EUROPE - Germany has overtaken the UK as the preferred location for investment in non-listed real estate funds, according to the European Association for Investors in Non-listed Real Estate Vehicles (INREV).

The organisation's 2011 Investment Intentions Survey showed German retail was selected by 36% of investors as their preferred location and sector.

This signalled a marked shift from 2010, when German retail failed to figure in the top 10 of locations and sectors.

Last year, the UK was seen as the most attractive market, but this has now fallen behind Germany, France and the Nordics.

Lonneke Löwik, director for research and market information at INREV, said: "This is a dramatic change in sentiment. Over the last two years, the UK dominated the rankings, with UK retail, UK office and UK industrial/logistics included in the top four most preferred country/sector combinations.

"While the UK remains well represented in the top 10, investors seem wary of higher property prices and a slower economic recovery in the UK, but attracted by growing confidence in the German and other European markets."

The survey, which captures insights from investors, fund-of-funds managers and fund managers, reveals a cautiously optimistic outlook for 2011. Nearly 70% of both investors and fund managers noted adequate supply of investment products and interest in their preferred markets, reversing perceptions from the 2010 survey.

There is also a perceived improvement in the ability to raise capital, with 50% of investors and 58% of fund managers rating this as less of a problem than in previous years.

However, 80% of fund-of-funds managers and fund managers still see capital raising as a significant challenge.

Appetite for the non-listed real estate sector has increased over the last two years, with more than half of respondents intending to increase their allocation to the non-listed sector.

In terms of investment strategies, 90% of investors are expressing a preference for a single-country strategy - an increase of 13 percentage points on 2010 - and close to 90% also prefer a single-sector strategy.

"These statistics suggest investors believe possessing a deeper understanding of a particular location or sector could be less risky than the benefits of diversification through a multi-country, multi-sector strategy," Löwik said.

Investors remain committed to core products, but to such an extent as estimated by fund managers (67% and 86%, respectively).

Investors are also looking for greater involvement and control in the fund investments, with 90% of investors preferring to be active investors compared with almost 80% last year.

It is not surprising then to see a growing interest in joint venture structures, with 67% of all investors and 90% of large investors expecting to increase their allocation to them over the next two years.