This year’s MIPIM real estate conference in Cannes promises to be important for the UK, Alex Rolandi hears. Plus, investors comment on other European city investments.
NB: The conference has been postponed until June 2 over coronavirus fears.
DAVID AINSWORTH, CHIEF EXECUTIVE OF CO—RE AND PRESIDENT OF THE CITY PROPERTY ASSOCIATION
How will Brexit affect London as a global city?
This is an encouraging time for commercial real estate in London. Following a decisive Conservative election victory at the end of 2019, which has delivered a clear path for the UK to leave the European Union, we are seeing a spike in activity in inward investment into the UK commercial property market. Investors, who have had the money but not the will to spend it with too many political and economic risks ahead, are now sufficiently incentivised to take a view on how the UK and London economies are set to grow.
London remains Europe’s biggest city, with the greatest global reach. In fact, it is likely to continue to grow and outstrip its rivals, as a recent IMF report states, with commercial property benefiting from a virtuous circle of substantial tech investment, the depth of talent companies want to attract, and a lack of supply of high-quality commercial developments that occupiers demand. This MIPIM promises to be an important year for the UK, with its largest ever government stand, to showcase how London has moved on beyond Brexit.
RONAN VASPART, DIRECTOR, MIPIM
What does MIPIM mean to you?
The future is human, and this year’s MIPIM is based around how real estate and cities can put humans at the heart of all their strategic decisions. By 2050 the world will have 9.7 billion inhabitants, of whom 70% will live in urban areas.
That’s why we are particularly focusing on cities this year. They are the centres for education, employment and innovation, and their future is essential for social progression, economic exclusivity, the environment and sustainable growth. Cities need to adapt to the needs of humans, which is why our conference themes are going to focus on demographics and a growing population, diversity and inclusion, wellbeing and social impact.
Decisions are going to be made by politicians, and innovations are going to be led by advances in technology. That is why we are expecting a large number of political stakeholders attending this year, including from the UK government making their post-Brexit pitch, and we are delighted that our keynote speech will be Apple co-founder Steve Wozniak.
JON HOLLICK, EMEA CHIEF INVESTMENT OFFICER, UBS-AM REAL ESTATE & PRIVATE MARKETS
What are the key risks to be expected in the sector in 2020?
We’re mindful of weak prospects for economic growth and ongoing political and trade tensions, which have pushed down our expectations for overall rental growth in Europe this year. But with many core cities remaining undersupplied, we still expect strong rental growth to come through in the best locations for office and industrial assets.
In the UK specifically, we are seeing a lot more interest in central London after the general election result, but political uncertainty may dampen the market again as we move closer to the end of the transition period. Occupier demand remains healthy, however, and with construction levels set to fall back dramatically from next year, we actually see central London having some of the strongest prospects for rental growth over the medium term.
Scrutiny of the retail sector is likely to only intensify; the sector’s revaluation in the UK is well underway and we may start to see a floor in values and rents for the more core dominant assets. But for many European markets, this process is only just getting started, and it will be interesting to see how valuers start to adjust the market to the structural challenges.
In the even lower interest rate environment we are now in, European real estate will continue to be an attractive destination for global capital. Ultimately, we expect investment volumes to remain healthy but below the peak levels recorded a few years back, limited primarily by the amount of suitable stock that can realistically be traded over the next year.
JEFF O’DWYER, FUND MANAGER, SCHRODERS (EUROPE)
Which are some of the most attractive European cities for investment and do opportunities go beyond Europe’s capitals?
Large European growth cities with diverse economies and growing populations, such as Berlin, Frankfurt, Munich, Paris, Amsterdam, Helsinki and Stockholm, are expected to outperform, alongside a limited number of smaller cities which have the same characteristics of larger cities – population growth, a strong university, etc – such as Utrecht, Leipzig, Malmo and Grenoble. The stronger growth is likely to be in offices, industrials and some of the more operationally backed sectors such as hotels, led by continued rental growth and minor yield firming. Retail remains a challenge, driven by uncertainties around setting sustainable rental levels.
As a real estate investor we see value in managing to core in major cities with [among other factors] a lack of grade-A space; mispriced assets that require active asset management; food-anchored retail schemes and convenience stores with strong or growing catchments and demographics… Other types of real estate which are benefiting from structural drivers, particularly in locations which attract multiple uses, include four- and five-star hotels with operational control; self-storage; retirement living; laboratories close to universities; residential and data centres.
PAUL JOUBERT, MANAGING DIRECTOR - TRANSACTIONS, EUROPE, INVESCO REAL ESTATE
The interest rate environment is supportive of real estate investment, but what are some of the risks and opportunities in real estate?
There is a clear market consensus that we are in a lower-for-longer interest rate environment and this is fuelling continued institutional demand for real estate. However, there continues to be some nervousness towards the sector, driven by the extended nature of the current real estate cycle, combined with a variety of external threats including increasing geopolitical risks, regulatory costs, e-commerce and climate change.
