Now a truly global market

Two leading international real estate consultants from the UK shed light on the worldwide dynamics impacting the CEE region, and how demographic changes and new sources of investment are shaking up the industry.
Yolande Barnes, Director of World Research at Savills
Rolling Stones or One Direction?

Whether you’re more familiar with rock legends The Rolling Stones or the latest pop boy band sensation One Direction can have a significant bearing on the real estate market, argued the Director of World Research at Savills, Yolande Barnes, speaking at Poland Today and PropertyEU’s CEE Summit in Warsaw. Here are some of the highlights:

“The world population is divided into the boomers and the Millennials. Those who recognize the Rolling Stones are the boomers, and those who identify with One Direction are the Millennials. The boomers are now pensioners and the Millennials are the workforce. The boomers have changed finance because they’ve had six decades of saving, which has had a big impact on the built environment and real estate. There’s a different – indebted – generation now, which is changing the investment world and the demand for workspace, living space, and cities.

By 2025, Millennials will form over half the world population and 75% of its workforce. They really are the future. However, there are a lot of countries, particularly European ones, that have seen their workforces shrink, for example France’s by nearly five percent since 1986 and Japan’s by over 12% since 1992. Therefore, the search is on for human capital – for talent – and it’s global. We now have to pay a lot more attention to Millennials – also known as Generation Y – and what they want. We are noticing that it’s the HR departments that are often coming to us with real estate requirements. They are not asking the question “what offices are available?” but “which city should I be in?” It’s not the cost of offices that is going to dictate the future of the workspace, but this search for global talent.

The important thing about Generation Y is that in their back pockets they have a handheld device which gives them access to everything, everywhere. And because these digital-native, tech-savvy generation can do anything anywhere, you really need to attract them to your city and have them be in your company. So we’ve become interested in where they hang out, and what they do when they’re there. Well, they prefer an old-fashioned street scene with coffee shops, because in a world where you can access everything, the only thing you can’t access is a face to face meeting with a human being. This is what these sorts of environments facilitate. So, tech cities are remarkably low tech. All over the world we’re seeing that younger generations want to be in a town or city centre, and this is really changing demand in cities.

It’s led us to think about the evolution of cities over the centuries, and suggest that we’re entering the fifth age of cities – the digital age. In the pre-industrial age, what mattered about a city was the ability to meet other people. In the early industrial city it was all about proximity to raw materials. Then we moved on to a Mercantile phase where trade and proximity to markets mattered. In the late 20th century, we’ve gone through the age of capital, where what matters is the ability to access financial capital.  Now this digital age starts to look more like the first age because what matters again is proximity to other people. So, it’s the access to human capital, not financial capital, that is starting to matter more.  

A big indicator of how well a city is going to do in the ‘new technology’ sector – and the creative sector – has a lot to do with what we call ‘city buzz’, basically how much is going on in the city culturally and socially, combined with well-being and wellness. That combination seems to give a pretty good indication of which cities are going to attract those talented millennial workers. So, what are the prospects for Europe and European cities? We’re going to become increasingly focused on the rent cycle – where cities are in terms of their rental growth prospects. These are increasingly attached to the fundamentals of the city and Europe does still look good value for occupiers. However, on a global stage, there are cities with that ‘city buzz’ which look cheap compared to the European cities. What will increasingly come into focus is residential property affordability. That is a major driver influencing people’s decisions. And again, some of the European cities actually look well-placed in that respect. Underpinning it all is the demographic strength of the city: how the workforce is forecast to grow; the ability of cities to attract the workforce of the future; the Millennial-to-boomer ratio (how many aging people the Millennials have to support, which in turn is a strong indicator of the kind of pressures that might be on social and health services). These questions will separate the cities that are going to do well, and those that will struggle. In short, cities need to boost their appeal to younger generations.”

A changing of the investment guard

At the same event – the CEE Summit in Warsaw – Richard Divall, Colliers International’s London-based Head of Cross Border Capital Markets for the EMEA region, gave a whistle-stop crash course in global real estate investment and how the CEE markets fit in. Here are some excerpts:

“I’m often on planes to Asia, and to North America, and now South Africa, so I have a good insight into what international investors are thinking. They are all very different so the easiest way is to categorise them into types of investor. There are really six types: the sovereign wealth funds, the global insurance companies and pension funds, the private equity funds, the family offices, the REITs, and then finally the big investment managers. What are they thinking, and what are they doing? We’ll start with the Sovereign Wealth Funds. They have safe, core strategies because of who they are. They often invest indirectly, and tend to favour co-investments with large investment managers. The Middle East funds have been around for ages. They like scale and – as opposed to a lot of Asian capital – often have local teams in Europe, which means they can access new markets. Once a big sovereign wealth fund goes into a new market or buys into a sector, then the rest of the country’s wealth – the insurance companies, the family offices, the REITs – generally follow, which is encouraging for the CEE region. The next types of investor are the global insurance companies and pension funds. They generally come from North America and Asia. Chinese state-owned enterprises are in this as well. They are here in Warsaw but you may not have heard this because they’re not doing it directly. 

Richard Divall, Colliers International

Then there are the private equity funds. They are completely different. Their cost of capital is higher, their hold periods are a lot shorter, they’re looking for value-added, like distressed assets which they can reposition, asset manage, and turn around. The trouble some of them have had entering the CEE markets is there hasn’t been as much distress here as there has been in Western Europe. Investors at this mature part of the cycle are moving away from risk and wanting to go into more core plus strategies. The fourth type of capital is family offices, the new name for private investors. There are a lot of them and they’re not making money in the bank in this low interest rate environment, therefore many are going into real estate. There’s also a lot of family office money from the Middle East that’s targeting the whole region as well. The fifth type is what I call the cash rich developers and the global REITs. The global REITs are being driven to diversify because there’s not enough scale in their markets or the pricing is too hot. The last group is what I call the global investment managers and they are very important for the CEE region because they have a lot of what I call ‘separate accounts’ – or non-discretionary mandates. They can get new money into the CEE markets because they have the local expertise, they understand the buying processes, and they understand the market dynamics.

Now onto how these groups act, and how the CEE market can come into play. Firstly, Asian capital tends to have very small teams, which basically means they can’t go and learn new markets. You can tell them that they should be buying offices in Budapest, for example, but they won’t do it because they don’t understand the market. They’re looking at the gateway cities with direct flights, which puts a city on a map. Three years ago, Manchester in the UK decided to do direct flights to Beijing. Within two months one of the big Beijing state-owned enterprises came over and invested hundreds of millions into a business park by Manchester Airport. Another point is that one of the first questions the global private equity funds ask is “are the local banks lending?”. They want to see liquidity and they want to see an exit. They feel a lot more comfortable if there is local institutional money or local REITS. It’s encouraging that Hungary has quite a few local institutions, the Czech Republic as well. If Poland goes down this route it will comfort the funds because they won’t feel they have to rely only on international capital to buy their product. Touching on the investment volumes, Poland might hit €5bn this year, which is fantastic. But it really is a changing of the guard. In the past it’s been German institutional money, UK money and US money. Now we are seeing more money from the Middle East, from South Africa, and of course Asia is growing. Real estate is now a truly global field.”

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Written by: Liam Frahm

Liam Frahm is Poland Today’s editorial co-ordinator and is based in the United Kingdom. He currently studies politics, philosophy and economics at Oxford University and is interested in current and international affairs.