Emerging trends in Real Estate A global view - PwC

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1 www.pwc.com/emergingtrends Emerging trends in Real Estate A global view Key themes for global investing in 2013. June 2013

2 A global view New York Emerging Trends described the amount of foreign capital in the city last year as London London remains the pre-eminent investment destination for safety-seeking Munich German cities scored highly in Emerging Trends European top 10, a confidence Tokyo Tokyos office market is recovering after three years of decline. Landlords reported breathtaking and the early months of global capital. Despite a competitive re-enforced by almost $9bn of investment rental increases in central wards of 13% in 2013 have proved no different. But new investment market and low office yields, in the market since the survey was the last quarter of 2012, positive news buyers are facing a competitive market valuations remain positive compared to conducted. Offices and hotels have been a thats anticipated to continue. The market and, as in London, will need to take more bond rates; offices offer a spread of 218 focus of investors attention. Munich real is performing well against 10-year risk to get capital invested. Condominium basis points over 10-year government estate is seen as a strong, liquid market for government bonds; spreads are around development is likely to be popular for bonds. Londons West End market is global capital and investors can find yields 353 basis points making real estate an those seeking high-powered yields as especially attractive, where capital values of up to 300 basis points over 10-year attractive option for investors. demand for luxury apartments outstrips for offices increased 0.8% and total returns government bonds. Office rents increased supply. improved by 1.1% in March, according to 3.3% over the year to March 2013 . consulting firm CBRE. ETRE 2013 US ranking ETRE 2013 Europe ranking ETRE 2013 Europe ranking ETRE2013 ranking 2nd for investment and development 3rd for investment and development 1st for investment and development 2nd best office location San Francisco This US city topped the league table in Jakarta Sydney Emerging Trends on account of growth and A robust Indonesian economy is boosting Australia received about half of all real a strong jobs outlook. Retail space was business and consumer confidence. estate capital placed by funds in Asia in identified as a good buy, as well as Emerging Trends interviewees rated the 2012, according to consulting firm CBRE. apartments. But in recent weeks, San city as the top destination in Asia Pacific Wide yield spreads combined with Francisco registered a 40 basis point for 2013; a prediction that has been borne divestment by institutional and decline in vacancy. First quarter out during the first quarter of the year as international sellers are big draws. The transactions showed foreign investors to rental increases continue. Central Business prognosis for 2013 is also positive; interest be net sellers in favour of select secondary District (CBD) office development is an rates, cut to record lows, are likely to help markets such as Houston, Seattle, Phoenix attractive investment at present; demand drive yield compression in its real estate and Hawaii. for prime offices from banks and markets. international companies are rising. ETRE 2013 US ranking 1st for investment and development ETRE 2013 Asia Pacific ranking ETRE 2013 Asia Pacific ranking 1st for investment and development 4th for investment and development 2 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 3

3 Confidence Monitor Ever since the collapse of Lehman Brothers, businesses around the globe have been Leader focused on survival. But this years Emerging Trends 2013 showed confidence is returning. Heres how interviewees expectations for the months ahead shaped up U.S. & Canada The Emerging Trends in Real Estate reports - produced annually by Craig Hughes Then* PwC in association with the Urban Land Institute for the U.S, UK & Global Sovereign Wealth Fund Interviewees seem to [have] come to terms with Europe and Asia Pacific - represents a crucial barometer of Real Estate leader the markets muddling-along pace, expressing sentiment towards the outlook for real estate. It is based on UK cautious optimism while abandoning hopes for a hundreds of interviews with the most senior property big bounce. professionals, and stands as the market leading insight into the Jan Muysken industry across the globe. Global Sovereign Wealth Fund Leader Now** Abu Dhabi Investment volumes are on the rise in the United Here, for the first time, we have drawn together those regional States, with the hotel sector seeing a particular insights into one publication. The aim is to focus on the most Kees Hage resurgence. Multifamily housing also continues to relevant trends and investment opportunities for the benefit of Global Real Estate Leader outperform, accounting for 37% of all deals in Q1 to those organisations with a truly global perspective. Luxembourg Q3 2012. As capital flows into real estate are forecast to reach $500bn by the year-end, it seems an appropriate moment to understand Simon Hardwick where that equity is heading, and why. Emerging Trends in Real Estate Project Leader Asia Global funds are most prominent in this surge in activity, and UK Then* were the largest cross border purchasers in the first quarter of On the one hand, sentiment in the region is fairly 2013. Increased investment has been recorded by Real Capital Uwe Stoschek positive. At the same time, finding assets to buy at Analytics in Europe and the U.S during that time rising by $15bn Global Real Estate Tax Leader, EMEA Real a price that reflects what is perceived to be a good on the same quarter last year. But this growing interest and Estate leader risk-adjusted return is another matter altogether. confidence presents new challenges to those seeking to access the Germany worldwide market. Now** R. Byron Carlock Jnr Deal volumes (excluding Chinese land deals) are Many global investors remain focused on prime assets, but, in National Real Estate Leader running at around the average since 2007 of $26bn cities like London and New York, competition is fierce USA per quarter. Within that, however, there has been a particularly for core product. Which strategies, therefore, should shift away from offices toward retail. investors now adopt to navigate both their target markets and K.K. So those they may not have considered before? Asia Pacific Real Estate Leader Hong Kong Europe This publication is an exploration of some of the ways investors Then* are working today. As a truly global firm, our Real Estate team is Respondents are more at ease about the economic the ideal partner to help ensure strategies are well designed and picture. Last year, interviewees were fearful to act, effectively executed in a joined up way; whether that is help with concerned Europe was on the precipice of absolute strategy, structuring acquisitions, finance, due diligence, legal, implosion. But businesses now believe its now tax, reporting or cost mitigation. important to focus on the day-to-day and to navigate the market as best they can. I very much hope our insights will provide you with useful ideas. We are committed to help our clients to identify and take Now** advantage of the market opportunities and look forward to the London attracted 30% of Asian exported capital in chance to explore these with you. the first three quarters of 2012, up from the average of 25%. This could reflect the fact that heightened Finally, I would personally like to offer thanks to Jan Muysken, risk in the Eurozone has driven capital flows to the PwCs Global Sovereign Wealth Fund Leader and his team for UK. their support in making this project possible. *Emerging Trends in Real Estate Craig Hughes, Partner, PwC Real Estate **CBRE Global Investors, Global Vision, Q1 2013 4 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 5

