LaSalle Investment Management warned today that the greatest challenge facing real estate investors in Europe was how to invest in a low-growth environment.
The global firm, which is based in Chicago, said in its annual Investment Strategy outlook for 2011, that there were “few easy wins” in Europe given the “subdued” economic backdrop.
Alistair Seaton, senior strategist for Europe, said in a statement: “The primary challenge will be investing in a low-growth environment without taking on unwanted or unmanageable risks.”
It said core European investors should focus on assets with secure income for the next few years as the economy and market conditions would provide little growth.
Meanwhile, investors seeking higher returns should look to banks seeking to reduce their exposure to property. It pointed to the estimated €115 billion property funding shortfall across Europe, which should lead to “plenty of stock” emerging eventually. “The bulk of these assets are in the UK and Spain, followed by Germany and France,” it said.
In addition, arguably the most compelling current investment strategy was the provision of mezzanine finance, said the firm, as there was otherwise little debt available above a 65 percent loan-to-value ratio.
For core investors, LaSalle said assets without secure income should be avoided until risks were reflected in pricing, which should start to occur as 2011 unfolds. “The best opportunities will be in the three largest markets of the UK, France, and Germany. These countries are also the most mature, transparent, and liquid real estate markets in Europe, creating a good and reliable environment,” said the firm.
Poland, added LaSalle, looked attractive because of its strong economic growth and a large domestic market, but it sounded a strong note of caution over investing in the rest of Central and Eastern Europe.
Elsewhere in the world, LaSalle pinpointed rapidly growing countries as being those capable of delivering investor performance. Jacques Gordon, global strategist, said growth strategies that took advantage of rapid urbanisation and burgeoning middle classes would be most successful. “In the low-growth countries, investment performance will get a boost from low interest rates and a rising flow of debt and equity capital, despite the weak recovery,” he added.
Although each country would offer up a different mix of opportunities, LaSalle said investors should consider a number of global themes in 2011. Banks will prove to be a greater source of deal flow, exit strategies for core real estate will be “highly executable”, investors will have to broaden their targets beyond long-leased prime properties in “world-city” markets if they are to achieve required returns.
In addition, mezzanine debt will still be expensive and scarce; yet demand will rise. In the US, LaSalle said the most attractive core investment opportunities next year would be those that capitalised on economic sectors, such as technology, health care, and entertainment, which will outpace the national average or take advantage of pent-up demand.
William Maher, head of US strategy argued in the US, value-add and opportunistic investing would become more attractive, but core investing would show the most signs for improvement.
The best higher-return opportunities will finally stem from the recent over-leveraging of real estate, particularly during 2005 and 2007. it added.
“Little of the distress to date has resulted in attractive investment opportunities be it debt or assets, but that will change in 2011 as banks and special servicers realise that delays face the risk of slow economic growth and/or higher interest rates,” the firm said today.
In Asia-Pacific, the firm recommended various strategies. In China, the best opportunity would be selective residential developments in second-tier cities. In Australia and Singapore, it singled out hotels due to improved operating performance.