Europe
A Bumpy Road Ahead, but Reasons for Optimism: Key Takeaways from MIPIM 2023
Last month, 23,000 CRE professionals traveled to Cannes for MIPIM 2023 – Europe’s largest real estate conference. Attendees soaked in the French Riviera sun on La Croisette as they gathered to discuss today’s real estate market and the potential opportunities and challenges that lie ahead. Shakeups and surprises in the financial markets took center stage, but optimism about the future of the commercial real estate market remained. Here were the three biggest topics that dominated the discussion and our perspective on what it means for the future. Financial market turmoil The conference kicked off amidst the largest banking failure in more than a decade with the collapse of Silicon Valley Bank (SVB), followed by the dramatic fall in the stock price of Credit Suisse and the subsequent announcement that UBS would be acquiring the company. The banking sector turmoil became a hot topic of conversation, with delegates divided over the economic impact of these micro-shocks. Some believed the downfall of SVB and Credit Suisse were not a signal for the entire economy, given SVB operated in a very specific ecosystem and Credit Suisse had faced a number of problems going back several years. Others felt it was eerily similar to the bank failures in 2008 and an indication we are moving into a financial crisis. Laser focus on interest rates For some delegates, the outlook off the back of the banking turmoil remained positive, as many thought the banking crisis would help stave off the Central Bank’s appetite for rate increases in their battle against inflation. Ultimately, this proved to be short-lived given the European Central Bank’s decision to raise interest rates across the Eurozone by 0.5 percentage points on March 16 and the Federal Reserve’s move to raise rates by 0.25 percentage points the following week. Interest rates, and the broader discussion concerning the pace of hikes, were topics already in focus long before MIPIM began. However, during the conference, there emerged a growing consensus that we are entering a new stage of the market with higher interest rates likely staying for the foreseeable future and old pricing levels now a thing of the past. Opportunities still available Where to source attractive investment opportunities was another key topic in Cannes. Similar to years prior, logistics led the way with regard to positive investor sentiment. Attendees agreed the fundamentals for the asset class remain strong, although in some markets many pointed out that logistics cap rates were slow to adjust to rising interest rates. Office, on the other hand, has largely fallen out of favor with investors given work-from-home and hybrid schedules remaining in place for many companies. Our perspective If an economic downturn is on our horizon, W. P. Carey is well positioned to weather the storm given we have a 50-year history of operating in all economic cycles. Our portfolio diversification, disciplined underwriting and lease structuring, and our well-positioned balance sheet, make us one of the safest REITs in terms of downside protection. As an all-equity buyer, W. P. Carey also remains well positioned to execute on deals and offer certainty of close given we aren’t reliant on third-party debt financing. For example, we recently announced a cross-border sale-leaseback of an industrial portfolio in Spain and Italy with Siderforgerossi, a leading manufacturer of specialized forged metal components. The facilities represent a significant portion of the company’s manufacturing footprint and are triple-net leased for a term of 25 years with annual rent increases. Despite the bumpy road ahead, I remain optimistic about the future. Rising interest rates make sale-leasebacks a more attractive financing option for corporates on a relative basis, meaning we’ll likely see an influx in opportunities in 2023. We always say that sale-leasebacks are a good tool in good times, but a great tool in uncertain times, and this sentiment couldn’t ring more true than it does today.
