Download negative interest rates create rush for real estate

”NEGATIVE INTEREST RATES CREATE
RUSH FOR REAL ESTATE”
Institutional Outlook (May 2015) by Pangea Property Research
An investor survey covering the 150 largest institutional investors in the Nordics
INSTITUTIONAL CROSS-BORDER
CAPITAL FLOWS
Over the next 12 months, Nordic institutional investors are planning to acquire real estate for
approximately €5bn. In general, there is a growing interest for investing abroad with Sweden,
Europe and the US being the most popular markets according to our investor survey.
INTRODUCTION
Welcome to the annual “Institutional Outlook” by Pangea Property Research
NORDICS
We are proud to present the 2015 edition of our
“Institutional Outlook” covering the 150 largest institutional investors in the Nordic region. The purpose of this report is to provide a detailed picture of
how these top tier investors, representing more than
€1,100bn of assets under management, view real
estate as an asset class. By doing this we hope to highlight current trends, topics and potential challenges
of interest for the industry as a whole.
Mikael Söderlundh
Head of Research & Partner
+46 73 770 77 90
[email protected]
SWEDEN
Adam Bakonyi
Analyst
+46 70 244 31 34
[email protected]
This year, the following main areas are covered in
the report:
•• Current real estate exposure and long-term
­allocation targets
NORWAY
•• Price expectations for the next 12 months
Espen Ugland Haugen
Analyst
+47 45 42 44 12
[email protected]
•• Investment strategies for the next 12 months
•• Investment preferences in terms of geography
and sectors
The report is based on public data and an extensive
investor survey conducted by Pangea Property
Research in March–April 2015. We would like to
sincerely thank all contributing parties for their
time and participation. Feel free to contact any of
us if there are questions or comments.
© Pangea Property Partners
A study covering
the 150 largest
Nordic institutional
investors
33
More than
€1,100bn in assets
under management
represented
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
EXECUTIVE SUMMARY
“Negative interest rates create rush for real estate”
Pangea Property Research conducts an annual investor
survey among the 150 largest Nordic institutional investors
regarding their view of real estate as an asset class and their
investment strategies in the forthcoming 12 months.
•• In the current market, Nordic institutional investors
consider real estate to be the most attractive asset
class from an investment perspective, just ahead of
equities.
Institutional Outlook 2015 key findings:
•• The most popular sector is residential, closely followed by office and public sector properties. Among
institutions seeking real estate exposure abroad,
­Europe is considered the most attractive market.
•• Nordic institutions are still underweighted in real
estate with an average exposure slightly above 8%
compared to long-term allocation targets of 10–15%
in general.
Altogether, the above findings show that real estate ­remains
highly attractive as an asset class and will ­continue to
­attract significant institutional capital going forward.
In fact, since we initiated this survey in 2011 there
has never been such strong demand for real estate
as today. There are many reasons for this, for ­example
­ultra-low interest rates pushing investors towards income
producing assets and an attractive yield gap on real estate
­investments.
However, since there is limited supply of high quality
assets in the current market and increasing competition
from other investor ­categories, it remains to see whether
the institutions will reach their allocation targets and
whether it will result in further yield compression.
•• Over the next 12 months, Nordic institutions anticipate increasing capital values in the real estate
market and equity market. However, there are country-wise differences such as institutions from Finland
having a more cautious view.
•• Over the next 12 months, a clear majority of the
Nordic institutions (69%) aim to be net buyers in
the real estate market. In total, they are planning
to invest approximately €5bn in real estate and
make divestments of approximately €1bn.
