Four real estate transactions in Europe that show the impacts of Covid-19
With the onset of Covid-19, we’ve faced an unexpected shock. Though the pandemic has challenged certain sectors such as hospitality and retail, it has also proven the resilience of core assets, driven a surge in online retail (and by association, benefited the logistics sector), and accelerated existing trends such as sustainability.
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But how are these changes playing out on the ground? Here are four real estate transactions in Europe that represent these shifts.
1) The loan provided by Aviva Investors to CLS Holdings indicates that sustainability-linked loans are incentivising green initiatives
Periods of significant uncertainty can accelerate change and force us to think differently. The debt market is not insulated from that. For some time now, the term ‘green loans’ has been used as a generic reference for debt facilities with a conscience, when in fact, green loans are any type of loan instrument made available exclusively to finance or re-finance green projects.
But the sustainability-linked loan is a more recent development. For this loan product, there is no specific requirement to use proceeds to fund green projects, but instead, the loan includes a downward margin adjustment if the borrower achieves specific sustainability or ESG-linked key performance indicators. Key Performance Indicators for sustainability-linked loans include, but are in no way limited to; using efficient architectural designs; an increasing amount of energy derived from solar power; retrofitting buildings to enhance energy efficiency; and social KPIs linked to ensuring the mental health and wellbeing of the end user.
A recent example of this was the loan provided by Aviva Investors to CLS Holdings, where a margin reduction was agreed if the borrower hit pre-agreed KPIs linked to sustainability. These, for example, included an increase in energy being provided by solar sources during the term of the facility.
The fact that lenders are beginning to offer loan products which take environmental and social considerations into account is hugely positive.
According to Lisa Attenborough: “Buildings are responsible for approximately 40% of energy consumption and 36% of CO2 emissions in the European Union – however, Europe is leading the way in the provision of sustainable finance. European borrowers accounted for 63% of overall sustainable lending during the first half of 2020, and this was led by sizeable facilities in Italy, Denmark and Germany.”
2) Airpark Berlin is an apt example of how the logistics sector is benefitting from the surge in online retail
Real estate returns remain attractive in relation to other asset classes, but we cannot ignore the fact that the pandemic has created a heightened level of uncertainty, which is now feeding into revised investment strategies. For many, the focus remains to be on ‘beds and sheds’, but with more pressure to invest than before.
Mike Bowden, Partner, Co-Head of the European Capital Markets team explains: “The industrial sector is the only mainstream sector to show an increase in year-to-date volumes, with rent collection statistics in both the residential and industrial sectors remaining extremely robust. And, as expected, the logistics sector has benefitted from a forced shift to online consumption under lockdown restrictions, with data points showing an increase in pricing compared to pre-Covid levels.”
Airpark Berlin is an apt example of this. The last-mile logistics facility is extremely well-located next to the new international airport, and it ticked all the boxes for core logistics investors. Pre-Covid pricing was circa 4%, reflecting €118 million. Now, however, the opportunity has received in excess of 20 bids and is close to closing at 50 bps ahead of this, reflecting 3.5% and €136 million.
3) Weisses Quartier in the Wierksweirtal district of Munich highlights how core, well-let, modern office assets have held up extremely well
Office space forms the bedrock of most institutional funds, and currently, the sector’s future performance is perhaps the hardest to predict.
Mike Bowden explains: “In terms of pricing, we have seen little evidence of an outward price shift, with the exception of a few deals where buyers have benefited from specific situations – such as timing or vendors’ fund strategies. What is clear, however, is that the core end of the market has held up exceptionally well, with a number of transactions pointing to an increase in pricing across a few of the major European markets, such as the top five German cities, and Paris.”
A great example of this is Weisses Quartier in the Wierksweirtal district of Munich. The asset, which was sold by Infrared, is a full refurbishment set to be completed imminently. It has been 99% leased, with 36% of the income secured against government tenants, and the remainder secured against well-performing tech covenants. In addition, the deal boasts a WAULT of eight years – ticking most boxes in terms of investment criteria.
The asset was in the process of being marketed with pre-Covid pricing expectations of circa 3.25%, reflecting €255 million. The process was pre-empted by Deka, who agreed a price of 2.9%, reflecting an inflated €280 million. This is a perfect of example of how core, well-let, modern office assets with sustainable income profiles are still in hot demand.
4) Backed by Digital Colony, Vantage Data Centres’ $2 billion expansion into Europe highlights the Covid-inspired surge of cloud application conference calling
The data centres sector has genuinely benefited from the pandemic, which is unsurprising given our exponential increase in cloud application conference calls while working from home. The likes of Microsoft and Google (who have experienced a 500%+ increase in cloud application usage through Covid-19) are of the opinion that the new normal will see at least a 200% increase on data centre demand and usage compared to pre-Covid levels. For context, it’s worth noting that data centre REIT performance has been running at circa 10% year-on-year for the last six to seven years.
Stephen Beard, a Partner in Knight Frank’s Data Centres team, explains: “Covid-19 does not appear to have dampened investor appetite towards data centres. This year, Vantage Data Centres, backed by Digital Colony, undertook a $2 billion expansion into Europe, with one of the highlight acquisitions being the Welsh wholesale operator Next Generation Data (NGD) for circa £500 m reflecting 19 times EBITDA (earnings before interest, taxes, and amortization).”
Likewise, in March, Digital Realty completed its purchase of Interxion in a deal worth $8.4 billion – becoming one of the largest data centre mergers on record. In addition, March also saw Swedish infrastructure fund EQT complete its purchase of Zayo in the largest syndicated private equity deal at $14.3 billion. These combined deals make the period of M&A activity under Covid-19 one of the busiest periods in data centre history, with over $25 billion of total data centre investment expected to complete in 2020.
These insights were first explored at the 2020 European Breakfast. Click here to view an on-demand version.