+ DUBLIN LONDON STOCKHOLM BERLIN AMSTERDAM FRANKFURT EMEA INVESTOR INTENTIONS SURVEY 2018 PARIS MUNICH + MILAN % + MADRID CBRE Research
EMEA Investor Intentions Survey 2018 Executive summary Solid economic performance and robust occupier market fundamentals providing a supportive landscape for real estate investments in Europe 33% of respondents expect to spend more on real estate in 2018 compared to 2017 Investors perceive asset pricing as the key obstacle to deploying capital in 2018, followed by a lack of product A faster-than-expected rise in interest rates is the main threat to property markets. In the EMEA survey results there is clearly less emphasis on political events compared to last year s survey results Investors expressed a larger appetite for risk, although they remain largely focused on core and core-plus strategies Industrial is the preferred sector for 33% of the respondents, surpassing Office for the first time in the history of the Investor Intentions Survey The rise in Industrial was at the expense of Retail Residential recorded the steepest increase in popularity, and was indicated as the preferred asset class by 2 of the respondents Driven by limited availability of product and competitive pricing, investors are seeking alternative ways of getting exposure to real estate, as evidenced by recent platform transactions (Logicor, Sponda, IDI Gazeley, Westfield) and by venturing into niche markets and new asset classes Income-related factors such as stability of income stream and yield relative to other asset classes are investors main motivations for investing in real estate Introduction The European investment market is performing well, driven by better-than-expected economic growth and robust occupier market fundamentals. In 2017, the market posted a record high investment volume of EUR 291bn. However, the market is running late cycle and with prime yields at record low levels, it is increasingly relevant to understand what 2018 holds in terms of investment activity and in which segments investors see value for future growth. Will investors continue to deploy more capital into real estate or will they cut back on investments in 2018? What are the main obstacles to investing in real estate in the current market environment and what are the main threats? Are investors moving up the risk curve? Which sectors will see most competition? CBRE s annual Investor Intentions Survey explores attitudes towards the attitude towards investing in real estate from the most reputable investors across the industry. It will provide answers to the questions above and will shed light on the trends shaping investment behaviour in 2018. CBRE Research 3
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Planned acquisitions / dispositions Obstacles to investing in real estate Whilst 2017 was a record year for real estate investment in Europe, investors expect to deploy more capital in 2018. Looking back at the replies to this question in the survey since 2012, investors have always indicated that they expected their purchases to exceed the previous year. In relation to actual investment volumes this ambition came true in five out of the six years, but it is also likely that investors tend to be structurally optimistic about their ability to source product in the future. Relative to last year s survey results, investors are more optimistic about 2018 as on balance 33% expect to spend more compared to 26% in the previous year (see figure 1). Respondents greater appetite for investing poses a concern in relation to the availability of product that was already cited as one of the main obstacles to investing in last year s survey. On a positive note, investors are more inclined to sell than last year: on balance 29% of investors expects to sell more than in 2017 (see figure 2). Supplemented by higher propensity to buy, this bodes well for market liquidity in 2018. Figure 1: Compared to 2017, do you expect your purchasing activity in 2018 to be... 45 % HIGHER 33 % BALANCE 12 % LOWER 41 % 26 % 15 % Figure 2: Compared to 2017, do you expect your selling activity in 2018 to be... 40 % HIGHER 29 % BALANCE 11 % LOWER 36 % 20 % 16 % The stage in the cycle poses challenges to investors seeking to deploy capital (see figure 3). Prime yields have moved well below levels recorded at the previous peak of the market. With all sector prime net initial yields 89 basis points below the level in Q3 2007, it is not surprising that asset pricing has become a key concern for investors and this is even more pronounced than in last year s survey (44% in 2018 vs 38% in 2017). Whereas keen asset prices may pose challenges to investors trying to acquire assets, it is a favourable factor for investors willing to sell. This may explain the increase in investors expecting to sell more in 2018. Availability of product also remains an obstacle for investors seeking to deploy capital and this is the biggest obstacle for 