This year’s MIPIM sees Egypt’s first-ever pavilion showcasing the country’s urban development programme and investment opportunities.
“There are challenges, certainly, in Egypt now,” deputy minister Khaled Mahmoud Abbas told MIPIM News. “But we’re well on course to achieving the necessary goals in terms of housing, utilities, urban redevelopment, infrastructure and employment.”
Abbas is Deputy Minister for Monitoring National Projects within Egypt’s Ministry of Housing, Utilities and Urban Communities. He spoke of the challenges and solutions facing Egypt’s housing and urbanisation programme.
“We have to run fast to keep ahead,” Abbas said. “We’re a young country. We have a three-tier structure of social-housing programmes. And we are looking to work with private developers where we will sell them the land in various sized plots and they take on the developments from there.”
The key thing, he said, was that the programmes are real: “They’re happening. They’re not just hopes and plans. We are actively driving the programmes forward.”
Social programmes for low-income housing are being built at the rate of 350,000 units a year; middle-income housing is being built at 300,000 units a year. “In total our housing programme is the largest such programme in the world. The key to investing in Egypt is that things happen. They don’t just stay on the drawing board.”
Over the next five years, around 3.5 million young Egyptians are projected to join the labour force and this presents a challenge, Abbas said. “However, this also creates a tremendous opportunity for faster growth; we can support the emergence of a strong and vibrant private sector to productively employ this emerging generation of workers.”
The deputy minister said the signs look good for Egypt. “Our reforms, which began in 2014, have created economic and financial stability. Our message at MIPIM is: The best investment opportunities now are in Egypt.”
Bahrain may be geographically compact, but its growing economy offers investment opportunities within a supportive business infrastructure designed to help companies flourish,” said Ali Murtaza, director of real estate investments at Bahrain’s Economic Development Board. “The economy of Bahrain is the most diversified in the region, with particular strength in the financial services and technology sectors and related industries,” he said. “We’re looking to be the Singapore or Hong Kong of the Middle East. As part of that we want to talk to European investors to examine ways of making strategic investments.”
One of the bedrocks of the attraction of Bahrain is its business policies and laws which give even small businesses the opportunity to thrive, Murtaza said.
“There are many reasons to do business in Bahrain including its central Gulf location, low cost of operations, talented workforce and stable economy. With a track record of pioneering under its belt, Bahrain continues to move forward with policies and reforms that empower businesses and industries to establish themselves and grow.”
Helsinki has been growing at a rate of 1.2% a year for the last decade, but the city authority wants to ensure that growth can be accommodated in a sustainable manner. “We have raised the bar in terms of our climate-change targets and we are to be carbon neutral by 2035,” said Anni Sinnemaki, deputy mayor for urban environment. “It’s pretty ambitious, but we have a good action plan. At MIPIM, what we have been saying to investors, construction companies and developers is that we don’t know how to do it alone. We need partners — and we need innovative partners.
Sinnemaki added that the real estate industry has a pivotal role to play if Helsinki is to hit its carbon-reduction target: “The real estate sector is crucial when it comes to carbon targets. Traditionally, it’s not been the most innovative sector, but I see real change. I’ve had really interesting conversations about lowering the carbon footprint of concrete, green roofs and energy efficiency. I think that climate policy can be a driver, making the whole real estate and construction industries more innovative.”
Sinnemaki also made a broader pitch for the Finnish capital as a destination for investment: “Helsinki is a vibrant, fast-growing city. We are doing really interesting and meaningful things and trying to tackle the challenges of growth in a sustainable and innovative way.”
The Scottish government’s ‘pro-business, pro-development’ agenda presents a significant opportunity for real estate investors, according to Finance Secretary Derek Mackay. He said there was great potential for foreign investment across a range of sectors and cities.
“We are open for business and we have a good track record of attracting investment,” he added. “We’ve put a competitive tax regime in place.”
Scotland is being represented in Cannes by a number of organisations and businesses, including development agency Scottish Enterprise, Scottish Development International, the Scottish Cities Alliance and the Scottish Property Federation. “This is the first time we’ve taken such a team approach to MIPIM,” Mackay said. “This is the premier property market and we are all working together. Scotland is such a strong brand.”
Mackay, from the Scottish National Party (SNP), said that much of the opportunity for investors from overseas remains in the country’s key cities of Glasgow, Edinburgh and Aberdeen, where there is strong demand for commercial property. He added that a shortage in the housing supply throughout Scotland also offered significant development potential.
Nakheel showcases at MIPIM projects valued at $15.8bn, including a big push into the hospitality sector. Chairman Ali Rashid Lootah said: “We’re particularly interested in investors from Europe. Numbers of European investors have grown in recent years — they’re now up to 3,500 — and we want to build on that.”
At MIPIM for the third time, Lootah said Nakheel is constantly expanding both in Dubai and abroad and that its success over the past decade has been based on having a strong and excellent team. “That’s the heart of any company,” he said. “The keys to both Nakheel and the Dubai economy in general are optimism, resilience and diversity.”Nakheel comes to MIPIM 2019 with a new range of real-estate at prime locations across the city. Among them are ready-to-occupy and off-plan residential units, with prices from $122,000 (€108,000), down payments as low as 5%, long-term payment plans and attractive rental yields. Land plots, also with attractive payment plans, for commercial, residential or hotel development are also available.
Two new Nakheel projects at MIPIM this year are Dragon Towers a twin-building, high-rise apartment complex at Dubai’s Dragon City community; and Jumeirah Park Homes, a collection of four-bedroom terraced homes — each with a private pool — at the high-end Jumeirah Park community. “We’re also looking to talk to institutional investors about our hospitality masterplan which we’ll be showing at MIPIM.
