How is cross-border investment evolving in Europe?
Our capital gravity model has predicted that in 2021, five of the top 10 destinations for capital will be in Europe, including the UK, Germany, France, the Netherlands and Finland. Likewise, five of the top 10 sources of capital will be in Europe, such as Germany, the UK, Switzerland, France and Sweden.
5 minutes to read
Mike Bowden, Partner, Co-Head of the European Capital Markets Team, sheds light on how this will this play out over the course of next year, how Covid-19 may have slowed activity in the short-term and why Germany might be a safe bet for investors.
Europe has not been immune to the pandemic impacting upon in investment volumes. Year to date investment volumes were down -18.5% by the end of Q3 2020, according to RCA, on the same period over the previous year. However, compared to the global reduction of volumes of -32% over the same period, Europe looks relatively resilient. The region also saw a rebound of investment activity in Q3 2020 by +8% compared to the previous quarter. This is despite many investors, particularly some Asian investors, being hampered in their ability to transact unless they are able to physically view the real estate – except in unique cases.
We've also seen a drop-off in the vitally important US capital. It's still very much there, and looking to try and invest, but we'll start seeing that US capital being deployed a little bit more frequently as we go into 2021 and we see more liquidity return to the market. This will be led by those groups who have European asset management arms or, indeed, local offices, which will enable them to view and underwrite the real estate from in-country.
For example, one group that was very dominant over the last 12 to 24 months were investors from South Korea, however, a combination of travel restrictions and a steady erosion of hedging benefits has dampened their activity. What we have seen is that the product that would typically appeal to this group of investors, such as the longer secure income deals, has been picked up by other capital sources, which has kept this area of the market particularly active.
When you look at where investors have been buying, and which groups of investors have been buying, it does, for me, split crudely into two groups. The large German open-ended funds and smaller German property companies have remained extremely liquid. They've had constant inflows throughout the pandemic. They used this period of uncertainty where competition has become somewhat limited, as an opportunity to acquire core product. As a result, the core-end of the market has remained relatively robust.
There are a huge number of data points, particularly in the logistics and living sectors highlighting that yields and capital values have risen above where they were pre-Covid. This is also the case in the office sector, which is where I focus, and has been under increased scrutiny over the past eight months for obvious reasons. There are a number of jurisdictions where we can now point to pricing being at, or in some instances, ahead of pre-Covid pricing for core, well-located assets secured against sustainable income, supporting the argument for a flight to prime.
Differences between Europe and the UK
In a normalised market, I'd probably spend two or three days a week in one of the European jurisdictions with our in-country offices, looking at product, pitching, looking out for new ideas and meeting clients. It's one part of the job I really enjoy and clearly over the past few months travel has been all but impossible.
But we have been travelling where we can. I was in Berlin last week, and fortunately for us, Germany is the most active European market and still remains a destination where we can travel from the UK without quarantine (accurate at the time of writing). I think there is a stark difference to what we're experiencing here in the UK and what's going on in Germany.
But I think it's important to point out that, with Germany being a federal state country, there are notable differences depending on which state you visit or indeed live and work. Within Berlin, what I experienced last week is that as a business we were at capacity in our office being back to 100% occupancy. In fact, most offices in Berlin were at around 80% or 90% in terms of occupancy. When you look at mobility statistics, they’re pretty much back to pre-Covid levels. It's a really good sign for the market.
Under the lens of the near-neighbours trend, investing in Germany has been a huge benefit for Berlin. In fact, the German funds have been buying very aggressively in their own country. And also, on top of that, it's important to point out that we've also seen a large amount of activity in Germany from core French institutional capital.
Historically, going back a number of years, French domestic capital was primarily focused on its own domestic market, and over the last few years, we've seen this group of investors increasingly look to diversify into the overseas core Western European markets. With consistent inflows into the funds, appetite for core has remained strong. We've seen a number of the SCPI funds, and the insurance money looking to buy into Germany, specifically. Meanwhile, Paris has performed extremely well during this downturn.
But ultimately, there are differences between what we're experiencing here in the UK and in Germany. They've controlled the pandemic somewhat better, and also the economy has performed better than all of the European neighbours.
If you're going to invest now, the likelihood is you'll invest into core and you'll try and look for that safe-haven economy, with Germany for the moment looking like a very safe bet.
These insights were first explored on October 2nd, in the webinar “Commercial Conversations – Active Capital – Capital Gravity.” Watch the full discussion now.