Optimism Amidst Uncertainty: Key Takeaways from EXPO Real
Earlier this month, Europe’s largest real estate trade show EXPO Real returned in Munich. Nearly 40,000 attendees gathered to network and discuss trends, innovation and opportunities in the real estate market. Traditionally, EXPO is a place “where deals get done” but given the current challenges in the macroeconomic environment attendees were more focused on understanding where the market is heading into 2023. Here were three of the most prominent topics discussed. Rising interest rates With the European Central Bank announcing its third consecutive rate hike this month, interest rates were the main topic of discussion at EXPO Real. Largely, attendees were focused on how assets should be priced to reflect rising rates, with the consensus that we’ll continue to see cap rates rise and property prices fall into next year. However, a big challenge that attendees are facing is how to bridge the gap between seller expectations and the pricing buyers will need to generate adequate returns. To compound the issue, inflation remains at record highs in Europe which means more interest rate increases are certainly on the horizon. This will create an even more challenging environment for real estate investors that require third-party debt financing to close transactions, making all-equity buyers better positioned to execute on deals. Logistics still dominant Despite the macroeconomic doom and gloom, the current market still has room for certain sectors to thrive. Logistics remains the darling of the real estate world, with Europe seeing record logistics investment volumes in the first half of 2022. 20% of all real estate investment in Europe is in the logistics sector, suggesting there is still a very strong investor appetite for the asset class. The sector continues to benefit from tailwinds amplified by COVID such as the rise of e-commerce, which continues to drive occupier demand for logistics and warehouse space. Record-low inventory and high demand have meant the logistics sector has been slower to see cap rate increases than others; however, many are seeing a re-pricing period take place which is critical for investors looking to close transactions. Sale-leasebacks gaining prominence as bank lending becomes more restrictive Amidst all the uncertainty at EXPO Real, there was still an undercurrent of optimism among attendees. Historically, we’ve seen more sale-leaseback opportunities come to market in challenging economic environments as a result of companies seeking ways to shore up capital to support ongoing business operations and growth. With banks becoming more restrictive with lending, alternative forms of capital such as sale-leasebacks provide an immediate opportunity to plug the financing gap for companies. And with interest rates likely to continue rising into 2023, now is a great time to pursue a sale-leaseback and lock in an attractive rental rate for the long-term.
The Return to Cannes: Takeaways from MIPIM 2022
Following a pandemic-induced hiatus, MIPIM, Europe’s largest real estate event of the year, finally returned to the idyllic city of Cannes. More than 20,000 attendees eagerly came out to meet in-person and discuss the most prevalent topics and issues impacting the real estate sector. During my experience at the four-day event, the following major themes unsurprisingly dominated most of the conversations: rising interest rates and inflation, the conflict in Ukraine and ESG. Here’s my take on how those may impact our business and the broader European real estate market. Interest Rates and Inflation Similar to the U.S., inflation in Europe is reaching highs not seen in several decades with euro area inflation hitting 5.8% in February, driven primarily by rising energy prices and supply chain challenges. As a result of fast-rising inflation, central banks worldwide will likely pursue an increasingly hawkish strategy, bringing forward interest rate increases. All-equity buyers like W. P. Carey may be better positioned to execute on deals in this environment since they are not reliant on third-party debt financing. From a seller’s perspective, the timing to pursue a sale-leaseback may have never been better – locking in a long-term rental rate now while cap rates remain low, and before interest rates begin to rise significantly. War in Ukraine We are incredibly saddened by the events unfolding in Ukraine and are committed to doing our part to support those in need. As of now, it’s difficult to say how exactly the war will impact the real estate market but it will likely continue to stoke the flame of rising inflation globally due to economic disruptions which could further impact interest rates and borrowing costs. It’s also possible that some companies may take a “wait and see” approach to investing in neighboring countries to Ukraine and Russia until there’s more clarity on when the conflict will end. Focus on ESG ESG remained a prominent topic, particularly as regulatory and disclosure requirements continue to increase, forcing companies to define concrete, measurable goals. With the main theme of MIPIM being “driving urban change,” there was certainly a lot of discussion surrounding how the real estate industry can tackle climate change and net zero emissions as well as ensuring sustainability of new developments. At W. P. Carey, we are intensely focused on ESG. In 2021, we invested in several green buildings, including the acquisition of a 1.1-million-square-foot, BREEAM-certified logistics facility in the U.K., net leased to Jaguar Land Rover. We also issued our first green bond offering last year with $350 million of proceeds earmarked for green projects. From an asset management perspective, we take a proactive approach to communicating with our tenants on sustainability projects that can reduce their environmental impact and reduce operating costs, such as solar panels and building efficiency retrofits. For example, we worked with our tenant Sonae MC in Portugal on the installation of a solar roof which was completed last year. We also worked with our tenant Nippon Express on the installation of a one-million-square-foot solar roof, which is now one of the largest solar rooftops in Europe. While we still have much progress to make, we are focused on reducing the carbon footprint of our portfolio and believe that green buildings are not only beneficial for the environment but can also have a significant business impact for W. P. Carey, including increasing property values, driving higher rents and attracting high-caliber tenants.