Since its debut at MIPIM in 2016 Nakheel has sold more than $730m worth of property with 550 units, collectively worth $300m.“Nakheel’s past, present and future projects are pivotal to Dubai’s achievements, and we continue to deliver groundbreaking landmark developments that capture the attention of investors the world over,” Lootah said.
Africa is rising. It is home to the world’s fastest-growing cities, with Nigeria alone estimated to add 189 million people to its urban areas by 2050. All the while, this resource-rich continent is under the gaze of the world’s superpowers, most notably China.
The mistake that many people make is that they see Africa as one, whereas in fact, as Charles Hecker, Senior Partner, Control Risks, the global specialist risk consultancy, says: the “economies, political systems, demographics and aspirations … vary substantially from region to region and then from country to country.”
Interview with Charles Hecker of Control Risks
Global Real Estate Experts caught up with Charles, together with his colleague Mark Whyte, Senior Partner:
GRE: Africa is the world’s second large continent. What is the potential of the region as a global economic player?
Charles Hecker, Senior Partner, Control Risks: Recent years have been economically and politically turbulent for sub-Saharan Africa. Growth in the region fell to 1.4% in 2016 – its lowest rate since the early 1990s – and remained at a relatively low 2.7% in 2017. But the world’s second largest continent is bouncing back. Forecasts show gradually improving growth over the next few years, in line with the steady, if fragile, improvement in the global economy. Other economic indicators, such as foreign direct investment and exchange rates, have also shown signs of improvement.
“The world’s second largest continent is bouncing back”
This recovery is not being driven by the usual suspects. On the contrary, the IMF recently warned that the poor performance of the continent’s traditional giants – Nigeria, South Africa and Angola – was holding back Africa’s economy. This is reflected in Control Risks’ and Oxford Economics’ semi-annual Africa Risk-Reward Index, last published in November 2018 (see below). In that report, Nigeria, South Africa and Angola all saw only minor improvements since the preceding index was published.
The dramatic political changes in South Africa and Angola that were highlighted in that edition are arguably laying an important foundation for longer-term growth.
GRE: What are the main challenges of operating in Africa?
CH: Exponential growth in African urban areas, while presenting major opportunities for investors, developers and contractors, comes with significant attendant risk.
Participants in Africa’s urban boom will face a range of hazards and threats – societal, technological, political and security:
Natural hazards, particularly from extreme weather events, will be magnified significantly in large urban areas.
Urbanisation and infrastructure projects will also be characterised by complex stakeholder networks, comprising governments, investors, developers, contractors and end users.
Development lifecycles will be long, and the investment requirements are forecast at US$90 trillion up to 2030, a significant element of which is likely to be lost through fraud.
Managing risks is central to the success of infrastructure projects. This is the case not only in emerging markets where, along with growing opportunities to invest in infrastructure, investors and developers face elevated risks to their projects, but also in established markets, where unforeseen events can derail an infrastructure project, despite what may seem a familiar and reliable business environment.
GRE: What do you need to enter into the African market… a local partner, a sense of humour?
CH: When all else fails (and arguably before that) a sense of humour is essential. Beyond that, requirements for local partnership will vary from country to country in Africa.
“Careful selection of a local partner can lead to a healthy and productive relationship, but the emphasis is on careful”
Some countries have quite strong local content laws, others less so. The risk comes from thinking that having a local partner solves an international investor’s problems. It doesn’t. Careful selection of a local partner can lead to a healthy and productive relationship, but the emphasis is on careful.
In Africa and around the world, extensive due diligence is required to ensure that your local partner’s relationship with key in-country stakeholders is transparent, and not a source of legal, financial, political or reputational liability. Beyond the question of partnerships, we would say that careful due diligence on both the national (macro) and project (micro) levels are critical to successful investments in Africa.
GRE: What is your top tip for people/companies new to operating in the region?
CH: Our top tip is to take a view which is as holistic as possible on risk to market entry. If you’re new to investment in Africa, think about a wide spectrum of threats, including political risk, regulatory risk, local business practices that may expose you to FCPA liabilities, shortcomings in state capacity and the lack of well-prepared projects.
“Our top tip is to take a view which is as holistic as possible on risk to market entry”
If that all sounds excessively negative, it need not. Openly acknowledging and effectively managing risks in Africa is the only way to deliver real, tangible value that protects the interests for all stakeholders, from investors through to end-users.
GRE: To what extent do you think the world has a grim view of the African continent, which is not the reality?
CH: For quite some time, the narrative about Africa has been one of ‘Africa rising’. The grim views appear when the investment community feels that the promise has failed to materialise. As with all markets, looking at “Africa” is not always a very helpful approach. The economies, political systems, demographics and aspirations on the continent vary substantially from region to region and then from country to country.
“The real view of what’s happening [in Africa]is … best seen up close”
This may seem obvious – and it is something we take for granted when looking at other markets – but it is something that often gets overlooked in discussions of Africa. The real view of what’s happening on the continent – including stories and investment potential that are genuinely exciting – is something best seen up close.
African countries defined by risk, reward & economic size
The Africa Risk-Reward Index, a report produced by Control Risks and its partner Oxford Economics, highlights how some of Africa’s largest economies are outshone by smaller rivals.
The index plots each country’s performance relative to their peers on the continent. The position of each country is defined by its risk and reward score; the size of its bubble represents the size of the country’s GDP.
Further details on the methodology for calculating each country’s scores are available separately. The Africa Risk-Reward Index should not replace an in-depth analysis tailored to your sector and company. Please contact us to discuss at: email@example.com or firstname.lastname@example.org.
A few facts about Africa…
Africa will account for nearly one third of the world’s population by 2050, as the number of people living on the continent rises to 2.4 billion from the current 1.1 billion. Nigeria will become the fourth most populous country in the world by 2040, after India, China and the US.(Source: UN)
Sub-Saharan Africa is the world’s fastest urbanising region. Nigeria alone will add a further 189 million people to its urban areas by 2050. However the World Bankidentifies three factors currently shared by African cities: they are “crowded, disconnected and costly”.
