MIPIM 2017: The view from the Croisette

By Paul Norman - Friday, March 17, 2017 14:11

Whether it was the purposeful response to the global political turmoil that has so affected European markets in recent months or just a product of the glorious sunshine but 2017’s MIPIM was notably becalmed compared to recent years. “Brexit” and the global electoral shift away from globalisation was the clear subtext for much with UK plc and government out in force trying to provide clarity about the post-Brexit world while down in the bunker rivals from France (in particular) and elsewhere were making it clear that there were now better places for businesses to place their money. CoStar News catches up with key figures in the industry to see who won that argument and to focus on the key themes emerging from the Croisette this year.

Around 24,200 people made it along to Cannes for property’s annual catch up, slightly up on last year, and there was plenty of evidence that buyers and sellers alike were taking MIPIM as seriously as they ever have.

There were over 5,000 investors and financial institutions and major international real estate projects were showcased by representatives from 23 nations including the refurbishment of historic monuments in Kyoto into a new Park Hyatt hotel, the creation of a “state-of-the-art” scientific and technology park on the 2015 Expo site in Milan, and the “cultural garden suburb” on Liverpool’s International Festival Garden site. Exhibitions explored innovations across the real estate world as technology “disruptors” and “smart city” creators increasingly dominate the Palais’s auditoriums.

The UK regions in particular also impressed with the quality of their pitches and presentations as Leeds, the Midlands Engine, Belfast and the Scottish Cities Alliance all told strong stories about their cities and the opportunities there.

But it was hard to compete with Manchester this year. Not only had the city introduced its own splendid pavilion by the sea for presenting but the outgoing Sir Howard Bernstein – of whom a lot more later - was in town to reflect on his years as chief of Manchester city council alongside a sprinkling of former Manchester united footballers who added a bit of stardust to proceedings.

Encouragingly there was plenty of commercial news emerging, both via the flurry of announcements coming out of the regional and city delegations as well as from conversations in the bars, tents, boats and restaurants that dot the Cannes croisette.

Brexit and all that

But the elephant in the room was “Brexit” and global political developments. The conference launched alongside two momentous political developments – government success in securing final passage for its so-called Brexit Bill and Scottish first minister Nicola Sturgeon’s decision to call for a second vote on Scottish independence – and that helped to frame much of what followed. The key message was property investors should not push the panic button in response as the market increasingly adjusts to extended political uncertainty.

Within this there was a sense that it has never been more important for real estate to foster close relationships with the corridors of political power and never it seems has this feeling been more recipricated.

Notably this was the largest UK presence yet seen at MIPIM yet with 960 UK exhibiting companies and cities, up 24% on 2016, and over 5,600 attendees. For the first time, the British Government hosted its own pavilion to raise awareness of its ‘Invest in Great’ campaign to promote international investment in the UK and promote the services and expertise of British firms in property and construction.

Three government ministers attended the event, Gavin Barwell, Minister for Housing, Planning and London, Mark Garnier, International Trade Minister and Baroness Neville-Rolfe, Commercial Secretary to the Treasury.

And the Prime Minister and the Scottish First Minister also both took the time out to provide upbeat statements for the MIPIM World “Destination UK” report.

The Prime Minister said: “As we leave the European Union, I am determined that we will seize the opportunity to forge a new bold role for a Global Britain as the most outward looking free trading nation in the world. At this conference we will demonstrate the continued attractiveness of all parts fo the UK for domestic and foreign capital. And by attracting investors to the whole of the UK’s real estate market, we will in turn drive jobs and growth across our whole economy, helping to build the homes that Britain needs and regeneration towns and cities in every region of the UK.”

Nicola Sturgeon, First Minister of Scotland, said: “I wish the Scottish Cities Alliance every success in showcasing the unique investment opportunities offered by Scotland’s seven cities, both individually and collectively.. The EY Attractiveness Survey recently named Scotland the number one place to invest outside London, with the best inward investment performance on record. That’s a compelling proposition for international investors.”

