2H2018 Real Estate Market Update – The hunt for yields continues

Download PDF

• Strong flows into European commercial property shows no signs of slowing
• Potential for yields to sharpen further over the second half of 2018

The strong flows of capital into European commercial property over the first half of 2018 show limited signs of slowing, as they continue to drive up prices and harden yields.

In our view, more capital remains to be deployed from Asia, Central Europe and the Middle East over the coming months, meaning there is potential for yields to continue to rise.

Buyers expect limited rental growth in the short to mid-term – yet the pressure to deploy cash into yield-generating assets continues to achieve record yields.
Asian institutions, benefitting from a lower cost of capital, are a key source of these inflows driving up prices. A number of acquisitions have been completed in the first half of 2018 with these buyers acquiring European commercial properties, including:

• The acquisition of Facebook’s Dublin HQ by Kookmin Bank of Korea for €101m in May 2018 (i)
• CapitaLand Commercial Trust, Singapore’s biggest REIT, purchased the Galileo portfolio of offices in Frankfurt for €356m in May 2018 (ii)
• FG Asset Management of Korea bought City of London office developments Cannon Bridge House and 20 Old Bailey in April and May 2018, for a combined total of almost £600m, backed by Korean investors Mirae Asset Daewoo and NH Investments & Securities (iii) (iiv)

Based on a number of transactions reviewed over recent months, our view is that yields on European logistics assets – a key area of interest for Rasmala’s investors – have reduced by around 50 basis points since the start of 2018.

These rising prices are something of a mixed blessing. While they mean the assets already acquired by Rasmala and its investors are seeing capital appreciation, they also mean that there is a risk of buyers overpaying for assets in the current market.

Our aim is to deploy more than $500m into commercial real estate on behalf of our investors in the second half of 2018. Geographies of focus include the UK, Ireland, Germany, Austria, the Netherlands and the United States.

We aim to invest in both logistics assets and prime office properties, and our Head of Real Estate, Naseer Aka, is constantly assessing opportunities across our nominated geographies.

In the current market climate, we remain focused on value, as do our investors. The key areas of scrutiny for our investors on any commercial property deal include:

• Length of tenancies – with the security offered by ten-year-plus leases a particular target;
• Vacancies – Our investors are unlikely to consider properties with sizeable vacancies, or if these are considered, we would expect a sufficient discount to reward the heightened levels of risk;
• Covenants – Strength of covenants is now as important to some investors as the level of rent charged;
• Location – investors now expect risk-adjusted premiums for weaker locations.

As per our business model, we are ‘client led’ and only invest in opportunities that are anchored or supported by our investors’ expectations on these and many other factors. The engagement is mutual and we look to keep our investors informed of market trends and intelligence that we collect.

Our latest investments include the acquisition in January 2018 of two logistics facilities in Germany for $185 million (€154 million), comprising a major new Amazon distribution centre spanning 88,000 sq m, and another let to a subsidiary of Decathlon, the sports goods retailer. Earlier in 2017, we acquired Amazon’s largest UK logistics facility in Dunfermline for $82 million.

Naseer Aka, Head of Real Estate at Rasmala, says that he expects inflows from Asian, European and Middle Eastern institutions to continue for some time to come, as there are large levels of capital that have been idly parked, looking for opportunities:

“At present, cost of capital remains low for European and Asian investors, and they still have relatively large amounts of dry powder. They have concluded a few substantial deals in the European commercial property in 2018 so far, and we expect that they will continue to be busy in the second half of the year.”

“These inflows have gradually made yields on European commercial property less attractive for our investors over the course of the year, meaning value is harder to find than it was six months ago.”

“Gulf investors in European commercial property take a very strategic approach in making deals. They are increasingly value-focused, and primarily interested in deals that tick all the boxes on tenancies, vacancies, covenants and location.”

“Whereas in the past some investors were willing to look past an issue on one or two of those factors – weaker covenants, a vacancy or a shorter tenancy – that is no longer the case.”