In the world, Africa is home to the largest arable landmass; about 30% of all mineral reserve; the Nile – the longest river; the Congo rainforest – the second biggest rainforest; 8% of oil reserves; and 7% of natural gas. (African Development Bank)
The African Union launched the African Continental Free Trade Area last year, which envisions a single market expected to generate a combined GDP of more than US$3.4 trillion and benefit over one billion people.The ACFT “could drive further growth, but it requires greater union and cooperation”, says Chatham House.
“There is no doubt that 2019 will see a quickening of renewed international competition in Africa. China is now Africa’s leading trading partner and India, Russia and others are increasing their involvement, whereas the European Union is treading water and the United States is falling behind” – Chatham House, January 2019.
China’s foreign direct investment in Africa climbed to US$40bn in 2016, placing it in fourth position behind the US ($57bn), the UK ($55bn) and France ($49bn). The top three countries for inward foreign investment in Sub-Sahara Africa were Ethiopia (US$3.6bn), Nigeria (US$3.5bn) and Ghana (US$3.3bn) in 2017. (UNCTAD)
Charles Hecker is the Keynote Speaker at the MIPIM 2019 session ‘Africa: Growth & Investments‘ on Thursday 14 March at 10:00-10.45 in the Beige Room. The session is part of this year’s Africa Forum.
How are things going on the global real estate market? What future challenges does it face? International real estate plaftorm Tranio presents an overview of the main trends that investors can focus on today and for the next year.
Germany is ‘a safe haven’
Germany is still one of the most popular countries for international investors. According to the UN, the FDI flow into the German economy amounted to $34.7bn in 2017: twice as much as in 2016. The FDI stock in Germany was estimated at $931.3bn in 2017: 18% more than in 2016. The growth of this indicator has tripled over the past 20 years.
The German real estate market has the reputation of being a safe haven due to its economic stability – the country has enjoyed accelerating GDP growth over the past five years. Germany also benefits from a relative scarcity of residential property which is driving demand, and the nation has seen an influx of well-educated professionals that is boosting property prices.
According to consulting company PwC, in Q3 2017, commercial property investments in Germany were at a record high and reached €39.5bn, which is 20% more than investments made a year earlier. Most buyers are local investors (55%), followed by buyers from Europe (22%), North America (12.5%) and Asia (9%).
Key drivers for investors buying German real estate:
affordable financing: foreign property buyers can get a mortgage in a German bank at 1.5-2% per annum, which will cover up to 70% of the property cost;
both the buyer and the seller are secured: all issues related to the purchase, maintenance and sale of the property are well regulated;
stable economy: German GDP has been growing steadily over the last five years. In Q2 2018, inflation-adjusted growth was 2.3%. The unemployment rate is 3.6% vs the Eurozone average rate of 8.4%.
population growth in major cities: between 2011 and 2018, the number of Berlin residents increased by 10%, in Hamburg by 7%, in Munich by 8% and in Frankfurt by 12%.
George Kachmazov, founder & managing partner of Tranio:
‘High demand for German real estate spurs higher prices and lower rental income. In search of higher returns, foreign investors are opting for value-added projects or looking to invest in smaller towns where the price per square metre is cheaper than other sought-after locations where the market is already heating up.’
Revival of Greece
According to the Bank of Greece, the country had €3.6bn of FDI flow in 2017 — almost a third as much as in 2016, and three times more than in 2015. Private investment in Greek real estate also reached a record high in 2017: the total value of transactions with foreign investors was €328mn — twice more than in 2016, and 2.5 times more than in 2015.
Four reasons why foreign investors look into Greek real estate:
the Golden Visa: Greece grants a residence permit for those who buy real estate in Greece above €250,000 — this is the most inexpensive programme to get a residence permit in the EU;
low cost: so far, the cost of the property per square metre in Greece is less than in other European capitals. Now, the market is at the bottom of its cycle, but is beginning to grow: the Bank of Greece notes growth in residential property prices for the second quarter in a row;
record high number of foreign tourist arrivals: according to the Bank of Greece, more than 30mn overseas travellers visited the country in 2017;
positive changes in the economy: Greek GDP has been growing for the fifth consecutive quarter, in August Greece successfully concluded the third programme of macro-financial assistance. Fitch Ratings has upgraded Greece’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB-‘ from ‘B’.
George Kachmazov, founder & managing partner of Tranio:
‘The current low real estate prices and high demand contribute to higher returns for investors. Thus, the net yield on the short-term rent of a renovated city-centre apartment in Athens is 5-7% per annum vs 3% in most European capitals. Moreover, there is potential for real estate prices to grow 20-30% over the next 2-3 years.’
Malta, Cyprus in peak demand due to popular citizenship programmes
For the last several years, Malta and Cyprus have been issuing residence permits to foreign investors in exchange for investments in the countries. However, an eligible investor must own local real estate there: in Cyprus the investor’s property cost must be above €500,000 (or above €2mn. In this case there is no need to invest in other assets); in Malta an investor must either own a property above €350,000 or rent a property and pay above €16,000 p. a. over five years. The citizenship by investment schemes are popular among wealthy foreigners: since the launch of the programme, Malta has issued more than 550 passports to such applicants, and Cyprus, according to The Guardian, has issued more than 1000 passports in 2017 alone.
The post-crisis drop in property prices in Cyprus stopped simultaneously with the launch of the programme in 2014. According to The Telegraph, in 2017 the cost of apartments in Cyprus increased by 7.4%. Experts note a distinctive growth in the premium and ultra-premium property sectors. According to the PwC study, the cost of transactions in 2017 increased by 24% compared to 2016, while a third of real estate deals involved foreign buyers.
