The stiff competition for core real estate assets is increasingly pushing investors to look for solid income-producing assets in secondary cities, according to the latest edition of the Emerging Trends in Real Estate Europe report.

The stiff competition for core real estate assets is increasingly pushing investors to look for solid income-producing assets in secondary cities, according to the latest edition of the Emerging Trends in Real Estate Europe report.

Published by the Urban Land Institute and PwC, the report finds that investors are looking beyond prime assets in major European markets in search of higher yields. For example, office investors in Munich can achieve yields of approximately 4%, but those willing to invest in smaller German markets such as Stuttgart can achieve up to 6.5%.

Investors are also looking to acquire secondary properties in major markets which have good existing income streams or which, with careful asset management, could be transformed into core assets.

An interesting consequence of the 'Battle for Assets' is that investors are increasingly considering development as a way of adding high quality assets to their portfolios. The report demonstrates that 71% of respondents believe that development is an attractive way to acquire prime property.

'We believe the real estate investment market in 2014 will be dominated by a battle for assets,' commented Simon Hardwick, real estate partner at PwC Legal. 'International capital will continue to flow into Europe, seeking to acquire prime assets in core locations. Intense competition for the limited supply of suitable property will inevitably continue to have an impact on prices - particularly in global gateway cities, including London. This will result in investors having to look at other opportunities and to accept more risk.'

DEVELOPMENT
This is reflected in the renewed interest in development, as well as the fast improving outlook for 'non-prime' locations and properties. 'However, we are sceptical about whether the positive sentiment will lead to a headlong rush into the most risky markets. Investors’ interest remains focused primarily on sustainable returns from quality assets in good locations,' he added.

The report highlights that there will be significant capital available in Europe’s real estate markets during 2014 with 71% of respondents believing there will be an increase in equity for refinancing or new investment this year. Although some of the equity will be domestic, significant investment is expected to continue to flow from sovereign wealth funds, especially those based in Asia. Nearly 80% of respondents believe that capital from Asia Pacific will increase during 2014, with 67% of respondents believing that capital from The Americas will increase this year.

The outlook for real estate debt availability is also improving, with 51% of respondents expecting the availability of debt for refinancing or new investment will increase this year, with only 15% of respondents expecting it to become more scarce. However, respondents were not expecting dramatic improvements to pre-recession levels and there remain significant geographical differences in perspective. The UK was the most upbeat on the prospects for debt with nearly 90% expecting greater availability, while southern European and Benelux countries were more cautious on the outlook.

The Emerging Trends report is based on the opinions of more than 500 international real estate professionals, including investors, developers, lenders, agents and consultants.

The full Emerging Trends in Real Estate Europe 2014 report is available for download at the link below