Our Thoughts
Mon, 07/10/2024 - 12:00
· 3 min read

Expo Real 2024: A Test of Sentiment at a Crucial Moment

The Messe München Exhibition Centre isn’t the most glamorous getaway on the property calendar, but you’ll be compensated with information for sacrificing the tan.

Hand me a glass of crisp white wine on a sunny coastal boulevard in the French Riviera, and I’ll tell you I’m feeling optimistic. A coffee in the bowels of a Bavarian exhibition centre doesn’t inspire the same feeling, and that’s why Expo Real is so useful.

I’ve been to about half of the past twenty editions, and this year’s will be among the most interesting – perhaps just behind 2008, when the conference was shaken by the collapse of Lehman Brothers just three weeks earlier. Expo always comes at a crucial moment in the transaction calendar, and this time it’s arriving at a critical moment in the real estate cycle. Are we at the end of the old one, or the beginning of the new one?

My sense is that hope will permeate the 40,000 or so fund managers, private equity executives and advisors milling among the 2,000-odd stands. In the UK, at least, an economic recovery looks set to gather momentum, and conditions look very favourable relative to European peers.

Upgrades

Last month, the OECD issued sizeable upgrades to the UK’s growth prospects, suggesting the economy will expand 1.1% in 2024, up from 0.4% in its May forecast, and another 1.2% in 2025, up from 1% previously. Those numbers are broadly in line with the Bank of England’s and rank the UK joint second in the G7. 

Perceptions of improved economic and political stability have boosted investor sentiment. The likelihood of faster cutting cycles from the Federal Reserve and the European Central Bank recently pushed sterling to its highest level against the dollar and the euro in more than two years. Macroeconomic conditions and relative political stability should remain supportive for sterling over the next year, BNP Paribas Global Markets’ projections suggest, helping to enhance the returns of dollar and euro-based investors.

A stronger currency will help increase the UK’s weighting in global real estate portfolio allocations, improving liquidity. It will also help tame imported construction materials inflation. It also reflects improved forecasts of economic growth, which is a bullish indicator for occupier demand.

Buying In

Investors are already buying into this story. The UK commercial real estate market is recovering ahead of the rest of Europe: year-on-year rolling annual investment volumes are pretty much flat in the UK and are down by almost a third in the Eurozone. Our forecasts suggest that prime office returns in the UK will average c.12% during the four years to 2028, compared to c.9% in Europe. 

INREV, the European Association for Investors in Non-Listed Real Estate, regularly surveys the more than 30 investors and fund managers that constitute its membership and the results tend to provide an accurate reflection of sentiment. Almost a third of respondents to the September edition expect yield compression in the UK during Q3, a marked improvement on the previous reading and a larger shift than any other market. 

As an investment destination, a quarter of respondents picked the UK as their first choice, second only to Spain, where improved economic conditions and leasing market fundamentals are drawing capital.

Outlook

Granted, the government will outline new tax and spending plans in a budget later this month and persistent talk of fiscal “black holes” have prompted some investors to adopt a wait-and-see approach. Despite the constrained fiscal backdrop, the Chancellor will be determined to find ways to boost economic growth, and improving forecasts and government consultations on planning reform suggest real estate investor sentiment will continue to improve in the coming quarters.

One of my most important tasks during Expo will be to get a feel for how much funding is being raised to target the UK. Preqin data cited by Green Street News suggests funds have accumulated as much as $12.6bn in dry power waiting to be deployed in the UK.

Gaining a better understanding as to when these funds will be deployed will be vital, though of course the early movers are already here, particularly in central London. At the time of writing, £1.5bn of Central London offices were under offer – that’s more than double the figure at the end of Q2 – while the recent launch of Citypoint and relaunch of 1 Southbank place show liquidity is improving. 

We’ll know a lot more when we get to Munich. A few conversations with investors will tell you what the data will say eight weeks later, but there are good reasons to feel optimistic. And I’m writing this from England, which had nearly twice the average rainfall in September, so at least you know it’s not the sun talking. 

This article first appears in Green Street News on 7th October.

Image courtesy of Alex Schelbert / Messe Muenchen

Expo Real 2024: A Test of Sentiment at a Crucial Moment