The price reduction in Malta also ended in 2013 – in the same year, the citizenship by investment programme was launched. As shown by a PwC survey conducted in January 2018, the said programme in Malta is one of the key drivers of demand for real estate. According to the National Statistical Office, Q1 2018 saw a 5% increase in real estate prices, on a year-on-year basis, and an 11% growth in a number of transactions made in Q1 2017 vs early 2016. According to statistics, participants of the programme in Malta prefer to rent apartments rather than to purchase them in 9 out of 10 cases. And if they buy, the average cost of the property is typically twice the minimum threshold. The cities of St. Julian’s and Sliema are the most popular locations among the programme participants. Here, real estate prices are rising the most, and 46% of real estate agents surveyed by PwC think so.
Marina Filichkina, Head of Sales at Tranio:
‘We saw sharply growing interest in the Cyprus citizenship programme in the third quarter of this year: the number of closed transactions has doubled. This could be due to a recent statement by the Cypriot authorities: they announced that security checks would be stepped up and the number of passports granted would be capped at 700 per year.’
Value-added projects are of interest
Yield reduction is a trend common in European real estate market: according to PwC experts, the property market yield decreased from 6% in 2009 to 4% in 2017. PwC quotes an investor as saying that today a 3% yield is considered to be a rather optimistic scenario: ‘Investors see these numbers achievable in Paris, Berlin and central London. However, these cities are a bit overheated, so you need to be very energetic to acquire an asset there.’
Investors are willing to take big risks to achieve the desired profitability —confirmed by 80% of PwC respondents. Value-added projects of construction and reconstruction bring 8%-12% per annum. Two-thirds of investors surveyed by PwC believe that redevelopment is the best way to acquire prime assets: in most cases, this means low-risk strategies based on skilful asset management and minor reconstruction of the property assets. At the same time, more and more investors are looking at development projects with interest as a lucrative opportunity to earn more.
Ekaterina Raznikova, Project Manager at Tranio Germany:
‘In the German market, profitable quality properties are quickly sold to local buyers. Therefore, foreigners increasingly look into value-added projects: investors with a budget of up to €1mn provide developers with mezzanine loans at a fixed interest rate while those with capital above €1mn become equity partners and get profit after project completion.’
Profitable real estate of the future: warehouses, micro-apartments, co-working and nursing homes
Housing affordability is the most important social challenge that will affect the real estate market in the near future. One of the ways to tackle it in large cities is micro-apartments, apartments with an area of 17-35m2 which are inexpensive due to their small floor area. Investors usually buy micro-apartments for renting them out to students, business travellers, young professionals and tourists. A growing number of one-person households and students also contribute to popularity of this type of real estate. According to Savills global real estate firm, in 2016 the value of transactions in the student housing sector in Germany exceeded the cost of all transactions made between 2009 and 2015.
Logistics real estate
According to the PwC survey respondents, logistics real estate topped the list of the most promising types of commercial properties. Investors note aggressive price increases and lower yields, but demand does not decrease as there is an extreme shortage of supply in the market. A particularly positive forecast is for warehouses on the outskirts of cities within the so-called ‘last mile’: they will store goods ordered online before delivering them to customers.
The growing popularity of co-working spaces is a new trend in the market featuring real estate as a service and tenants as customers. As noted in the PwC study, the interaction between tenants and property owners is becoming increasingly important: ‘The share of co-working, small companies, business incubators are growing. Requirements to flexibility of space, ability to divide it are becoming increasingly important.’ According to web portal Statista, the number of co-working facilities increased from 3 in 2005 to 15,500 in 2017, and in 2018, according to the forecasts, their number will grow to 18,900.
According to the UN, in 2017, the number of people over 60 was 962mn; by 2050, this figure will grow to 2.1bn, and by 2100 it will rise to 3.1bn. At the same time, the fertility rate is declining: according to the World Bank, the fertility rate was 5 50 years ago (on average, 5 births per woman); in 2016, the fertility rate was 2.4. Nursing homes and health care complexes are the types of real estate that will benefit the most from these demographic changes. According to Statista, in 2013 every fifth investor estimated the investment potential of nursing homes as ‘very good’, while in 2017 every third investor shared that view.
Tranio has been working with overseas real estate for more than eight years. Over the past three years, the company has been focussed on development projects, primarily inGermany. Good investment projects are not easy to find in the central European country: there are not enough projects to meet investment demand, and local professional developers can afford to be picky with whom they choose to work.
Most projects are apartment constructions, requiring €3M to €50M on average and last 18 to 36 months.Usually, developers do not invest their own funds in a project but obtain financing from two sources: bank loans (65–80 %) and investor capital (20–35 %).
Investments in Germany are secure
Many experts predict that a price adjustment can be expected in markets around the world, as the decade-long growth cycle reaches its peak. Therefore, it makes sense to invest in the countries that are most protected from unfavourable market situations, and Germany is one of them. I see three advantages that Germany has:
– an abundance of well-educated professionals;
– smooth administrative procedures, following concise regulations;
–legendary hard-working nature.
These factors presume that if the prices fall or there are other misfortunes, Germany will be one of the countries least affected by the events and that it will recover quicker.
Unlike the rental business, where the yield rate usually does not exceed 5% per annum, development projects usually bring clients 10–15% per annum. But greater yields bring higher risks. Tranio cares about minimising these risks. To be unprofitable, prices in Germany’s market must plummet 20%. This scenario is equivalent to a collapse in the global economy and appears unlikely.
The main disadvantage of real estate in comparison to other investment vehicles (e.g., securities) is the low liquidity. However, this disadvantage is partly offset by development projects being quite urgent: their terms usually range from 1 to 3 years. If you believe the German market will remain stable on such a horizon and have spare capital to invest for such a term, investment into a development project is beneficial for you.
Renovation or construction?
