Platforms, The Height Of Fashion

Transcription

1 CAPITAL ADVISORS EMEA FEBRUARY 218 Platforms, The Height Of Fashion Public Equity Private Equity Public Debt Private Debt

2 HIGHLIGHTS 4Q highlights Public Equity Public Debt Private Equity Private Debt Several very significant M&A deals were agreed in Q4, an escalation of the trend of earlier in the year Investors are seeking to build scaleable, operationally efficient platforms of real estate in sectors benefitting from disruption Expectations are that these opportunities will prove resilient in downturns and out-perform in upturns The fourth quarter saw some significant new issuance A traditional CMBS deal and a more unusual syndication of a portfolio of bank loans by a major high street lender provided the main talking points Strong appetite for real estate debt exposure, as well as attractive pricing compared to other forms of Asset Backed Security, should sustain demand for further CMBS issuance in 218 Weight of money targeting European real estate is impressive But investors are proceeding with caution where imminent capital growth is not expected Market preference for diversified funds a function of historically higher rate of income distribution Private debt remains the best value of the quadrants, in our view, attracting significant volumes of capital from a wide range of new entrants to the asset class Despite the competition to deploy capital, lenders are remaining disciplined in balancing risk and return The volume of business that will be available to new entrants will depend on the strength of the transaction market and the appetite of legacy lenders to refinance maturing positions CBRE LIMITED 218 FOUR QUADRANTS 1

3 S UMMAR Y 217 set a new record for investment volume in Europe Strong demand looks likely to sustain this in 218 IN 217 TOTAL REAL ESTATE INVESTMENT IN EUROPE REACHED 4Q investment outlook European commercial real estate investment volumes reached a record high of 285 billion in 217. This represents an increase of 9% on the previous year and 2% up from the previous peak in 215. An upturn in UK investment volumes, coupled with a near record performance in Germany, provided a significant boost to European volumes, contributing 73 billion and 57 billion respectively to the year-end total. The UK market recovered from a weak first quarter to post a 13% increase in investment volumes compared to 216. Driven by several landmark transactions including 2 Fenchurch Street ( The Walkie Talkie ) for 1.4bn, 122 Leadenhall Street ( The Cheesegrater ) for 1.3bn and Grosvenor House for.6bn, demand for real estate in continental Europe was also strong. Several markets, including Austria, CEE, Denmark, Finland, Italy, and The Netherlands, posted record high investment volumes, thanks to improving occupier market fundamentals and inflows of foreign capital. 2 FE BR UARY 218 A key trend in Europe in 217 was the surge in large platform transactions and corporate acquisitions. The industrial sector saw several notable deals throughout the year, including the sale of Blackstone s Logicor platform to China Investment Corporation for 12.3 billion, and more recently the disposition of IDI Gazeley by Brookfield for 2.4 billion. In the retail sector, two major REIT mergers Unibail/Westfield and Hammerson/Intu occurred in December. Elsewhere, the delisting of Sponda, Blackstone s OfficeFirst acquisition and several mergers in the investment management industry spoke of the drive for scale across the property industry. We explore this theme in more detail in the Public Equity section. Looking ahead into 218, investor demand remains robust although the potential for further growth in investment may be limited given the strength of 217 transaction volume. Generally, we expect volumes in 218 to be similar to those in 217, although France may be an interesting exception. The second half of 217 saw investment pick up after a subdued start to the year, reaching 12 billion in Q4 and 27 billion for the year, as investor sentiment became much more positive in light of Emmanuel Macron s election and recent economic reform. We expect this momentum to continue, driving further increases in transactions this year. 285bn 9% 157bn UK TRADING VOLUME HAD AN ANNUAL INCREASE OF THE COLLECTIVE VOLUME FOR FRANCE, UK AND GERMANY A KEY TREND IN EUROPE IN 217 WAS THE SURGE IN LARGE PLATFORM TRANSACTIONS AND CORPORATE ACQUISITIONS RECORD ANNUAL VOLUMES FOR: CBRE LIMITED 218 FO UR Q UAD RANTS 3

