Building World Magazine | 09/2021

The company is now over four years old in CR. How was last year and this year for Savills?

2020 was obviously a challenging year for everybody. The Property Management business was put under a huge amount of stress; requiring constant adjustments to management procedures and operational responses. We have approximately EUR 1.1 billion AUM (assets under management) so it was very demanding on the management team, but they stood up to that task exceptionally well. Last year we brought a Valuation team into Savills mid-year and our Building & Project Consultancy (BPC) business line saw a major uptick in business with many landlords using the lockdown periods to expedite refurbishment programmes. So ultimately, we had three non-transactional business lines that stood up very well last year, which really helped us through a more fallow year for the transactional side of the business. The first quarter of 2021 saw the CR under lockdown again but in the 2^nd and 3^rd quarters everything began to look much more positive, with many occupational and investment projects now crystallising and I am confident that will reflect in a strong end to the year. 

The pandemic a year-and-a-half in has hit some occupiers hard, how is it in your office?

Clearly, there will be an adjustment to occupational regimes post-pandemic, but this will be by no means generic across the economy. Companies were forced into flexible working and for many doubters, including myself, they have seen how this can work and work effectively. As with everything, one-size does not fit all and for Savills CR, the pandemic merely sped-up a change in flexibility of working policies, already being phased in but I don’t believe it will be overhauled completely. Similarly, looking at our occupational statistics from the managed portfolio, there is a clear pattern emerging that physical occupation is much higher in SMEs (small and medium enterprises) than it is in MNCs (multinational corporations). With an investment hat on, it gives rise to the hypothesis that granular tenant rosters may stand-up better in the medium term than those dominated by a handful of larger occupiers who seem convinced that flexible working will become the norm for specific employee functions and that office spatial requirements will reduce.

Savills strategy last year was not to make knee jerk reactions to a situation nobody truly understood and hence we didn't scale back the business. As one of the largest international real estate advisors in the world, it admittedly took Savills a while to land in the CR, so we were not about to unpick three years of hard work at the first sign of a challenge. The business has grown immensely in four years and we  moved into much bigger premises last September and are now working from offices twice the size. Internally we have occupancy of over 80%; the culture of the business is not siloed into horizontal or vertical structures, and we know that we work much more efficiently as a business with people working physically together. 

Savills has announced new positions quite steadily since opening – how big is your team now?

We are in excess of 60 people now. We knew from initial establishment that to be able to hold our own alongside other international agencies in the market we needed to gain traction and scale quickly. We acquired an outstanding Property Management business, SB Property Services, within the first six months, which gave us a platform to build on. We then implemented team lifts where we found opportunities, for example in Valuation,  BPC and most recently office agency. Time we believed would be of the essence and with hindsight that was one thing we got very right. 

Let's turn to the investment market in CR. How were H1 volumes and what trends or characteristics do you see?

We saw a volume of EUR 716 million in H1 2021, a year-on-year drop of 63% (or up 16% if the exceptional Residomo transaction is removed from 2020's figure); this is still well below (-59%) H1 2019. The pace of activity increased in Q2 and Q3 when pandemic restrictions were easing but still lacked larger transactions, those above EUR 100 million. Offices accounted for some EUR 339 million (47% of volume) and industrial transactions just over EUR 120 million (17%).  I am not sure there has been a major shift in trends between 2019 and 2021, but investors rightly ensure thorough and proper levels of due diligence and I would say that early stage (pre-bid) due diligence is more expansive.

Investors are more conscious of their own time resource and want to focus on transactions where they stand a higher probability of success.  So for all the gusto (quite rightly) concerning the depths of capital available, and although bidding is competitive and price-competitive, I would not say it is as deep as we have seen in the past. Sure, if you are selling an institutional industrial sector asset you will be harvesting 10, 15, 20 offers but generally across other commercial sectors I see less but more focused offers from specialised, experienced and qualified investors.

How do you interpret demand, and what are yields now by sector?

It's obvious there's no shortage of buyers for industrial, whether they be European REITs looking into CR, developers themselves looking to buy standing properties to increase assets under management and scale, or those buying older assets to reposition – so of course that’s driving sector yields down. The return of the benchmark transaction we completed of ‘Amazon Prague’ two years ago may have raised a few eyebrows, at a low four yield, but nobody would argue that looks aggressive today. Project Hyundai in Ostrava is an excellent example of where regional industrial assets now also price. Offices we benchmark circa 4.1% but my view is if best-in-class product came to the market it would be sub-4%.

In retail, it's hard to say what core yields are as owners have asset management challenges still to work through but we still see good activity so transactions will complete, however the complexity of those deals will continue going forward. In any case,  I try to move away from this discussion with clients as for me the climate is not about yield so much but rather more focus is needed on income. RE is an obvious inflation hedge, broods stability and multiple arbitrage options to finance with bank debt and now bonds. People like to quote yields as it’s a natural and digestible benchmark but +/- 10bps on an initial yield will not determine the success of the investment rationale in this climate, as much as whether those rents and income streams are +/-10% in the medium term.

Do you see any changes in financing conditions over the coming year? Have the main sources of capital changed?

It appears that inflation will be modest (perhaps 3% this year) so I don't think interest rates will necessarily be used as a mechanism for further control and banks should continue to finance quality product well. Now we have a secondary market allowing bonds to be more easily used for financing (for single assets rather than for full funds at this stage).  Concerning capital, domestic investors remain strong, which is a good thing for the stability of the market. Foreign capital, which is increasingly in depth typically aggressive either at the very core or opportunistic end, is still strong (it was 58% of the H1 volume) and tends to be more competitive on those higher transactions volumes.

How does the investment market look for the rest of 2021? What can be said of potential volume?

Several deals we're involved in are quite substantial and certainly there will be others in the market, so if all of these transaction deals get over the line, then the volume can be surprisingly large. So if the market continues like it has and all of these conclude we could see another year like 2019; on the other hand they may fall into next year - bear in mind the three or four months at the beginning of the year were very slow, so going forward timing will be really critical for a number of these deals in process and whether they drop into 2021 or 2022. There are very few transactions out there that follow a simple cookie-cutter format and most are more complex. Agents have to be much more creative in how you bring buyer and seller together and transactions need to be detailed and structured early on. Looking ahead, I am hoping we will transact on somewhere close to a EUR 500m volume in 2021.

What are the plans for Savills and its business lines looking forward?

We now offer all key service lines of PM, Building & Project Consultancy, Valuation, Offices Agency, Industrial Agency, Research and Investment. We will be adding retail to that in the short term. Retail has exceptional challenges (but it was a changing sector and the pandemic has obviously sped this up), however retail will evolve as it always has, and we like many of our clients, sign up to that mantra. We will continue our expansion and activity into the multifamily/PRS space and we have an exceptional USP (unique selling proposition) through our association with Lexxus. In an immature and developing sector, when investors enter they are eager for data and analysis and having a partner that's been in that segment and possesses 28 years of data sets as well as the development and operational inertia it’s something that positions us well and will allow us to grow this business line alongside others into 2022 and beyond.