There are several types of development. Based on my experience, the safest option is the renovation of a property that already exists. The developer finds a vacant property unencumbered by long-term rental agreements and renovates it, dividing into individual apartments if required. Then the building is occupied by tenants and sold as a whole, apartment by apartment or in packages.
Another option is a new development, which, in its turn, has two scenarios: there are land plots with and without construction permits. The first scenario, with a construction permit, is simpler than the second scenario, but land plots for such development are more expensive, and the project yields are lower. The second scenario, without a construction permit, is a higher-risk and a drawn-outprospect, but it is also more profitable. There are larger projects for land plot development via changing the urban development plan, obtaining permission for a substantial increase in the construction volume and a partial modification of the allowed construction type. Such projects are a synergy of real estate, fine knowledge of building and legal regulations and artful negotiations with the city authorities. Officials and the city must be interested in the changes proposed. Usually, the latter type of project is the riskiest but also the most profitable.
Loan interest rates can increase
The favourable situation in Germany’s property market is attributed to the low borrowing costs. Deposit interest rates remain negative,while the average mortgage rate, according to Deutsche Bundesbank, fell from 4.42% in 2009 to 1.65% in 2018, and banks are eagerly financing property construction and purchase.
In their turn, the low rates come as a result of the European Central Bank’s quantitative easing programme: under this programme, the ECB has been buying European national public bonds from different banks to inject money into the countries’ respective economies. However, on 14 June 2018, the bank announced its intention to terminate the programme by the end of the year, and now the market members expect the loans to become more expensive.
Therefore, investors should approach projects where the ratio of bank financing is high with cautiousness. The greater the leverage, the higher the potential yield, but the sensitivity to adjustment also grows, and negative dynamics can lead to a capital loss. An optimal ratio is 65% of loan capital and 35% of personal funds. However, if you want to obtain maximum return on capital and the bank is ready to provide a high leverage (e.g., up to 80% of the project value), you should not dismiss the opportunity to get a cheap loan, but it is also important to have a plan of what to do if the prices fall. I recommend using a loan with a high ratio of bank financing if you have spare capital that would allow you to complete the project relying on own funds if the market situation is unfavourable, rent the property by yourself for 1–3 years and then sellit on.
The shorter the project term, the lower the risks associated with the growth of rates. I think that the growth will not be too fast: the ECB will, probably, raise the rate to a level of 3%, which is similar to that in the US, in 2 or 3 years’ time. Therefore, it can be assumed that 1-2-year projects are more predictable than the 3-5-year ones. I recommend entering longer-term projects if you expect to obtain 15% per annum or more.
Metropolitan suburbs and B-locations are the most promising.
As for the choice of location, I recommend investing in low-risk projects in locations with a growing population, strong economy and high buying capacity.
Traditionally, in Germany, such locations are the ‘Big Seven’ cities: Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart. However, their markets are overheated, and the prices are too high. For instance, in Munich, good building land costs from €3,000 per square metre,while in other Bavarian cities it is about €1,000/m².
Investing in development is more profitable in the suburbs of large cities. For instance, the suburbs of Munich, Berlin, Hamburg and Stuttgart are developing quickly thanks to the young families who relocate there from metropolitan cities where residential property prices have become too high. B-locations with a population starting from 60,000 are also promising. For example, in Bavaria, such locations include Augsburg, Ingolstadt, Regensburg, Fürth and their suburbs.
In Eastern Germany, investment terms are less convenient. The economy is weaker in the east; the population is smaller and poorer, and, subsequently, price growth potential is lower, and the demand for residential property is not as high as in the western federal states.
Equity partnership or mezzanine financing?
Equity partnership is considered a highly profitable investment format. When participating, the investor expects to obtain a profit share up to 10–15 % per annum after tax and expenses. However, the investor accepts the project’s risks and is the first to lose the money if the development does not pay off.
If you are not ready to take risks, I recommend considering mezzanine financing which the investor provides the developer with at a fixed interest rate (5–10 % per annum). The difference from equity partnership is that following the results of the project, the investor receives interest on the loan in the first place, and the profits are divided afterwards. If the project is less profitable than expected, the developer earns less, but the investor gets the interest specified.
There is also a combined partnership option when the investor receives a small interest on the loan (5–8% per annum) and a profit share (10–50%).
Don’t forget about tax structuring
Tax structuring is the most important part of the project’s economy. It is important to check whether a double tax treaty is applied to your country of residence and to make sure there are no special rules regarding work for you.
In the case of equity partnership, the German corporate tax is levied on profits, after which the investor pays the dividend tax. The tax amount and taxpaying jurisdiction depend on the investor’s residency. For instance, if the share in the development project is owned by a company registered in Europe, the need to pay the dividend tax can be avoided, butif the equity partner is a Russian individual, its rate will be 15%.
More money, more profit
Major investors (from €1mn) have more opportunities than minor ones: firstly, these are higher yields due to better terms of bank financing and more effective instruments for the optimisation of the project base cost and tax structuring. Furthermore, developers prefer working with major investors, ready to finance the whole project.
Therefore, some clients come together for club deals when several investors put funds into the same project. This option is suitable for those who do not have enough funds to cover the entire project or those who want to try investing a small amount of capital before decidingon major investments. The minimum contribution to a club deal is usually €100,000.
Tranio is currently preparing a project for minor investors under which they will able to join forces in a large social network, make collective investments and get all the privileges of a major investor.
The developer’s role in a Value Added project
Typically, investors remain uninvolved in the project’s operative management, delegating this function to the developer. Before investing, they discuss project strategy, financial model and other terms with the developer and then switch to the ‘silent partnership’ mode, receiving regular development reports. If the key parameters, such as the expenditures estimates or the sales price, have to be reviewed, it is usually approvedby the investors’ majority vote.
