EUROPE - Invesco has described European hotels as "a compelling sector" and has announced a shift in focus from European office to retail over the next 12 months amid "unabated" interest from pension funds.

However, the head of product management Simon Redman said the firm would continue to target office assets in regional UK cities such as Manchester, Bristol and Southampton, with significant planning constraints.

In the meantime, research director Simon Mallinson said pricing continued to be attractive for off-market European office transactions, with strong occupier demand and low vacancy rates within "core, tight" central business districts.  He also pointed to strong corporate cash balances and a paucity of competition for larger lot sizes.

Invesco will further target mid-market European hotels as the business travel sector continues to hold up and the hospitality sector undergoes significant consolidation. Redman pointed to hotels' inflation-linked high-income return, but said the manager would avoid operating companies, instead targeting assets that were subject to long leases.

In the meantime, Mallinson confirmed his overall positive outlook for the European market, arguing that pension funds could achieve sufficient diversification even if they restricted real estate investment to their home region - say, divided between mature markets, southern European markets and the Nordics.

"You can get diversification both against equities and bonds and within the asset itself," he said. Invesco has invested US$1.1bn (€820m) via 27 transactions in the European market this year.

London would be the exception to a broadly positive European rule from 2014 onwards, said Mallinson. Despite current supply constraint, forecast supply will dampen rental growth prospects and the fact that 50% of London's property is now in the hands of cross-border investors will likely increase volatility.

"You don't want to be in London for the long term unless you're a very long-term investor," he said. "Get in there for the cycles to take advantage of the volatility."

In Central and Eastern Europe, a likely regulatory change within the next 12 months that will allow Polish pension funds to invest in their domestic real estate market will provide much-needed liquidity and offset the potential for increased volatility as a result of overseas investors' activity.  But for the time being, said Mallinson, Russia remained "a bit Wild East".

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