4 Briefing: strategy Moving the needle Across the globe, Almost five years on from Lehman Brothers collapse, global institutional Spotlight: strategies for 2013 investors are capitals confidence appears to be Europe inching along the returning. Interest in higher-risk assets or appetite there for secondary stock, there s debt available to risk spectrum. But Higher risk strategies have returned or are locations in the UK converted into deals during the first buy it, says Joe Valente, head where are the best being explored; value added vehicles have become the most sought-after fund type by quarter as sales outside of of research and strategy at JP Morgan. opportunities? private real estate investors and markets London rose by 11% on the previous year to $1.3bn, across the US and Asia are registering according to LSH Research. DTZ is predicting improved increasing investment volumes outside fortunes for the UKs wider capital cities. For large global investors, secondary property market moving beyond safe cities and too, where it foresees that Almost half of investors in new funds are prime product is not easy. increasing comfort with risk looking to commit to vehicles that follow However, recent data suggests will lead to an improvement in an opportunistic strategy over 2013, some of these gateway centres values and capital growth for according to Preqin. While, value added are offering good that market outperforming funds raised almost one fifth of the total secondary opportunities. prime from 2015. capital secured by all closed-end private property funds last year. Over the last eight months, On the continent, the picture is yield spreads between prime different. Pricing of secondary This emerging trend follows a five-year and secondary in London have assets has not yet adjusted focus on core assets and locations. But narrowed from a 450 basis enough. In many markets, Andrew Moylan, Manager, Real Estate point gap in 2010 to 300 today, secondary property needs to data for Preqin, says concerns over the according to CBRE. de-price by a further 10-20%. pricing of prime assets, combined with This will take a while to work improving performance of value added It shows that, not only is through, says Monika Ward. funds have boosted confidence. Value- added property investments are pro- cyclical investments, so they benefit from +11% an economic recovery, however weak, says Monika Ward, Deputy Head of Research and Strategy at Axa Real Estate. Typically, the tactic is to hold over a period of three to seven years, with leverage ranging between 40-70% loan to value and to target a net return of 10-14%. $1.3bn Investment trends in the U.S. markets reflect that capital is being more exploratory. Alistair Meadows, Director of International Capital Group, Asia Pacific at Jones Lang LaSalle says Asian capital is struggling in New York and San Francisco because the returns dont hit required hurdle rates. Investors have Sales outside of London rose during the first quarter on the previous year therefore started to focus on the second tier markets like Chicago, Houston, Seattle. 6 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 7

