Competition heats up for European real estate amid excess liquidity

The wave of capital sweeping over Europe is putting pressure on some of Europe's leading investors, attendees at PropertyEU's Outlook investment briefing in the London office of Colliers International heard earlier this week.

Excess liquidity is becoming a problem, agreed Philip La Pierre, head of investment management at Union Investment. 'I'm not so excited about all that capital. Debt and equity are competing with each other for every asset that is available. The amount of equity being invested today is more than 2006. Low interest rates - and we have a five-year view on this - is fuelling this business. The amount of cash out there and the lack of returns from other sources is pushing investors into real estate. It's a sentiment-driven environment.'

The search for yield is pushing some investors out into non-core locations but although Union Investment remains a keen buyer, it is not prepared to go up the risk curve, La Pierre said. 'We won't move into higher risk locations. We would rather pay a higher price than take a bigger risk.'

He conceded, however, that this strategy could potentially rein in the Hamburg-based company's expansion. 'If we transact €3 bn this year, that would be fantastic. More would be even better. My advice would be buy everything you can, because it's not going to get cheaper in the next two to three years. The only hope that keeps me alive is the low supply (in offices ed.) and good net absorption. At the moment, developers are throwing capacity into residential. Even office rents in Milan are stable although the vacancy level there is massive.'

In terms of asset class, however, Union Investment is very flexible, La Pierre said. 'We look at the quality of assets whether it be logistics, retail, office or hotels. We don't mind, but that's because we're not driven so much by performance but by wealth preservation.'

At the same time, the competition is growing, he conceded. 'Germany is our home market and we can do quite a bit there. Last year we invested €1.2 bn in Germany But this year I am struggling to invest €700 mln.'

Product is also thin on the ground in other countries, he added. 'Europe has become a very small continent. I like Oslo, but we have to hedge our costs there. Sweden is fantastic, but pricing on the rental and yield side is incredibly expensive. Retail is also expensive. We look at these markets and turn over every stone, but it's not easy.'

Union Investment has already bought huge swathes of offices in the Netherlands, particularly the South Axis of Amsterdam and is now looking at Rotterdam, La Pierre reported. 'In Brussels there is a lot of regulation and that's a very difficult market. But you can get good returns in Luxembourg. France is extremely stable, but the prices we can afford are in locations that the French don't go to so we're a bit wary about that. We would love to do something in Spain, but the yields we see are pricing in rental growth that we don't see. I like Poland, but Warsaw is massively oversupplied.'