European investors are adopting “alternative” investment strategies in the face of massive demand for safe, core, yet scarce assets, according to Germany's Union Investment Real Estate.
In its latest annual study in which 168 property companies and institutional investors were polled in Germany, the UK and France, the fund manager said investors were still seeking a safe home for their capital, but they faced very limited returns due to historically low interest rates. Accordingly, more and more investors are leaving the beaten track and accepting more risk, said the Hamburg-based manager.
The heavyweight company said massive demand for safe investments was making core properties expensive and scarce and found that UK investors were the most willing to take risks with almost two thirds of UK investors now accept greater risk in order to generate adequate returns again. In fact, according to Union's findings, UK investors firmly believed that other European players needed to be much bolder when investing. France is also seeing a trend away from a strict focus on safety towards high-yield investments, said Union Investment. Six months ago, only a fifth of French investors regarded returns as the most important investment factor, but that figure is now 44 per cent. In Germany too, ongoing competition for investment properties in the core segment is concentrating attention on riskier and thus higher yielding investments, but the country’s investors nevertheless continue to regard returns and safety as equally important.
Union Investment found investors were considering acquiring properties with shorter leases as an alternative investment strategy. There is also a greater trend towards investing in development projects. Reinhard Kutscher, chairman of Union's real estate management board, said: “Project acquisitions accounted for about half of our own investment volume of some €4.5 billion in the last two years. We expect development projects and redevelopments to play a greater role for investors going forward.”
Interestingly, sovereign wealth funds from Asia and the Middle East are expected to play a major role in European commercial property markets going forward. “If investors from Asia and the Middle East were to significantly boost their positions in European real estate markets, competition will become even more intense,” said Kutscher. “European investors will be under even more pressure to adopt alternative investment strategies.”
The tricky choice between safety and returns is reflected in investors' assessments of future strategy. On the one hand, 49 per cent of the investors told Union they intended to invest more in secondary locations and thus deviate from a “safety first” approach. On the other hand, strategists are continuing to hedge their bets. They plan to invest more in buildings that are let to several tenants rather than just one, in order to avoid “cluster risks”, said the study.
Almost half of the decision-makers also preferred to focus on core European countries when planning investments, for safety reasons. “The euro crisis is having a more sustained impact on investment decisions than expected. Investors remain cautious in terms of strategy and are taking precautions against defaults,” explained Kutscher. “At the moment, though, the only way to generate higher returns is to take calculated risks,” he added. Nonetheless, only a small number of investors – just 14 per cent – are considering boosting their exposure to non-European investments.
Union Investment also found the supply and demand equation was the biggest factor influencing decisions whether to invest in a property. That said, the financial crisis and associated eurozone difficulties have resulted in the economic outlook and in particular credit terms being important aspects for almost as many investors.
Unlike the last boom period between 2004 and 2008, when investors hoovered up European properties opportunistically using high levels of leverage, the proportion of debt capital is now much lower and investors are considerably more cautious. Union Investment stressed the main challenge was to find an investment strategy that guaranteed adequate returns despite low interest rates, strong competition and a difficult credit environment.
Although investors are increasingly willing to look at alternatives, the experts polled still see growth potential in the core segment. They anticipate rising prices in the segment, notably in their own country but also in the US. In addition to the core markets, there has also been a improvement in expectations for Irish core properties. Some 44 per cent of all respondents believed that prices would increase on the Emerald Isle. In contrast, less than a quarter of survey participants were confident that Italy, Portugal and Japan would see prices moving higher.
Despite the ongoing instability in some European real estate markets, investors in the three biggest European economies rate their financial position as better than in the previous year. Only six per cent regard their company as in a worse state. However, French property investors remain somewhat more cautious than German and UK counterparts.