BRIEFING: Pace of capital inflows into Europe to accelerate

Europe is set to see the flow of foreign capital into its property markets accelerate further this year due to the yield gap between real estate and 10-year government bonds and structural investment reforms in regions like Asia.

‘The next couple of years will be remarkable,’ Iryna Pylypchuk, director of global research at CBRE, told PropertyEU's European Real Estate Outlook Briefing which was held in London on Thursday. ‘We are seeing the beginning of a structural shift with capital coming in which is diverse in terms of origin and well as type, looking at everything from core to opportunistic investments.’

Asian insurance companies, for example, are being allowed to invest abroad and to invest more in real estate and this will have a dramatic impact on the sector at a global level, with Europe expected to reap large rewards from this momentous shift.

‘Asian insurers, who have $6.7 tln in assets under management, are now looking for places to diversify their investments and plan to increase their allocation to real estate,’ said Pylypchuk. ‘Asian insurance liberalisation will have a massive impact on the market and Europe will benefit.’

Private capital from Asia and the US
In a less obvious but equally significant shift, a lot of private, non-institutional capital from Asia as well as the US is coming into Europe for the first time, partly to take advantage of currency moves which have made the euro and sterling relatively weak.

‘While Middle Eastern investors have a marked preference for Europe, Asian investors tend to be unbiased and follow Asian migration,’ said Pylypchuk. ‘The Chinese love development so they tend to gravitate towards the UK as there is not much development going on in continental Europe. They have done offices and hotels and they are now ready to broaden out into other sectors like retail, maybe using joint venture structures. They are bolder and they act faster.’

Interest in Europe is not new, as there has been a steady increase in the last three years to a record high both in absolute terms and as a percentage of total investments (28% last year, according to CBRE research). But the pace will accelerate further this year, experts believe. There are compelling reasons: Asia, for example, has the widest yield gap between real estate and 10-year government bonds.

UK most attractive destination
The UK, the strongest economy in the G7, is regarded as the most attractive destination by foreign investors, followed by Germany and Spain on an equal footing. Investors have a wide choice as European markets are at different points of the cycle, said Richard Gwilliam, head of property research at M&G Real Estate: ‘The UK is quite far ahead after five consecutive years of consistent returns, but Europe has positive news and momentum on its side.’

Despite big regional variations within Europe, the gap between property yields versus bonds is compelling throughout the continent. ‘Expectations of growth were lower than reality in the past, and Europe could surprise on the upside again,’ said Pylypchuk. ‘I really believe that in 2015 investments will surpass the €250 bn mark. It will be the strongest year on record.’