5 Expansion tactics: Oxford Properties Group Second-tier locations ranked highly Europe in this years Emerging Trends, including Jakarta, Kuala Lumpur Investors on a European expansion trail tend to follow a traditional journey - beginning in London, then to and Chinas secondary cities. the continent, without stopping at regional markets Alistair Meadows, Jones Lang LaSalle along the way. Spotlight: strategies for 2013 But when Canadas Oxford Properties purchased Readings Green Park for around 400m in November Diversified European Asia Pacific: 2011, it showed it was determined to be original in its portfolio strategies investment horizon of a typical approach. Second-tier locations ranked superannuation scheme, it G erman offices Buy in fringe-CBD highly in this years Emerging said. The investment in the out of town business park locations in Munich, Berlin, and Trends, including Jakarta, Oxford Properties first investment outside London Hamburg Kuala Lumpur and Chinas Emerging markets such as since entering Europe five years ago - required active Paris 20-District offices A deferred secondary cities, as investors Taiwan and India all management over the 1.4m sq ft of space, a large cyclical play. Strategy based on the hunt for opportunistic returns. experienced strong growth proportion of which was unoccupied for a decade. deterioration in tenant demand in the rates in 2012, according to CBD having a geared negative impact The confidence in value added DTZ. The real estate arm of the OMERS Worldwide Group - and then a rapid recovery. Proposed strategies is reflected in Preqins which is developing Londons Leadenhall Building in a entry at the end of 2014 latest data. One hundred and The majority of investors joint venture with British Land and St James Market Amsterdam office investment eight funds based in Asia Pacific 1 with the Crown Estate purchased the business park Vacancy and economic risks are already have an interest in value added expect positive returns of as a complement to its Central London portfolio. starting to improve in the CBD Three emerging markets vehicles, particularly those that between 0-9% across all regions [globally]. This is more UK regional and South East are investing in Asia. Almost Kuala Lumpur: skewed towards higher returns Oxford Properties believe the Thames Valley which prime office investment takes half (41%) of those institutions Industrial is Kuala Lumpurs best performing sector. It across North America and in describes the counties and towns between advantage of demand rippling out from were superannuation schemes registered 7% of rental growth and 6% of capital value particular Asia Pacific where Oxfordshire and London delivers a middle way for London and the stronger regional office based in Australia. growth in 2012, according to Colliers International. 42% of respondents expect overseas investors seeking to secure yield advantage markets The most active sectors are logistics and small and returns of between 10 and while minimising increases in risk. The figures Italy and Spain offer opportunities to The long-term nature of value medium enterprises. Foreign firms, especially from 19%, says Kate Barrow, DTZ support this; data shows vacancy in this region is 16%, buy as the markets rapidly-approach a added property funds Singapore, are meanwhile setting up operations in Head of Asia Pacific forecasting. with prime space at 4.3%. cyclical market trough. This applies to complements the long term well-established industrial parks that have good both offices and shopping centres, but infrastructure and connectivity. 2 Paul Brundage, Executive Vice President, Senior only at the prime end (quality and Managing Director, who opened the London office in location) 2008 says: There is a different occupier profile in the Dublin office investment is a Thames Valley. We were thoughtful about what the recovery play as the market bottoms out Houston: opportunities might be as opposed to just buying from an historic low. Only buy the Houstons fast-expanding energy hub is attracting assets that came up for sale. best-occupied properties in the CBD, buyers seeking higher returns from U.S. property. given the high vacancy risks Non-U.S. firms - including Allianz and Tel Avivs The area has a higher income yield than London, an A European logistics investment Menorah Mivtachim Holdings - have acquired educated workforce and proximity to great strategy capitalises on the changing $2.83bn of offices in the past three years, according to transportation, he adds. Since acquiring the park, demands brought about through Real Capital Analytics. Oxford Properties has registered 21 leasing internet sales. Acquire smaller units in 3 transactions at Green Park from IT, telecoms and growing conurbations that will be pharmaceuticals firms, including the Cisco surrender supported by the rise in demand and a 139,000 sq ft letting to Chinese telecoms Chicago: company, Huawei. Source: Axa Real Estate South Korean investors have been active buyers in Chicago, driven by their search for the high yields that But its investment in Reading does not necessarily New York offices cant offer. Investors from the country herald the start of a wider European strategy; accounted for the second-largest volume of Brundage says Oxford firmly believes in having boots acquisitions in the city in 2012. In May, John Buck Co on the ground before investing in new markets, even teamed up with a syndicate of South Korean investors core capital cities. to buy the high-rise office tower at 161 N. Clark Street for $348m. 8 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 9

