The wave of good news that has washed over the European real estate sector in recent months is showing no signs of abating.
The wave of good news that has washed over the European real estate sector in recent months is showing no signs of abating.
In early July, Mahdi Mokrane, LaSalle Investment Management’s head of research & strategy, joined the chorus of optimists by saying that the positive momentum in Europe is probably well grounded and that it is no surprise that global investors are increasing their weighting to European real estate.
‘Capital flows into the region continue to progress and there is now increased appetite for risk in core markets and more interest in markets that were previously not on international investors’ radar screens such as Spain, Italy and Central Europe,’ he commented in a strategy update.
SOURCES OF NEW MONEY DIVERSIFY FURTHER
The origins of global capital inflows into Europe are becoming increasingly diverse and exotic. According to a recent report published by CBRE on capital flows in and out of the Middle East, new real estate allocations from Saudi Arabia and possibly even Iran will emerge in due course and add to the forecast $180 bn (€133 bn) Middle Eastern spend on real estate over the next decade.
Chinese investors are already storming London to snap up some of the capital’s biggest – and juiciest – properties this year. According to market watchers, they are more entrepreneurial and adventurous than the first wave of Asian investors in London and will look at both shorter income and development opportunities.
While global investors are expected to continue targeting Europe in the coming 12 months, it remains a key challenge to find sufficiently large and liquid markets to spend their money, according to Marcus Cieleback, head of research at German listed investment company Patrizia Immobilien. Speaking at a recent Outlook Briefing held by PropertyEU at the Paris office of law firm Taylor Wessing, Cieleback noted that there are only a couple of markets at city level that really have the liquidity for deals in the large ticket bracket and where transactions are happening. London and Paris dominate the European scene, followed at a distance by Frankfurt. Although the German city has some large ticket deals, it has a lower growth story in terms of GDP and workforce size, Cieleback pointed out.
The huge amount of equity targeting Europe from Asia and the US and the relative dearth of large-ticket deals is driving a growing number of investors to move up the risk curve, Cieleback said. Banks are doing the same, Reinhard Kutscher, board member Reinhard Kutscher of German fund and asset manager Union Investment, told PropertyEU in a recent interview. Like equity investors, banks are keen to do financing of quality core assets, he pointed out. ‘But like equity investors, they’re starting to walk up the risk scale. That’s what investors are doing, because of lack of opportunities, and the banks are following.’
LENDERS MOVE UP RISK CURVE AS WELL
Equity flows are indeed only one side of the equation. The increased risk appetite of European real estate lenders also indicates that the signals have turned to green on the debt side. That conclusion is borne out by DTZ’s latest Money into Property report. Some 40% of lenders polled in the survey now expect a substantial recovery in lending conditions in 2014 itself, compared to just 6% in 2013, DTZ’s global head of research Hans Vrensen said during a webcast on the report.
‘This year’s results suggest that most lenders think that the recovery is already here now. There is no delay as in previous years. This marks a massive change in sentiment compared with 2013,’ he said.
A key signal to watch for in the current cycle is rising interest rates – which are currently at an historic low - but according to Union Investment’s forecast, a significant increase is not expected to materialize until after 2015. Kutscher: ‘There will be some change in the next two to three years, with interest rates returning to normal. In the US, rates are starting to go up and the ECB (European Central Bank ed.) will have to follow in the next 12 to 18 months. 2015 may not be the end of the low-interest rate story either, but at some point in the cycle there will be a correction. The main question is the timing and whether we will see it in this phase of the market cycle. But it is (just) a matter of time.’
For the coming period, interest rate levels remain the proverbial elephant in the room. But as the sources of equity and debt flows become more diverse, so do the investment rationales. The PropertyEU team looks forward to exploring these further in the next six months.
Judi Seebus
Editor-in-chief
Related articles:
European real estate to draw in more global capital – LaSalle
OUTLOOK BRIEFING: Global capital flows spark rethink of strategies
OUTLOOK BRIEFING: Large liquid markets remain in short supply in Europe
OUTLOOK BRIEFING: Global investors more upbeat about Europe than some insiders
‘Remarkable’ improvement in lenders’ sentiment – DTZ survey
Market outlook turns positive despite geopolitical threats
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