Editor's Choice: Europe moves at multiple speeds

The recent rally in real estate investment volumes in Spain and other parts of Southern Europe marks a clear break with the downward spiral of the post-global financial crisis period.

Indeed, investors are piling into parts of the region, with as many as a dozen or more cross-border investors competing for some assets. Great news for the vendors when multiple bidders drive up prices by as much as 15-30%, but a question some newcomers may need to ask themselves is whether the market fundamentals warrant such enthusiasm.

Granted, some foreign investors are able to acquire property solely with their own equity. But those players that need financing from lenders outside their own home market may find the doors they are knocking on remain closed. German lenders, for example, are still reluctant to finance anything but core, even in their own market. And that while Europe's economic powerhouse saw real estate investment more than treble in the first quarter of this year to €10 bn compared with the year-earlier period. Not surprising then that German bankers have an even grimmer view on the southern economies.

The fact that Portugal and Greece have returned to the capital markets is not a sign that Continental Europe is out of the woods, they argue. With unemployment rates still way above 20% in Greece, Spain and Portugal, consumer demand in those countries is unlikely to pick up in the foreseeable future. Meanwhile the economies of Italy and France continue to splutter.

While investors are casting their nets wider for value-add properties in their hunt for higher yields, German bankers have no plans to be sucked in on their way. A clear signal came this week from Berlin Hyp, one of the leading real estate banks in Germany. 'The eurozone crisis is far from over; it has only been sugar-coated by the European Central Bank for now,' CEO Jan Bettink told PropertyEU.

A new two-speed momentum
Neither is the market back to normal yet for European fund managers. Europe was the worst performer in 2013 at a time when the non-listed real estate sector globally experienced a 'dramatic uptick ' in total returns, new research announced this week by the European, Asian and US property fund organisations, INREV, ANREV and NCREIF reveals.

According to their new Global Real Estate Fund Index, returns for Europe as a whole - measured by the INREV Quarterly Index - averaged 3.5% last year. While this is significantly better than the negative 0.50% recorded in 2012, the positive 2013 result was largely generated by a jump in the UK of 8.77% compared with 0.28% the year before. For Continental Europe, returns last year totalled 0.99%, dragged down by the negative Southern Europe returns of minus 11.86%. Central and Eastern European funds saw returns of 1.98%.

German bankers have a reputation for being vigilant and cautious and Europe will forever remain a patchwork of moving parts proceeding at multiple speeds. But there is a ray of light for investors seeking to move up the risk spectrum. Since the outbreak of the financial crisis, core funds in Europe have continued to outperform their value-added funds. Last year, however, value-added funds moved slightly ahead, according to the INREV Quarterly Index, with a score of 3.87% compared to 3.46% for core funds.

As yields tighten further for core assets, that new two-speed momentum may well gather pace.

Judi Seebus
Editor in chief

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Spain's Colonial carries out €1.26b capital increase
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