For us it is clear that office investors are “moving up the risk curve”. The increased appetite for risk has been supported on the one hand by more positive economic indicators and improving office market fundamentals and, on the other hand, by the increasingly competitive conditions in the core office markets. Given that we expect these trends to further strengthen in 2014, we should see a further increase in risk appetite in 2014. Essentially, we expect growth in four areas:
Firstly, in 2014 we should see a further broadening of the investable office market in Europe. In 2013 we already saw regional cities in the major markets report strong growth in investment and we expect this to continue in 2014. Furthermore, within core markets, like Central London, we expect there to be increased investment into non-core assets that have an asset management angle or that are located at the fringe. However, the largest impetus could come from markets outside the core, such as Southern Europe, Ireland, the Benelux and CEE. Nevertheless, the adage of buying non-core assets in core markets and core assets in non-core market still holds true.
Secondly, we should see more portfolio sales in 2014. Even though the volume of office portfolios fell slightly to €7.0 bn in 2013 from €8.9 bn in 2012, it increased sharply in Southern Europe. Many of Europe’s banks are still holding large real estate portfolios. This, together with other structural market conditions such as the liquidation of German open-ended funds and private funds and the maturing of ‘bad banks’ such as NAMA, FMS and Sareb, are likely to result in more portfolios being traded. Additionally, the strong fundraising by opportunistic funds in 2013 will create an investor-led demand for larger transactions and clearly portfolio transactions are one of the best ways to achieve scale.
Thirdly, 2013 has been a very strong year for fundraising by private real estate funds with opportunistic strategies. According to Indirex, opportunistic funds accounted for 49% of the record €115 bn of global real estate fundraising in 2013. The top three largest global fund raisers, Lone Star (€8.7 bn), Brookfield (€8.6 bn) and Blackstone (€6.8 bn) accounted for 20% of the total capital raised. We expect US investors to be a driving force behind the move towards opportunistic strategies as they typically demand higher returns when investing internationally. This was confirmed by the 2014 INREV Intentions Survey which found that without US investors the intended exposure to value add/opportunistic would actually have dropped.
Finally, we expect development to return in 2014. A lack of financing, subdued occupier markets and high risk premiums have held back development in recent years. Over the last five years, the delivery of new product has been below the long-term average. However, we are forecasting a 20% increase in office development completions in 2014 and again in 2015. This is not yet a full return to speculative development, as 50% of total office supply to be delivered in 2014 has already been pre-let, but it is nevertheless a welcome change. Moreover, the competitive conditions in core markets could lead to more development partnerships where core investors are securing quality assets at the development stage.
However, despite more confident markets, investors will need to keep a close watch on the impact of Fed tapering. We already experienced major falls in emerging market currencies and a sell-off in stock markets around the globe in mid-January as the Fed continued to reign-in its bond purchasing. As a result, volatility increased globally which was illustrated by the CBOE VIX S&P500 volatility index reaching a 12 month high; investors will need to remain wary if venturing into risk-on strategies.
Please view the latest:
European Office Investment Market Outlook here.