BRIEFING: Real estate pricing is top investor concern

Nervousness over pricing has become the biggest concern for investors in European real estate, relegating fears of an economic slowdown and worries about a political crisis to second and third place, according to a new CBRE survey which was presented at PropertyEU's European Real Estate Outlook Briefing in London this week.

Experts agreed that there is so much demand from both local and foreign investors and such limited availability of assets that the gap between offer and demand is unlikely to narrow. It is therefore not a question of acquiring overpriced assets but rather of beating competitors to buy a much-prized asset which is likely to increase its value.

In prime markets there is a fundamental lack of supply which is pushing prices up, but investors’ concern must be put into context, said Richard Gwilliam, head of property research at M&G Real Estate: ‘The sector might be seen as expensive, but it is cheap compared to bonds. And European real estate is cheap compared to real estate in Asia and other places. So I am convinced the flow of capital will, if anything, accelerate in the coming months.’

Aside from the currency issue, which can make investments in euro or even sterling attractively cheap to foreign investors, there is the belief that fundamentals are improving. Sentiment is positive, as the economic recovery is no longer limited to the UK but is well under way in countries like Ireland and Spain.

In 2015 consumer spending in Europe is forecast to be the highest in 14 years. Since the crisis the development pipeline has slowed down and not fully recovered, but by the end of this year take-up levels, which currently lag behind the recovery, should pick up again.

Industrial and logistics
‘The fundamentals are picking up and this is reflected in sentiment,’ said Iryna Pylypchuk, director of global research at CBRE. ‘Retail demand is leaking into logistics. Industrial and logistics is the new in-demand sector in Europe today.’

While investors' intentions in the office and the retail sectors match actual allocations, in industrial actual investments are currently less than half of investor intentions. ‘This sector will really open up in 2015 and will become a bigger part of the investment market.’

Given the twin obstacles of asset pricing and availability of assets, investors are increasingly prepared to move up the risk curve into value-add, opportunistic investments. These new strategies often require active asset management and can lead to joint ventures with local partners, which is adding interest and depth to the market.

‘Credit tourists, that is bond investors, looked around the UK in 2010, then Spain in 2012. They are now in Italy and Portugal and maybe will be going to Greece and Cyprus next,’ said Jos Short, executive chairman of Internos Global Investors. ‘A lot of capital is chasing opportunistic investments, especially distressed and non-performing loans in Europe.’