The developer’s service fee includes three components:
– property selection fee (1–2% of the value)
– project management fee (10% of the construction costs)
– success fee (typically, about 50% of the profit)
The local developer manages the project together with Tranio’s team. It takes charge of tax, legal and investment administration, as well as the assessment of risks, while the developers attract financing and manage the construction. Qualification, experience and professional connections prove the project team’s high expectations: these qualities permit the efficient management of the project at all stages:
– find and buy buildings and land plots, attract independent experts for legal and technical audit and formalise the transaction;
– select contractors for the construction, control their activity;
– attract financing: obtain bank loans, sell the project company’s bonds to third parties;
– find the management company, control the rental flow;
– sell the end product: find buyers, formalise transactions;
– divide profits.
Therefore, the cooperation of competent and experienced developers and project teams gives investors the opportunity to put funds into Value-Added projects easily. Additionally, it minimises the investor’s risks while the yields remain higher compared with most alternative investment vehicles (e.g., stocks and bonds).
The hot topic of Brexit is one of a range of regulatory and legislative issues being discussed in syndicated loan markets across Europe.
Others include the end of the Libor era, the new EU directive on non-performing loans, ESG lending and whether the interest in blockchain will fizzle out, or not.
Syndicated loans in the real estate world have grown in importance over recent years, attracting a wider variety of institution types as lenders, and hence boosting liquidity.
To discuss how these topics are affecting the syndicated loan market in Europe, Global Real Estate Experts caught up with Amelia Slocombe, Director & Head of Legal at the Loan Market Association (LMA), the EMEA syndicated loan trade body, and her colleague Senior Associate Director Gemma Lawrence-Pardew.
How is a deal on Brexit – whatever shape or form that may take – likely to affect the syndicated loan market?
Amelia Slocombe: The syndicated loan market is largely unregulated, so it is difficult to know precisely how it would be treated in a no-deal Brexit scenario. Essentially, it would require a country-by-country analysis of how lending is handled in each country: for new and existing lending, and for primary lending and secondary trading.
In a worst-case scenario, if it were to become illegal for a UK-based lender to lend to a borrower in a particular EU country, that borrower might be required to repay its entire loan. The treatment of existing loans is therefore likely to be one of the biggest concerns.
The effect of Brexit also goes wider than this. The fact that the UK will be treated as a ‘third country’ post Brexit poses the possibility that lending from the UK to the EU will no longer be practical or cost effective, even if it is legal. This could mean lending to EU borrowers becomes less competitive.
Moving on from Brexit, the UK’s Financial Conduct Authority has set a 2021 transition date to close the chapter on the Libor interest rate benchmark. How is this affecting the syndicated loan market?
AS: A replacement benchmark for Libor has yet to be agreed and, at present, nothing being discussed replicates its key components. Fundamentally, this relates to its forward-looking term structure: i.e. the borrower knowing on day one how much interest it will need to pay at the end of the interest period it has selected. This is essential from a cashflow management perspective.
The new benchmarks currently being proposed for the loan market are overnight rates. Putting aside the fact that Libor compensates lenders for an element of credit and term risk and overnight rates do not, from a pure borrower perspective, overnight rates would require compounding, also meaning that the borrower would not know the final payable rate under the end of the relevant period. In addition, from an operational perspective, this would be a much more onerous process to calculate and verify.
What is currently happening on an EU level?
AS: One of the main regulatory proposals is a directive relating to non-performing loans (NPLs), issued by the European Commission earlier this year, in March.
The purpose of the directive is help develop a transparent secondary market for NPLs, which in itself we would support.
However, the overarching issue is that the wording of the legislation is not restricted to NPLs. Instead it applies to all credit purchases from banks by non-bank investors, and therefore has significant implications for both the primary and secondary syndicated loan markets.
In addition, it requires banks to disclose information to purchasers to enable them to assess the value of the credit agreement and the likelihood of recovery. This cuts across generally accepted disclosure arrangements, as well as the more general ‘buyer beware’ principle.
We are lobbying hard to reduce the scope of the directive to loans below a particular threshold, so that at least this would exclude the majority of the wholesale loan market. Unfortunately, it remains a bit of a wait-and-see at the moment.
And UK legislation – such as the draft Registration of Overseas Entities Bill from the Department for Business, Energy & Industrial Strategy (BEIS)?
AS: This bill, from the BEIS, requires registration at HM Land Registry of any overseas entities owning property in the UK. A key area of concern for a security agent or secured lender will therefore be to ensure that its options for enforcement against an overseas borrower remain fully available, even if the borrower itself has failed to comply with the bill.
From an enforcement and security perspective, the bill is too narrow and does not cover off a broad enough range of situations for lenders. As an example, if a non-compliant borrower subsequently becomes compliant, the borrower can register its ownership at the Land Registry but the security interest itself cannot. We have responded to the consultation and intend to follow up with the BEIS.
How is blockchain set to change the syndicated loan market?
Gemma Lawrence-Pardew: A real buzz exists around blockchain and distributed ledger technology (DLT) in the financial services sector at the moment, with market participants looking for safer, more efficient means of transacting.
In the syndicated loan markets, there are clear efficiencies to be gained through more accurate record keeping as well as process and workflow improvements. For example, DLT should remove the need for all aspects of data and systems reconciliation taking place during the lifecycle of a loan; in turn taking away the reliance on manual reconciliation systems and freeing up the time of operations professionals to focus on other tasks.
From a documentation perspective, the adoption of legal contract automation technology could substantially speed up the drafting process, allowing a template to be tailored to the specific transaction quickly and easily, with the final ‘finessing’ done ‘by hand’.
It will be interesting to see to what extent the market adopts this technology and puts it to use.
Where are we at with the emergence of ESG (environmental, social & governance) lending?
GLP: Having garnered the support of the borrowing and lending communities, the ESG lending market has developed rapidly over the past few years. This has, no doubt, been assisted by global climate change initiatives, such as the UN’s 2030 Agenda for Sustainable Development and the European Commission’s action plan on sustainable finance.