2011
2012
2013
2014/15
110
124
155
156
€872bn
€968bn
€1,057bn
€1,134bn
8%
8%
8%
8%
28%
22%
38%
63%
n/a
n/a
n/a
72%
Net buyers (% of respondents)
81%
21%
54%
69%
Increase by more than €50m (% of net buyers)
60%
43%
53%
62%
Office
Residential
Office
Residential
Sweden
Asia
US
Europe
INSTITUTIONAL OWNERSHIP
Number of institutions covered in the survey
Total assets under management (AUM)
Average real estate exposure (% of AUM)
12M EXPECTATIONS ON CAPITAL VALUES
Real estate market (% with a positive view)
Equity market (% with a positive view)
12M REAL ESTATE INVESTMENT STRATEGIES
REAL ESTATE INVESTMENT PREFERENCES
Most attractive sector
Most attractive foreign market
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
444
NORDIC INSTITUTIONAL OWNERSHIP
Average real estate exposure slightly above 8%
Institutions
Assets under
management, €bn
Real estate under
management, €bn
Real estate exposure, %
Sweden
77
487
38
7.8%
Norway
35
165
18
10.7%
Denmark
19
258
19
7.2%
Finland
25
224
20
9.0%
156
1,134
94
8.3%
Country
Nordics
Note: All figures are excluding Norges Bank Investment Management (NBIM).
The investors covered in this report are large corporate and public
pension funds, insurance companies and other institutional investors such as foundations, endowments and unions. Altogether, the
institutions have more than €1,100bn of assets under management,
of which slightly above 8% in real estate. As can be seen in the table above, institutions from Norway have the highest real estate
allocation and institutions from Denmark have the lowest allocation. Furthermore, it can be noted that smaller institutions (with
less than €10bn of assets under management) tend to have
a higher real estate allocation and a larger share of indirect real
estate investments.
Currently, Nordic institutions own real estate valued at approximately €94bn, which is almost €12bn higher than in previous
survey. The increase can be explained by the fact that institutions
have been net buyers in the real estate market as well as increasing
capital v­ alues. However, the average real estate allocation has only
increased from 7.6% to 8.3% due to increasing equity portfolios.
­Going forward, this means that there should be room for significant further acquisitions since the bulk of Nordic institutions have
long-term real estate allocation targets between 10–15%.
Institutional breakdown by category
Average
real estate exposure by type of institution
Average real estate exposure by type of institution
Institutional breakdown by category
Institutional breakdown by category
12%
15%
Corporate pension funds
15%
26%
9.8%
10%
Public pension funds
Corporate pension funds
Insurance companies
Public pension funds
Other institutions
Insurance companies
8.3%
8.2%
8%
7.1%
6%
Other institutions
26%
4%
50%
2.8%
2%
50%
0%
9%
Corporate pension Public pension funds Insurance companies Other institutions
funds
9%
Institutional
breakdown
by size
Institutional
breakdown
by size
(assets
under management)
(assets
under management)
Average
realreal
estate
size
of institution
Average
estateexposure
exposure byby
size
of institution
14%
11.4%
12%
23%
10%
>€10bn
44%
All institutions
8.3%
8.1%
>€10bn
€1-10bn
8.3%
8%
€1-10bn
<€1bn
6%
4%
2%
33%
0%
<€1bn
All institutions
The charts are based on number of respondents
55
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
REAL ESTATE COMPARED TO
OTHER ASSET CLASSES
The most attractive asset classes
The most attractive asset classes
The most attractive asset classes
In the current market, Nordic institutional investors
consider real estate and equities to be the most attractive
asset classes from an investment perspective. According
to the survey, 38% of the respondents rank real estate
as their first hand choice, followed by equities (32%)
and alternative investments (18%) such as hedge funds
and private equity. The least attractive asset classes are
­government bonds (3%) and infrastructure (0%).
The most attractive asset classes
3%
3%
9%
9%
Real estate
Real estate
38%
38%
18%
18%
Equities
Equities
Alternative investments
Alternative investments
Corporate bonds
Corporate bonds
Government bonds
Government bonds
32%
32%
Expected real estate capital values
in thereal
nextestate
12 months
Expected real estate capital values in
Expected
capital values
Expected real estate capital values
The strong demand for real estate goes hand in hand
with a positive view on real estate capital values
(property prices) going forward. In the forthcoming
12 months, as much as 63% of the Nordic institutions anticipate capital values to increase and only
11% e­ xpect capital values to fall. The result is similar
in all Nordic countries except Finnish institutions
having a more cautious view on real estate capital
values in the next 12 months.
