European Residential Investment Market Update EMEA Residential Research | Spring 2018 Residential investment overview Contents Market size by country €0.7 €1.0 Residential investment overview 3 €0.7 City investment volumes 4 €2.6 Denmark 8 France 10 €2.9 Germany 12 €17.0 Ireland 14 €2.9 Netherlands 16 Spain 18 Sweden 20 €4.2 United Kingdom 22 Final word 24 Contacts 25 €5.3 €5.6 ■ Germany ■ Sweden ■ Denmark ■ Netherlands ■ France ■ United Kingdom ■ Spain ■ Finland ■ Ireland ■ Other 3 European Residential Investment Report | Spring 2018 City investment volumes European market overview 2017 • Investment in European residential totalled €43 billion in 2017, including stabilised assets, development deals as well as corporate transactions. • This year, the market has continued to experience a growth in demand from a wider range of global investors attracted to the stable income profile, improved diversification and possibility of building a residential platform. This appetite is expected to grow unabated for the foreseeable future. • Peripheral markets such as Denmark, Spain and Ireland saw significant growth in investment volumes as investors targeted opportunities in emerging markets. Growing liquidity Yield compression Institutional investment in European residential continued Europe’s core cities have seen strongest example over the its trajectory of growth, with total investment rising by 13% past year, with Amsterdam seeing average yields move in by to €43 billion in 2017. A number of markets saw double- 45bps to 3.2%, over 2017. digit growth in investment volumes over the past year with Yield compression has been strongest in primary and Spain, Denmark, Ireland and the Netherlands observing the secondary markets across Europe although certain markets, strongest growth. Volumes in these markets increased by namely Sweden and Germany, have seen much more between 40% and 200% year on year and are forecast to moderate changes in pricing. Both of these markets already continue growing over the next year. have significantly lower net yields of between 1.5%-2% and 2.5%-3% respectively. Foreign capital We anticipate that these markets are likely to observe Overseas capital, in these markets in particular, represented a slight or no yield compression over the next 12 months, significant share of total activity. While foreign investors have with the greatest compression likely to occur in secondary traditionally been aggressive in targeting standing stock assets geographies or emerging markets. with value-add opportunities, their appetite to move further Berlin Dusseldorf €3700m €560m up the risk curve has led to significant growth in the number of 1 13 Outlook Copenhagen Dresden forward deals completed. This is particularly true for investors €1750m €500m 2 14 who have been able to acquire at scale and have had a As investors’ demand shifts towards residential, overall Stockholm Greater Manchester 3 €1400m 15 €490m number of years’ experience operating in foreign markets. demand far outstrips potential opportunities in the market. Greater Paris The Hague Standing stock opportunities are not as ubiquitous as they 4 €1280m 16 €490m once were and moving forward will not be the only way in Paris Forward deals Malmo which investors enter a new, foreign market. The scarcity 5 €1180m 17 €470m The total volume of forward deals across the continent London of income producing assets acts as a common theme and Gothenburg remains above long-term levels with growth driven by strong 6 €1100m 18 €320m drives our predictions for the year ahead. Madrid Utrecht demand from both domestic and international investors. 7 €1100m 19 €290m This is often the easiest route to market due the shortage of Hamburg Munich standing stock opportunities, particularly in markets that 8 €1000m 20 €290m Dublin Edinburgh do not have a wealth of stabilised assets such as the United 9 €700m 21 €280m Kingdom and Ireland. The overweight of capital against Amsterdam Marseille available opportunities is driving greater attention towards 10 €610m 22 €270m Barcelona Rotterdam joint-venture deals where investors can get access to suitable 11 €600m 23 €170m land and development opportunities. Helsingborg 12 €560m European Residential Investment Report | Spring 2018 4 5 European Residential Investment Report | Spring 2018 Investment outlook Liquidity growth but at a slower rate There are now a number of truly pan-European M&A in residential will follow commercial residential investors with significant scale in multiple historical highs JLL anticipates that European residential investment markets. That number is anticipated to increase as demand volumes will continue to grow over the coming year to a for geographically diversified portfolios increases, in Commercial real estate M&A activity is at an all-time high total of between €47bn and €49bn. particular from investors with a strong residential track in Europe following a number of high profile acquisitions in However, more pertinently, the rate at which volumes record in their native market that are able to leverage their 2017. Although traditional commercial sectors represent a grow is unlikely to keep up with historic levels as the lack existing experience. greater portion of current activity, early signs in 2018 indicate of readily available investment opportunities will hinder that this trend is likely to spread to residential. The desire from investors to drive scale and the scarcity of suitable growth. Forward deals are likely to increase but not by Joint ventures will drive cross border and a sufficient level to keep historic rates of circa 15% p.a. product are two fundamental reasons why JLL anticipates growth achievable. forward activity growth in residential M&A activity over 2018. The overweight of capital against available opportunities is Vonovia’s €5.2bn acquisition of Buwog in March 2018 driving greater attention towards joint-venture deals where highlights the weight of capital targeting opportunities in European residential investment investors can get access to suitable land and development foreign investment markets, but heightened M&A activity opportunities. While this type of deal structure has been most 50 (€bn) is not restricted to these geographies. Germany’s largest common in nascent stage markets with high inflows of foreign residential owner has also sought out opportunities capital such as Spain, we have observed a number of investors in Scandinavia and France in the past 12 months, with 40 partnering up with local developers across the continent. particular interest in Sweden. The chronic shortage of institutional grade residential 30 investment stock across Europe’s largest markets has historically acted as a significant hindrance to investors 20 seeking to deploy capital in the sector. However, there has been a marked shift in investors’ appetite for risk, be that 10 development or letting, which has seen them edge further up the risk curve. 0 Forward funding, forward commitment and land deals 2014 2015 2016 2017 2018 are the easiest route to market for investors in residential. 2015 volumes were characterised by extraordinary levels of M&A However, foreign investors or non-residential specialists are extremely cautious of entering this segment of the market Heightened geographical diversification without a suitable partner. Cross-border residential investment volumes in Europe As the number of the joint-venture partnerships have now represent a third of total volumes, up from 25% just a increased, we anticipate that this trend will continue to grow year ago. Investors that have traditionally had exposure to strongly into 2018. Lendlease and CPPIB’s recently announced more than one residential market in Europe have usually UK joint venture is indicative of this wider trend that is clearly acquired assets in Europe’s more mature markets or not limited to any single market or investor type. markets with similar legislative structures to their own. This dynamic has begun to change as investors have become more adept at operating in markets with nuanced differences in rental market legislation. Peripheral markets with strong fundamentals are the greatest benefactors of these flows of capital and are likely to see the greatest growth in short-term investment volumes. European Residential Investment Report | Spring 2018 6 7 European Residential Investment Report | Spring 2018 Spotlight on Denmark Denmark Net yield map Do you anticipate non-domestic Foreign investment fuels significant growth in investment activity volumes of capital to increase? As things stand, foreign investor activity can be attributed to just a few market players. We expect this dynamic to change and anticipate that more foreign investors will enter the market in the near future, which will increase competition for core assets. • Residential investment volumes The record high transaction volume of forward deals in Denmark last year As international investors typically for 2017 reached a total of €5.3bn in Denmark last year was largely were acquired by Danish investors, with prefer low-complexity assets, we €5.3bn, an increase of just over attributable to heightened levels of pension funds being particularly active expect heightened competition in 50% from the previous year foreign investment. Overseas investors in the smaller ticket segment of the the development market with more • Levels of foreign investment became more aggressive in targeting forward market. aggressive underwriting of rental levels Danish opportunities as a