The mood at Expo Real was extremely intense this year. New companies and alliances are forming. Big Deals are happening in a grab for assets. 41,500 people attended, smashing records. The industry has realised that rates are not going to rise much anytime soon and that real estate is, for wholesale capital, definitively the next best risk after sovereign bonds – with one big advantage: it provides a return.
The intense and highly buoyant mood was not sparked but certainly boosted by Canada’s Oxford Properties, the real estate arm of OMERS, the Ontario Municipal Employees Retirement System, and US-based Madison Realty. Last month they signed to pay a price for Berlin’s Sony Centre of €1.1bn, close to double what it went for in 2010. Double! Hines bought it in 2010 on behalf of the Korean National Pension Service for €585m from Morgan Stanley.
This is a weight of capital story. But it turns out that the weight of capital is heavier from public Canadian money and private US – even than Korean pension savings which, you would think, would really want to be holding assets outside their country right about now. If anyone still doubts whether European commercial property yields will fall further it’s certainly not those two buyers.
But back to Expo. More than 41,500 attendees from 75 countries came to Munich last week, breaching the 40,000-mark for the first time, and up 6% from just over 39,000 last year. In all, 20,011 trade visitors attended, up from 2016‘s 18,963. Among overall attendees, the Top 10 countries of origin, after Germany, were: UK, Netherlands, Austria, Switzerland, Poland, France, Czech Republic, USA, Luxembourg and Spain.
Exhibitor numbers soared 13% to 2,003, and every second booth seemed to be occupied by a developer, most focused on housing – the investment asset class of choice for many insitutions. Many have revamped identities or taken new names. Instone, Apleona, Implenia, German Profit Estate, GIEAG. Ouch!
The organisers of Expo Real, Messe München, described the mood as strong and watchful but I think this misses the mark completely. No one is standing and watching. All are trying to get in on this asset grab, and it’s not that easy. Many smaller investment firms were complaining about not being able to win assets, muscled out by the big institutional boys with deeper pockets, or managers with who-knows-what nationality or size of capital behind them.
And there is another crucial point. US real estate prices have soared further and faster than Europe these last 12-18 months, and the yield gap with equivalent euro assets has opened to 100-150bp. Ergo Oxford-Madison wading into Berlin. But Europeans have now also become net sellers in the US, eager to take profits bring the capital back home for deployment here.
This is indeed a mood akin to 2007. But the difference is that the steady decline in bond yields toward or even through zero – helped, I probably need not add, by central banks buying up every semi-collateralised fixed income security in sight – means institutions don’t have a lot of options left. The difference from 2007 is therefore that institutions are deploying considerable amounts of equity into the deals. This is not a speculative bubble driven by debt, but by weight of incoming equity driven by the world’s pension savers, insurers and private wealth seeking a return. Euro yields are headed lower for the next year at least.