11%
in
Increasing capital values
Unchanged
capital
valuesvalues
Increasing
capital
Decreasing
capitalcapital
values values
Unchanged
26%
Decreasing capital values
26%
63%
63%
Expected equity market capital values in the next 12 months
Expected equity market capital values
Nordic institutions expect strong equity markets as
well. In the survey, 72% of the respondents anticipate positive returns and 22% anticipate negative
returns over the next 12 months. Institutions from
Finland have a neutral view on the equity market
in the coming year, with 25% expecting a strong
­market, 25% expecting a weak market and 50%
­expecting a flat market.
the next 12 months
the next 12 months
11%
Expected equity market capital
valuesequity
in themarket
next 12
months
Expected
capital
values in
the next 12 months
22%
22%
Increasing capital values
Unchanged
Increasing capital
capitalvalues
values
Decreasing
values
Unchangedcapital
capital
values
6%
Decreasing capital values
6%
72%
72%
The charts are based on number of respondents
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
666
INVESTMENTS STRATEGIES
€5bn of institutional capital allocated to real estate investments
A clear majority of the Nordic institutions (69%) are
planning to increase their real estate holdings over the
forthcoming 12 months. Among these net buyers, 62%
want to increase by more than €50m, 29% between
€10–50m and 10% by less than €10m. Furthermore,
­there are some investors (10%) planning to decrease
their holdings over the next 12 months, according to
the survey. In total, the Nordic institutions are planning
to acquire real estate for approximately €5bn and ­divest
real estate for just above €1bn in the coming year1. Since
their current real estate portfolios are valued at €94bn
this means a net increase of 4% (excluding value changes). Most institutions mainly focus on direct investments, however, approximately one out of four prefer
indirect investments such as real estate funds.
Over the last few years, the institutions’ investment
strategies have become more aggressive in terms of
number of net buyers and targeted investment volumes,
as ­illustrated in the charts to the right. Countrywise, there are some differences such as institutions from
­Sweden and Denmark being somewhat more active on
the sell-side and Finnish institutions focusing more on
indirect real estate investments.
Real estate investment strategies in the next 12 months
Real estate investment strategies in the next 12 months
100%
21%
80%
6%
54%
Net buyers
69%
60%
Net sellers
40%
Neutral
15%
73%
10%
20%
31%
21%
0%
2012
2013
2014/2015
Targeted investment
volumes in the next 12 months
Targeted investment volumes in the next 12 months
100%
80%
43%
53%
62%
>€50m
60%
€10-50m
40%
<€10
21%
43%
29%
20%
26%
14%
10%
0%
2012
2013
2014/2015
The charts are based on number of respondents
Real estate investment strategies in the next 12 months
Real estate allocation
Targeted investment volume
Investment focus
Increase
Decrease
Neutral
>€50m
€10–50m
<€10m
Direct
Indirect
Sweden
75%
17%
8%
56%
33%
11%
71%
29%
Norway
63%
0%
38%
60%
20%
20%
83%
17%
Finland
60%
0%
40%
75%
25%
0%
50%
50%
Denmark
75%
25%
0%
67%
33%
0%
100%
0%
Nordics
69%
10%
21%
62%
29%
10%
76%
24%
Based on answers in survey 2015 and Pangea’s estimates where information is missing
1
77
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
INVESTMENT PREFERENCES
Which markets and sectors are most popular?
Geography
Sector wise
Over the past years, interest for investing in real estate
­abroad has increased gradually among Nordic institutions.
Currently, Europe is considered to be the most attractive
market for foreign real estate investments. As can be seen in
the chart below, Europe is ranked as the first hand choice by
41% of the respondents, followed by Sweden (36%) and the
US (27%). A clear trend is that interest in Asia has declined
over the past few years, while interest in Europe is rising.
Which is the most popular sector in the current market is a
close call between residential, office and public sector properties. All these three sectors are ranked as either the most
attractive or second most attractive real estate sector by more
than 50% of the Nordic institutions. Country-wise, there
are some notable differences such as, in relative terms, higher rankings for public sector properties in Sweden, offices
in Norway and logistics/warehouses in Finland.