Going forward, it is necessary to ensure the development of a united classification system. In May 2018, the EU Commission presented a package of measures as a follow-up to its action plan on financing sustainable growth.
These included proposals to establish a taxonomy for climate change and environmentally sustainable activities, which could be used to set standards for financial investments across Europe.
The aim of the EU Commission’s taxonomy is to create a harmonised set of criteria to be used in different areas, such as labels, standards and benchmarks, with the end goal of being embedded into EU law. Ideally this taxonomy would be adopted on a global basis, allowing for the development of a common language.
At the LMA, we have initially focused on the development of green loan principles (GLP), which seek to provide a high-level framework of market standards and guidelines, and allow for consistent methodology to be applied across the whole green loan market.
These GLP set out a clear framework of recommendations to be applied by market participants on a deal-by-deal basis, depending on the underlying characteristics of the transaction, and based on four components: Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting
Looking to 2019, we will be seeking to produce a set of principles that apply to sustainability improvement loans – those loans that incentivise a borrower to achieve predetermined sustainability performance targets.
All in all, there is a bright future for the ESG loan market, with plenty of opportunities available to both lenders and borrowers.
Hundreds of movers and shakers from Asia’s fast-paced real estate industry assembled for the region’s premier property summit, MIPIM Asia.
More than 900+ industry leaders, representing 570 firms from 36 countries, descended on the Grand Hyatt Hong Kong, on November 27-28, for the must-attend event – an annual calendar fixture for top property professionals since 2006.
Technology and trade tensions were among the recurring themes at the packed programme of presentations, panel talks and keynotes, which saw more than 90 speakers appearing across six stages. Standing room was frequently the only option.
Best attended among the myriad of headline attractions was the thrilling round of celebrity speakers serving frank keynote talks in the Grand Ballroom.
Opening the programme, MIPIM’s global director Ronan Vaspart laid out the conference theme Invest in a Better Tomorrow. He hinted at what was to come, telling delegates that MIPIM Asia would “invite you to imagine the world in 2030”, addressing “hot topics including smart cities, sustainability and the blooming proptech boom”, and explore “the ever-growing investment opportunities presented across the world’s most populous continent.”
Next came a touch of star power, as TV host Desmond So popped up to introduce the first keynote, delivered by celebrated writer, thinker and China expert, Dr Jonathan Woetzel, a director at McKinsey & Company who outlined those promised “cities of the future” in a fascinating keynote entitled Smart Cities: For a More Liveable Future.
“I can already see that people have different reactions to that [subject],” he quipped, taking to the stage. “There’s so much noise around smart cities, so much hype – but it’s important to get the facts. That’s what this is about: The facts.”
Dangling a proverbial carrot, Woetzel asked the audience to guess the world’s smartest city – before revealing it was a trick question. McKinsey’s research assessed how “smart” 50 key global cities are, and concluded that while some are around 70 per cent there, most have a long way to go – highlighting on a map a “red ring of fire circling the Pacific”.
Hard questions were asked regarding the prospect for investment in post-Brexit Britain at the UK: Still Great Tomorrow? session – but a robust and convincing argument was put forward by the heavyweight panel, which included British representation from Birmingham City Council Leader Ian Ward and Department for International Trade Senior Advisor Sir Edward Lister, as well as Timothy Tsui of Apastron Investment Ltd, with Cushman and Wakefield’s Francis Li as moderator.
The day closed with a keynote address from Google’s travelling tech guru Ed Parson, who expounded on many of the ideas he presented to a smaller audience at the opening of MIPIM Proptech earlier the same day (more on which later).
Preceding him onstage was MIPIM favourite Ronnie C Chan, who proved a top draw once more making a decisive case that the true loser of the ongoing trade war would be the USA, at a fiery keynote entitled The China Growth Story: How Will it be Impacted by the US-China Trade War?
“Trade is not a big deal – everybody will lose, but as far as China is concerned, it won’t hurt that much,” began Chan, the chairman of Hang Lung Properties Limited. “I can convince you of that in ten minutes.”
He did a fine job. Chan’s blunt rhetoric lambasted an obstinate US and made an impassioned speech for leaders to resolve their differences.
“Like it or not we live in a ‘G2’ world,” he said. “But it does not have to be a bipolar world.
“Many, many issues cannot be resolved unless we work together – [countries]can compete in tech and trade, and be friends too. That is the world we’re looking for.”
A rather different perspective was put forward on the same stage some 15 hours later, at day two’s opening Meet the Chairman session, where KPMG’s Andrew Weir presented a more sobering scenario.
“Three, four months ago, the trade war was seen as sabre-rattling,” said Weir, KMPG’s Global Chair of Real Estate and Construction, “but it’s grown into a major, major issue – and when you open Pandora’s box, things come out.
“The worrying trend now is people are saying even with a new president, this issue is there now, and it’s not going away.”
Also sitting on this elite panel was Kenneth Gaw, president and managing principle of Gaw Capital, George Hongchoy, CEO of Link Asset Management Ltd, Nigel Slattery, founder and CEO of the Slattery Property Group and François Trausch, Global CEO of Allianz Real Estate, all artfully moderated by Mingtiandi founder Michael Cole.
When the conversation turned from global to local concerns, Hongchoy blasted the lack of supply in Hong Kong’s property market.
“Commercial real estate holdings are so low, most are held by developers for so long,” he said. “There’s not a discipline of offloading assets from the balance sheet. So there’s no trading [comparable to]other sectors.”
Dealmakers had plenty to chew on at a series of compelling talks as part of the dedicated Investment tract, which opened on November 27 with the forthright panel talk Key Investment Trends in Asia Pacific, featuring top dogs from Colliers International, SC Capital Partners and ARCH Capital Management.
