Investment volumes for European real estate have slowed down in recent months. In fact, it has been a weak start to the year for European property as a whole. Data from Real Capital Analytics showed deal volumes were down year-on-year in Q4 2015, and this slowdown has continued into January and February.
But, while volumes have dropped, the market has been steady when it comes to competition for individual deals. European investors are still active, while there has been increased interest from both North American and Asian investors looking to increase exposure to Europe.
Yet, there are investors concerned about whether or not they are the ones who will ultimately pay the record low yield. So while we have seen yield declines in mainland Europe; the pace has been slow. At the prime end of the UK market, particularly in London, yields have stopped falling altogether. Despite flat prime yields in the UK, yields have continued to fall in the riskier areas of the market, as investors have moved up the risk curve, in search of higher returns. This is true of more secondary industrial assets, regional offices, and anything with short-term leases or vacant space.
You do not have to go far up the risk curve to find good deals. It is in the edges of the main markets, which provide a better value, and if an investor is savvy enough, a better risk-return trade off. Within the mainstream sectors, investors are attracted to deals where the lot size is large enough that it cuts out other potential bidders. Take the investment made on behalf of our clients in the Tour First office tower in Paris-La Défense, for instance. There, we were able to secure a quality asset at a yield we were comfortable with, and because it was so large, there were a relatively small number of bidders.
This is different from the large portfolios that are up for sale. More and more portfolios come on to the market but they often sell at a premium to their last valuation. A portfolio premium can be off-putting as there will be investors who specifically look for large portfolios in order to secure immediate diversification or hit allocation targets quickly. The assets within many portfolios are not always within our risk tolerance, as the market still contains a number of problem properties, frequently packaged within portfolios in order to sell them quickly.
The other main strand of looking elsewhere to avoid the competition and low yields is in more alternative sectors.
For example, AXA IM – Real Assets has also been actively acquiring hotels around Europe on behalf of its clients. It has targeted the main cities, which include London, Paris, Berlin, Milan and Rome. In fact, AXA IM – Real Assets has completed more than €500 million of hotel acquisitions since January 2015 as part of its strategy to invest in upscale hotels on behalf of clients, and its hotels portfolio now stands at over €2 billion.
Hotels in these cities provide a mix of business, conference and leisure tourism and the occupancy rates are still relatively high. Yet, there is not so much competition, as many investors do not invest in hotels, either through preference or because they got their fingers burnt in previous downturns. Hotel investing requires a set of skills that not every real estate investor has: our dedicated hotels team works with brand management teams and hotel operators to maximize the investment potential. Plus, we have knowledge not only of traditional lease contracts, but our specialist knowledge enables us to take on more of the hotel operating components in the investment strategy.
AXA IM – Real Assets likes hospitals too, as a source of long-term income. These relatively defensive assets are particularly attractive as returns from other sectors begin to decline. As with hotels, we are able to leverage our ability to work with the operating companies of the assets. Plus, the strategy is underpinned by a number of compelling socioeconomic factors in Europe, such as a growing elderly population. Such are the benefits of investing on the edges.