Global investors are increasingly looking for alternative routes into Europe’s booming commercial real estate markets as the hunt for yield heats up.
Europe pulled in US$81 billion of foreign capital from investors based outside the region last year, according to JLL. In contrast, overseas investors spent US$44 billion in the Americas, and US$15 billion in Asia Pacific.
The popularity of real estate in major European cities is driving the use of a wider range of investment vehicle structures and encouraging investors to explore capital cities in Central and Eastern Europe, says head of international capital at JLL in EMEA.
“While direct investment is still the main route, competition for real estate across the continent is shaking up the way global investors – particularly Asian newcomers – behave.”
With Asian capital accounting for a significant amount of global capital flows into European real estate, growing numbers of Asian investors are joining forces with in-country experts to deliver business plans.
“We expect that more joint ventures, club deals and partnerships between Asian investors and European experts will happen in the coming year,” Bowen says.
Canadian investors have also been active in the region and use a similar strategy.
“Canadians remain a leading light in cross border capital – last year was a record-breaking outbound year for them,” says Bowen. “Their model of partnering with local experts in JVs with pan European investment managers continues to be the preferred route and it works well.”
Big demand, low supply
A decade into a property cycle, the availability of stock is lagging rampant demand. Global fund managers are sitting on a record level of capital allocated to commercial real estate, with US$295 billion of dry powder at the end of 2018, according to Preqin.
Europe’s major cities remain a favourite destination for international investors. London, Paris, and German cities all recorded a higher proportion of cross-border investment in 2018 than their respective 10-year averages, according to JLL data.
In Munich, 59 percent of commercial real estate investment in 2018 came from outside Germany, compared to a 10-year average of 33 percent. Paris saw over 41 percent of investment come from abroad last year, up from a 35 percent average.
However, the presence of domestic capital should not be dismissed – with both large French and German institutions continuing to invest in their own markets and across Europe, Bowen says.
“There’s a healthy mix of domestic and international capital in Germany’s major cities and of course Paris,” he says.
London, despite a “pause for thought” as negotiations over the country’s exit from the European Union continue, is still popular with global investors.
“Driven by transparency, London – and indeed the big cities of the UK – remain high on investor wish lists,” says Bowen, highlighting that London was, for the second year in a row, the most liquid global real estate market.
A lack of clarity and certainty, however, is a stumbling block right now – although through the eyes of investors in comparatively more volatile economies, Brexit is a small issue to contend with.”
More widely, Europe’s political uncertainty may seem off-putting. However, from a global perspective, the continent remains a sound choice, says Bowen.
“The U.S. market is dominated by domestic investors, the key cities of Asia are equally sought after by domestic capital and with the added currency benefits, Europe is still in vogue,” he says.
Looking further afield
Yet as equity struggles to find a suitable home in Europe’s intensely sought-after cities, investors will continue to push into new markets like Budapest, Prague and Warsaw in the search for higher yields.
Last year, the Polish capital made its debut in JLL’s top 10 global cities for cross-border investment.
“Most investors are now familiar with Germany or France – but a short drive away from some of those markets, new opportunities exist,” Bowen says.
“However, for now, you’re unlikely to see global investors go beyond core, safe assets in those markets.
The preference for top quality real estate – particularly offices occupied by stable companies employing talented staff – remains a key factor.”
Click to read about why Europe’s listed real estate companies need economies of scale.