There’s a question that international investors ask their advisers a lot: should I buy or should I lend? It is certainly a question that Richard Dakin, head of CBRE Capital Advisors, and Dominic Smith, senior director in CBRE’s research team, have struggled to answer with more than a “it depends”.
However, the pair have collected data from the largest office markets across 20 European countries to come up with a more scientific response and have, using CBRE’s European Forecasting service and Debt Map, created hurdle rates of return for ungeared equity investors and debt investors in an attempt to forecast the risks associated with both debt and equity – hedged, of course, against the euro.
Here they explain their three main findings:
1) A majority (12) of markets are forecast to outperform at least one of their debt or equity hurdle rates, suggesting that investors with a flexible strategy have plenty of opportunities to choose from.
The seven markets forecast to underperform hurdle rates are by no means no-go areas, however. Investment in debt or equity in these markets merely requires superior deal selection skills, since the market cannot be relied upon to do the heavy lifting. Or, of course, investors may have different risk premiums (and therefore lower hurdle rates).
2) It is not the case that – as is often supposed – markets that are good for equity are bad for debt, and vice versa. If this were true, then all the data points would be in either the top left or bottom right quadrants of the graph (right). In fact, 14 are not. This shows that it is perfectly possible for markets to be simultaneously attractive (and unattractive) for both equity and debt alike.
3) Six markets are forecast to deliver above-hurdle rate returns for both equity and debt, including the three largest markets – London, Paris and Frankfurt – as well as Copenhagen, Oslo and Vienna. But while there are some common themes uniting these markets, such as low risk premiums and low prevailing senior debt LTV, these do not apply universally.
And while many of the eight markets forecast to underperform both debt and equity hurdle rates have high risk premiums and high prevailing senior debt LTV, this is not always the case.
“A market underperforming at the average level need not dissuade an investor from selectively identifying opportunities that will deliver against hurdle rates,” says Dakin. “And then of course there are the curve balls: if the client on the other end of the phone happens to be a Korean investor, currently enjoying a positive carry from currency hedging of more than 150bps, then very suddenly all bets seem to be on.”
He adds that CBRE’s analysis shows there are still interesting areas to invest in across the market, despite the late-cycle conditions we are experiencing.
“It is vital, though,” warns Dakin, “that to capture all opportunities investors are as flexible as they can be in their approach and consider debt as an asset class worthy of attention, depending on the market context.”
Main image © Lydie Gigerichova/imageBROKER/Shutterstock
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