Real Estate Maintains Momentum

Transcription

1 CAPITAL ADVISORS EMEA AUGUST 218 Real Estate Maintains Momentum Public Equity Private Equity Public Debt Private Debt

2 HIGHLIGHTS 4Q highlights Public Equity Investors likes and dislikes have changed little over the past eighteen months There is only very selective demand for retail exposure, but widespread preference for logistics and alternatives With the trends driving this long-term and structural in nature, it is hard to see this polarisation not persisting Private Equity Public Equity exposure preferences continue to be mirrored in Private Equity Scale is an increasingly dominant factor too, with the number and size of large funds increasing in the last few years Funds over 1bn in size now account for over 5% of new equity raised, versus 33% a few years ago Public Debt Four public CMBS transactions closed in Q2 218; collectively worth c 1.5bn this marked a significant step up in activity Pricing was tight and investor interest high, with most deals being over-subscribed Further transactions closing before the Summer break will provide more tests of investor appetite Private Debt Demand for Private Debt continues to be strong as a wide range of players fight to get access to the market There is evidence of margin compression at the super-prime end of the largest European markets and the prime end of other European markets With returns under threat and regulation increasingly onerous, banks are employing new structures to try to maintain or improve key measures of return CBRE LIMITED 218 FOUR QUADRANTS 1

3 S UMMAR Y At the European level, H1 volumes were only slightly lover than in 217. Of the major markets, France saw the largest increase. 4Q investment outlook H1 217 Other CEE Nordics Iberia Benelux Italy UK Keen pricing and a severe lack of product in the key German cities and Paris continue to be the main headwinds. Nonetheless, with supportive economic growth, ongoing high levels of interest in real estate and less upward pressure on European interest rates than elsewhere, there is potential for full year 218 investment volumes to approach or even reach the record levels seen in 217. Figure 1: Investment volumes remained strong in H1 218 Germany At the national level, the UK bounced back after a weaker Q Several landmark office transactions completed, resulting in a record quarter for City of London office investments in Q International capital accounted for 82% of the investment total for the quarter and 5% was driven by inflows of Asian, and particularly Korean, capital. This buyer group has been particularly keen to secure larger assets, and therefore investment turnover in the remainder of the year will be highly dependent on the supply of this type of product. Germany s strong start to the year investment volumes are roughly in line with last year is particularly impressive considering that there have been no transactions above 1bn recorded in 218 to date. France is showing signs of strong growth after a year of political uncertainty; in the first half of the year almost 12bn was invested, an increase of 28% compared to the same period last year. The Benelux and Finland are also showing strong growth, seeing volumes rise by 48% and 23% respectively in H France As is typical for a mature stage of the cycle, ultra-large deals continue to be an important driver for investment totals and are often the explanatory factor for volatility in volumes. In H1 218, this was illustrated by the UnibailWestfield acquisition that involved several large prime shopping centres in the UK, and which contributed hugely towards an increase in investment volumes in the UK retail sector. In Spain, Colonial completed its takeover of Axiare, boosting office investment figures. In the Netherlands, a 1.5bn residential platform transaction pushed investment volumes there to a record half-year total of 1bn in H Due to investors appetite for scale and potential for efficiency gains, we expect activity in platform transactions to continue in the remainder of the year. Investment Volume, bn Investment volume of 68.5bn in Q2 218 propelled European commercial property investment volumes to 127bn in the first half of 218. This is down 4% on H1 217, but the decline was more than accounted for by the one-off Logicor transaction ( 12.25bn) that occurred in the second quarter of 217. This illustrates the depth of the current market environment while industrial volumes were down on the same period last year, H1 218 saw office and retail volumes increase by 1% and 4% respectively on the same period in 217. The rolling twelve month all property total reached 288bn an increase of 4% compared to the same period in the previous year. H1 218 Source: CBRE 2 AUG UST 218 CBRE LIMITED 218 FO UR Q UAD RANTS 3