Mark Garnier, Parliamentary Under Secretary of State at the Department for International Trade, jetted in for a series of speed dates with key real estate stakeholders fighting the good fight for UK plc. He told CoStar News: “Up until Christmas the Brexit vote was causing uncertainty for the commercial market but that seems to have settled down so that we can construct a really positive business case for investing in the UK. We are embarking on an exciting journey. We are going to be much more international and it is now about getting out to the rest of the world. What we want to see from the real estate sector and would like to help with is how it can meet this demand from overseas investors into building and infrastructure.”

Gavin Barwell said that the under-supply in UK housing represents a significant opportunity for overseas institutions and funds seeking to invest in Britain. He said: “There’s huge potential to bring in investment from outside the UK. There is real demand for housing all over the country and for institutions there are investment opportunities. There’s a clear commitment from government, backed up by increased spending. We have a clear ambition to increase the supply.”

Jules Pipe, Deputy Mayor of London predicted that the UK capital will continue to be the dominant European hub for global investors. Pipe said that if real estate investors seek alternative destinations to London, they are likely to look at New York, Singapore or Hong Kong rather than European capitals.

The UK property industry was also keen to discuss the realities of a post Brexit UK. Colliers International was reporting that while it would be interesting to track the immediate response of the markets to the triggering of Article 50 as well as the impact on household expenditure there remained greater risks to the performance of UK property markets.

At its annual MIPIM market update on Europe as the conference gets underway the theme was that the greatest risk to the stability in the UK commercial property market is not a ‘Brexit’, but the policies that Donald Tusk, President of the European Council and Donald Trump, President of the United States, may introduce in the coming year.

In “In the Balance: United Kingdom 2017” Colliers identified EU fragmentation and US economic policy as the biggest risks to the future of the UK commercial property sector which, despite entering a normal cyclical slowdown, is otherwise being buoyed by powerful macro factors such as the sheer weight of global capital seeking yield, global demographics adding more to savings and pension pots, low interest rates and low bond yields.

Richard Divall, Head of Cross Border Capital Markets, EMEA at Colliers International, said: “The remarkable feature of Brexit has been its limited impact on UK occupier markets. Net absorption data for London suggests that occupier markets have only marginally weakened, and much of this can be linked to the banking and finance sectors who were already in the process of downsizing expensive Central London exposures by ‘north shoring’ back office functions.”

Despite the substantial forces supporting global real estate and UK real estate in particular, there are numerous risks that shape the views of even long term property investors added Walter Boettcher, Chief Economist at Colliers International:

“In the UK, media attention has been centred primarily on ‘Brexit’, but this risk to investors is a small part of a much larger risk of wider EU fragmentation and new Eurozone instabilities. Growing nationalism in key countries such as France, Italy, and the Netherlands, among others, poses large risks to Donald Tusk’s mission to push forward EU political unity. Many EU members are wishing to re-claim national sovereignty in many areas, including re-establishing national currencies. In fact, the UK’s notification to leave is looking increasingly as confirmation of EU political mismanagement.”

The Scottish Cities Alliance was out in force with a range of investment opportunities at Aberdeen, Dundee, Edinburgh, Glasgow, Inverness, Perth and Stirling and Stuart Black, director of development and infrastructure, the Highland council, was telling visitors to their bunker stand that a series of UK government backed City deals were going some way to help take forward schemes that in the past would have relied on EU funding.

On first minister Nicola Sturgeon’s confirmation that she will ask for permission to hold a second referendum on Scottish independence with a vote to be held between the autumn of 2018 and the spring of the following year George said: “In some ways it is useful publicity. Scotland is a very stable economy with a high-skilled workforce and politicians that are very focused on growing the economy.”

David Davidson, Cushman & Wakefield’s Chairman in Scotland, said there was no need for panic about Nicola Sturgeon’s decision to ask permission to hold a second referendum.

He said: “Indy Ref2 will be the third Referendum in four years in Scotland and we therefore have some perspective that we didn't have in 2014. Business has to go on. There is a point where businesses have to focus on the day to day. That was one of the surprising outcomes leading up to the 2014 Scottish Referendum and immediately following the BREXIT vote.