34% of all respondents. Neither asset pricing nor availability of product are unique to EMEA, so this finding reflects concerns that apply globally. Investors also expressed competition from other investors as a barrier to investing, which touches on the asset pricing and product availability concerns. Figure 3: What is the biggest obstacle to acquiring assets in your region? Asset pricing Availability of assets Competition from other investors Availability and/or cost of debt Low market transparency Currency risk Tax Americas APAC EMEA % 0 10 20 30 40 50 60 70 0% 3% 7% 9% 20% 18% 16% 13% 17% 34% 43% 44% 58% In line with the stage of the cycle, investors perceive asset pricing as the main obstacle to deploying capital in the current market environment. Keen pricing is true for the prime end of the market. However, from an analysis of historic price levels in our investment transaction database we see that price levels across the broader market are still below pre-crisis levels. Transaction costs Lack of investment partners 0% 4 CBRE Research CBRE Research 5
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Threats to property markets Appetite for risk Looking back, 2017 was a year of major political events for EMEA. Whilst in last year s Investor Intentions Survey, investors were mostly focused on fundamentals and external factors as main threats, a series of general elections in major European economies were occupying investor sentiment. The results were received with optimism and although uncertainty remains in some countries, investors focus on politics has faded and shifted to monetary policy. In 2018 s Investor Intentions Survey, investors perceive faster than expected rises in interest rates as the biggest threat to property markets (see figure 4). At the end of last year, the European Central Bank (ECB) decided to commit to its asset-purchasing programme until at least September 2018, but by cutting back purchases from EUR 60bn per month to EUR 30bn per month. During this period, it is not likely that the ECB will interfere with interest rates, but monetary policies from other Central Banks such as the Fed in the US can affect international interest rates and in fact already have done so in the first months of 2018. A bubble waiting to burst and global economic shock undermining occupier demand ranked in joint second place, each indicated as the biggest threat by 20% of the respondents. The first relates to the concerns investors have with asset pricing in the current market environment. The global economic shock can be interpreted as concern about a black swan event, and while economic fundamentals are increasingly robust, history has taught that unexpected events can have a material impact on market sentiment and investor behaviour. Figure 4: Investor main concerns Faster than expected rises in interest rates Property is overpriced, a bubble waiting to burst A global economic shock undermining occupier demand A change in government policy that makes property less attractive A local economic shock undermining occupier demand Global political instability (conflict and or terrorism) Local political instability Overbuilding leading to excess supply Some other property market related shock E-commerce Deflation Other, please specify Increasing real estate debt Higher than expected inflation Distressed sales by existing owners % 0 5 10 15 20 25 30 6.9 % 5.2 % 4.6 % 4.3 % 3.7 % 2.0 % 1.2 % 0.9 % 0.6 % 0.6 % 0.3 % 0.3 % 28.5 % 20.5 % 20.5 % Compared to last year s results, investors are clearly less concerned about politics. Despite the fact that there is uncertainty in the political landscape in Europe, investors have shifted their focus to economic fundamentals and monetary policy With limited availability of product in the prime segment and keen pricing, the question rises whether investors are willing to move up the risk curve in search for yield. According to the Investor Intentions Survey, investors have indeed indicated that they have a growing appetite for risk compared to 2017. However, when looking looking at actual investment strategies, investor preferences look rather conventional and are tilted towards core investments, followed by core plus and value-add (see figure 5). Just 7% of investors prefer opportunistic assets and with investing in distressed assets seems a niche market. This can also be explained by the lack of opportunities in these segments: the economic upturn is broadening across Europe and occupier markets have now seen several years of improving fundamentals reducing the number of landlords in financial distress. Figure 5: What type of property assets are most attractive to purchase in 2018? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Prime or core assets Good secondary Value-add Opportunistic Distressed assets 9% 29% 30% 29% 3% 8% 30% 17% 4 3% 38% 17% 4 2015 2016 2017 2018 14% 27% 25% 3 7% 25% 30% 36% 6 CBRE Research CBRE Research 7