4 R ELATIVE VALUE Our UK Four Quadrant pricing model compares relative values across the universe of real estate investment options. It calculates required and expected return for each Quadrant, and interrogates any gap to understand the extent to which this represents a pricing signal. 4Q relative value Currently, the model suggests that one Quadrant, Public Debt, is fair value in other words, Expected Returns broadly match Required Returns and the other three Quadrants, Private Debt, Public Equity and Private Equity are good value Expected Returns are greater than Required Returns. The best value is once again to be had in Private Debt. It is important to understand though that these signals should be treated 4 AUG UST 218 with caution. Although this model has shown good predictive power in the past, it may not hold into the future. Furthermore, investors should use it in conjunction with their own risk and return requirements in mind, as well as their own view of the cycle. Figure 2: Expected return versus required return, UK, Q2 218 For those who view the UK cycle as increasingly mature, evidence that Private Debt appears good value will be welcome, given that it would be natural to favour this Quadrants when downside risk is a key consideration. Those with a more optimistic outlook however, will perhaps see an opportunity in the Equity Quadrants. Public Equity offers the opportunity to buy in at a discount to Net Asset Value (NAV)* and to maintain liquidity, should it be required. Private Equity funds on the other hand have the advantage of greater income distribution and a level of secondary liquidity that should not be discounted. * [Note: the model does not factor in any widening or narrowing of the discount to NAV, either to zero or to the long-term average, both of which would be potential outcomes. With the UK Public Equity sector trading at around a -17% discount to NAV (versus 7% for Europe), this is a source of significant potential upside.] Percent Once again, we present the results of our Four Quadrants pricing model, which compares relative value across the universe of real estate investment options. Currently, it is just for the UK, but will be widened out to the rest of Europe in future publications. It is deliberately simplistic, in part due to a paucity of performance data for some of the Quadrants, but also because of a desire to maintain its accessibility. It seeks to compare expected returns, defined by current market pricing and income growth forecasts (where relevant) with required returns, determined by the risk free rate and a risk premium that we have set. Further information on the methodology can be found at United-Kingdom-Four-QuadrantsViewPoint---Pricing-Model-July Private Debt Income Yield Public Debt Prviate Equity Expected Income Growth Public Equity Required Return Source: CBRE CBRE LIMITED 218 FO UR Q UAD RANTS 5

5 P UBLIC EQUITY The Public Equity Quadrant captures real estate exposure gained through ownership of shares in a company that is invested in real estate. Typically, these will be Real Estate Investment Trusts (REITs) or Property Companies. This class of investor may be diversified or sector-specific, and some will have exposure to development. Most will have a modest level of gearing (sub 5% LTV). PUBLIC EQUITY Figure 3 compares individual REIT share price performance in Q2 218 (on the y axis) with performance over the preceding 12 months (on the x axis), and groups companies into categories according to investment focus. There is a strong correlation between the two variables, indicating the degree to which out-performance has continued at the individual REIT level across the two periods. There are also a number of clear patterns in performance and discount or premium to NAV at the company and grouping level, which illustrate where investors preference currently lies. 6 AUG UST 218 Retail continues to under-perform generally, with only the occasional exception, as investors avoid exposure to income streams made more uncertain by the transformation of the sector. Retailer and food and beverage CVAs have created numerous headlines in the UK in the second quarter, undermining existing income and expectations of future rental growth. On the other side of the coin, Logistics has been a consistent out-performer, as the sector has benefitted from the ongoing shift of retail sales online, and by the desire of all retailers to continue to deliver supply chain efficiency gains in an era of severe margin pressure. Also out-performing have been Residential and Alternatives (the latter often being a specialist form of residential), as investors continue to put their faith in changing demographic and societal trends delivering greater demand for this form of real estate. There is less of a consistent pattern of repeated performance from one period to the next with regards those REITs we have categorised as being Diversified or with a London or Office focus. This may indicate that in these areas investor preference is less allied to a broad longterm trend and driven more by shorterterm company specifics. The immediacy and transparency afforded by Public Equity will surely provide further guide to investors in this and other quadrants over the second half of the year. 15 Sergo Beni Stabili 1 Deutsche Wohnen Eurocommerical Warehouse de Pauw Great Portland Unite Capital & Counties 5 Q2 218 Price Return Although the Public Equity quadrant is in many ways arguably the most dynamic of the arenas we cover here, certainly with regards speed and volatility of change, the second quarter of 218 was very much an exercise in more of the same. Investors continued to express similar preferences and dislikes as in previous periods, with resultant impact on the performance of REITs in the sector. Figure 3: Public equity markets continue to favour certain exposure British Land Aedifica LEG Immobilien LandSec Cofinimmo Unibail-Rodamco Klépierre Carmila Gecina Befimmo Derwent Icade Vonovia Merlin Properties PSP Swiss Mercialys -5 Hammerson Shaftesbury CeGeREAL IGD -1 Intu -15 GENERALLY, THOSE COMPANIES AND SECTORS OUT PERFORMING IN Q2 218 WERE THOSE THAT HAD DONE WELL OVER THE PREVIOUS 12 MONTHS Year To Q1 218 Price Return Residential Alternative Logistics London Diversified Office Retail Source: Bloomberg CBRE LIMITED 218 FO UR Q UAD RANTS 7

