Europe’s real estate investment market will continue to grow strongly in 2016 despite a growing element of investor caution, experts at PropertyEU’s recent Outlook Briefings said.
Europe’s real estate investment market will continue to grow strongly in 2016 despite a growing element of investor caution, experts at PropertyEU’s recent Outlook Briefings said.
Both lending and equity funding are expected to remain high and sustain strong demand in the office sector. However, the combination of yield compression and high equity funding are making investors more discerning, said Peter Schreppel, CEO of Germany at CBRE.
Research from CBRE shows deal volumes in Germany heading for a new cyclical peak of over €50 bn in 2015, close to the 2007 high of €57.5 bn. ‘The big difference is the level of equity that is being put into transactions these days,’ Schreppel told the audience in Frankfurt in late November.
‘In 2007 we saw transactions in which investors did not put a penny on the table,’ Schreppel pointed out ‘It was all debt driven. Today investors are actually putting money on the table and the equity portion is larger than in 2007 so that is more stable.’
Supporting the more cautious market sentiment is the fact that yields for prime and secondary assets are not converging to the same degree as in 2007, said Schreppel. ‘This underscores the point again that yes there is money out there but it is more cautious even though liquidity is very high.’
While debt is readily available for prime asset deals, ‘it hasn’t gone up the risk curve as much as it used to do in 2007’, Schreppel said. This means that not every property that is put on the market is sold, ‘because investors and banks will not buy everything.’
Philip La Pierre, head of investment management Europe at Union Investment, said there were several positive factors driving the investment cycle upwards. ‘We still see high willingness of banks to finance, high equity sources globally going into different European markets,’ he said. ‘We see a strong fundamental demand for office space, potentially even a growth scenario for rents if supply remains low. But you also have to bring in a bit of caution.
‘We’ve seen 2-3 years now of very high investment volumes, we’ve seen a long period of low interest rates and we’re seeing a change in that in the US and potentially in UK policy so the question will be: when interest rates start diverging across the globe, will that take some of the money out of the markets and potentially soften yields?’
Schreppel acknowledged that US interest rates were likely to rise ‘but this will be more a signal to the market than a big step’. Europe is likely to keep interest rates low for much longer, ‘which usually means that yields will compress in the long term’, he added. Overall, the spread between interest rates and prime property yields is still big enough for real estate to maintain its appeal.