Why Tenant-Landlord Relationships Matter
Since our founding in 1973, W. P. Carey has been a long-term partner to our tenants. This means that when we invest in a property, we are also committed to advancing the tenant’s business and look to support their evolving real estate and capital needs throughout the duration of their lease and beyond. A Long-term Partner: Building Beyond the Original Transaction W. P. Carey partnered with Sonae MC, a leading Portuguese food retailer, in 2018 when it acquired its mission-critical warehouse facility in the Azambuja logistics park, Portugal’s prime logistics hub outside of Lisbon. Since its founding in 1985, Sonae MC has steadily grown its market share. Today, the company has more than 1,300 stores throughout Portugal and Spain, 35,000 employees and a broad range of products and services. At the time of the acquisition, Sonae MC was experiencing rapid growth, particularly through its city-center convenience stores and e-commerce operations. In order to meet rising demand and continue executing on its strategic plans, the company needed additional food distribution warehouse space. “In recent years, Sonae MC has been expanding its store portfolio, mostly with small, convenience stores; in the last decade, 750 new stores were opened. This growth will continue for the next few years to solidify even more of our dominant market share. This means our company’s logistics operation has to continue growing its warehouse footprint to be able to receive, prepare and ship an ever-growing number of merchandise," explained Rui Braz, Head of Area – Logistics Development at Sonae MC. To support Sonae MC’s growing business, W. P. Carey partnered with the company and agreed to fund a $28 million expansion of the Azambuja facility. Completed in 2020, the 300,000-square-foot expansion was custom built to Sonae MC’s specifications and totaled over 840,000 square feet, making it the largest refrigerated warehouse in Portugal. With the additional space, Sonae MC was able to increase its capacity and speed of supply to Mainland stores in the central and southern regions of Portugal. “The Azambuja expansion was part of a plan to strengthen our logistic capability, which makes it a fundamental piece to the company’s strategy,” said Braz. A Shared Vision: Committing to a Greener Future Our ability to support our tenants’ real estate needs goes beyond just expansions. We can also partner with our tenants on projects to help reduce their carbon footprint and meet their sustainability goals. W. P. Carey and Sonae MC are both committed to creating a greener future, which meant the expansion of the Azambuja warehouse was built with sustainability in mind. In 2021, a solar roof generating an estimated 4,000 MWh/year was successfully installed on the newly expanded facility, earning a LEED Gold certification for the property. This makes the facility Portugal’s first LEED Gold certified warehouse, an exciting milestone for W. P. Carey, Sonae MC and the country as a whole. “Receiving a LEED Gold certification for our new building in Azambuja, being the first in Portugal and, on top of that, the first for a refrigerated warehouse, is an important acknowledgement of our focus on sustainability. The thought that was put into multiple aspects like the isolation of the building, rainwater utilization system, and the investment in the photovoltaic solar plant–that reduces 30% of our electrical power grid needs for the entire facility–clearly portrays our intention in diminishing the operation’s environmental footprint,” Braz added. The new building is also equipped with innovative cooling and insulation systems that are more energy efficient and environmentally friendly. The joint delivery of fresh produce allows 20% fewer deliveries to shops, a reduction of 1.4 million km traveled per year and the equivalent of 1,100 tons of CO2 saved per year. A Win-Win: Long-term Benefits for Both Tenant and Landlord W. P. Carey prides itself on serving as a long-term, flexible partner to its tenants. By building strong relationships we are able to not only understand the business objectives of each tenant, but also their unique corporate values. In the case of Sonae MC, we were thrilled to have the opportunity to support them and their business needs, while also advancing our goal of reducing the carbon footprint of our overall portfolio. “W. P. Carey has had a fundamental role in the development of this project, proving to be the right partner along the entire process of building this warehouse and its sustainability and efficiency features, which we’re all proud of,” Braz concluded.