6 P R IVATE EQUITY The Private Equity Quadrant relates to capital that is invested in entities that are not listed on a public exchange. Trading in these funds or companies will take place (if at all) privately. While private equity has a reputation for aggressively seeking higher returns through active management, higher risk stock selection and higher leverage, many funds falling into this category are in fact diversified funds invested in core real estate with little or no gearing. PRIVATE EQUITY 8 AUG UST 218 We have also talked about the trend of increasing scale of fund size, and a study of Preqin data to the end of 217 provides interesting evidence about this. Splitting recent history into a five year period ( ) and a preceding ten year period (23-212) shows that roughly the same number of 1bn+ funds were closed in each period (16 and 17 respectively), but that with those funds in total accounting for 44bn and 25bn of equity, the average size of 1bn+ fund has risen from 1.5bn in the period to 2.8bn in the period. Of the total equity raised in these two periods, the proportion accounted for by 1bn+ funds has increased from 33% in to 51% in Investors are exhibiting a clear preference for scale albeit that this trait is likely not the goal in itself, but a perceived enabler of some other goals, such as lower costs (economies of scale on the vehicle and/or on the investors due diligence), greater diversification and better track record. 35 7% 3 6% 25 5% 2 4% 15 3% 1 2% 5 1% THE PROPORTION OF EQUITY RAISED BY 1BN+ FUNDS HAS INCREASED FROM 33% IN TO 51% IN INVESTORS ARE EXHIBITING A CLEAR PREFERENCE FOR SCALE. Share of Equity Raised The types of fund strategies attracting most interest were once again balanced funds, particularly pan-european, and specialists in favoured sectors or locations, such as logistics, student accommodation and leisure. Similarly, there has been no let-up in investors collective aversion to secondary retail. Long Income funds also remain popular, with pension fund consultants particularly keen on these strategies indeed, they are probably the difference between portfolio allocations to real estate increasing (if long income is included) or decreasing (if it is excluded). Pricing reflects these preferences of course. According to PropertyMatch, balanced funds have typically traded close to or at a slight premium to NAV, with virtually no interest in selling at less than NAV. Specialist funds in favoured sectors can command premia of up to 5% above NAV, as can long income funds an indication both of investor preference and of the length of queues to get into some funds. On the flipside, units in specialist retail funds can change hands at discounts to NAV of greater than 1%. Equity, Rasied Bn Many of the themes that we commented on last quarter (and indeed in prior quarters) continued to dominate the Private Equity market in the second quarter of 218. Activity was strong, in both fund raising, deployment and secondary trading our PropertyMatch business for example concluded 99 trades in the first half of the year (an increase of 2% or so on the same period last year). Figure 4: Private equity funds increasingly dominated by larger players % Largest Five Funds (lhs) Rest of Funds (lhs) Largest Five Funds Share (rhs) Source: Preqin CBRE LIMITED 218 FO UR Q UAD RANTS 9