6 News in brief: Finance Asia Pacific: United States: Attractive debt terms are The US real estate finance continuing to support market may be returning to investment volumes in the Asia health but institutions remain Pacific region, with all in costs committed to vehicles focussed for a prime borrower in on debt. Briefing: debt markets now as low as 1.5% in Allocating capital to a professional Japan and 2.5% in Hong Kong As CMBS issuance hit $48bn in manager is an alternative route that has and Taiwan. late 2012, Prudential Real seen the creation of various debt vehicles Loan terms Estate Investors raised $805m and existing institutional investors setting Paul Guest, Head of Research of discretionary capital for a up third party management vehicles. and Strategy at LaSalle US-focussed debt fund. Investment Management says: The investor must then satisfy itself on the Debt is readily available in The firm expects $1.8trn in Despite global interest alignment, specialised capabilities, allocation and diversification strategies of Japan and banks are mortgage loans coming due in real estate lending, its chosen partner. These are not competing quite aggressively. over the next several years as property owners search for debt strategies require straightforward decisions in a market that is at the early stages of development, But Guest adds that Japanese reliable and trusted sources of specialised skillsets, where rating, benchmarking and banks are also increasingly releasing assets where interest capital. bringing together real performance analysis is lacking and market data on lending is limited and is not being serviced and value Oaktree Capital Group also estate, finance and difficult to prove for accuracy. is being eroded. This is an opportunity for value added kicked off the year with fundraising for a vehicle aimed fiduciary capability. Whats on offer? investors to return and pick at $3bn that will seek to take Emma Huepfl a Opportunities for private debt investors up properties; the majority of buyers coming back to control of companies through the purchase of loans and start with core real estate lending where Principal at Laxfield loan assets are backed by large real estate Japan are not focused on equity stakes, primarily in the Capital explains how to investments with predictable, often rated these assets and are looking for core instead. US. income streams. European banks rarely navigate the landscape compete for the very large financing As Emerging Trends 2013 Interest rates have also fallen predicted: Recapitalizing requirements of these sorts of assets. sharply in Australia, with the well-leased, good-quality Reserve Bank of Australia assets, owned by overleveraged Mortgage providers who can fund cutting interest rates to a borrowers, who are upside amounts of 100m or more and have an record low of 2.75% in May. down financially [are good appetite to hold these investments are The reduction has made investment bets]. This ongoing better positioned to take this business. All REITs more competitive, feast of opportunities has in yields for these core loans (margin says Alistair Meadows, plenty of legs because banks It seems theres never been a better time to 20 years. The standard bank market, by priced over 5 or 10 year gilts or swaps) Director, International continue to engage in extend be a lender in the commercial real estate contrast, was based around five-year currently trade at between 3 and 4%. Capital Group Asia Pacific, and pretend loan strategies as market, and a wide range of international floating rate loans with interest rate risk Jones Lang LaSalle. more mortgages reach their investors continue to examine the hedged via swaps. For more modest appetites, there is a maturities. opportunity. middle ground of funding where UBS reported in March that Market take up of new capital has been individual loans vary from 10m to 75m domestic banks in the region Lots of real estate has Latest data demonstrates interest in debt is slow because many borrowers consider and banks still form a substantial part of remain well positioned to income-generation potential increasing. Globally, 34% of investors are fixed rate - with yield maintenance the market. Risk positions top out in the administer further credit but has been compromised now looking to allocate capital to debt provisions - a trading encumbrance. senior market at between 55 and 65%. support. Even in China, where by distressed capital funds, compared to just 8% in 2011, Gaining market share in this area depends the government has imposed a structures. Look for distressed according to Preqin. Another barrier is route to entry. The most as much on deliverability as price lending embargo, domestic borrowers, not distressed successful new entrants have been competitiveness; those with a banks have been subsequently properties. Mezzanine debt This interest is heavily focused on Europe, established overseas lenders such as the US straightforward decision-making structure allowed to resume their credit and preferred equity positions but is most apparent in the UK, where a life companies with a specific allocation to have much to gain. expansion, it said. will offer particularly good combination of higher margins, greater private debt. These investors are risk-adjusted returns. transaction volume and ease of execution, transferring proven lending skills from an Returns in the mid-market reflect the make it a natural first step for new existing platform, often with the help of divided nature of the commercial real European commercial real estate mortgage local intermediaries or a local team. estate sector, where the gap between investors. prime and secondary has spread to Debt is quite freely available in Slower to capitalise have been institutions exceptionally wide levels. Funding for But converting interest into deals is not without recent lending experience. Setting London offices in good locations, even with Japan and banks are competing straightforward. Much of the new capital up a team, a strategy, a credit process and relatively short income streams is widely quite aggressively targeting the UK has fixed rate and longer gaining credibility in the market is a time available and even where the assets are duration requirements of between five and consuming, expensive process. transitional. 10 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 11

7 U.S. investors, driven to seek investments in the UK by yield compression in their own mortgage market, By contrast, lenders are largely avoiding Debt - the next chapter: are likely to continue regional offices or retail (except the very to increase their best), and trading volumes indicate that a There were two fixed rate lenders in margin premium of 100-200 basis points Europe in 2007. But there are now more presence. does not yet offset the negative sentiment than ten. Despite this, overall lending and refinancing risk around these sorts of volumes were lower in 2012 than in 2011. assets. Yields on these mortgages also vary markedly depending on the sponsor There is a bottleneck around the entry quality. point for new investors seeking conservative prime assets to gain traction The distressed and secondary loan and experience. Margin compression has markets offer higher yield, but suit only been significant as new entrants price first those with risk appetite and real estate deals to win business. This is slowing new capability. Large portfolio sales from banks lenders, as they must compete with lenders attract many bids and suit specialised who have proven execution skills and are investors with large resources for analysis targeting well-capitalised investors with and the management teams required for access to a wide range of financing detailed documentation analysis and asset relationships. strategy. US investors, driven to seek investments in A disparate range of funding has targeted the UK by yield compression in their own the mezzanine sector, raised through mortgage market, are likely to continue to funds, public issues and via direct increase their presence, subject to deal allocations. Target returns in excess of opportunities and continued yield uplift. 10% do not make this natural funding for a well-capitalised investor buying secure, More European institutions that have well-let assets. So investors need to be expressed an interest should undertake positioned to deal with exit risk and have a deals, creating a further pool of liquidity. strategy for working with, or replacing the Asian capital, particularly from low existing management if the equity position yielding markets, is showing strong is heavily eroded. interest. Like the global equity pool targeting London assets, the range of debt investors circling the UK market is extraordinarily wide. How to create a successful debt product 1 Be realistic and patient; the market is adjusting carefully and investments are slow to book 4 Avoid the pay structures that rewarded origination over long-term performance 2 5 Expect caution from borrowers jaded by dealing Be prepared to shift strategy as pricing changes with retreating lenders and the inadequacy of and opportunities develop. This needs to be a CMBS structures to deal decisively with problem multi-year strategy with flexibility around returns loans that allow you to be patient in a thin market and act quickly when transaction levels rise. 3 Expect scrutiny before take up. Ensure that the combination of new skills required - detailed Laxfield Capital is a commercial mortgage investment knowledge of real estate, lending, and fiduciary management business. Clients include leading global investors, capability - are all satisfactorily represented in US Life Companies and European Banks. It recently announced your platform. the Laxfield Lending Programme with initial capital from GIC. 12 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 13

