EUROPE - European real estate investors are no longer as concerned about the health of the underlying occupier markets and instead have identified scarcity of debt financing, as well as rising interest rates and inflation, as the chief dangers, according to CB Richard Ellis (CBRE).
The significant change in investor sentiment was one of the findings of a survey of close to 350 European real estate investors, which was launched by CBRE at MIPIM in Cannes, France this week.
The same survey last year found demand-side risks in the occupational markets were considered the greatest threat, and one in three investors saw a 'double-dip' recession as a primary recovery concern.
CBRE said this year's survey results reflected the impact of continued credit constraints coupled with above-target inflation, rising bond yields and expectations that rate increases from the current ultra-low level are coming closer.
Over the last few months, there has been a sharp increase in medium-term interest rates: for example, the German 10-year government bond yield has increased from a low of 2.15% in August last year to around 3.15%. This is increasing the cost of capital to banks and thus the rates at which those lenders that are still active are prepared to lend.
Peter Damesick, EMEA chief economist at CBRE, said: "Real estate is often considered as a hedge against inflation, but this is true only to an extent and depends on the source and nature of inflationary pressure."
Damesick said indexation could provide short-term protection against inflation, but was only sustainable if underlying rents also increased in line with inflation in the longer term, which required some strength in occupier demand.
He added: "The cost-push inflation that is affecting Europe at the moment, driven by currency weakness and increases in oil and raw material prices, is much less likely to lead to increases in rental value.
"History also tells us that, if higher inflation induces tighter monetary policy, that can prove negative for property performance."
Phillip Cropper, managing director of real estate finance at CBRE, said: "The impact of these concerns over interest rates, inflation and a shortage of debt finance will differ greatly depending on the nature of the property an investor holds.
"Current buyers of prime real estate are using very little debt and are generally buying property for its bond-like qualities, rather than as an inflation hedge.
"The availability and cost of debt is much more significant for the secondary market, where historically levels of leverage have been higher.
He added: "Currently, there is very little appetite to lend on secondary property, where the market perceives there to be significant tenant and leasing risk. This is unlikely to improve for a considerable time, and this is likely to impact pricing."