4 RELATIVE 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 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 cbre.co.uk/4qpricingmodel. Currently, the model suggests that two Quadrants appear to be fair value in other words, Expected Returns broadly match Required Returns and two Quadrants are good value Expected Returns are greater than Required Returns. More specifically, it appears that Private quadrants appear better value than Public quadrants, and the best value is once again to be had in Private Debt. It is important to understand though that these signals should be treated 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. For those who view the UK cycle as increasingly mature, evidence that Debt Quadrants appear good value will be very welcome, given that it would be natural to favour these Quadrants when downside risk is a key consideration. Those with a more optimistic outlook however, will perhaps see an opportunity in Public Equity buying in at a discount to Net Asset Value (NAV) but maintaining liquidity should it be required. In this regard it is important to stress that 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 -13% discount to NAV, this is a source of significant potential upside. OUR RELATIVE VALUE MODEL SUGGESTS THE BEST VALUE IS ONCE AGAIN TO BE HAD IN PRIVATE DEBT Percent SOURCE: CBRE Figure 1: Expected Return vs Required Return, UK, Q4 217 Private Debt Public Debt Private Equity Public Equity INCOME YIELD EXPECTED INCOME GROWTH REQUIRED RETURN 4 FEBRUARY 218 CBRE LIMITED 218 FOUR QUADRANTS 5

5 PUBLIC 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 2: Global M&A Deals in , 7, The public equity quadrant s penchant for generating headlines came to the fore as 217 drew to a close, with a number of high profile deals thrilling the market. In the retail sector, Hammerson s purchase of Intu to create a company with 24bn in assets set a high-water mark that stood for all of a week, until Unibail-Rodamco announced the purchase of Westfield Corporation to form a 61bn global shopping centre portfolio. Activity was not confined to the retail sector however; among other deals was the purchase of Austrian peer Buwog by German residential specialist Vonovia. The strength of real estate M&A activity was reflective of wider trends. According to Reuters, announced global M&A totalled $3.6tn in 217, matching the figure seen in 216, while in Europe announced M&A increased by 17%, from $742bn to $868bn. Globally and in Europe, real estate accounted for around 15% of M&A activity, with the Unibail- Rodamco deal the fourth largest of all European M&A deals and the ninth largest globally in 217. In our view, the common thread running through the majority of this activity is that they show a desire on the part of investors to build scale in sectors of the market where there are perceived benefits from disruption. That disruption may be technological, in the case of logistics where the internet continues to shift a huge volume of consumption online. It may be behavioural, in the case of retail where the split between convenience and prime destination locations is becoming ever more pronounced. It may be organisational, manifesting itself in corporations increasing desire to have a greater proportion of flexible space. It may be political, as in the UK where the role of the state in the provision of rented accommodation is steadily being taken over by the private sector. In short, this wave of M&A activity represents investors responding to disruption by building scaleable platforms that will deliver direct operational advantages from the efficient management of dominant real estate portfolios. In closing, we should perhaps acknowledge that historically, M&A volumes have peaked immediately before a downturn. While our global economic outlook does predict US weakness beginning in late 219, manifesting itself in a technical recession in 22, we do not believe that this will cause today s deal-makers to regret their actions. Far from it in fact: a focus on dominant, operationally efficient positions of scale in sectors more likely to see income growth will deliver resilient performance should the economy weaken, and strong out-performance should pessimism be unjustified. THIS WAVE OF M&A ACTIVITY REPRESENTS INVESTORS RESPONDING TO DISRUPTION BY BUILDING SCALEABLE PLATFORMS THAT WILL DELIVER DIRECT OPERATIONAL ADVANTAGES US$ Billion Real Estate Energy & Power High Technology Industrials Financial VOLUME (US BN) NO. DEALS SOURCE: THOMSON REUTERS 6, 5, 4, 3, 2, 1, No. Deals 6 FEBRUARY 218 CBRE LIMITED 218 FOUR QUADRANTS 7