8 Analysis: markets Going local Emerging Trends Capital seeking European real estate is This local thinking which demands becoming ever more global in nature, but investors drill down to the granular details Partnerships: accessing local reported that thinking also more local within key markets as it relating to the property itself - is a strategy sources of capital micro is a growing seeks safety and growth. being employed by JP Morgan. The firm is interested in residential property in Berlin Teaming up with local operators is a tactic Beccar says the partnership will allow the trend. But how do Emerging Trends description of the and parts of the UK industrial market. But often used to source deals in new markets. firm to take capital around the globe; less those with global ambitions of global capital looks evermore to establish which micro opportunities to But localisation is helping fund managers than 1% of current allocations to real prescient as 2013 nears the halfway mark. pursue, the firm employs a dedicated team. access new sources of capital that would be estate are outside Italy. Italy has a large strategies master local otherwise difficult to reach. investor community, but one without great opportunities? Overseas investment in property seemed You need asset management skills to experience of investing abroad so we can set to top levels seen in 2012 by the first generate value. We had a closed team that CBRE Global Investors has recently teamed help provide a global allocation. quarter of the year. Outbound Chinese worked in the London office for five years up with an Italian firm to target Italian investment into real estate alone, and then set up offices in markets in institutions as part of their plans to The fact that Fabrica was based in Rome, according to Jones Lang LaSalle, could Germany and France. significantly increase their exposure to where many big pension funds are found, reach $5bn this year. While U.S. investors non-listed real estate funds. appealed to us. And through the are, once again, seeking higher returns In the local markets in which it invests, the partnership, we can swiftly access capital, abroad, moving $2.6bn into funds firm uses local partners, which aid them Its a joint venture with fund manager rather than taking time to set up a new targeting commercial real estate during with planning, re-zoning issues and Fabrica Immobiliare, which will set up platform ourselves. the first quarter; the largest inflow since sourcing off market deals. Most of our co-branded Italian regulated property 2007. deals in the opportunistic space are funds aimed at investors in that market, This new trend within the investment organised this way, says Valente. and eventually help take that capital community is developing fast and we Diversification and yield profiles preferable abroad. wanted to position ourselves quickly. to those of stocks and bonds continue to But a shift in the way fund managers are make real estate an attractive asset class working with investor capital risks making The move follows INREV research though for many looking at new markets, it difficult to execute deals efficiently. showing Italian institutions were set to approaching them from a macro perspective may not be appropriate. Single asset management transactions and high levels of investor discretion may be at increase current real estate allocations from $50bn to $64bn within three years. This new trend within the investment odds with the increasingly competitive Its an approach especially crucial to nature of the investment market. While Fabrica will act as fund manager, it finding returns in the mature European will introduce CBRE Global Investors to market, as Emerging Trends explains: Being the big wizards of the world is not As Simon Marrison, Chief Executive Officer, Europe at LaSalle Investment Management explains: The key for any Italian institutional capital seeking to invest abroad. community is the aim. We want to be better locally, build teams and expertise in specific places. It is a question of depth. new investor is getting to know and trust people with a local knowledge base; the biggest challenge is moving quickly We havent done anything like this before, explained Florencio Beccar, Country M anager at CBRE Global developing fast Joe Valente, Head of Research and enough when opportunities arise. Investors. Fabrica can help us prepare investor presentations and the team gave and we wanted to position Strategy at JP Morgan agrees that looking us insight into what institutions need. It behind the macro picture is a crucial has its finger on the pulse where these strategy in todays low growth investors are concerned. ourselves quickly environment: When economies were growing, investors were buying assets just to be invested in a specific country. Now most arent going to be rewarded for taking a macro position and relying on Florencio Beccar, Country Manager, CBRE Global Investors growth across the board. 14 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 15

