Expo Real starts in Munich today with delegates arriving at the exhibition halls amid a growing consensus that interest rates will remain higher for longer as well as a risk of recession in Europe despite hopes of a soft landing in the US.
Event organisers are predicting ‘stable’ participant numbers and nearly 1,850 exhibitors from 36 countries, only a slight fall on the 2022 edition. But those who are attending will be doing so in the hope their company’s business plan and capital structure can withstand not only rates of 6-8% but also a slide into recession.
Pertti Vanhanen, CEO of Cromwell Property Group Europe, said: ‘I think this Expo Real conference is going to be an interesting one. Eurozone interest rates are at their highest level since the launch of the Euro in 1999, creating extremely difficult conditions for anyone seeking to refinance.’
He also noted transaction volumes were down 50% in the first half of 2023 and that the market remained very quiet. ‘People are coming to Expo Real wanting to know when volumes are likely to normalise.’
While many are anticipating a wave of distress as a result, Vanhanen said the industry was yet to see this, so timing around when it is likely to occur will be a big point for discussion. ‘There are many investors on the sidelines sitting on dry powder.’
He added: ‘Following the price correction last year, I think we’re likely to hear more about the bifurcation in the office sector. Valuations of core assets in prime locations are holding up much better than non-core offices in B locations.’
Christian Bearman, partner at Arrow Capital Partners, said ‘material issues’ will manifest much quicker in this cycle than others given high carry cost, with interest coverage ratio issues emerging sooner than loan maturity deadlines, which creates a ‘market for preferred equity and funding gap solutions’.
Bearman said capital was accumulating given a mini stock market recovery, with financing also ‘stabilising’.
‘The view is that central bank tightening is nearly done, which means the time to transact is getting closer, but there is still a material gap between public market implied cap rate valuations compared to actual private market trades comps. We think that is 5.2% vs 4.7% public vs private for logistics in Europe currently compared to 2.5% in January 2022 public markets.’
He added: ‘Since January 2022 in Europe, cap rates have risen by 40%, UK financing by 400%, and European financing by 3300%; so that is a serious shock to the markets to absorb. Approximately 40% of higher interest rate impact is still to be felt globally. We will see how commercial real estate performs in a world of high replacement cost, limited overbuilding, and stable rent and demand for favoured assets, plus a solid job market, stabilised rates and surprisingly strong equity markets.’
With economic challenges all around, Expo Real said it was putting ‘decarbonisation’ front and centre, followed by other key topics of ESG, digitalisation, changing demographics, as well as urban development and the transformation of cities.
This year, the trade fair is introducing a platform called ‘EXPO REAL Decarb - make the climate change work,’ targeting start-ups, scale-ups and companies involved in ‘properties as ecosystems,’ ‘decarbonisation of the property portfolio,’ and ‘climate-neutral district and urban development.’ The focus is on innovative and practical solutions to implement future projects in a climate-neutral manner or to climate-optimise existing buildings.
On Friday, a keynote speech entitled ‘From climate risks to climate opportunities’ will be delivered by Dr. Parag Khanna, the Indian-American political scientist and founder and managing partner of FutureMap, who attracted widespread attention with his 2021 book ‘Move: how mass migration will reshape the world—and what it means for you.’
Claudia Boymanns, exhibition director of Expo Real, said the trade fair would, as ever, seek to provide a forum to address all real estate’s pressing challenges. ‘First of all, I would like to say to all delegates that we are pleased that the feedback we are receiving so far is quite positive, despite the current situation,’ she told PropertyEU.
‘It is undisputed that the real estate industry is currently experiencing volatile and challenging times. However, the past has also shown that the industry can work together to find solutions to get through such times.’
She added: ‘Expo Real has always been a platform for discussing and developing solutions not only in good economic times, but also in difficult ones. And for this reason, the trade fair could not take place at a better time. I am convinced that the participants will use the opportunity to deal intensively with the challenges there. And more than ever it is about collaboration, connections and innovations.’
Some exhibitors are pivoting their stands in accordance. German real assets manager, Patrizia, for example, has made its booth motto: ‘NEXT NOW – the value of investing in future cities.’ The company is sending 100 people. It said: ‘This is not just lip service for us, because we know that tomorrow begins today and that’s why we invest in sustainability and create long-term value.’
Newcomers this year on the fairground include the joint pavilion ‘UK Cities and Partners’, featuring Opportunity London, Marketing Manchester, Newcastle, and West Midlands. There is also Majid Al Futtaim from Dubai as a major participant and, for the first time, the Real Estate General Authority from Saudi Arabia. And there will be an Italian joint pavilion, Real Estate Italy. Romania and Bulgaria are not present this year.
Despite headwinds, some social media postings exuded excitement ahead of the three-day event. For example, logistics developer CTP is promising an appearance by German footballing legend, Bastian Schweinsteiger amid networking parties. ‘We dare you to say real estate conferences are boring, because this one is going to blow your socks off!’ the company stated.
Germany in focus
But more immediate concerns of macroeconomic uncertainty and other investment market challenges are certainly front and centre in delegate minds as they head for the Messe.
At last year’s Expo Real, cracks were already beginning to appear, especially in the German development sector with talk of projects being under water. This year, there is talk of a much bigger crisis with several developers having collapsed and building licences down 27% since the start of the year. Many exhibitors are promoting real estate developments all over Germany but they are doing so at a time when the Economist magazine is calling the country ‘the Sick Man of Europe’, nearly 25 years after its seminal cover. The magazine states Germany has gone ‘from a growth leader to a laggard’.
The most acute issue lies in the German housing sector. Many delegates are expected to comment on the country’s government recently presenting a 14-point plan to address urgently needed affordable housing, with money coming out of the Climate and Transformation Fund.
Germany is not alone with its struggles. There appears to be unfolding drama in other countries too where developers are urgently asking for government support.
Said Vanhanen: ‘Construction volumes are currently below 2008/9 levels, which is fuelling a looming crisis in the construction sector in Germany, the UK and elsewhere across Europe. The sector has literally been screaming out for government support as a result, so I think we’ll hear more about this at Expo Real.’
And yet, the shadow being cast over Europe could be much longer, still. Recession in Europe is likely to be on many delegates’ lips. Last month, the EU Commission cut eurozone growth forecasts as Germany is in recession. The eurozone economy is predicted to grow more slowly than previously expected both this year and in 2024.