Real estate investors would be well advised to change the definition of super core to include real estate debt, according to Mahdi Mokrane, AEW Europe’s head of research & strategy.

Real estate investors would be well advised to change the definition of super core to include real estate debt, according to Mahdi Mokrane, AEW Europe’s head of research & strategy.

With European banks forced to shrink their balance sheets, the funding gap for real estate has doubled, he pointed out at PropertyEU’s Outlook 2013 Investment Briefing in Paris at end-November.

‘Even without indexation, investors can get their money back within a timeframe of three to five years and redeploy it. Debt is the new super core.’ Mokrane also sees potential for more opportunistic deals. ‘Funds will be expiring in the next two to three years. There will be opportunities in debt funding.’

While financial conditions have improved in the periphery countries of Europe thanks to the European Central Bank’s long-term refinancing operation (LTRO) and its commitment to buy up bonds in Italy and Spain, Mokrane does not expect France or the rest of Europe to rebound for the next three to four years. By that time, heightened inflation expectations may also give the real estate industry additional tail wind.

In the meantime, the focus of most equity investors will remain on core although the definition of this investment style has become more blurred, Mokrane said, with strong risk aversion leading to widening yield divergence.

What is the definition of core, he asked rhetorically, when it is possible to buy good core assets in a provincial UK town for a yield of 9%? Spain and Italy face the most dramatic situation, he added: ‘These markets have become opportunistic even with core assets.’

The hunt for core has led some core investors to buy assets in the development phase in the expectation that conversion into core would be the ultimate result. But that period is coming to an end in the major property markets in Europe, Mokrane warned. ‘It will be a struggle to find any value added in Europe.’

The full story appears in the December issue of PropertyEU. Click on the link to subscribe: