As 2020 comes to an end, PropertyEU highlights the deals that have helped shape the European investment market over the past year.
Expectations were high at the start of the year; European investment volumes for commercial real estate were on track to hit a new record, with investment activity in the first three months up 52% on the previous year, according to data from broker CBRE.
A number of major platforms were changing hands, already pointing to what would be the two main themes of the year: ‘beds’ and ‘sheds’. In January, Swedish housing landlord Heimstaden Bostad agreed to take over a residential property portfolio in the Czech Republic from funds advised by Blackstone Tactical Opportunities and Round Hill Capital in a massive deal worth €1.3 bn, while in Germany and CEE, GIC’s P3 platform finalised the acquisition of the Maximus logistics portfolio for nearly €1 bn. Even retail seemed to be out of the woods, with Unibail-Rodamco-Westfield inking the sale of a stake in a multi-billion-euro portfolio of its French shopping centres for a net initial yield of 4.8%.
Then the Covid-19 pandemic erupted. The global health crisis has triggered a revolution in real estate investing across all sectors and has become a tale of devastation for a few. ‘Hotels have been one of the sectors most challenged by the pandemic,’ says Chris Brett, head of EMEA capital markets at CBRE. ‘If we think about it, not even in the global financial crisis was the hospitality industry forced to close. But today, with no travel, the ultimate impact is on hotels.’
Most deals agreed pre-Covid had a hard time going through, sometimes due to travel restrictions, in other instances because buyers sought to renegotiate the price, particularly in the case of the most impacted sectors such as retail and hotels. Intu’s sale of the massive Puerto Venecia mall was postponed but it didn’t see the price chip and eventually completed.
There were a few reasons for this. Buyers Generali and Union Investment were underwriting one of the best performing shopping centres in Spain. They were also cash buyers and - probably the most convincing – they would have had to leave over €40 mln in deposit on the table, had they decided to walk away.
Conversely, Orion Capital Managers renounced a £21 mln deposit to pull out of a £400 mln (€460 mln) UK retail park deal agreed on 20 February with vendor Hammerson. Seen in the context of the pandemic, the collapse indicates that the pre-Covid price was far too high, and although the landlord said at the time that it had four other bids on the assets, the portfolio has still not traded.
Durable income stream
Amid all the uncertainty caused by the pandemic, investors are looking for the certainty of rental income, be it in the office, logistics or residential space, says CBRE’s Brett. ‘In a year like this, when you can guarantee an income stream over 10 years, you provide investors with the level of safety they need. This is why durable income stream is the key to deals happening today. It is what is carrying a number of transactions through. Investors rely on that and they know they are getting a return.’
Long-term leased logistics assets in particular are setting record yields. In Finland, NREP Logicenters signed the single largest logistics transaction ever in the Nordics in December, setting a record low yield for Norwegian logistics assets of 3.9%, according to well-informed market sources. The property - a mission-critical food distribution centre fully let on a 20-year triple net lease contract to Coop - attracted over 100 expressions of interests with 40 investors actively bidding.
Logistics was already going strong before the pandemic struck but the crisis has accelerated this trend, says Brett. ‘Physical retail spaces have been closed for most of the year while online retail has remained open, playing to the benefit of logistics which has shown a defensive nature in the face of the pandemic.’
The market is not expected to slow down any time soon, he adds. ‘I think the impetus around the sector - both in terms of leasing and investment activity - is set to continue in 2021. The amount of capital targeting logistics today is as high as it has ever been.’
In the office sector, there have been concerns about the impact of flexible working but at the same time the sector has seen yields harden over the course of the year. Cap rates for prime, long-let offices have gone below 3% in a number of European cities, largely thanks to the very competitive cost of debt. In Germany, Union snapped up Ericus Contor in Hamburg for €190 mln, a 2.5% cap rate, and later in the year forward-purchased the Neue Balan Haus 27 development from seller Allgemeine Südboden for an undisclosed price, tipped by PropertyEU sources to be around €345 mln and representing a gross yield of 2.9%.
Meanwhile, CBRE GI in September bought Pontis Haus in Munich for roughly €150 mln, or a 2.7-2.8% cap rate. The asset had received 14 bids, according to experts. Brett: ‘Investors are paying record prices for long leases to very strong covenants. The low cost of debt is helping strong buyers buy buildings they would ordinarily not have been able to buy.’
Distressed opportunities
Despite the pandemic, there is still an abundance of capital looking to get into real estate. And while beds and sheds will continue to be the best bets in 2021, opportunities may arise in the most ravaged sectors. Retail is likely to hit rock bottom in the next few months, with a number of distressed owners expected to be looking for quick ‘cash solutions’. ‘I believe we are seeing an overcorrection in the retail sector and that there will be some fantastic opportunities going forward,’ says Humphrey White, head of Knight Frank in Spain. However, he admitted that debt financing for retail transactions has completely dried up. ‘While there is very little on the market right now we believe that many properties would be buyable off market, at the right price, and we expect an increase of transactions when pricing finally hits the bottom. For now, owners are just kicking the can down the road and trying to hold on a little longer.’
Similarly, the hotel sector is expected to see mounting distress and a string of loan sales in 2021. Several funds are being prepared to pick up the pieces. ‘While in most countries it is currently not allowed to foreclose on loans, a cover that was necessary to keep businesses afloat as long as possible, this cover will fall away as we enter 2021, and this will have an impact on all property sectors, but particularly the most-impacted such as the hotel and retail sectors,’ concludes Chris Brett of CBRE.
DEAL IN DEPTH 1
Investors park more money in sheds
GIC's purchase of Apollo's Maximus portfolio was one of the most keenly watched transactions of the year and turned out to be the second largest logistics deal of 2020. The Singaporean sovereign wealth fund – which owns P3 Logistics Parks – made a winning bid for the assets in October last year with the transaction closing just in time before the pandemic erupted in March. Covering over 1,000,000 m2 of industrial space, the Maximus portfolio encompasses 28 properties largely across Germany, the Benelux and Poland. GIC paid a net price of €950 mln for the package as part of a strategy to scale up its fully owned P3 logistics platform and reinforce P3’s position 'as a leading developer and manager of logistics properties in Europe'.
Otis Spencer, chief investment officer of P3 Logistic Parks, said at the time of the deal announcement that the group was ‘actively looking for further investment deals’. It didn’t take more than a few months before GIC secured another billion-size logistics portfolio in Germany, effectively doubling P3’s size in Germany.
On the back of huge investor interest in the sector, this year has been an extremely busy one for logistics portfolio sales, with Union Investment taking over Logistrial Real Estate and its 19-property strong portfolio in a €800 mln deal with Garbe Industrial Real Estate and GLP acquiring Goodman Group’s Central and Eastern Europe (CEE) logistics real estate portfolio for roughly €1 bn. There are a number of other ambitious portfolio transactions ongoing, although the availability of product continues to be well below investors’ appetites. P3 is seeking a buyer for a 375,000 m2 portfolio of industrial and logistics assets across Europe known as Apex, while AEW is tipped as the buyer of a 13-asset logistics portfolio in Germany which was put up for sale earlier this year by landlords Patrizia and Garbe.
DEAL FACTFILE
Maximus logistics portfolio
Countries: Germany, Benelux and Poland
Buyer: GIC
Vendor: Apollo
Price: €950 mln
Yield: 6%
Size: 1 million m2
Broker: Cushman & Wakefield
DEAL IN DEPTH 2
Prime hotels retain their allure despite Covid
One hotel deal that did complete – at a time when others fell through – was Covivio and NH Hotels' acquisition of the Dedica Anthology portfolio. The transaction, which is likely to remain the largest European hotel property deal for some time – was first revealed by PropertyEU in November last year and got signed in January, with the closing postponed from June to September due to the coronavirus outbreak. The deal with landlord Värde Partners marked Covivio’s debut in Italian hotel investment and was closed for €573 mln, eventually including as much as €86 mln of capex.
Vendor Värde began buying the debt of the company holding the hotel assets at a discount in 2016, ultimately acquiring 100% of the equity in 2017. The owners had breached covenants on a €320 mln loan provided by 23 banks. Värde then proceeded to transform the hotel group by appointing a best-in-class management team, refinancing the business with a €337 mln loan from Blackstone, and executing an ambitious investment programme. In 2018 the hotels were re-branded The Dedica Anthology.
Totalling 1,115 rooms, the portfolio involves eight luxury European hotels including several emblematic hotels such as the Palazzo Naiadi in Rome, the Carlo IV in Prague, the Plaza in Nice and the NY Palace in Budapest. Two of the hotels – in Florence and Nice – are under renovation and will reopen respectively by end 2020 and in the second half of 2021. The assets will be operated by NH Hotel Group through long-term triple net lease contracts with a minimum guaranteed variable rent, generating a minimum yield of 4.7%.
Covivio and NH’s acquisition highlights investors’ continued interest in the sector in the case of prime hotels in core locations where there is less concern about the impact of Covid-19 on long-term real estate values. ‘Investor sentiment remains positive for the medium term and the transactions that have occurred demonstrate this confidence,’ said Jonathan Hubbard, head of hospitality EMEA at Cushman & Wakefield. ‘Nonetheless, with a very uncertain trading outlook in the short term, many well capitalised investors are holding out for pricing adjustments or some distressed sellers to unlock more upside in their acquisitions.’
DEAL FACTFILE
Dedica Anthology hotel portfolio
Countries: Italy, France, Czech Republic and Hungary
Buyer: Covivio and NH Hotels
Vendor: Värde Partners
Price: €573 mln
Yield: 4.7%
Size: 1,115 rooms
Broker: Eastdil Secured
DEAL IN DEPTH 3
Embattled retail sector continues to struggle
After the e-commerce storm, the Covid-19 pandemic has dealt the retail sector another heavy blow. And with retail property values already stagnating, investors have become increasingly weary of any retail which is not food-anchored or convenience.
Even before the pandemic, one of Spain’s best performing malls - the massive Puerto Venecia shopping destination – sold at just a small profit to acquisition price, and that was heralded as a major achievement for the sector.
Retail specialist Intu acquired 100% of the massive mall in Zaragoza, Spain, for €451 mln back in 2015, and shortly thereafter sold down a half share to CPPIB for €225 mln. Five years later, Intu has sold its remaining 50% in the massive destination retail asset for €237 mln, meaning the investment netted just €11 mln over the period.
The disposal was not enough to rescue the struggling retail property owner. Burdened by debt and hit by a fall in retail values, the UK REIT collapsed into administration three months after closing the deal. Intu’s 18-property strong shopping centre portfolio is currently in various stages of liquidation, with the only remaining asset in Spain – a 50% stake in Intu Xanadú – being disposed to Nuveen Real Estate, according to sources.
Puerto Venecia’s new owners are Generali’s property arm on behalf of the newly-launched Shopping Centre Fund and Union Investment on behalf of the Unilmmo: Deutschland open-ended real estate fund. The acquisition was the first to be carried out by the Generali Shopping Centre Fund, launched in 2019. Amid a worsening outlook for the sector, the Italian insurance giant is now believed to have paused fundraising activities for the vehicle.
DEAL FACTFILE
Puerto Venecia shopping centre and retail park
Country: Zaragoza, Spain
Buyer: Generali and Union Investment
Vendor: Intu and CPPIB
Price: €475 mln
Yield: 5.19%
Size: 120,000 m2
Broker: CBRE
DEAL IN DEPTH 4
Huge student housing bet stands out for more than volume
Underlining the ‘beds and sheds’ trend, at the start of 2020 Blackstone paid £4.7 bn (€5.26 bn) to buy iQ Student Accommodation from Goldman Sachs and the Wellcome Trust in what was said to be the largest-ever private real estate transaction in the UK.
But the deal stands out for more than just volume. It reflected a 4.6% net initial yield, an attractive return in these low interest rate times. It also marked Blackstone’s re-entry into the student housing sector following the sale of the Nido accommodation business back in 2012. ‘The scale of the transaction and the fact that it was done by one of the largest global investment managers and one which has past experience of the asset class is a major indication of confidence in the sector,’ commented Stuart Osborn, Knight Frank’s European student housing specialist.
The US alternatives investment giant was lured by the sector’s positive rental growth prospects. As demand continues to outstrip the supply of beds, rents for London en-suite accommodation have soared by as much as 17.5% since 2015 and are expected to continue to rise in the long run. ‘We have seen a significant amount of rental growth in the sector over the last 10 years, and we even saw solid rental growth performance during the GFC. And although rental growth will be tentative for the next academic year we’d certainly expect rental growth to return to the market as soon as conditions stabilise,’ Osborn added.
The iQ platform was created in 2006 with Wellcome Trust as one of the founding investors, and merged with Goldman Sachs' student housing business in 2016.
Today the company owns and manages more than 28,000 beds across the UK, with a focus on key university (Russell Group) cities, and with a development pipeline in excess of 4,000 beds. According to iQ, it is the largest owner of student accommodation in London, with significant holdings in Manchester, Leeds, Sheffield, Edinburgh and Birmingham.
DEAL FACTFILE
iQ Student Accommodation
Country: UK
Buyer: Blackstone
Vendor: Goldman Sachs and the Wellcome Trust
Price: €5.26 bn
Yield: 4.6%
Size: 28,000 beds
Broker: Eastdil Secured
DEAL IN DEPTH 5
Green, core offices weather the Covid-19 storm
With flexible working posing new challenges for the office sector, investors have been focusing on ultra-prime assets, paying record prices for modern, core offices boasting strong green credentials and long-term leases.
In Milan, UBI Banca forked out a record €500 mln for its new HQ office development – a 120 metre-high building in the Porta Nuova development. The asset – known as Gioia 22 – is set to become Italy’s first tower to meet Nearly Zero Energy Consumption Building (NZEB) standards when it completes next year.
Under the deal, UBI has taken control of the asset by buying 100% of the shares in the Porta Nuova Gioia fund, which owns the Gioia 22 building, from Coima Sgr, acting on behalf of the Abu Dhabi sovereign wealth fund ADIA. Coima has also entered into an agreement with UBI Banca which will allow it to acquire either directly or by designating a third-party investor, a minority stake in the Porta Nuova Gioia fund at the start of the rent payments in 2021.
The sale is just one example of the ongoing yield compression for prime, long-let office assets in Milan’s city centre, with several recent deals closed at or below 3%. The record to date has been set by a consortium of ultra high-net-worth individuals led by Mediobanca which last month agreed to pay a 2.8% yield for a 13,800 m2 newly-renovated trophy asset in the heart of the city. The historic Post Building in the central Piazza Cordusio is being sold by Blackstone and its local partner Kryalos sgr under the code name of Project Ermes for €247 mln.
DEAL FACTFILE
Gioia 22 office tower
Country: Milan, Italy
Buyer: UBI Banca
Vendor: Coima Sgr and ADIA
Price: €500 mln
Yield: NA
Size: 35,800 m2
Broker: Citigroup