EUROPE - Real estate investors are in danger of underestimating the risks associated with the European sovereign debt crisis, according to Joe Valente, head of research and strategy at JP Morgan Asset Management (JPMAM).

In a new research paper, Valente warns against assuming that negative repercussions will be confined to peripheral Europe.

He said: "The danger inherent in this situation is that the focus on peripheral Europe is distracting people from the potential problems faced by all asset classes across all markets."

However, Valente, who left Allianz Real Estate earlier this year to join JPMAM, argued that core real estate in Europe could prove to be resilient should the sovereign debt crisis escalate.

"While real estate is clearly not isolated from this growing uncertainty, it is at the same time better positioned to mitigate some of the risk," he said.

"Even if default occurs, core real estate will continue to generate cash flow regardless of the sovereign debt problem in the country in which it is located."

In other words, the risk of a tenant defaulting (in the short term) is not a proxy for the credit risk at a country level.

"All else being equal, income-producing real estate let to strong covenants is defensive and relatively well positioned to mitigate some of the risk," Valente said.

"The value of income-producing real estate would, of course, be affected, but much of the pain would be deferred."

Real estate assets with the least bond-like characteristics and those in secondary locations have more potential to be adversely affected by developments in Europe, the paper concluded.

"Public sector austerity could translate into slower economic growth and a more sluggish leasing market," Valente added.

"Assets with vacancy risk in smaller secondary locations would once again be most vulnerable."

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