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Motivation for investing in real estate Preferred cities Figure 6: What are your main motivations for investing in real estate? The ranking of European cities in terms of the volume of transactions tends to remain broadly constant from year to year, but shifts in investor preferences indicate which 30 Paris markets may expect to see more or less activity over the coming 12-18 months. 28% Among investors responsible for investment in EMEA, the most sought-after cities for investment were Paris, Madrid, Amsterdam, Frankfurt, and London. Paris popularity, which 25 came in top this year, seems boosted by expectations that the positive political and economic momentum in France is likely to have a positive spin-off on its real estate market. Madrid has seen strong investor interest in the past year 20 19% Madrid thanks to improving economic fundamentals and increases 19% in office-based employment. Over the past three years, Amsterdam has been rising % up the rankings of European cities as a destination for real estate investment. Strong economic growth, limited 15 development and rapidly declining vacancy have served to boost its overall attractiveness over time. German 13% cities have performed exceptionally well over the past year in terms of investment flows. The current strength of Amsterdam the German economy, and excess demand over supply 10 promising further rental growth, have combined to render 7% 6% German cities attractive for investment. Frankfurt s popularity may have been partly driven by 5% expectations of potential spill-over effects from Brexit 5 towards the German city. London still features in the top five and dominates global rankings in terms of investment 3% flows, but uncertainty induced by the UK vote to leave the European Union has eroded its relative popularity amongst Frankfurt continue to see the highest volume of investment activity of Other, please specify Occupation Higher income return than other asset classes Expectation of better capital value growth than other asset classes Yield relative to cost of debt (positive leverage advantage) Yield relative to other asset classes (positive spread over government bonds) Hedge against inflation Geographic diversification Asset class diversification European investors. That said, London will undoubtedly 0 any European city and remains the highest priority target for investors from outside Europe. London 8 CBRE Research CBRE Research 9
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Preferred sector Figure 7: Most attractive sectors for investment in EMEA For the first time in history of the Investor Intentions Survey, Industrial is regarded as the preferred asset class by The rise in Industrial has been at the expense of Retail, most of the respondents (see figure 7). This reaffirms the but 10% of the investors still see Retail as their preferred status of Industrial as institutional asset class and shows asset class. The main motivation for investors that prefer the confidence investors have in the fundamentals and retail properties is asset class diversification and stability of structural growth. Both in terms of occupier base and income stream. investment market, the market has already seen strong consolidation activity which is set to continue as the cycle Residential has seen the steepest rise in popularity matures. compared to 2017 and is the preferred asset class for 2 of the respondents. Investors indicated the attractive Office ranks second, but continues to be a popular risk-return profile and strong fundamentals driving rental asset class and investors in office properties indicated growth as main motivations for investing in Residential. 32.7% 26.4% 21.5% 9.6% INDUSTRIAL OFFICE RESIDENTIAL RETAIL 27.4% 8.3% 5.3% 4.6% LOGISTICS** HOTELS LIGHT INDUSTRIAL** RETAIL HIGH STREET* 2.6% 2.3% 1.7% SHOPPING CENTRES* RETAIL WAREHOUSE* OTHER an intention to seek markets with strong economic fundamentals for rental growth and established markets with high liquidity, whereas for Industrial the attractive riskreturn profile of the market was investors most important driver. * Subcategory of retail ** Subcategory of industrial Percentages have been rounded 10 CBRE Research CBRE Research 11