“Activity levels were lower than in non-referendum years but tenants with lease events relocated and investment properties traded. Glasgow and Edinburgh had robust levels of office take up in 2016. While some investors sensed increased risk, some saw opportunity. Core international and UK capital was more risk averse but others sensed opportunity.

“Discounted pricing was not as bad as initially feared. Some investment sales stalled but most property on the market prior to BREXIT has now been sold. Cushman & Wakefield has a number of properties on the market in Scotland now and the next two months will test market appetite for Scotland.

“Perhaps after the surprise of the BREXIT and Trump votes, the prospect of more change in Scotland will seem less of a concern? And perhaps politicians north and south of the border can get on with the job of growing the economy?”

The mood

So what were the key themes for the industry this year?

Chris Ireland, UK chief executive, JLL, caught the generally positive sentiment as well as the commitment to navigating a sure path for the UK and other global markets in the face of political uncertainty: “Whether or not it is the weather and the pyschological impact that has, but it has felt that there is a generally positive and constructive mood this year. It has reinforced my sense that for overseas investors, the UK, and in particular London, remains a priority. There is a lot of Chinese and Asian money looking at the capital, and outside of London there is a lot of appetite from German and Middle Eastern investors. Some of the big overseas investors are also looking increasingly at how to get involved with major UK wide development and regeneration projects. Government and local authorities are getting the message out more at MIPIM too in response to the Brexit vote.

“Overall despite a number of very big deals we expect transactions will likely flatten in the next quarter as the underlying general market is still short of stock. But pricing is strong and that does encourage more sales. We are seeing strong growth in industrial and logistics and in alternatives in particular.”

Paul Brundage, Oxford Properties, executive vice-president, Senior Managing Director, Europe and vice-president of the BPF, had a clear message both in terms of his role as a major North American investor in UK real estate and his upcoming role as BPF president: “There has never been a more important time for the property industry to be in partnership with UK government. As the first non British president of the BPF I will be focusing on three key areas of messaging for UK property. They are how it contributes to economic growth, essential infrastructure and great places. In terms of Oxford London was one of our key market focuses ahead of the referendum vote and this is still the case.

"We remain bullish about investing in the UK. For the BPF there are five key responses to the political landscape. Working in partnership, encouraging a stable regulatory environment, encouraging funding of infrastructure, focusing on skills required and focusing on the housing sector. My focus will be on continuing to be diverse in terms of people, sector, asset class, geography and capital structure. And we will emphasise being inclusive.”

Gerry Hughes, chief executive, GVA, picked out a series of developing themes at the conference: “Government is very much here and the industry too talking about a post-Brexit world. The key themes are cities are getting their acts together more and more in terms of promoting city economies and working across local authority boundaries. Secondly the importance of private/public partnership has been reinforced. Thirdly there is way more attention on technology and how it is affecting the workplace. How do authorities create the right environment for the digital space is a key theme? The market remains a little flat in some areas because of the political situation and uncertainty but there are strong sectors too.”

Tomas Jurdak, CEO, HB Reavis, who took part in a conference moderated by CoStar News on the impact of Brexit on London real estate was clear that his companies’ commitment to the capital was unchanged but said the vote had put the brakes on expansion into the UK regions: “We want to diversify our balance sheet. Our plan is to split our exposure to one third in the UK, one third in central and Eastern Europe and one third elsewhere and we are looking particularly at Germany and Asia. As part of this we are under offer on four schemes in London. Our attitude to London has not changed post the referendum. We take a long-term view and believe in the fundamentals of London.

"There will be a short term impact on rents and values for two to three years but in the long-term it is a very stable market. But we did decide against looking at regional UK office markets after the referendum vote as we do not know what the impact is likely to be. At HB Reavis we spend a lot of time on research and innovating. London offices are often old and conservative and we have done a lot of work on improving access, changing the floors and creating space that supports our clients. It is a creative process.

