The directors of four European property consultancies exchange views on the credit squeeze, Chinese and Russian money, and the market’s recent past and its near future
This year marks a change for Europe’s property consultants. Just as investors can no longer count on rising prices, consultants can no longer count on raking in profits from organising tenders that attract hungry investors. EuroProperty invited four directors of Europe’s biggest consultancies to a round table discussion at its office in London to talk about their hopes and fears for next year.
Are you glad the year is over?
Tony Horrell: I think it has been an exciting year. Obviously the sentiment in the market is moving. This last quarter has seen lower volumes, transactions take longer and deals are falling out of bed. We are entering a period about confidence and negative sentiment with a number of investors not wanting or being able to take decisions. How is the market going to react in the first quarter next year?
Chris Bell: It has been a great 12 months and now we are seeing a slowdown in confidence. Continental Europe seems to be holding fair so far. So I’m optimistic for next year. Three years ago, we saw half the levels of last year.
Pat Gunne: We’re having this conversation in the middle of a credit crunch, so obviously there is a recession on debt and it has an impact on the capital markets. That has a huge impact on confidence. But we’re coming off a year during which West End rents grew by 25%, City rents by 20% and European rents by 10%.
John Slade: I hope we’re in the middle of the credit crunch and not somewhere at the beginning. I was worried that the UK market was going to grind to a halt but that has not happened. Sales are actually beginning to happen, maybe because people have redemptions and have to pay. The UK is down. In mainland Europe some places are and some are not. The large lot sizes, which rely on debt, are difficult to sell. The secondary market relies more on debt than anything.
How far have prices come down?
TH: In the UK, probably between 10% and 15%, going by prime yields. How much further could they fall? We’ll continue to see LTV ratios falling, and margins rising, which affects pricing. The volume of bidders is lower. For the Continent, there is a chill wind beginning to blow.
CB: I find it hard to see any logic behind it getting worse. Tenant markets around Europe are good. Interest rates remain low. People are not losing their jobs.
JS: I think 15% is as far as values will fall in the UK. London had quite a way to go because it was out of kilter with the rest of the market. In Europe, prices are going to resemble those of 18 months ago. Prime yields in Paris of 3.5%? You can forget that.
TH: We ignore the change of investor type at our peril. We have been so used to a range of types, particularly for larger lots. That has got a lot smaller now. A lot of investors are either out of the market or are looking at other regions of the world. We have become so used to “big is beautiful”.
JS: The supply of equity is still good. The German open-ended funds are back in the market. There is not a sign that they are going to be withdrawn. We’ve still got good property and the right price.
CB: Big deals are rare. The rise of portfolio deals happened in the past 12 to 18 months. Equity is not going away. There is still a good market for deals up to €100m.
JS: You’ve got a lot of funds that have got to invest in property and that money is not going to get out of the system.
Have you had any requests from China or Russia to invest?
PG: China has a lot of cash. When the Chinese bought a stake in Blackstone, they were just testing the water. When they come, they will be going for London and Paris prime assets. In three years, if we are having this chat, I think that Chinese buyers will be the biggest in the market.
JS: We’ll all be sitting in Beijing, then. A lot of rumbling is going on at the moment.
CB: I’m not sure about China. I’m not a big China fan, because they cannot get the money out of the country. There’s enough money in Europe to keep the market going.
TH: One thing about equity money from the Middle East or wherever is that it’s no longer smart to pay the best prime price and hang a picture on the wall for your collection. People will seek out value.
When do you expect the banks to come back?
TH: Assuming the US won’t have a big recession, it won’t be until at least the middle of next year.
CB: I tend to agree.
PG: There’s going to be a lot of bad news in the first quarter because only $70bn out of $200bn, or whatever it is, the bad stuff, is out of the system.
JS: I don’t think anybody knows the depth of the problem. This is a real kick in the guts. The UK market is beginning to slow down. It may come back in the middle of the year. If we came out of it by September, it would be a quick re-adjustment.
Should investors now wait till the second half and then step up in, or should they buy now?
JS: You haven’t got that many distressed sellers but you’ve got interest rates trending down at the same time. A lot of people have made a lot of money over the past ten years. People who bought in the past 12 months are probably pretty sick now because they have geared high and maybe they didn’t lock in the interest rate.
