If you thought there was a lot of international capital ready to be invested in European real estate, think again. The wall of money is more massive than anyone could imagine, experts agreed at the Real Estate Private Equity event, organised by PropertyEU, which was held in London this week.
‘There is too much money around that needs to be deployed,’ said Thomas Wels (pictured), head of real estate and private markets at UBS Asset Management. ‘I feel there is a certain desperation out there.’
In addition to the significant amount of capital already looking for deals in the continent, there are ‘major capital flows that sooner or later will be comfortable with investing in Europe,’ notably from China, Japan and other Asian as well as Middle Eastern countries, said Ric Lewis, chief executive and chairman of Tristan Capital Partners.
‘We are seeing a lot of capital already, but what is even more intriguing is the capital on the doorstep, about to cross the threshold and come into Europe,’ he said. ‘Our client base is so much more diverse now.’
The case for investing
‘A lot of money going into real estate is driven by factors that have nothing to do with real estate,’ said Paul Richards, head of European real estate at Mercer. ‘We are seeing money from the Middle East and Japan coming specifically into real estate because of low bond yields, focusing on strategies that create value.’
Real estate continues to be attractive despite valuations that can be steep, because of the lack of alternatives, said Paul Jayasingha, global head of real assets at Willis Towers Watson: ‘Pricing has moved, but bond yields have fallen so there is still a strong case for investing in real estate.’
The awareness of political risk is not a deterrent to investment, panellists agreed. Investors take on board the uncertainties over Brexit, the prospect of tricky elections in France and in Germany and possible electoral turmoil in Italy because they believe in the growth story.
‘Political risk in Europe is not leading to a retreat to safety,’ said Richards. ‘Quite the opposite: most people see it as a chance to take advantage of the uncertainty to find good investment opportunities. And unless something really dramatic happens in the financial markets, the attractions of real estate will remain, as government bond yields are likely to stay low.’
Bubble risk
The ‘desperation’ to invest in real estate, however, can lead to risky behaviour: ‘The zero or negative interest rate environment is disturbing because if it continues it can lead to bubbles,’ said Wels. 'I am not saying we are in the bubble zone yet, but equity-driven speculative developments are happening. More money is going into riskier strategies like development in the search for yield.’
