Editor's choice: Sweet spot

The European real estate sector remains in a sweet spot following the ECB’s decision on Thursday to extend its quantitative easing programme by an extra six months until the end of March 2017.

Given that interest rates in the eurozone are not expected to rise any time soon, property yields will continue to look attractive compared to government bonds for the next months at least. And even if some markets like London and Paris are approaching historically high pricing levels, other forces are helping push the peak further back, attendees at PropertyEU’s Outlook Investment Briefing heard recently in Paris.

Arguments that prime yields are at their long-term averages fail to take account of the peculiarities of the current market, Stephen Miles, managing director of EMEA capital markets at CBRE in the UK argued. Some investors are more focussed on the financing, he pointed out.

‘Yields are constantly shifting down but that is being facilitated by low financing prices so it doesn’t work to look at the 20-year average. It’s possible to get good cash on cash returns with lower actual property returns and we’re still a couple of steps away from rising interest rates. First we will see some more QE expansion, some retraction and then interest rate rises,’ he predicted.

The US on the other hand is widely expected to see an interest rate hike in the near future, possibly as soon as next week. While such a move could dampen enthusiasm among core North American investors for real estate this side of the pond, the signs so far point to a sustained flow of capital across the Atlantic, the briefing heard.

Scales have tipped in favour of foreign money
Indeed, North American capital was the biggest driver behind the growth in cross-border capital flowing into the German real estate market in the first nine months of 2015, according to research from CBRE. Presenting the data at PropertyEU’s Outlook Briefing in Frankfurt at end-November, Peter Schreppel, CEO Germany at CBRE, said the German market had become increasingly international in recent years in terms of sources of capital.

Mainland Europe’s largest market is now virtually equally split between domestic and cross-border capital. In fact, the scales have tipped in favour of foreign money in the first three quarters of this year to 53% of the total, he said. In 2014, foreign players accounted for 46% of the pie in the same nine-month period.

North American money has continued to be the biggest growth driver for European property investment so far this year, whereas the influx of Asian capital is yet to come. But Daniel Mair, a partner in EY’s German restructuring practice, is optimistic that more Asian money will materialise: ‘There’s still plenty of hundreds of billions of Korean and Chinese money waiting to be deployed into Europe.’

Back in Paris, CBRE’s Miles endorsed the view that Asian investors are finally becoming more active. But, he added, some may have been standing on the sidelines for a bit too long given the falling yield spreads for prime property. He foresees a growing amount of Asian capital now heading into European real estate fund vehicles.

‘Many Asian investors have been trying to co-invest through joint ventures and club deals but they are not as fast at making decisions. We’re seeing less Asian money going into direct property and more into funds. They are going to have to give up the control that they wanted to have because they keep missing those opportunities.’

Sounds like a sweetener for European fund managers, especially after the bitter pills they’ve had to swallow in recent years.

Judi Seebus
Editor in chief