6 PRIVATE 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 privately, if at all. 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 Figure 3: Distribution Yields Public vs Private Equity There continues to be a huge volume of money targeting European real estate, but between the allocation and deployment of capital there remain significant challenges to overcome despite the favour in which the asset class is currently held. Many investors today, looking globally, favour Europe. We are seeing significant allocations of capital towards the continent, as investors target a mix of political stability and robust economic growth, which combine to produce strong risk-adjusted returns, or simply seek to diversify away from domestic exposure. Beneath the macro level however, investors can begin to get nervous; achieving required returns from core assets can be difficult in Germany and France, given prevailing yields, while the UK is cheaper for a reason that reason being the political risk surrounding Brexit. Therefore, investors often seek to pursue a strategy giving some core exposure in these large markets, while gaining additional return from higher yielding assets in either smaller markets or alternative sectors; in this regard, we note a preference currently for Scandinavia as a destination and for healthcare as an emerging asset class. In these more opportunistic markets there is often more impetus to move quickly to capture limited opportunities in more core markets, by contrast, we perceive a trend among some investors to consider delaying deployment, as the chances of missing out on a sharp increase in capital values are judged to be more remote. In the secondary market, our PropertyMatch business once again saw strong volumes last quarter in diversified funds, where transactions tended to take place around or at a small premium to Net Asset Value (NAV). Similarly, long income and certain alternative sectors healthcare, student, leisure, residential continue to attract a premium to NAV, although a few specialists notably in retail and London offices are priced at a discount. We have noted in previous editions of this report the disparity between the Private and Public Equity quadrants, with diversified portfolios in the former prices at or above NAV, whereas the former trade was at a significant discount. On the face of it, this appears incongruous; however we think the answer lies in the propensity of the Private Equity universe to distribute a greater proportion of income than the Public Equity sector. For example, when measured as a proportion of enterprise value, diversified UK Private Equity funds typically distribute comfortably in excess of 3%, whereas UK REITs distribute closer to 2%. In a market where capital growth expectations are low, and desire for an income yield high, it is perhaps not surprising that the market is favouring those entities more historically geared towards distributing a higher proportion of their income. Distribution Yield as % Total Portfolio Value Mar-1 Jul-1 Mar-11 Jul-11 Mar-12 Jul-12 Mar-13 Jul-13 Mar-14 Jul-14 Mar-15 Jul-15 Mar-16 REIT AVERAGE FUND AVERAGE SOURCE: CBRE, BLOOMBERG Jul-16 Mar-17 Jul-17 8 FEBRUARY 218 CBRE LIMITED 218 FOUR QUADRANTS 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, 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. For some time the public debt quadrant was perpetually playing host to more encouraging signs than Barney Stinson s office, but the market finally saw some meaningful new transactions in the fourth quarter of 217 in the form of one fairly typical CMBS issue, one slightly more complex CMBS issue and one securitisation of bank debt that combined elements of CMBS and CLO structures. On the CMBS side, a perfect storm of strong sponsor (Blackstone), extremely popular underlying asset class (last mile logistics), attractive pricing and constrained supply relative to alternative ABS investments meant that the securitisation of 364m of debt was significantly oversubscribed. A smaller CMBS secured against an Italian retail portfolio was also transacted. The largest deal of the three was the portfolio securitisation by Santander of 25 UK commercial 1 FE BR UARY 218 real estate loans, which synthetically transferred credit risk from Santander via a credit protection deed. The Santander deal (dubbed Red ) reflects a trend that we witnessed emerging in 217, whereby banks sought to reduce first loss exposure on senior lending, even where this is at relatively modest LTVs, to improve their capital efficiency. Often achieved through insurance-type arrangements with a single counterparty, Red is thus significant both for its scale and innovative structure. These deals may indeed herald an upturn in issuance that will endure into 218. With more and more investors seeking access to real estate debt, the public debt space could be set to benefit if pricing remains attractive relative to other forms of ABS. It is difficult to say for certain if this will be the case. If we were to make a slightly leftfield projection for 218 Figure 4: Comparison of Spreads on European Public Debt 35 3 however, it would be that we think more buyers and sellers will explore the development of structures similar to the tenant credit lease which is common in the US, in particular in the long-income market. THE MARKET FINALLY SAW SOME MEANINGFUL NEW TRANSACTIONS IN THE FOURTH QUARTER OF 217. THESE DEALS MAY INDEED HERALD AN UPTURN IN ISSUANCE THAT WILL ENDURE INTO Basis points PUBLIC DEBT EUR CMBS A GBP CMBS A END-16 GBP Corp Bonds itraxx Main END-17 SOURCE: BAML CBRE LIMITED 218 FO UR Q UAD RANTS 11

