capital markets.
“US capital is very mobile and targets markets where it can add value and move in and out with certainty. Some are looking to play the cycle, and the recovery of different markets at different rates has allowed investors to alter strategy accordingly,” adds Hull.
As a result, something of a greenback-fueled bandwagon has materialized. PERE has chartered its journey so far:
“The capital came to the UK first, principally based on economic fundamentals. Investors could see the economic recovery developing and were attracted by strong rental growth and the liquidity,” says John Mulqueen, head of transactions EMEA at CBRE Global Investors.
In fact, according to data from real estate research firm Real Capital Analytics (RCA), since 2012, the UK has received more than double the investment from US investors than the next most popular European market – Germany. However, big bets on the capital are not the whole story.
“The UK was first to come out of recession, and secondary markets certainly received a lot of attention and were the target for many investors who had initially been attracted to the London market,” says Hull.
Arguably the hottest European market for value-add and opportunistic real estate right now is Spain.
“At the peak of the previous cycle in 2007, Spain was a €10 billion market. Annual turnover declined to less than €1 billion in 2009. Looking at the numbers to date we should easily exceed the previous peak by the end of 2015. This by no means suggests we are reaching the peak of this cycle as we are certainly forecasting strong performance in 2016,” says Hull.
Yet, Marrison says that the pace of the Spanish market is likely to slow down over the coming years: “The game has got a little bit ahead of itself. I would argue there was too much focus on Spain and the repricing in Spain happened a bit quicker than everyone thought would happen such that there it is harder to find true value opportunities to satisfy the amount of US capital which triggered the repricing.”
The other market on the Iberian Peninsula, Portugal, has also seen an influx of US capital hunting for opportunistic returns. This year to date more than €1 billion of US capital entered Portugal, which is way more than double the two prior years when only €650 million was invested in real estate, according to data from RCA. “Take the Alaska Permanent Fund, it acquired shopping centers in Portugal. That was early on in the move to the Iberian Peninsula and it was an early call on the recovery of Portugal and they supported it through a separate account,” says Michael Clarke, head of investor services EMEA for CBRE Global Investors.
Cross-border real estate investment into the Nordics more than double what it was in 2013 and 2014 combined, according to data from RCA. The total invested from international sources is at its highest since 2007, with €9.3 billion invested so far this year. But, to be able to invest in the Nordics today you have to take on the Nordic investors, especially the large Swedish investors, plus a highly constrained supply, say several market sources, which describe the Nordics as limited in scale.
Over the past three and a half years US investors deployed nearly €18 billion to Germany, according to RCA. Some of the largest institutional investors in neighboring Canada are backing Germany too.
For instance, the Canada Pension Plan Investment Board (CPPIB) established a partnership with Unibail-Rodamco, to expand its German retail property platform back in May. “The western economies like Germany have followed the UK as the economic story has improved. There has been a time-lag of sorts but the sentiment is now backed up with some hard data and you are seeing more commitment to the market as a result,” says Mulqueen.
At the peak of the last cycle capital spread east. Today the US is more cautious. The Poland and Czech Republic markets have been very strong in the past year, says Mulqueen, “So I think these two have matured into the western psyche as a core market for European capital.” Yet, interest in CEE heightens as JP Morgan, Lone Star and Oaktree Capital Management are said to be purchasing major loan books totalling roughly €3.1 billion backed by commercial real estate in the region. They are not alone with Blackstone, HIG Bayside Capital and AnaCap Financial Partners also said to be pursuing CEE NPLs in the region. Such activity gives rise to the notion the CEE will be the next stop for the US bandwagon.
Many say France should expect to see more real estate investment soon. “A common theme is certainly the ability to invest large scale capital in core CBDs and Paris therefore will certainly be one to watch. France has recovered more slowly than other leading countries in Europe and we expect to see investors target some of the larger assets in the market,” says Hull. Marrison, who is based in Paris, agrees with Hull and says France has been punching under its weight relative to historic activity and relative to the UK. “France’s moment has yet to come and yet you do have this very deep market concentrated on Paris with a deep occupier market and the ability to place serious amounts of capital, so you have got to think that France is moving up the agenda.”
The peripheral markets are getting played on the basis of a cycle rather than a long term hold, and chief among these markets for attracting US capital at the moment is Italy. In fact, so far this year Italy has seen more US investment than Spain. The same is true if you aggregate the total US investment since 2012, with Italy garnering €5 billion and Spain €4.8 billion. This was a surprise to some. Marrison says Italy is often considered less investable than Spain. While the country has appeared to be slower to emerge as a potential market for private equity real estate capital, the numbers don’t tell the same story.