AXA IM Real Assets head of UK transactions Huw Stephens was one of a number of long-term fund manager investors to point to the fundamental appeal of property as an asset class and the cyclical nature of real estate investment which continues irrespective of other events: “Property can be made more complicated than it needs to be. London and the South East drives 38% of the UK’s GDP. In 2010-11 we took the view that London would recover smartly from the recession. We were able to buy, on behalf of clients, land at the right level and start developing into the recovery. We believed in the market particularly because of certain trends such as re-urbanisation and the merging of the various submarkets where for instance we believe that the rental disconnect between the West End and the City will even itself out eventually. The biggest change now is to do with technology and the way we use and occupy space. The specification we look at for instance at our 22 Bishopsgate development sees it as a vertical community and the structure has to be more adaptable and flexible."

Justin O’Connor, chief executive officer, Savills Investment Management, said: “It is natural to wait and see for many investors with the current global political and economic uncertainty, particularly given the long-term nature of the asset class. Of course for others there will be money burning a hole in their pocket. We are launching a pan European retail fund with a diversified investment strategy. We see good opportunities for retail in such markets as the Nordics and Italy where pricing is attractive. We like convenience based shopping centres, retail parks and high street retail. In the UK, there is also the opportunity of acquiring schemes which have been undermanaged off a new pricing base allowing us to add value through repositioning and changing the tenant mix.”

There was general agreement that transactions will fall away in the coming months but that there will be continued strong performance in some sectors.

Simon Williams, head of UK investment, BNP Paribas Real Estate, said: “There is not a lot of product around but a restricted market means that investors need good advisers. The first quarters investment volumes will look good but mainly as a result of a smaller number of big deals. The next quarters investment volumes is likely to be down as there is less product and most buyers are looking for core product. However there are always opportunities and it's important for advisers to work harder to find different and maybe more complex or less obvious opportunities in markets like this.”

A number of themes were emerging in the real estate finance markets. Chris Holmes, head of debt, EMEA, JLL, said: “A first trend is the strength of Asian demand to invest equity in the UK from Hong Kong, Singapore, Taiwan and Korea. And they are bringing their domestic banking relationships to the UK market. The debt is arranged with local relationships where there will be better cost of funding or perhaps corporate recourse banking. We are seeing the very early influx of these funds and there will be massive growth.

"There are also a lot of parties from Asia wanting to be involved in the secondary part of the loan and in syndication. Distribution is growing in these markets and we are very focused on advising on this, identifying debt and opportunities for servicing this. Our recent hiring’s in Australia and Asia-Pac are part of our plan to create a global debt distribution function.

“A second and maybe interrelated theme is certain lenders are increasingly interested in bigger ticket deals in the alternatives sectors. It is becoming more attractive. As there is more investment yield slightly higher margins can be secured. With core central London at tight yields becoming increasingly interesting to Asian lenders, alternative asset classes for some lenders are a key growth area.”

The regional markets were also keen to tell individual stories of life in a post-Brexit world.

Chris Cheap, senior director at GVA’s Manchester office, said: I have been really proud of Manchester here again. The city sticks its head above the parapet and sees itself as competing with the leading tier 2 European cities. The ambition comes across with a lot of stakeholders here and a strong presence. The city is at a crossroads in terms of local governance and how the new chief executive deals with devolved powers going forward will be crucial. The market though is characterised by huge demand for office space. That demand story of above 1.2m sq ft of take-up for each of the last three years is a strong catalyst for the city.

Mike Hawkins, director, Colliers International, said: “Sir Howard Bernstein is irreplaceable of course. In the same way there will never be another Cantona or Messi but you will have something different. The success of Manchester as a city has been years in the making and there is a great team in place at Manchester council that have all contributed tot his. Post Brexit Manchester is seen as a highly credible city to grow businesses and invest. After 23rd June there were 600,000 sq ft of office lettings across all sectors – legal, pharmaceutical, accountants, financial, technology. There are five global serviced office requirements in Manchester currently and these are incubators for new start-up companies that Manchester can help expand. The demographic profile of Manchester has irrevocably changed.”