8 PRIVATE DEBT 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 fund. Because it is private, achieving transparency of even basic pricing terms, and hence performance over time, has historically been challenging. PRIVATE DEBT The final days of 217 were accompanied with a seemingly constant flow of news heralding the latest successful fund raising for a European debt fund, with the occasional announcement of another new entrant to the sector setting out similar plans for 218. To us, this represents the logical strategic consequence of our long-stated arguments of the relative value of the private debt quadrant, an understandable tactical allocation given the maturity of the cycle in many markets, and a necessary and beneficial restructuring of the quadrant as new attitudes to risk (in part driven by regulation) forces traditional providers of debt to reduce exposure. None of these forces appears likely to be in retreat in 218, and so we expect private debt to remain extremely popular throughout the year. We note an increasing tendency for lenders to focus on refinance risk. In assessing viability on an ongoing basis, lenders have for some time paid more attention to the debt yield rather than the interest cover ratio (ICR) given extremely low interest rates have rendered ICRs fairly comfortable, and a perhaps justified concern over real estate pricing in an era of low yields. This latter prudence is coming to the fore as lenders stress refinance prospects for five year loans into the early 22s: common hurdles include assumptions that interest rates will be above where swap curves are predicting and some outward drift in property yields. Thus, the high volume of new entrants to the market has not yet put significant downward pressure on margins. Lenders remain disciplined in trying to achieve given levels of return, and in focussing on medium-term risks are often building in protection in the form of amortisation, rather than placing undue faith in rising rental and capital values. It is difficult to say whether the volume of capital raised to provide debt finance will be significantly more or less than the market will require, given the uncertainty around traditional lenders appetite to refinance existing positions that will mature in 218, and to take on new business. But it will be a rare deal that sees no competition amongst lenders. For those looking for an edge in 218, we would recommend as flexible an approach as possible, to both asset, geography and perhaps most crucially capital structure: lenders who are able to offer borrowers a one-stop-shop, subsequently distributing parts of the loan they are not interested in holding, rather than forcing borrowers to go to more than one provider to secure all the finance they desire, will have a significant advantage in the coming year. THE HIGH VOLUME OF NEW ENTRANTS TO THE MARKET HAS NOT YET PUT SIGNIFICANT DOWNWARD PRESSURE ON MARGINS. LENDERS REMAIN DISCIPLINED IN TRYING TO ACHIEVE GIVEN LEVELS OF RETURN Funds Raised ( m) 3, 25, 2, 15, 1, 5, SOURCE: PREQIN Figure 5: Fundraising for Europe-focused Debt Funds FEBRUARY 218 CBRE LIMITED 218 FOUR QUADRANTS 13

9 contacts For more information regarding this report please contact: Anthony Martin Executive Director Investment Advisory t: e: anthony.martin@cbre.com Paul Lewis Head of Corporate Capital Markets Corporate Finance t: e: paul.lewis@cbre.com Graham Barnes Executive Director Corporate Finance t: e: graham.barnes@cbre.com Steve Williamson Executive Director Debt and Structured Finance t: e: steven.williamson@cbre.com Paul Robinson Executive Director 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