TH: A number of mezzanine funds, or let’s call them opportunist funds, are thinking that some time next year there will be some goods things to go through.
What is your forecast for the Continent?
JS: I think you’re still going to see a good market. Scandinavian markets have good growth and limited stock. Spain is going to be hard. It probably led London into the downward spiral of pricing and got very expensive. I think that central and eastern Europe has held up well in the past three to four months. We predicted that demand would fall there because people thought it would be high risk. Although there aren’t so many bidders, prices are going pretty well. Holland has a lot of stock, but there seems to be demand. Maybe it’s come off by 2.5% to 5%, but it’s coming off from record levels. Longer term, I think Germany is a good bet, but in the shorter term, pricing has slipped on the less good assets.
TH: I too like Stockholm, but there is some level of price change. It hasn’t come through from a lot of evidence. Paris has held up best in terms of investor interest. We haven’t seen the full movement on the Continent. There’s not enough evidence yet, but I think there’s some more slight negative change to come. It’s not going to be a big fall. The record levels of issue are over, which means you have pragmatic selling and buying.
If you were to make one bet on an area and sector to invest in next year for a period of five to seven years, where would you place your money?
JS: I would go into Paris and Moscow offices. I think that Russia is going to come in further. Politically, it’s going to keep its stability, thanks to whatever Putin is doing.
TH: I agree with Paris, but I would invest in Russian logistics. There is so much retail. Moving up the curve, I like retail and development in Turkey. I don’t see much price change on prime shopping centres.
CB: Moscow retail or logistics. Can I buy shares? Otherwise I was going to buy Great Portland at a 40% discount.
JS: You probably have some shares already.
PG: I would put half my money on my favourite city, London. I think it’s going to make the fastest correction. I would invest the other 50% into Moscow grade-A city- centre offices, ideally taking a leasing risk.
Where is not the place to go next year?
JS: Let me think where we haven’t got any clients! Not the place to go is eastern Europe – I think it has some corrections to go. I’d beware of secondary retail centres in central and eastern Europe.
TH: Some markets attract a lot of attention, but are relatively small – the Baltics or the Balkans, for example. But something tells me on a relative-value basis that they may not offer the best value all the time.
PG: Secondary assets in secondary cities, especially those with names I cannot spell.
How is your company adjusting to the credit squeeze?
PG: The occupier side is still active. The consultancy is still good. The capital market is a long-term game.
JS: Capital markets are going to vary. We need to be more aware of those opportunities. It’s also a time to look at costs and calm down on our lunches a bit.
TH: John, speak for yourself! So, John is going on a diet. We’ll continue to expand to new places or acquire other businesses. In the past few months, western European trading staff have been prepared to go to other markets. People have been moving around at a greater rate than before. All of us were looking for more staff. When that calms down, it may bring about a bit more decorum in the employment industry.
CB: We are all going to question expansion and whether it has been achieved. Sometimes it was a question of whether such a move was right, because it was expensive. People feel expensive. There’s no harm in taking a bit of the froth out. Our market share has a way to go relative to the market. If the market stood still, we’d still keep going because we’ve got a lot to go for.
Would you advocate doubling the size of your capital markets team next year?
CB: It’s unlikely to double, but we’d still expand. What we learned at end of the dotcom bubble is to hold your nerve. We’ll still pay top dollar for the best people but we’ll be looking harder. No doubling, but 10, 15 or 20%. When the markets return, good people are good assets.
TH: A lot more people will go into the emerging markets in Europe and Asia. You have to weigh up the career opportunity for the young person in the UK or France to get in one of those markets against losing their talents in Europe.
JS: We’ve been sprinting for the past two years. It’s now slowing. Even if the credit squeeze lasted for another year, there’s enough background work to keep us ticking over. We need to be in good shape when the market comes back. We are looking at other markets and it’s important to export your firm’s culture. There is a big opportunity in Russia. We all probably think we’re understaffed in Moscow relative to the potential. Japan is a big market. We don’t have a lot of staff there but Tokyo has a fantastic yield gap. We are looking at expanding but not at the pace we have seen over the past few years.
PG: All our capital market teams had a shortage of 20%. It’s just that the volume of people we were looking for has subsided. You don’t get into capital markets for the short term. For us, hiring is specific: Germany, eastern Europe, Moscow and Scandinavia. We’ve all had problems recruiting in the past few years.