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Retail disruption Alternatives The Investor Intention Survey was discouraging for retail investors in EMEA. Only 10% of investors are prioritising the retail sector in 2018. The majority of these are focusing on the high street rather than shopping centres and retail warehouses. The disruption and challenges facing the retail sector were well publicised in 2017. But it remains easy to ignore the huge variations that exist in the sector across EMEA; and face the reality that retail continues to evolve, but some opportunities will remain. Across the continent, the provision of physical stores differs. However, how consumers are choosing to shop is creating disruption, the growth of e-commerce and speed of change remains a key differentiator. The UK remains the most penetrated market by e-commerce, with 16% of all retail sales occurring online (Euromonitor), while Southern and Central Europe remain relatively immature at around 4-6%. As investor sentiment has weakened in the face of these changes, astute investors will continue to invest in the sector, but stock selection remains a key consideration. Assets that are flexible enough to adapt to current disruption and future trends remain high on the agenda for investors. Total returns are increasingly becoming polarised with the rapid rate of change. Assets that look to target convenient or destination elements typically outperform those in the middle of the spectrum and look most likely to be able to differentiate their offering from e-commerce s transactional orders. Survey respondents were more likely to focus on prime and core properties, as the schemes are the best positioned to follow future consumer trends. Despite this, there was some willingness from respondents to move up the risk curve in retail assets. The low yield environment and limited availbility of stock are encouraging those investors. Some assets in this higher risk category will remain as retail destination and adapt to consumer trends, other will be repositioned to alternate uses. Driven by aggressive asset pricing and limited availability of product, investors have become increasingly resourceful in finding new ways to deploy capital. This can be through pursuing new asset classes such as niche markets dubbed alternatives, but investors are also seeking alternative means to get exposure to traditional real estate, such as through platform transactions. The market has seen notable examples in corporate acquisitions such as Logicor, IDI Gazeley and Westfield, but also through the delisting of Sponda. Alternative sectors are increasingly popular amongst investors. In certain markets, such as Germany, the Nordics and the Netherlands, residential has already become mainstream as evidenced by strong investment activity. Excluding residential, alternatives have also recorded a healthy growth in investment volumes from EUR 16bn in 2007 to EUR 24bn in 2017 (+45%). In this year s Investor Intentions Survey, investing in alternatives continued to be a popular strategy (see figure Automotive/Car parks Self-storage Cold Storage Data centre Infrastructure Leisure/Entertainment Healthcare Single Family Residential Real estate debt Retirement living Student living Already invested and actively pursuing further exposure 8). 7 of the respondents have indicated to be already invested in alternatives and 70% said to be actively pursuing investments in alternatives. This year s respondents most frequently cited to be invested in student housing (33%), closely followed by real estate debt (29%). This closely relates to last year s results, when most investors indicated to pursue investments in student housing which shows they have been successful in. Whilst past results do not provide any guarantees for the future, 37% indicated to actively pursue investments in student housing in 2018, followed by retirement living (26%) and real estate debt (26%). The main reason for investing in alternatives was for investors to benefit from structural changes in demand (26%) and higher initial yields (25%). The third most frequently quoted motivation for investing in alternatives is protection against real estate downturns (14%), which might indicate that investors perceive lower correlation between traditional asset classes and alternatives. Figure 8: Are you already invested / actively pursuing investment in any of the following alternative sectors? Not invested, but actively looking for exposure Already invested, but not looking for further exposure 0% 10% 20% 30% 40% 50% 60% 70% 80% 12 CBRE Research CBRE Research 13
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Flexible offices The rise and rise of the flexible office has presented the European investor community with challenges and opportunities. Perhaps the biggest of these issues in the new flexible office market is assessing the value implications of co-working space as a component of a traditional office building a question that investors, landlords and occupiers alike have been grappling with over the last year. This is reflected in this year s survey, where only 33% of investors state that they are yet to have reached a strong conclusion about co-working. We expect assertions about co-working will firm up over the next year as valuation evidence becomes more widespread across the region. This is the overarching attitude. Looking more closely, investors seem to be acutely aware that the demand-side occupier drivers behind the flexible revolution are here to stay, suggesting co-working formats are more of a longterm opportunity than a short-term risk. 30% agree