YEAR IN REVIEW: Shock and stores

With Brexit and slower economic growth in the background, the real estate market also had to contend with retail disasters and a lack of stock in 2019. Yet investors’ spirits were not dampened much as they looked for real estate amid record low interest rates.

The year began with a shock. Corestate Capital sneaked out a statement about its CEO Michael Bütter’s departure under mysterious circumstances just before New Year’s Eve. So, when people returned to their desks in January, Corestate was talk of the town.

However, as the first few weeks of 2019 passed by, this turned out to be a blip – a localised in-house issue rather than a sign of the times. By the end of the year, however, another shock would be in store as both co-global heads of real estate at Aberdeen Standard Investments (ASI) were told to leave.

But CEOs at major property investment firms were not ‘calling it a day’ en masse. They were not having major ructions with their boards because of the wider economic turmoil, the direction of the market, or something even more sinister like investors no longer wanting property. On the latter point, nothing could be further from the truth.

Aviva Investors Real Assets’ CIO Mark Versey told PropertyEU that these might be turbulent times for financial markets given central banks were making U-turns on monetary policy. There was also the reality of negative interest rates, trade wars, and volatility in the equity markets. But Versey said the appetite for real estate among investors continued to be strong.

All through 2019, it was the same story on loop as investment managers repeated how clients wanted property for diversification, cashflow and better returns than bonds. To that end, not much had changed.

Blackstone was able to complete its fundraise for the world’s largest-ever global property fund at $20.5 bn (€18.63); the largest-ever German real estate transaction took place, involving the Millennium Portfolio acquired by Commerz Real for around €2.5 bn; Korean capital fanned out across Europe and struck some huge deals such as Lumière in Paris, and Fifth Wall Ventures raised the largest proptech fund in the world to date as European proptech start-ups mushroomed everywhere.

Strong appetite, falling volumes
But there was also a decoupling effect. If appetite for real estate was so strong, why did European real estate volumes decrease in 2019? Well, Brexit was partly to blame. European volumes have been falling since the June 2016 vote to leave (though they are still healthy judged by 10-year averages). This was again the case in 2019.

By October this year, CBRE said year-to-date volumes totalled €192 bn – a 13.9% drop on the €223 bn recorded in 2018. Chris Brett, head of EMEA capital markets, cautioned: ‘Investment into European real estate remains strong, but as we have seen throughout the year, volumes are softening.’ He said a lack of stock and uncertainties generated by Brexit in the UK market were delaying decision-making. ‘That aside, the market is highly liquid with large volumes of capital available to deploy.’

Brett added the market continued to see yields fall, with the exception of battered parts of the retail sector. Alexander van Riel, head of Continental Europe at CBRE Global Investment Partners (GIP), said he felt investors with real estate faced a lack of palatable alternatives, thus holding back the market. His point is: why would owners and investors sell assets without seeing a better place to recycle the capital?

Incidentally, last year, GIP entered into an agreement with Pygmalion to create a European hotel venture. On its own, this is not massively significant. However, with yield for traditional asset classes hard to come by, many investors throughout 2019 looked towards niche, alternative or specialised operational assets including residential sectors such as co-living, micro-living and BTR. There has been a plethora of deals, funds, joint ventures and platforms backed up by market reports extolling the virtues of certain sectors and the underlying drivers.

Long term, seismic social and demographic trends are making some of these asset classes seem less exposed to the wider economic slowdown in Europe. Notable in the UK student housing sector was The Unite Group’s £1.4 bn acquisition of Liberty Living Group with its portfolio of over 24,000 beds. Also in the UK residential development arena, CBRE acquired middle-market BTR multifamily developer Telford Homes for its investment and development platform, Trammell Crow.

WeWork drama
Meanwhile, in the more traditional property sectors such as offices, some shocks were to come. WeWork, which until 2019 was somewhat celebrated for being a ‘disruptor’ of the traditional office landlord/tenant relationship, itself got disrupted. In preparation for an IPO, the US company filed financial documents on the US SEC website in August, and that precipitated a collapse.

Under co-founder and CEO Adam Neumann, the firm had previously talked itself up massively. It had also become a major tenant of offices in Europe. However, the SEC filing showed the company’s true financial position was precarious and its IPO would get shelved. With a model to take long leases but sub-let on short, flexible terms to ‘members’, the Silicon Valley company had not adhered to a business model that old-school property types would swear by over a bottle of claret in an expensive restaurant. With details of massive losses and liabilities out in the open, WeWork’s valuation suddenly went from $47 bn to $10 bn. Its CEO was ousted, and WeWork faced laying off 20% of its 12,500 workforce.

