DTZ INTERNATIONAL RESEARCH
[BIZ: London, October 24] According to DTZ, the range of investors involved in commercial property in Europe has never been so diverse. This weight of money will continue to push down yields and new capital will continue to flow into property as commercial lenders across the region (with the possible exception of Germany) continue to expand their property lending. The continued influx of money into property over the course of 2005 to date has been supported by low bond yields, which are linked to low interest rates expectations into the euro zone. Five-year swap rates have fallen since January and there has been a structural shift towards a low and stable inflationary environment to support this continuing trend. A return to a tight monetary policy is not expected and those looking to invest in property are feeling confident enough not to be swayed by a temporary dip in yields. The other factor influencing money into property is a strategic re-weighting of multi-asset portfolios with an increased role for property. Recognition of real estate’s stable income and potential for future growth combined with lower volatility than most other asset classes, came at a time when institutional investors were looking for an alternative to equities. In response to improved transparency and liquidity across European markets, the risk premium applied to property, or the asset class specific premium investors require to compensate themselves for additional risk, has narrowed. The growing market for indirect property investment and the possible introduction of tax transparent vehicles in the UK and Germany should for the institutional investor mean that this risk premium remains low even if it does not fall much farther. All of the factors above have helped to heighten investor confidence in property, while high demand for assets and limited availability of stock has led to a shift in investor strategy. Core investors are becoming more flexible in their attitude to asset selection and risk. This has broadened their target opportunities in terms of sector, geography and quality. Quarterly review of activity Results from DTZ’s analysis of investor activity in real estate across Europe over the last quarter show that total transactions completed over the Q3 2004 to Q2 2005 period has remained stable averaging EUR 27 billion per quarter. In Q2 2005 the total volume of European purchasing was EUR 25.6 billion. Historically, 2004 was a record year for commercial real estate investment in Europe, however it must be noted that the figures were considerably skewed by the Canary Wharf transaction. Thus far 2005 is on track to fall slightly behind investment levels seen in 2004 but to surpass annual average volumes between 2000-2003. Q3 2005 is forecast to see transaction volumes of just over EUR 27 billion. Driven by lack of suitable domestic product, crossborder activity is a major influence in real estate investment. In Q2 2005, crossborder real estate activity represented 29% of total investment whereas historically (2000-2004) it has represented on average almost 34% of total purchasing volume. In 2000, crossborder activity represented 26% of total purchasing increasing each year to reach a peak of 42% in 2004 owing in part to the Canary Wharf transaction in Q2 2004. German investors transacted EUR 1.1 billion outside of their domestic market in Q2 2005 compared to EUR 2.1 billion in Q1 2005. On average German investors purchased EUR 2.7 billion of non-German real estate on a quarterly basis between Q3 2004 to Q2 2005 period. North American investors made up primarily of US opportunity funds increased their activity in Q2 2005 compared to Q1 2005 to reach EUR 2.8 billion. Their purchasing however remains below the levels of activity seen over the 2000-2004 period. A rolling total of purchases by lot size over the last four quarters demonstrates the importance of large transactions over EUR 100 million in European real estate. Many of the largest German deals have been sale and leasebacks as a result of a number of distressed sellers. These include two over EUR 200 million in Q4 2004 and two between EUR 100-200 million in Q1 2005. Q2 2005 saw four sale and leasebacks over EUR 100 million across Europe, one of which was in Germany. Of the four sale and leasebacks over EUR 100 million, which took place in Q2 2005, all but one were undertaken by crossborder investors. Particularly active in taking on assets from German corporates seeking to release cash are the opportunity funds. Q4 2004 saw Fortress’s Guernsey based investment company Eurocastle purchase EUR 300 million of assets from Deutsche Bank in that year’s largest commercial German transaction. France has seen a number of deals between EUR 100-200 million in Q3 and Q4 2004. These took place almost entirely in the Isle de France region. Likewise the transactions in excess of EUR 200 million recorded also took place in the Paris and surrounding areas. The UK saw the largest volume of purchases in excess of EUR 100 million. Investors into the UK were a diverse group although private investors ranging from private property vehicles to private property companies and institutions were the most active. By contrast activity in the French market particularly at the larger lot size end of the spectrum was dominated by public investors namely the German open ended funds and the quoted property vehicles made up for the most part by the French SIICs. John Defauw, Managing Director of DTZ (Belux): “We firmly believe the dramatic yield compression across Europe is sustainable whilst interest rates remain low and the rising liquidity and transparency meets investor demand. Property as a growth asset with defensive qualities – including low volatility and inflation-hedging benefits – will remain a key tool in wealth protection. Looking ahead, we expect to see continued high demand for real estate based assets and increasing cross-border activity.” Joe Valente, Director of DTZ Research adds: "The level of cross-border activity is set to rise further as investor appetite continues to rise and signs that investment grade product is also improving partly fuelled by distressed sales in Germany. However, perhaps the most extraordinary feature of the current cycle is the range and type of investors active and relatively competitive in the market place."
Investor demand for pan-European real estate remains strong despite the continuing yield compression across most European markets says international property adviser DTZ. EQ, a new quarterly bulletin analyzing pan-European investment activity in real estate published by DTZ Research, reveals today that yields over the course of 2004 fell across key European markets by an average of 26 basis points. Some of the main capital cities experienced much greater compression, often in the range of 50/75 basis points. This trend has continued into 2005 with yields in most markets, including Paris and London’s West End and City office markets, continuing to come in.
http://www.dtz.be