7 P UBLIC D EBT The Public Debt Quadrant encompasses borrowing by entities engaged in real estate investment, where that debt has been issued via a public market. In practice, this usually means corporate bonds of REITs or Property Companies, or securitisations of debt backed by single assets or a portfolio of assets, often termed Commercial Mortgage Backed Securities (CMBS). Often this debt will be rated by independent agencies; most will be investment grade though some may be higher risk. PUBLIC DEBT April kicked off with the 53m Citi/ Morgan Stanley CMBS for Blackstone (FROSN-218 DAC) backed by 63 primarily office and retail assets in Finland. The transaction priced at the tight end of guidance and was well subscribed across the capital structure (A/75bps, B/85bps, C/1bps, D/14bps, E/22bps, F/3 bps). The pace picked up in May with two public and one private transactions coming to market. Cheyne Capital privately securitised a 155m refinancing of the debt of LOV Hotel Collection (LHC) in France. Bank of America Merrill Lynch (BAML) successfully placed the Taurus AUG UST IT CMBS upsizing the original 3m issuance to 34m; the Italian transaction is backed by two Blackstone logistics loans and one loan backed by six shopping centres owned by Partners Group with all loans asset managed by Kryalos. The transaction was heavily oversubscribed (A/2x, B/5.4x, C/3.7x, D/3.5x, E/2.9x) and priced at the lower end of guidance (A/1bps, B/125bps, C/21bps, D/335bps, E/45bps). Goldman Sachs also came to market with the 427m Ribbon Finance 218 backed by a portfolio of 2 Holiday Inn and Crowne Plaza hotels in the UK. The transaction was also well received and final pricing came in at the lower end of guidance (A/78bps, B/15bps, C/145bps, D/175bps, E/21bps, F/315bps, G/35bps). June saw only one transaction close, the Goldman Sachs Dutch 235m Kantoor Finance 218 backed by two loans made to PPF Real Estate Holding and Aventicum Capital Management. The PPF loan is secured by nine primarily retail/office assets and the Iron loan is secured by nine office assets all located in the Netherlands. Despite some initial rumblings of pricing widening on the class B and E notes the deal priced well below initial guidance and is one of the tightest priced transactions this year (A/72bps, B/1bps, C/145bps, D/25bps, E/425bps). There are three more transactions stated to close before the summer break. Morgan Stanley s ELOC 31 LIBRA DAC backed by light industrial assets located in the Netherlands and Germany, BAML s BAMS CMBS backed by UK light industrial assets and Goldman Sachs Elizabeth Finance 218 secured by retail and office properties in the UK. We expect that these transactions will continue to be well received by investors and it will be interesting to see if there is continuing support for tightening pricing on CMBS transactions Basis Points Increasing redemptions of legacy CMBS continued to drive investor demand in Q2 218, which saw four public (and one private) CMBS transactions close. Blackstone continues to play a leading role in the market, being behind two of the deals, although the other two public CMBS were backed by different sponsors. Figure 5: Pricing for four public CMBS transactions closing in Q FROSN-218 DAC Taurus IT CMBS A B C Ribbon Finance 218 D E F Kantoor Finance 218 G Source: CBRE CBRE LIMITED 218 FO UR Q UAD RANTS 11

