Real estate investors in Europe see no rise in returns before 2019
Only one in four real estate investors in Europe believes that the current market cycle will peak soon and that the initial rate of return on real estate will start to rise again, according to the findings of the latest property investment climate study by Union Investment, which is carried out twice a year, and this time involved a representative survey of 168 professional property investors in Germany, France and the United Kingdom.
The overwhelming majority of respondents (75 percent) do not expect a turnaround until 2019. Of that figure, 43 percent expect it to come even later.
An investment strategy based on “same risk – lower return” is being pursued by 71 percent of investors in Germany and by 74 percent of respondents in the United Kingdom.
Compared to the last survey, carried out a year ago, this represents a rise of 15 and 14 percentage points, respectively, among those surveyed. In France, the tolerance of risk is somewhat higher, even in the current market environment, with 41 percent of investors stating that they are taking on more investment risk in order to achieve the same yield targets as before. The remaining 59 percent expect to achieve lower returns with the same level of risk.
Shift to alternative asset classes
Overall, the surveyed investors are somewhat skeptical about the European investment climate for office and retail real estate. Almost a third of professional investors are pessimistic about the opportunities for attractive office investments in the coming 12 months. Retail property is assessed even more negatively — a narrow majority of 51 percent currently sees few prospects for compelling investments. Against this backdrop, alternative asset classes within the real estate world are attracting more and more attention. Due to the prevailing high prices for office and retail property, around half of those surveyed are pursuing dedicated alternative strategies. Logistics properties, hotels and residential property are the main targets of this shift in focus. Among U.K. investors looking for alternative investment products, logistics properties are most popular, at 83 percent, followed by hotel and residential, both at 61 percent. Among the equivalent group of German investors, around 50 percent intend to focus increasingly on these three property types.
As part of this strategic realignment, specialized products such as student accommodation and social housing are generating significant interest among European investors. A quarter of all French respondents, 29 percent of the German investors surveyed and 67 percent of U.K. survey participants who have defined an alternative investment strategy are looking to acquire micro housing. This segment includes the student housing referred to above, which is only used on a temporary basis.
“In recent months, high prices for office and retail real estate in the core markets have sparked the creativity of professional investors and caused them to take a broader view of the property market. This development is already being reflected in new fund ideas,” said Olaf Janßen, head of real estate research at Union Investment Real Estate GmbH, Hamburg.
Investment climate also affected by political sentiment
The presidential election in France and the Brexit preparations being undertaken by the British government have had a palpable impact on the real estate investment climate in Europe. Approximately 61 percent of French investors believe that the French real estate markets will perform better under the new administration in the Élysée Palace than was forecast prior to the election. This mood reflects French investors’ assessment of the general economic situation of their country over the coming 12 months. 48 percent expect that the French economy will be in better or significantly better shape in a year’s time. Across all three countries, however, only 30 percent of those surveyed share this opinion.
With regard to the United Kingdom, meanwhile, professional real estate investors expect a high level of economic stability in the country over the next 12 months. 49 percent of respondents expect the situation to remain largely unchanged, while 46 percent anticipate an improvement. Having said that, the “Expectations” parameter in the investment climate index for the U.K. markets has reached an all-time low of just 42.5 points. That is also the lowest value recorded anywhere in the current survey. Despite the prospect of economic stability, European investors will thus continue to adopt a more defensive stance in the United Kingdom.
“The example of the United Kingdom clearly shows that political uncertainty around Brexit continues to outweigh the core data on the general economic situation,” explained Olaf Janßen. “At the same time, some European investors have already returned to the U.K. markets and are finding suitable conditions for new investments if they are willing to accept more risk.”
The overall picture: France ahead of Germany and the United Kingdom
The Union Investment study conducted twice a year allows a real estate investment climate index for the European core markets to be compiled, making it possible to track trends. The most recent study shows that the German market is highly stable with a slight upward trend. Compared to the last survey six months ago, the investment climate in Germany has improved by 1.2 points to 67.7. France has experienced an even bigger increase. Since the last survey, carried out a year ago, the index has risen by 3.3 points to hit a current peak of 70.3. In the United Kingdom, the investment climate has stabilized since the last survey, which was strongly impacted by the ramifications of Brexit. At 61.4 points, there has actually been a slight improvement.