What is your feeling for the mood this year ?
Damian Harrington : I think the mood is good this year. I mean obviously we’re in the later part of the cycle where you’d expect things to fall off more than they are, and even things like Brexit and all of the other political furore we’ve had over the last year, you’d expect things to slow down and it’s not. Germany is doing really well. UK is doing really well, both neck and neck as to who will take the number one spot (in investment volume this year).
German yields are pretty hot mined; there’s a lot of German cities with prime yields lower than London West End which is quite extraordinary really… But all market pricing is up so if you look at Asia which is actually growing in investment volumes. And yields there are even lower than they are in Europe across all sectors.
But what we’re also seeing is that a lot of money is now going into development and the large scale projects. Within Asian markets, I mean that’s what’s driving a lot of volumes and a lot of the deals that we’re seeing in Europe this year. There’s quite a lot of transactions for large-scale big ticket projects, forward funding, or new developments for deals in Europe and major markets in Europe. They are either recently completed buildings, buildings that are under construction.
If you look at vacancy rates, certainly offices and industrial, they’re at all time lows compared to money markets. Take-up rates or absorption is at 10-year highs this year across the major markets. So the economy is still growing, they’re ranging from, depending where you are, 1% to 5%. So that’s driving occupier activity which will drive the need for development given that vacancy rates are so low. And there’s also a need for a lot of new modern offices stock which in many markets is quite old and with all these new ways of working, there’s a lot other refurb, redevelopment, repositioning of assets.
But it’s late in the cycle?
DH : I’m surprised how active it is this late in the cycle but there is a comfort around where yields are. Yes, they’re low. But whilst interest rates will start to trend up, all the forces that impact interest rates drag their natural equilibrium rate down over the last 20 years so even if they do go up they’re only going to go up so much; they’re not going to ramp all the way back up again. So there may be a softening of yields. I think that’s going to be likely in a couple of years, but it’s not going to be significant. All the pressure is going to keep them where they are for the next 24 months, I think.
What is the spread against 10yr fixed income?
DH : There’s still a good spread, I mean it depends on the market. It is thinning in some so it will be down to less than 50bp in some markets. But in many there’s still 200bp, pretty wide. It’s still relatively healthy.
London is a strange market because of Brexit but there is still a lot of Asian demand.
DH : London’s done about Stg23bn year to date, so you take out the two big Chinese deals, it’s still done Stg20bn. The next biggest city is Paris which is €8.5bn at the minute. And then you’ve got Berlin which is just about touching on €7bn, so London is way ahead of the other big markets and then there’s a drop down to, Madrid in fourth, Frankfurt fifth, Amsterdam sixth.
But if you took away the Asian investors in London, that would cut it surely?
DH : It’s probably less significant than people think. Asian capital, cross-border capital is only about 7% of total volumes. Asians are buying some big items but the Americans are spending more than the Chinese. About 20% of activity is American money – so firms like Blackstone, big investment managers who are consolidating more capital, are spending more.
So they obviously don’t believe that jobs are going to be pouring out?
DH : Nor do we, no. There is a relocation of some jobs. On the financial services side it’s about 14,000 within the investment banks which is about 14% of their employee base. But if you look at that relative to total number of people in financial services in London it’s 4%. If you look at the total office market you need to start adding a couple of decimal points for it to even register. Frankfurt will definitely benefit; that’s the leading city in terms of where these jobs will go. But you’re talking, maybe, five, six, seven, 10,000 jobs. And a lot of it is still seeking options rather than actually things being completely moved.
But there’s still no certainty as to exactly what is going to be needed. The two things that are definitely moving are the Financial Services Authority has got to go to Frankfurt, it’s the logical choice outside of the UK and Switzerland. European Medicines Agency. If you look at the life science clusters across Europe, theh UK is really strong as is Switzerland, but Germany is very strong, maybe Benelux, Nordics. But Germany could do really well with these relocations and that will strengthen their growth in a cluster if they went into Heidelberg or somewhere like that. But this mass migration of jobs, I just don’t see it happening.
Which major markets on the continent do you like? Is Germany just too hot now?
DH : I think it just depends what you’re buying. If they’re standing assets, yields are pretty punchy. But if you’re looking at development and there’s still growth. The economy is chugging along, it’s driving the occupier side, vacancies are super low. So I’d be looking at development, construction, re-purposing.
Every second stand here seems to be a residential developer!
DH : Yes, and resi is the other big one. Well year to date, obviously logistics to a degree and residential. All the other sectors have just about maintained their share of the overall pie; offices have made a bit of a comeback courtesy of some of these big deals – all the big projects that are happening are primarily office-driven. But the sector that keeps on growing is residential. So it made up about 15% of volumes, where at the start of the cycle it was about 3%, maybe 3-1/2%. So it’s a real growth sector. There’s been some big portfolios in Germany as well… People will always need homes; they won’t always necessarily need offices… Student housing is obviously a part of that, and it has grown. The other big sector is senior housing. That makes the student housing segment look tiny: if you think about the way populations are going, we’ve got an ageing population and a shrinking population and fewer young people coming through. Student housing… I mean the opportunities are still there because Europe is way behind the UK. By 2020 they’ll take up a much more significant part of the workforce.
If you had to overlay a matrix in Europe of markets and assets, what do you like best for, say, 5-7 years institutional money?
DH : I think urban mixed-use, the stronger the amount of residential – and possibly some logistics. I think retail is going to prove to be a better bet than people are worried about, certainly within strong cities because even if you look at a lot of retailers, the proportion of some retail sales to online is nowhere near as big as what people have assumed it will be or would be. And people still like to shop – or online retailers will have to have showrooms… So I’d be looking at mixed use in strong urban centres in German cities, Nordic cities, Benelux and UK.