9 Q&A Pan-Asian strategies are Routes into Asia Whats the best way for newcomers difficult at the to get exposure? If youre going into the market for the first time, it is best to be low risk. The easiest moment Alistair Meadows, Jones Lang LaSalle way is through the indirect route. Weve seen UBS and Aviva running fund of funds to get exposure. REITs in Singapore or Japan have done well in last couple of years. Are investors seeking direct Fresh capital flows State-run wealth funds from Micro trends China to Norway made 38 deals too? property investments valued Weve had conversations about that with Stockholm $10bn at almost $10bn in 2012, European groups that are new to the Swedens population is expected to accounting for 21 percent of region. But to establish from scratch is reach 10 million by 2018. This growth is all sovereign fund investments costly. Investors need to find a joint prompting a $40bn investment in the last year. venture partner with an existing platform citys infrastructure and strategic to undertake either a specific fund strategy development. or broader tie-up. Azerbaijans state oil fund has said it intends to allocate Hamburg $1.7bn What strategies are best? around $1.7bn property New mixed-use district Hafen City is Pan-Asian strategies are difficult at the investment in cities including expected to double the city centre moment unless you have deep pockets. London, Paris and Southeast population. Rental increases of 4 Specific markets and sectors are very in Asia. percent were recorded there over 2012. favour, so finding a focused operating partner is advisable. Vienna U.S. investors moved $2.6bn Constrained city centre retail space is How are investors approaching into mutual funds and expanding and new shopping centres London diversification? are emerging at rail stations. Retail $2.6bn exchange-traded funds that Investors like local economies such as Economic growth will be different across primarily invest commercial warehouses are benefiting from the West End, a destination for growing the region. So investors want to make properties abroad during the improved-quality assets and demand numbers of TMT firms and sure they get exposure to that. first quarter of 2013. from tenants previously focused on international shoppers. Increasingly, investors are adopting shopping centres. The regeneration of Kings Cross is combined strategies investing in core widely seen as a success story, providing markets in Australia and seeking Boston a new hub for creative industries. opportunistic returns in China. An increase in high-technology and Investors are watching values in $19.8bn Taiwan insurers real estate biomedical R&D employment continues Stratford, where opportunities exist at Alistair Meadows is Director, investment assets have grown to take the lead, increasing investor the former Olympics site and International Capital Group, Asia by 13% a year in the past six interest in the Boston market. surrounding areas. Pacific, Jones Lang LaSalle years to $19.8bn. 16 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 17

10 Q&A Investment trends: Asia Pacific What are the key investment trends Australia is seeing increasing in Asia Pacific at present? investor interest. Why is that? The region remains dominated by regional From a valuation perspective it is quite investors, while European and U.S. attractive. Theres a lot of competition for investors have been net divesting. core assets, while the wholesale funds are Institutions previously not committed to experiencing inflows so big domestic real estate, or those that had low groups will be back buying. But we think commitments, are seeking to increase the next step is a move up risk curve; that exposure. market is not very crowded at the moment. How do global investors see the What are the best opportunities? region today? LaSalles top picks are neighbourhood Activity has been heavily focused on the retail retail centres in good catchment U.S. because of its perceived value and on areas focused on non-discretionary spend Europe due to its distressed opportunities. and good quality offices with smaller floor But over the last five years, Asias share of plates in or near to the Central Business the investment universe has risen to 30% Districts which need some management. and there are very few investors with that Hotel development hasnt kept up with level of allocation to the region. If growth Australias tourism market. There has been continues then being under-invested very little development of three and four means youre going to underperform. star business hotels in main markets like Global funds are beginning to Melbourne and Sydney. acknowledge that. What is the most exciting trend for What are the current trends in the foreseeable future? non-listed funds? Historically Chinese insurance funds have Typical countries for In the last couple of years investors have not been able to buy property. But are now sought sector specific vehicles and smaller able to invest domestically. If they seek to funds had been more successful. Chinese invest between 5 and 10% of their assets in regional funds to target logistics and Indian residential are popular real estate, then that would mean $42bn of areas of focus. investment. That is 2.4 times the average annual turnover of the commercial real would be Japan, China The benefit of sector specific funds is that estate market in China. This could present investors have direct control and there is a big opportunity for both domestic and less chance of strategy drift. What has international investors to team up with a and Australia changed is there are more regional funds major core buyer group that needs to invest emerging. LaSalle has been raising capital in new product in china. for a regional fund. Typical countries for Paul Guest, Head of Research, LaSalle Investment Management regional funds to target would be Japan, Paul Guest is Head of Research for China and Australia. LaSalle Investment Management 18 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 19

