By Paul Stenson, Head of Real Estate Investment Management, Ireland
It’s now roughly ten weeks since the curtains came down on EXPO REAL 2023. With that in mind, I thought it might be a good time to look back at some of the key themes from this year’s trade fair.
Overall, a remarkable number of prevailing themes have proved prescient and gathered further momentum since the event. But some of the doomsday rhetoric may have been a bit overdone, as selective ‘green shoots’ are now appearing across certain markets.
In quite a few discussions at EXPO REAL, there was talk of an expanding universe of alternative assets, and how funds can now gain exposure to exciting new investments such as battery storage plants, wind farms and other renewable energy assets. Since then, this theme has gained more traction with the Urban Land Institute (ULI) and PwC highlighting ‘energy transition’ assets as the number one sector prospect for 2024 in their recently published ‘Emerging Trends in Real Estate’ report. It will be interesting to see how traditional investors and consultants adapt to this area of quasi-operational real estate. Remember that things move fast once initial industry interest translates into strategy; for example, life science as a sub-sector barely existed 10 years ago.
Another dominant theme at this year’s event was artificial intelligence (AI). AI is still an emerging technology, so it’s hard to know what impact it will have on the industry. However, it’s worth noting that earlier this month, Digital Realty and Blackstone announced a $7 billion hyperscale data centre joint venture. Through the joint venture, the two companies are set to develop four hyperscale data centre campuses in three metro areas across two continents in an effort to capitalise on the explosive growth in data. “Data centres are experiencing once-in-a-generation demand growth, driven by cloud adoption and the AI revolution,” commented Jon Gray, President & COO of Blackstone, when the joint venture was announced.
It was mentioned at EXPO REAL that financing and refinancing has been challenging in 2023, and this trend has persisted. That said, we have seen some notable success in the last two months, especially in the refinancing arena with incumbent lenders opting to stay the distance in expiring facilities in many markets and sectors. On the downside, development finance feels like it is even more difficult to secure than it was two months ago, especially for non-living sectors.
Insolvency events – another key topic at the trade fair – have continued to create headlines recently with some of the names mentioned in hushed tones at EXPO REAL now in formal insolvency processes and beginning complex restructurings. This will obviously have a further dampening effect as the extent of exposure to the likes of Signa Group becomes apparent. On the occupier side we have seen some more retail casualties, but nothing not already expected – much like the long-running WeWork train derailment (which we have all been watching in multi-year astonishment).
All that said, some institutions are looking at 2024 as a fresh start and highlighting opportunities. For example, the likes of AEW Capital Management and Blackstone have recently stated that there are prospective sectors and locations offering value that they consider targets for 2024. This is impacting allocation strategies, and we have heard of large funds reconsidering some of the rebasing they did during 2023. There have also been instances of successful fundraising completions since October, such as Hines’ HEVF 3, which raised over €1.6 billion. These successful fundraisings have been weighted towards well-proven investment managers and strong thematic business cases. Also, the renewed interest in the UK seems to be gaining strength. This might not be reflected in transactional values, but it is reflected in the amount of underwriting modelling and market investigations that are being instructed by interested parties.
On the regulatory front, the German tax changes that formed the basis of many discussions seem to be settling down faster than I expected. However, it could be that smaller institutions are only now beginning to realise what is needed to be undertaken. There have also been some new residential regulations implemented in the Netherlands and Spain, but investors have come to expect some degree of government intervention in the European residential sector today.
Finally, we have ESG, which is on the mind of every market participant right now. According to a CBRE report in November, the office sector is suffering the most value destruction here, with low scoring assets experiencing something of a magnifier effect compared to low scoring logistics or retail assets. Speaking of the office sector, it continues to languish in the doldrums, with purchasers and tenants becoming even more discerning, so I won’t elaborate further on this sector.
This blog started out as a personal research note, so hopefully it made some sense. In any case, I’m very much looking forward to EXPO REAL 2024, which will take place at Messe München on 7-9 October 2024. Straight after Munich’s 2024 Oktoberfest, in fact – how convenient!