Among the manic bustle of several thousand jostling Expo delegates, Invesco’s managing director of Europe Andy Rofe maintains an aura of tranquillity.
This is despite pricing in Europe getting keener as competition for assets grows, political and economic headwinds jolting the equity market, and the looming threat of interest rate hikes and slowing quantitative easing.
“In 2017 we have been busier than we have ever been,” he said.
”Since Brexit we have seen more capital flowing in to the business than we ever have before, which is kind of counter intuitive. It’s global real estate wanting to invest in Europe, including the UK.”
He says that with the political instability hitting the equity markets, and bonds still offering very little in terms of income, that is only continuing.
“They [investors] class real estate as a durable asset class that is a safe haven and less volatile. The movements you are getting in the equity markets as a result of political noise, currency movements, they affect the equity markets a lot more than real estate.
“The beauty of real estate is that it is relatively illiquid, you need to look at it on a long-term basis, and that protects it from a lot of volatility relative to those other asset classes.”
Invesco, which manages more than $68bn globally and which has three European real estate funds, is, like many other investors, putting more and more back into Europe. It has just closed its first value-add European fund with €350m.
While this attention on European real estate is driving down yields and putting pressure on managers to deploy capital, Rofe says he does not think that any markets have yet reached their peak.
“All of the markets are in uncharted territory, all of the capital values per sq ft are higher than we have ever dealt with before, but it has not slowed down equity into those markets,” he says.
Nor is he worried about fiscal threats. A recurring theme of the conference this year has been one of the fiscal headwinds that may be soon set to impact the sector: the likelihood of an imminent interest rate raise, and the chance of a slowing of quantitative easing.
Rolf is calm. “I think there is a lot of wriggle room,” he said.
“Yields on average are still 100 basis points above Gilts. Historically, Real Estate pricing has never really adjusted itself until it got within 25 basis points of the gilt level.
“We have got at least 12-18 months if not longer. Interest rates are going to drive gradually, but I cannot identify any real growth drivers that will accelerate interest rate in the short to medium term.”
Rofe points that while there has been a huge amount of political noise over the last 12 months, investors into real estate are just ignoring it.
“We are seeing this through the constant capital flows through the business,” he said.
“They are basically saying look in greater granularity at where you are investing, and the real estate underpinning those return profiles… and we will invest there irrespective of what is happening on the political scene.”
Rofe calmly explains that there are advantages for real estate in that uncertainty too – case in point the UK referendum.
“Leading up to Brexit we did not buy anything in the UK for 18 months, since Brexit we have bought about half a billion in the market,” he said.
“What Brexit did was create diversity of opinion, and that create quite an interesting market… What it really created was the opportunity to access assets that we couldn’t have done before, because people were not minded to sell.”
Does that mean he still think the UK has a place in the asset managers portfolio? Currently it accounts for about 15% of its European allocation.
“We are not under pressure to be in that market all of the time, we are only in that market when we want to be.
“I would say that the UK has a place in portfolios. People talk a lot about the growth rates, but Europe is working very hard to try and get up to the rates of growth that we have in the UK.”
Faith in these markets and how much longer they have to run or not, Rofe still think a big focus of Invesco going forward will be towards alternative real estate assets.
“We have got a real focus in the company on operational real estate, whether that’s residential or hotels and the space in between, co-living, serviced apartments.
“And I think that’s going to be developing, and the amount of capital that we have to deploy in those sectors is going to grow as a percentage of what we manage, I have no doubt about that.”
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