11 technology, telecoms and media continued coming to the UK universities is also on the Analysis: markets to grow its overall share of Central London office take-up last year according to Jones Lang LaSalle - which reported a 2% rise. US private equity group Carlyle is currently Swinging London increase to 22% over 2012. How long-term this demand may be is up developing three student housing developments in central London. While in January, Legal & General Property agreed for debate. But these occupiers are having to forward fund a student accommodation scheme in Finsbury Park, north London. Emerging Trends 2013 a positive impact on rents and supply in the citys sub markets. While companies such reports a growing as Derwent London and Canary Wharf Legal & General is backing the development, pre-let to the University of need for investors to Group are developing product to court this new class of occupier. Arts London on a 25-year FRI (full consider how social repairing and insuring) lease from completion. trends are changing Advertising and media companies, which require close proximity to clients, as well real estate. London is as a thriving neighbourhood for its young Bill Hughes, Managing Director at Legal & workforce, are focused on districts such as General Property, explains that there are one city already seeing Soho, Noho and Covent Garden. While many opportunities to develop and the transformation areas such as Kings Cross, Farringdon and forward fund sites for the citys growing Clerkenwell are also experiencing population of overseas students. increasing activity. This sector offers our funds the David Marks, co founder of Brockton opportunity to invest in index-linked Capital, believes these firms present income on very long leases to strong developers with a long term opportunities. covenants, while also providing relatively Googles letting proves that physical higher yields than the traditional real interaction is still important despite estate sectors. Our focus remains on services such as Skype. Buildings are funding quality developments that are places for people to meet and exchange backed by premium universities and ideas. located in first class locations. Much of the global capital thats been more, UK domestic institutions are busy As fast as real estate can change, it is LaSalle Investment Management is also buying London real estate in recent years creating the right product to deliver new changing. TMT companies desire focusing on this asset class in London, as has been pre-occupied with the prime, types of properties to serve these trends. buildings that attract the best people, that well as other cities in the UK. core markets. make them happy and productive and Here, we explore some of the key trends which dont look old fashioned. Simon Marrison, Chief Executive, Europe As a safe and transparent city with a shaping Londons investment market. diverse occupier and investment base, Investors are buying warehouse buildings London has attracted enthusiasm for its Mobile and tech: and making them attractive to this type of real estate assets from global investors in the European market. But in recent months, transactions have declined as When Google signed up for a 999-year lease on 1m sq ft of space at Londons Kings Cross, it showed London was well on occupier in return for long leases. Theyre choosing these over glass and steel blocks let to a different tenant on each floor Investors are competition rises and available stock depletes. the way to re-inventing itself in the wake of the global financial crisis. Student accommodation: Londons universities have become a focus buying warehouse However, a quiet revolution has been underway in recent years thats helping reposition the city for long-term growth, The telecommunications, media and technology (TMT) sector is now the tour de force in Londons leasing market, as of attention in recent months, as data shows the asset class to be the best performing asset in the UK property buildings and creating increased opportunity for London investors. demand for computer equipment, online remote access, and cloud computing fuel growth. markets. UK student housing funds have returned making them An evolution of trends from the rise of tech companies to sustainability - will widen the remit of opportunities for The sector which encompasses broadcasting, publishing, new media, close to 12 per cent since the start of 2012, compared with 1.2 per cent for all property and 4.9 per cent for gilts, according to IPD. attractive institutional, long-term capital. What is advertising, marketing, PR, information While numbers of international students David Marks, co founder of Brockton Capital 20 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 21

12 Connectivity to the internet and security are top priorities for occupiers Simon Marrison, Chief Executive, Legal & General for the firm says: Our view is that there is Research conducted by GVA for Crossrail, still a shortage of this type of accommodation in the UK and a huge change in terms of what students, said the value of commercial buildings near Crossrail stations would likely increase by 10% during the next decade, Spotlight especially those from overseas, require. Connectivity to the internet and security above already rising projections. Residential values near the stations are projected to increase by 25% in London Jakarta are top priorities for occupiers. and 20% in the suburbs. With student housing its possible to get Anticipating the uplift in values, Brockton scale. But its also important to team up Capital has recently invested 95m in the with operators that can help piece together former Royal Mail sorting office on New sites too, he adds. Oxford Street. David Marks, co founder of the firm says; The asset has been vacant Crossrail: for several years but its proximity to Its impossible to tell what Crossrail, one of Crossrail means there will always be the biggest infrastructure projects the city demand for that building. has seen, will bring to Londons standing as a global city when it opens in 2018. But Understanding what a city needs in terms recent research puts the value of its impact of space and price allows you to build the on property at around $8.5bn. right space in the right place and at the right time, he adds. London the view from They want local experiences, places that are individual and Emerging Trends quirky. They arent looking for globalised streetscapes. Were looking at asset management initiatives] that These [tech] firms will seek seek to refurbish good assets underspecified buildings that with green credentials. they can adapt to their needs... Indonesias economy is fast becoming one Indonesian partner to develop or forward of the most exciting growth markets in the purchase an office development, explains Outside, they look for buzzing Asia Pacific region. Alistair Meadows, Director, International Tech companies dont neighbourhoods where clients GDP growth of 6.4% is set to double the Capital Group, Asia Pacific, Jones Lang LaSalle. want to operate out of office can be entertained in hip bars middle class population by 2020, from 74 towers; its not cool. or cafs. million to 141 million. As a result of such positive socio-economic trends, Indonesias Domestic firms have strong balance sheets and no need for debt. So investors capital city ranked as Asia Pacifics best need to offer something other than capital, investment destination in Emerging Trends. like development expertise or a corporate Sustainability is the only tenant relationship. This is a workforce which thing tenants want to talk But while a range of REITs, sovereign wealth funds and developers have doubled After offices, Indonesias logistics sector has grown up with climate aboutWe are designing room investment volumes from $150m to currently offers best growth rates as change; it wants responsible for bikes and doing everything $350m in three years, placing capital remains difficult as domestic firms seek to regional manufacturers, especially from Japan, seek to locate facilities in the buildings that are edgy, too. else we can. retain assets in the rising market. country. Industrial rents grew 18% in 2012, while capital values grew by 24.5%, Investors have been seeking a local according to Colliers International. 22 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 23