Most attractive real estate markets for foreign investments
Most attractive real estate markets
for foreignreal
investments
Most attractive
estate markets for foreign investments
100%
100%
90%
80%
80%
41%
70%
70%
60%
60%
50%
50%
30%
35%
30%
20%
20%
6%10%
0%
27%13%
36%
41%
27%
36%
7%13%
7%
7%
7%
6% 0%
12%
Europe
14%
Europe
14%
Sweden
7%
7%
Sweden
USA
90%
80%
70%
60%
80%
33%
70%
50%19%
40%
30%22%
30%
20%
10%
0%
10%
22%
29%
7%
20%
22%
35%
29%
35%
29%
22%
7%
7%
0%19%
7%
7%
13%
20%
Finland
Norway
19%
22%
22%
13%
Residential
13%
Ranked no 2
Ranked no 3
Ranked no 3
43%
Ranked no 4
Ranked
no 4
Ranked no 5
13%
25%
25%
29%
29%
7%
7%
19%
Norway19%
Asia
Asia
15%
7%
Denmark
7%
Ranked
no 5 no 6
Ranked
Ranked
no 6 no 7 (worst)
Ranked
Ranked no 7 (worst)
Denmark
15%
10%
15%
20%
20%
20%
15%
20%
20%
9%
13%
4%
13%
9%Public sector
Retail
20%
22%
Retail
The institutions were asked to rank the attractiveness of different markets
(votes on home markets excluded) and sectors
888
10%
20%
15%
15%
22%
Public sector
15%
15%
26%
9%
4%
9%
Office
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
43%
6%
6%
4%
4%
22%
4%
4%
Office
Ranked no 2
19%
22%
21%
4%
Residential 4%
13%
26%
13%
21%
13%
Ranked no 1 (best)
Ranked no 1 (best)
Most attractive real estate sectors
Most attractive real estate sectors
29%
19%
40%
7%
13%
60%
50%
20%
33%
20%
Finland
100%
90%
20%40%
USA13%
Most attractive real estate sectors
100%
20%
40%
20%
12%
13%
14%
13% 14%
19%
13%
20%
29%
6%
33%
13%
20%
6%
29%
6%
7%
7%
13% 33%
21%
35%
6%
7%
7%
7%
7%
13%
21%
40%
40%
10%
13%
90%
30%
30%
20%
20%
20%
Logistics/
Hotel
warehouse
Logistics/
Hotel
warehouse
Ranked no 1 (best)
Ranked no 1 (best)
Ranked no 2
Ranked no 2
Ranked no 3
Ranked no 3
Ranked no 4
Ranked no 4
Ranked no 5
Ranked no 5
Ranked no 6 (worst)
Ranked no 6 (worst)
SUMMARY AND OUTLOOK
A bigger appetite but a smaller market
To conclude, the overall theme in this year’s investor survey
is that Nordic institutions have a very positive view on real
estate. They anticipate increasing capital values and want to
be large net buyers over the next 12 months. In fact, since
we initiated this survey in 2011 there has never been such
strong demand for real estate as today. The reason for this is
most likely a combination of several factors. For example,
­significant market uncertainty and ultra-low interest rates are pushing investors towards income producing assets
like real estate. There are also few other viable investment
alternatives available and since property yields are lagging
­interest ­rates there is currently an attractive yield gap.
The challenge facing many institutional investors today ­
is that there are few motivated sellers in the market and a
general lack of supply. In addition, competition from other buyers such as e.g. listed real estate companies, family
­offices and foreign investors is increasing. Going forward,
this should open up for wider investment criteria and more
­focus on sizeable platform deals if the institutions want to
reach their allocation targets. To invest €5bn over the next
12 months is rather aggressive in relation to historical figures, as illustrated in the chart below.
Real estate investments by Nordic institutions
6,0
5,0
EURbn
4,0
3,0
2,0
1,0
0,0
2009
2010
2011
2012
2013
2014
2015F
The chart shows real estate investments by Nordic institutions with 2015 being a forecast based on the survey
99
PANGEA RESEARCH – INSTITUTIONAL OUTLOOK
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PANGEA RESEARCH – INSTITUTIONAL OUTLOOK