Today’s investor strategies are all about core, security and stability. Why? Surely, most active investors have a defensive profile, meaning they’re focused on core markets and fully let Grade A properties in the CBD. These natural core investors are not alone nowadays. They are competing with “artificial core investors”. Artificial because former value-add or opportunistic investors have changed their investment profiles due to lack of credit and/or a lack of opportunities.
What happens when growing demand encounters limited supply? Prices go up – a normal economic reaction and a situation we currently see in most European markets. Additionally there is a lot of capital waiting on the sidelines to invest and it’s impossible that all of this will be invested in prime. It is becoming more and more difficult to achieve investors’ return expectations, so they will have to look for alternatives.
And at this point secondary enters the game. If investors will not or cannot change their macro strategy, they will need to look for secondary investments. So far, so good. Firstly, you need data and your point of contact is the research department, so the sales department calls and asks for prices for secondary investments or even a spread above prime. This shouldn´t be too complicated, so they expect an answer within the hour… The researcher, however, starts to get nervous as there has been no real indication of secondary pricing for more than five years! Since 2008, most of the (few) investment deals were core and within the hype period 2005-2007 prices for secondary were finance driven and in most cases unrealistic.
Fair enough, but a further problem will soak the researcher with sweat: what is secondary? This term is used as if everyone understands its meaning. In reality there is no exact definition of secondary. Are we talking about a sub-market outside CBD?; a Grade B building?; a building with considerable vacancy within the CBD?; a property with a weighted average lease term of two years? A lack of a definition is the starting point of a lack of transparency. A lack of transparency is one reason for uncertainty and uncertainty is an obstacle to an active investment market. As long as investors and banks cannot get a view about the pricing of assets apart from prime/CBD, European markets are driving only at half-throttle. My view is that the number of investors who would invest in secondary is growing but nobody wants to be the first. It is too risky, so they are desperately looking for advice. We should have the answers for them but let us keep this answer as specific as possible and differentiate to get a clear view about the spread to prime.