Soon after there was more meat on the bone at the Investment Strategies in Top Markets in Asia Pacific panel talk, which shifted the action to the Grand Ballroom to hear the combined insights of Johnny Adji, Senior Investment Director at Cambridge Associates, George Agethen, Senior Vice President for Asia Pacific at Ivanhoe Cambridge, Clara Chan, Chief Investment Officer (Private Markets) at Hong Kong Monetary Authority and Chris Chow, Managing Director, LaSalle Investment Management.
“I’ve always believed global investors are under-allocated in Asia,” lamented Adji to an appreciative audience.
The panel participants revealed their respective positions on the current Asia Pacific investment market, key factors that influence their decisions, and the impact of the US-China trade war – but they also generally considered real estate a worthwhile investment in the region going forward.
Moderator Patrice Derrington, Dean of Real Estate Development Program at Columbia University, summarised the panel’s views at the close: “We have continued enthusiasm for investing in real estate in the Asia Pacific.”
Next came more good news, shared with investors at the frank panel talk Asian Cities: Investment & Opportunities Outlook, featuring Stanley Ching of CITIC Capital Holdings Ltd, Nicholas Loup of Chelsfield Asia and Farook Mahmood of FIABCI-India, and moderated by Real Capital Analytics’ Petra Blazkova.
The stage is set for insightful panel talk Asian cities: Investment & opportunities outlook.
Featuring Stanley Ching of CITIC Capital Holdings Ltd, Nicholas Loup of Chelsfield Asia and Farook Mahmood of #FIABCI-India, moderated by @realcapitals’ Petra Blazkova. pic.twitter.com/sbH0mIaOsX
The following day, Europe was declared very much open for business at the BRI: European Opportunities panel, which hosted representatives from four key European cities to talk about the prospects for investment in light of China’s ongoing Belt and Road Initiative (BRI), which concentrates on infrastructure development in Asia and Africa.
London was represented by Bruce Dear from Eversheds Sutherland, while Capital Value MD Marijn Snijders gave the view from Amsterdam, Alexandre Missoffe came from the Greater Paris Investment Agency and The Government of Moscow sent Evgeny Dridze. Moderating the mic was Aries Poon of S&P Global Market Intelligence.
Despite not being covered by China’s BRI investment, Missoffe said the landmark “21st Century Silk Road” scheme presented “a spirit” of collaboration the whole world could enjoy. “BRI is not just an agreement between countries,” he said, “it’s a spirit – it’s about how you can multiply connections between countries in the world – it’s about infrastructure.”
Dear went further, dismissing Brexit as a “silly little squabble” which will cause “temporary volatility” that can be enjoyed by investors – “Brexit is a problem for us, but an opportunity for you,” he said – and called on Prime Minister Theresa May to use the break from the EU to open the door to Chinese BRI investment.
Snijders meanwhile said Europe stood to benefit from the US-China trade war, which will lead to a “deeper relationship” between China and the Old World.
“I’ve met so many investors these past two days excited about Europe,” he added. “We are connected and can offer a wonderful opportunity. Europe is the place to be – it’s showtime.”
At a concurrent talk, investment opportunities were discussed at Housing Trends for the Future, another panel session with Lankry Architectes’ Ouafia Djebar Brookes, Wing Tai Properties MD Kenneth Ng, Chinacham Group CEO Wun Hing Donald Choi and Livestate founder Eric Au.
Co-living spaces should not be overlooked for the ascendant market, said Ng. “I don’t think it’s a trend you can ignore. It’s not really a trend, it’s how [millennials]were brought up and see the world, aided by technology,” he said.
Taking place concurrently to MIPIM Asia was the first edition of MIPIM Proptech Asia – a regional spin on the thriving property technology summit, following in the slipstream of successful editions of flagship MIPIM Proptech NYC and this year’s debut MIPIM Proptech Europe.
Proptech got a headstart on property, with an informal launch party on the evening of November 26 – the night before MIPIM Asia – which attracted delegates from Europe, Australia and the Middle East for drinks and networking opportunities. The night was capped with a lively talk from Carrie Law, CEO of China’s largest international property portal, Juwai.
Early next morning the show shifted up a gear with an incisive one-day programme spread across two rooms. Opening up was charismatic Google geospatial technologist Ed Parsons, who spelled out how the location technology on smartphones could be applied far beyond the basics of navigation and localised search engines, introducing instead the idea of “ambient place”.
Smartphones communicating with one another in real-time have allowed us to develop “situational superpowers” to predict the future – such as traffic, live bus times, or even the footfall at your pub or restaurant.
Naturally privacy concerns came up at the Q&A.
“Transparency is really important,” said Parsons. “People are more welcoming to share if they understand the direct benefit they gain. People are naturally and quite rightly concerned how their information is used.”
Next Proptech was declared On the Road to a Bright Future at a lively opening panel talk, which kicked off with moderator Paul Chen, Head of Asia at RealFoundations, demanding out-the-blue that the entire panel pitch, in two minutes, their experience to comment on the topic.
Congratulations to all the panellists – Microsoft’s Wincy Chan, Anuj Nangpal of JLL Spark, Knotel’s Ed Shenderovitch and Andrew Young of Sino Land Company – for their fast thinking.
Later, Young advised HK-based startups to look beyond the local market.
“We have seven million people in Hong Kong, but ten times that in the Greater Bay Area – and the median income is rising rapidly,” he said. “Don’t just take the easy option.”
The Asia stage of the MIPIM 2019 Startup Competition saw six fledging firms pitch. for backing, in front an expert judging panel made up of Hong Kong King Wai Group’s Antonio Chan, Jayne Chan of InvestHK’s StartmeupHK, Real Estech cofounder Vincdent Pavanello and Christopher Tay of the competition’s global sponsors Union Investment Real Estate.