8 P R IVATE D EBT The Private Debt Quadrant consists of lending to real estate investment that is not done via a public exchange. Usually, this will relate to lending by a bank or a fund. Because it is private, achieving transparency of even basic pricing terms, and hence performance over time, has historically been challenging. PRIVATE DEBT Given the above, it is clear to us that the resurgence of the CMBS market is a symptom of this abundance of interest, reflecting as it does an overflow of capital from the Private Debt quadrant, rather than a shortage; investors are eager to access real estate debt and 1 2 AUG UST Q4 217 Q1 218 London Zurich Stockholm Madrid Bratislava Bucharest Lisbon Warsaw Oslo Amsterdam Rome Dublin Budapest Berlin Paris Helsinki Copenhagen Prague A trend to watch over the second half of the year will be the increasing desire of banks to take out forms of what are effectively first-loss insurance. We saw a number of instances of this in the UK in 217, employing a variety of structures, including CMBS, which ultimate purpose was to protect lenders from the initial impact of default. While seemingly expensive THE RESURGENCE OF THE CMBS MARKET IS A SYMPTOM OF THIS ABUNDANCE OF INTEREST, REFLECTING AS IT DOES AN OVERFLOW OF CAPITAL FROM THE PRIVATE DEBT QUADRANT, RATHER THAN A SHORTAGE. 4. Brussels Despite the fervour to deploy capital, generally lenders are remaining disciplined on leverage as, it must be said, are borrowers. Where competition is manifesting itself is on pricing and terms, which are moving in borrowers favour. At the super-prime end of the capital city office senior lending market in the four major European economies, margins below 1% are not exactly common, but equally they are no longer surprising. Similarly, in the next tier of seven Western European markets, five saw margins tighten over the first half of the year, according to the CBRE Debt Map. Figure 6: Downward pressure on private debt margins at first glance premia can typically be high single digits such insurance can help reducing regulatory capital by improving Slotting treatment, and thus increase key measures such as Return on Risk Weighted Assets. With Basel IV likely to have similarities with Slotting, this type of product could soon be as common on the continent as it is in the UK. Vienna are increasingly prepared to be openminded about the route taken to do so. Margin (%) At the end of H1 218, there is still no let-up in the strength of demand for providing Private Debt across Europe. New debt funds continue to announce themselves on a seemingly weekly basis (in some cases, such as France, aided by regulatory changes relaxing the rules around non-bank lenders originating loans). Private equity houses are increasingly being drawn to performing loan book sales, rather than focusing on just the NPL market. Banks, while also seeking new lending opportunities, are having to defend their existing relationships at refinance from new entrants seeking to compete on price. And, especially in the UK, we are seeing evidence of traditional equity investors crossing the quadrants and issuing debt on deals where they cannot compete on acquisition price. Q2 218 Source: CBRE CBRE LIMITED 218 FO UR Q UAD RANTS 13

9 contacts For more information regarding this report please contact: Anthony Martin Investment Advisory t: e: anthony.martin@cbre.com Mark Evans Head of EMEA Equity Placement T: E: mark.evans@cbre.com Graham Barnes Corporate Finance t: e: graham.barnes@cbre.com Paul Coates Head of Debt and Structured Finance T: E: paul.coates@cbre.com Paul Robinson Alternative Investment t: e: paul.robinson@cbre.com Dominic Smith Senior Director Research t: e: dominic.smith@cbre.com This report was prepared by CBRE Capital Advisors and the CBRE Global Research Team. CBRE CAPITAL ADVISORS CBRE s Capital Advisors team provides independent and industry-leading capital markets advice, backed by our unrivalled financial expertise and global real asset insight. We work closely with clients who are looking for the focus, discipline and reach of a global corporate finance firm, combined with the real asset sector knowledge of the world s leading commercial property company. Our experts comprise experienced financing professionals who match client needs with investment strategies across specialist sectors and geographies, using a variety of capital structures. The EMEA team works seamlessly with the CBRE network globally to provide clients with best-in-class advice and execution. GLOBAL RESEARCH AND CONSULTING CBRE EMEA Research Team forms part of CBRE Global Research and Consulting, a network of pre-eminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at: cbre.com/researchgateway DISCLAIMER 218 CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. cbre.co.uk/capitaladvisors