13 Viewpoint Green link Sustainability is rising As Debbie Hobbs, Sustainability Manager of Legal & General Property, explains: Sometimes occupiers have changes they would like to make but internally they cant up the agenda, and On a daily basis, we are doing as much get approval for them because there is no good relationships as we can with our tenants. Its embedded in everything we do and part of everyones capital to fund it, says Hobbs. But, for the right situations, we have access to cash to between landlord job. We recognise that, as owners of real fund upgrades, such as replacing lighting, and occupier are estate, we are only one part of the solution. for instance. That could be the difference between a tenant re-signing a lease or not. vital to success To foster better dialogue with occupiers, Improved dialogue has enabled the firm to the firm is creating an asset sustainability offer occupiers advice around reducing plan for every building in its portfolio (set energy usage in their units, or on how to to be in place by the end of 2013). The plan more effectively recycle waste. It also puts will enable asset managers to establish forward standard Green Lease clauses in targets to improve sustainability on an every lease to provide an early annual basis. This information will help introduction to sustainability and co- us when talking to a buildings agents, as operation for occupiers. well as set service budgets that will then be agreed with the occupier. We discovered that lawyers would often strike out these clauses because they didnt Legal & Generals managing agents are understand them, even though the tenant also using handheld tools to record had requested them. So we have found conversations with tenants to make sure that better dialogue with tenants at all issues and ideas are shared, especially with levels of the organisation is crucial in L&Gs asset managers. Common questions helping to avoid this, says Hobbs. an agent will ask the tenant are if it is prepared to share data, or if capital is an There is no doubt, she says, that obstacle to improving aspects of their sustainability impacts value and the firm building. now targets BREEAM Excellent for all new development. Bill Hughes, Managing Director of Legal & Provide an early During the global financial crisis, Emerging The increasing emphasis on occupiers is General Property, adds: We firmly believe Trends has reflected a range of attitudes being embraced at Legal & General in the financial benefits of sustainability; it towards key aspects of the market. But one Property, which is putting tenants at the offers us more secure and longer-term introduction to theme that has continued to evolve over centre of its asset management strategy. income. Aside from the legislative drivers the past five years has been sustainability. that are making it evermore important to This, it argues, enables the firm to deliver plan ahead, the best occupiers are sustainability and This years reports revealed attitudes to continual improvements in the demanding green buildings. green issues are becoming evermore environmental performance of buildings central to investors and lenders in their through the adoption of best practice. Indeed, we now see it as our fiduciary co-operation for decision-making processes. And its a trend responsibility to go above and beyond particularly evident in cities like London But the firm - which has 10.6bn funds property industry norms. We are thinking and New York, where change is being under management in the UK - believes ahead in implementing sustainability occupiers driven by the rising influence of technology, communication and dialogue can be just initiatives across our portfolio, well in media and telecommunications firms in the as crucial to performance as the latest advance, to protect long term asset values leasing market. technologies. and enhance our investors returns. Debbie Hobbs, sustainability manager, Legal & General Property 24 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 25

14 Data hub Sectors Real estate equities New wave offices Alternatives Industrial Lending Global property stocks returned almost Tech companies are demanding a Pension fund allocations to alternative Industrial is the most attractive sector in Global investors have been eyeing 30% last year, beating the MSCI World different kind of office space, while large asset classes are rising fast. Investor Europe with attractive income returns opportunities to lend to European markets Index by over nine percentage points. corporates are seeking headquarters demand is growing for assets such as forecast for the next five years, according over the last five years. As capital As they gain popularity with pension that match their Corporate Social healthcare and student accommodation to DTZ. Emerging Trends echoed these constraints continue to weigh heavily and endowment funds, Credit Suisse Responsibility credentials and lower because these asset classes offer predictions on the basis of changing on banks, ten new players entered predicts further upside, given attractive costs. Is the end in sight for the glass long, index-linked and government or patterns in global trade and consumption. the market in 2012. U.S. investors are dividend yields and near-zero interest and steel office block? Emerging Trends government-backed leases. In the UK Investors are encouraged to look for anticipated to increase their presence rates. Its top regional pick was US identified growing demand for efficient in the first quarter of 2013, 1.95bn of upgrade and refurbishment opportunities in the UK market this year as well as REITs. But Emerging Trends identified designs and green-rated projects and 2.76bn of deals completed were for in the US and in China, where a wide range of institutions. But while other Australian and Singaporean REITs owners who say sustainable buildings commercial assets other than offices, e-commerce is outpacing the capacity competition is increasing, margins are among its most attractive. In Europe provide good returns. retail and industrial, according to Lambert of local logistics networks designed for still substantially above those of 2007. - where returns were 29.5% last year - Smith Hampton. Globally, Emerging meeting exporter demand. In Europe, There are also opportunities to fund interviewees cited German residential Trends interviewees spotted opportunities amassing large platforms could be an deals outside of the prime markets as as a good bet. for investors in China, Japan, Belgium opportunity to serve a fragmented market investors get more comfortable with and Germany. In the US, investors picked and build a business suitable for the value added deals opportunities (for 30% bite-sized speciality types in alternatives public market. more, see page 10). like self-storage and medical offices. Margins are still substantially 1.95bn 2007 above those of Global property stocks returned almost 30% last year of 2.76bn of deals completed were for commercial assets other than offices, retail and industrial 26 Emerging Trends in Real Estate a global view 2013 2013 Emerging Trends in Real Estate A global view 27

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