For active investors, this uncertainty creates investment opportunities and in 2020, we are targeting assets with reversionary upside following recent strong market rent growth, or changing regulatory pressures. Logistics continues to benefit from the growth of e-commerce and the ongoing modernisation of supply chains, while hotel and residential assets continue to see limited supply and high structural demand in most major European cities.
A common theme to these sectoral changes is the accelerating power of innovation, which some cities are driving more than others and should be favoured, such as London, Paris, Munich and Stockholm. However, while these are accelerating or deepening, the trends in themselves are not new. As such, in the current low-interest rate environment, we continue to underline the need for an active value creation to deliver relevant risk/returns. More than ever, being creative and buying well is key, looking to deliver value earlier in the business plan, then crystallising upside.
AMAL DEL MONACO, HEAD OF SECTOR SPECIALISTS, AXA INVESTMENT MANAGERS – REAL ASSETS
How strong have fund flows into property been and what are the consequences for the real estate asset class?
Continuing the theme from 2019, the weight of capital targeting the asset class is far outstripping the annual volume of transactions, despite the perceived lateness in the cycle, which might lead to property yields coming under renewed downward pressure in 2020.
In terms of specific asset classes in Europe, demand in the residential and logistics sectors remains resilient, so we are confident that we will see attractive risk-adjusted return profiles in these sectors as a result.
2019 saw record real estate investment into the residential sector and the structural drivers underpinning this appetite – namely urbanisation and demographic trends – will support continued interest. As new supply has not been able to keep up with this spike in demand, we expect the sector to continue to benefit from sustainable rental growth. However, affordability and local regulation need to be carefully assessed.
Sustainability is increasingly at the forefront of day-to-day business. We are actively engaged with stakeholders, whether it be end customers or our operating partners, helping them understand how to navigate the evolving ESG landscape to deliver responsible investments and sustainable performance.
DAN POTTORFF, MANAGING DIRECTOR, DEBT INVESTMENTS AND SPECIAL SITUATIONS, LASALLE INVESTMENT MANAGEMENT
How are structural changes in European markets affecting real estate debt?
Regulatory change, combined with today’s late-cycle economy, is driving investor demand for real estate debt and we expect this trend to continue through the medium term.
Changes to the Basel standards, due to take effect in 2022, will impose higher capital reserves for real estate lending and further restrict the scope of lending that can be undertaken profitably by traditional banks. Non-bank lenders like LaSalle, who have the expertise and flexibility to provide a range of debt solutions, have taken advantage and will see a greater range of opportunities going forward.
Real estate debt is also benefiting from the late-cycle characteristics that European markets are currently experiencing. To find value at this point in the economic cycle, we firmly believe that investors should pursue a high-alpha, low-beta approach. Real estate debt – especially whole loans and mezzanine – can play an important offensive role in an investor’s strategy, by providing cash yield while offering downside protection and balancing a portfolio’s equity allocations.
ALISTAIR CALVERT, CHIEF EXECUTIVE, CLARION GRAMERCY
Is the European logistics sector best placed to outperform other real estate this year? If so, why?
The European logistics sector will& continue to outperform other property sectors in 2020. Online sales are still growing at a double-digit pace year-on-year and the e-commerce penetration rate continues to rise in several EU countries.
Urbanisation – people flocking to major metros to live, work, and play – has fuelled an urban logistics boom. Supply chain managers seek modern warehouses located within proximity to major population centres, which serve customers faster and leverage the available labour force. This suggests many acquisition and development opportunities. Furthermore, European economic growth has shown signs of stabilisation with an improved macro outlook for 2020 and 2021.
Logistics real estate fundamentals continue to tighten with the warehouse vacancy rate dropping to about 2% in several large EU markets. With manageable new supply and high barriers to entry due to expensive land costs, density and local regulatory constraints, we expect rent growth to accelerate across many markets over the next 12-18 months. Finally, interest and mortgage rates are highly attractive, and debt and equity capital are readily available, boosting total returns for investors.
JAMES THORNTON, CHIEF EXECUTIVE, MAYFAIR CAPITAL
To what extent is climate change a factor in real estate conversations?
The major real estate trend for 2020 is likely to be climate and environment. The industry is finally facing up to the responsibility it has for reducing the impact of the built environment on global emissions. We expect occupiers to demand that the real estate they occupy minimises environmental impact. Buildings with weak environmental credentials will be increasingly hard to let. Landlords must also consider how they can ensure their buildings are resilient in the warmer, wetter UK of tomorrow. We expect climate and environment to lead industry discussions this year.
2020 is also likely to be another year dominated by Brexit, [although] some clarity has emerged following the decisive general election result.
MIPIM 2020 takes place at the Palais des Festivals, Cannes, France, on March 10-13.
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