Yet, what WeWork stands for is not being contested. Throughput 2019, real estate investors and advisors have been espousing treating tenants as ‘customers’. From now on, real estate needs to be approached like a service industry – the so-called ‘hotelisation’ of real estate. That phrase became rampant at industry events such as Mipim and Expo Real.

PropertyEU got its own taste of this huge trend of hotelisation. During the year, we donned jeans and T-shirts to visit a WeWork office for a special report on providers of flexible office space. We also toured an office leased by Knotel, another fast-expanding flexible office provider from the US. Knotel explained its differences to WeWork such as subletting on much longer terms and never having its Knotel branding anywhere. The major theme to highlight was that WeWork is not every flexible office provider in the world, or as the Financial Times said in a headline in October: ‘Knotel wants to be WeWork – without the ‘bloodbath’.

Retail bloodbath
Throughout 2019, there was another bloodbath to speak of: retail.

Just like with Brexit, the UK felt the effects most painfully. As e-commerce took a tighter grip, there was a conveyor belt of retail chain failures. KPMG said there had been 44 retail businesses entering into administration up to September in the UK such as shoe shop chain LK Bennett, Office Outlet, Debenhams, Forever 21, and Mothercare.

For retail property, the most controversial aspect was retailers opting to enter into Company Voluntary Arrangements (CVAs) – only possible in the UK – which allow a company to rearrange liabilities and debts while continuing to trade. A group of landlords known as the Combined Property Control Group mounted a legal challenge to Debenhams’ CVA. They argued among other things that landlords were not ‘creditors’ with respect to future rent and therefore could not be compromised. They lost the case.

In other European countries, retail failures were also witnessed, such as Canadian department store chain Hudson’s Bay. In September, the group said it would close its 15 stores in the Netherlands as well as an e-commerce site and HQ building just two years after the Dutch rollout. Canada’s Hudson’s Bay has already sold its minority stake in its European operations to Austrian investment firm, Signa Holding.

Across the UK and the Continent, logistics was the asset class that benefited from e-commerce while retail became a dirty world. This was to the frustration of those with solid strategies in areas of retail property holding up well, such as luxury shopping and factory outlet centres.

The uber-negative retail sentiment took its toll. BNP Paribas Real Estate said in November that retail investment dropped for the fourth year in a row, plunging 25% over the past 12 months to €41 bn. In the UK alone it crashed 34%, which BNP Paribas attributed to over-cautiousness as a result of the use of CVAs.

It is little wonder that the strap line for the opening panel at the ICSC’s annual conference in Barcelona in April was provocatively entitled ‘Armageddon or renaissance?’. The ICSC believes mixed-use schemes, innovation, technology and leisure will help with the sector’s renaissance and in Europe started to consider the organisation’s own evolution.

Amid the gloom, some investors were already sniffing out the opportunity. For example, our feature called ‘Malls on the mind’ in April explained how newly-formed Axis Retail Partners believes prime shoppjng centres will come up for sale in two or three years’ time and is ready to invest. Axis is backed by €500 mln from Italy’s Generali Group. Florencio Beccar, CEO of Axis, said the time will come when long-term owners of some of the best malls in Europe will reduce their exposure.

Rounding out the year
As the year drew to a close, no-one was yet forecasting an actual shock to the overall property market. In some parts of Europe, property professionals were working on deals that might translate to even lower yields than achieved so far. Warsaw, for example, has proved to be a red-hot market with record low office yields to prove it. Adventum International, a Malta-based fund manager, set a record in Q3 by buying the 10,000 m2 Renaissance Plaza office from REInvest Asset Management at a yield of 4.52%.

The CEE region as a whole presented a big story throughout 2019, and property agent Savills said investment activity has been rising steadily in CEE since 2013. Volumes exceeded €8 bn from Q1 to Q3 2019 – 54% above the five-year average. ‘We have seen an increasing willingness of international capital to enter the region,’ said Savills’ Chris Gillum, head of offices regional investment advisory for EMEA.

In October, Middle Eastern investor, Corporate Finance House Group, acquired the Day Tower office in Bucharest in its first investment in Romania. Such international groups want European property, and the takeaway from 2019 is they are prepared to travel to access it. ?

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