Sir Howard Bernstein, outgoing chief executive of Manchester city council, reflected: “Over the last 20 years the story has been about adapting to the global market with a diversified economic base, broadening and deepening key assets and services and transport and infrastructure, investing in science and innovation. It has been about growing an eco-system to meet demand. My proudest moments have been how we dealt with the bomb in 1996, the preparation for the Commonwealth Games and the regeneration created on the back of this particularly at the Etihad campus and the ongoing regeneration of east Manchester, the rethinking of the Manchester office offer with Spinningfields and NOMA and so on.

“We have developed a culture of collaboration with the private sector and among the 10 local authorities, pushing the same priorities and there is a collective spirit in Manchester. With regards to Brexit there are two lenses to see it through - a European one and a UK one. I don’t think the Europeans have understood the full implications of what a chaotic exit would mean for Europe as well as the UK.

Secondly from a UK lens there will be eco"nomic and political uncertainty for a few years and we are still open for business of course but it is about how we are smart about tracking the international opportunity. Manchester has a better chance of success as part of the Northern Powerhouse. Better transport links between the Northern cities is pivotal. Being clear about the sectors we are investing in will be key.

"In terms of devolution we must deliver on what we have promised - it is a great responsibility. In health and social care we must deliver transformational changes. And we must focus particularly on skills given the disconnect many people feel with the country.

“MIPIM is incredibly useful. We come and we work very hard. It enables us to have a platform for the Manchester Partnership to network among themselves sharing ideas and developing shared priorities There is an opportunity for people to talk about the challenges facing cities. At a panel this morning with Amsterdam, Stockholm, Antwerp we all said who benefits from Brexit – and the answer was no one. And also of course we can bring forward key opportunities seeking investment support.”

Sector wise there were many keen to point out the continued strengths and opportunities being driven by structural change unaffected by political events.

The poster child for real estate at present is industrial and key players were unsurprisingly buoyant about the opportunities. Ian Worboys, chief executive officer, P3, said: “Under GIC’s ownership and with direct support from senior management in Singapore, we have plans to grow strongly. We will reveal our investment strategy later in the year but there are obvious gaps to grow into including the UK and Hungary in terms of new markets. We will continue to build upon what we have and we like to buy up land around our existing parks. We are also focused on redeveloping older assets.

“There is a lot of older stock in great locations. It has turned to very much a landlord market just now in industrial. We will buy standing stock and we will also look to buy other opportunities or partner with other developers that do not have our capabilities to take sites forward. And, in addition to all of this, what we spend a lot of time doing is making our customers really feel like valued customers.”

Andy Harding, lead director JLL UK industrial and logistics said: “For JLL, industrial and logistics has been one of the better performing sectors over the last 24 months and we continue to look at markets and specialisms were we can continue to grow our business. One area we have focused on is improving our strategic occupier advisory service and given the response from our key and new clients we will continue to look at expanding this specialist team. Overall it is hugely positive that in the UK enquiry levels continue to increase in key markets with part of our focus being on identifying new development opportunities to feed the continued demand.

In the retail space Capital & Regional investment director James Ryman, said: “We are finding that we have a strong retailing market, with a good volume of [leasing] deals and store upgrades, particularly where we have invested in the centres. But there are clearly headwinds created by Brexit and currency movements and we are working actively to make sure our assets stay relevant.”

Capital & Regional has recently announced a series of lettings, including two former BHS units at its shopping centres in Walthamstow and Redditch to Lidl and The Range. It has also been active in the investment market, buying The Exchange in Ilford in January and The Marlowes shopping centre last year. Ryman said it remained acquisitive, with a view to buy schemes in the UK’s top towns where retailers want to be.

Focusing on the advisory world while potential consolidation grabbed some headlines there were plenty seeing opportunity for growth in changed climate.

Cluttons senior partner Steven Morgan said: “We are going to refocus on our core markets delivering a top-end service to our clients. There is a great opportunity for growth of a large niche market practice given the consolidation in the agency space. We will focus on the London estates and our property and asset management offer.”

pnorman@costar.co.uk

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