Capital will continue to flow into the European real estate sector from different regions of the world, driven by international investors’ need for diversification, delegates at PropertyEU's Global Capital Flows and Investment Opportunities Briefing heard on Tuesday.

Capital will continue to flow into the European real estate sector from different regions of the world, driven by international investors’ need for diversification, delegates at PropertyEU's Global Capital Flows and Investment Opportunities Briefing heard on Tuesday.

None of the risks often cited, from the slowdown in China to the Federal Reserve raising interest rates, from Russian power games to Grexit or even Brexit, constitutes a real threat to the sector, as in investors’ eyes the opportunities far outweigh the risks.

This was the consensus view from sector experts at the briefing, which was held at the City offices of TH Real Estate.

The move towards a slow and gradual but broad-based and cyclical recovery in Europe, stimulated by low interest rates, spare capacity in the labour market and low commodity prices, is helping investor sentiment. ‘Real estate markets will benefit from an improved economic forecast, but what is really driving activity is the weight of capital looking for an allocation,’ said Thomas Beyerle, group head of research at Catella. ‘Most concerns are swept away by the demand to place capital.’

‘The dry powder available for investments in real estate in Europe this year is €235 bn, compared to €140 bn in 2013,’ he pointed out. ‘So this year the figures will overtake for the first time the 2007 pre-crisis peak of €226 bn, completing the recovery of the market.’

In the first half of the year investors poured €144.3 bn into the sector in Europe, an increase of 46% compared to the same period last year. Office properties are the most sought after, accounting for €50 bn worth of investments in H1 2015, according to Catella research, followed by the retail sector with €35 bn.

Cross-border investments continue to grow and now account for 54% of all investments in Europe, with the US comfortably in the lead with €31.3 bn in the first six months of this year, followed by Canada with €13 bn and then France with €10.4 bn. ‘The US will drive activity in the market, while the Fed will drive sentiment,’ said Jonathan Hull, managing director of EMEA Capital Markets at CBRE.

London has an even more comfortable lead as the investment destination of choice, attracting €26.6 bn of investments, far ahead of Paris in second place with €6.3 bn and Berlin in third position with €4.2 bn.
‘Interest in office and retail in these locations will stay high and there will be limited potential for prime yields to compress further,’ said Beyerle. ‘Occupier demand will continue to improve and prime rents will come under upward pressure in the medium term.’ Strong investor demand will push yields down in London and other key cities, and Catella’s prediction is that prime yields in the UK capital will bottom out at just above 3%.

‘Generally speaking, we are confident the market will run for another two or three years at these levels,’ said Hull. ‘There is more capital than there is stock, and that is going to be the challenge.’