di Thomas Beyerle
When examining the current market situation, considerable interest in “value-add” investments can be observed among institutional investors over the past 12 months – both in the segment of companies previously acting as “core” investors and also among traditionally opportunistic investors. The reasons for this pincer movement are partly company-specific, but there is also another reason at the level of the market: the expansionary monetary policy of the ECB and the FED and the resulting yield compression for conventional investments are leading to increased counter-reactions when yields fall short of the traditional 5% benchmark for real estate investments. For example, the initial net yield for European core office investments in the investment locations examined is expected to average 4.5% at the end of this year. The corresponding figure in Germany is considerably lower at 3.6%. This represents a roughly 30% decline in initial net yields since 2000.
But what comes after the “value-add” investment, do these properties in fact have structurally higher risks in relation to the specific properties, tenants and locations? In this complex risk-adjusted situation, asset management therefore also increasingly requires attention as a value driver. To put it more simply: for the investor, a value-add classification is associated with more work with the property itself. Stabilising or increasing the cash flow component as a tactical objective. Strategically, this should certainly be accompanied by an increase in the change-in-value yield at the total return level.
In 2016, properties with a total value of EUR 256 billion changed hands in Europe in the commercial segment (office and retail). Catella Research estimates that around EUR 50 billion of this (20%) related to value-add properties. In the baseline scenario, we anticipate an average potential for resulting AM services totalling EUR 6 billion to EUR 10 billion by 2021. On average, the AM potential thus comes to just under EUR 1.6 billion per year in Europe. Based on the transaction data, we can see that in a comparison throughout Europe, the highest value-add transaction volume in 2016 was to be found in Germany (25%), the UK (22%) and France (14%).
See also our map “Value-add potential in Europe”.
The current momentum in the “value-add” segment is triggering two market reactions at once: firstly, for each euro invested, asset management measures worth 20 cents are capitalised. Secondly, it is giving rise to a strong focus on real estate private equity funds, which have a new target group structure. Due to the continuing compression of initial yields, institutional investors’ interest in value-add investments is growing in the current year, too. Nonetheless, documented expertise in strategic and operational asset management is essential. This ability represents the real value driver.