that co-working environments are the future of office work and so should be embraced, while 27% of the sample also agree that this type of space provides amenity to other tenants in a building or surrounding area. Both factors rank higher in this year s survey than statements around credit risk, profitability or threat to rental value. Looking forward, what are the indications of the desirable mix of co-working space in office buildings? This year s survey results indicate 40% of our respondents think that a 0-20% allocation to co-working within a building increases building value, while higher allocations have negative impacts on value. This, coincidentally, is aligned with corporate occupier sentiment, where generally speaking we expect about 20% of corporate portfolios in the future will be dedicated to flexible office space. Figure 9: What impact do the following proportions of co-working space in a building have on long-term capital value? 40% Balance of positive and negative attitudes towards the impact on long-term capital value 30% 20% 10% 0-10% -20% -30% -40% -50% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Proportion of co-working space in a building 14 CBRE Research CBRE Research 15
EMEA Investor Intentions Survey 2018 EMEA Investor Intentions Survey 2018 Conclusions Methodology Investing in a late-cycle market The results of our Investor Intentions Survey are optimistic across the board with investors seeking to invest more in 2018 compared to the previous year. However, with prime yields at record low levels, asset pricing and availability of product are the two key obstacles for investors seeking to deploy capital in the current market environment. However, aggressive asset pricing is a favourable condition for investors willing to dispose of assets and investors have indicated to sell more than in 2017. A higher propensity to both buy and sell may bode well for market liquidity in 2018. In line with the limited availability of product, investors are looking for alternative ways to find exposure to real estate. This is exemplified by the search for investment opportunities in niche markets and appetite to invest in these segments is growing. Another way investors are broadening their horizon is by acquiring platforms through corporate acquisitions or delistings. With the maturing of the cycle, the market for these platform transactions is likely to see more activity in 2018. The Investor Intentions Survey was carried out between 26 December 2017 and 24 January 2018. The survey attracted 1,010 respondents globally. This report covers the 350 respondents who indicated that they were responsible for investments in EMEA. The responses were spread across a range of investor types (see figure 10). The most numerous were fund / asset managers, who accounted for 44% of survey participants. Insurance companies, pension funds and sovereign wealth funds were responsible for 15%. Other respondents were developers (9%), private equity (7%), private individuals / family offices (7%), listed property companies (inc. REITs) (7%), private property companies (5%). Figure 10: Business sector that best describes your organisation s main activity: Investors do see risks on the horizon, most frequently citing faster-than-expected rises in interest rates as potential threats to property markets, followed by fears that property is overpriced and a global shock that will undermine occupier demand. 44 % 9 % 8 % 7 % 7 % 7 % 6 % 5 % 3 % 2 % 1 % FUND OR ASSET MANAGER DEVELOPER INSURANCE COMPANY LISTED PROPERTY COMPANY (INC. REIT) PRIVATE EQUITY PRIVATE INDIVIDUAL INVESTORS / FAMILY OFFICE PENSION FUND PRIVATE PROPERTY COMPANY OTHER BANK SOVEREIGN WEALTH FUND 16 CBRE Research CBRE Research 17
EMEA Investor Intentions Survey 2018 Key contacts For more information about this regional report, please contact: Jos Tromp Head of Research, EMEA t: +31 20 589 07 53 e: jos.tromp@cbre.com Raphaël Rietema Capital Markets, EMEA Research t: +31 20 204 43 25 e: raphael.rietema@cbre.com Global Research Leadership Nick Axford, Ph.D. Head of Research, Global t: +44 20 7182 2876 e: nick.axford@cbre.com @NickAxford1 Henry Chin, Ph.D. Head of Research, Asia Pacific t: +852 2820 8160 e: henry.chin@cbre.com.hk @HenryChinPhD Richard Barkham, Ph.D. Chief Economist, Global t: +44 20 7182 2665 e: richard.barkham@cbre.com Spencer Levy Head of Research, Americas t: +1 617 912 5236 e: spencer.levy@cbre.com @SpencerGLevy Neil Blake, Ph.D. Head of Forecasting and Analytics, Global t: +44 20 7182 2133 e: neil.blake@cbre.com @NeilBlake123 Jos Tromp Head of Research, EMEA t: +31 20 589 07 53 e: jos.tromp@cbre.com About CBRE Group, Inc. CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at cbre.com CBRE Disclaimer 2018 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. To learn more about CBRE Research, or to access research reports, please visit the Global Research Gateway at: cbre.com/researchgateway 18 CBRE Research