Investment options in Europe are shrinking, while the risk of misallocating capital is rising, according to the latest edition of Union Investment's property investment climate report.
The survey of 161 professional property investors in Germany, France and the UK - which is carried out twice a year - revealed that 52% of European real estate investors are pessimistic about meeting their yield targets in the next three years. Even taking a five-year view, half of those polled don't expect to achieve the forecast returns on investment.
'Huge investment pressure in the property markets leads to a higher risk of misallocating capital,' commented Olaf Janßen, head of real estate research at Union Investment. 'Strategies must strike the right balance between accepting necessary risk in a zero-interest environment and exercising due care given the many threats.'
Many of Europe's investors are recalibrating their attitude to risk, with 60% citing 'returns' as their main motivation, far outstripping 'security' (29%) and 'liquidity' (9%). In January only 55% stated that they assessed real estate chiefly in terms of potential returns, compared with 52% last year.
In terms of geography, an overwhelming 84% of UK investors prioritised returns above other criteria, compared to 40% of Germans and 56% of French investors, the latter representing an 8% rise on the last survey.
Despite the increased focus on returns, investment strategies remained essentially defensive with only 35% explicitly looking to generate the same returns by taking on a higher level of risk. 46% of French investors elected for 'same return – higher risk' strategies, whereas only 32% and 28% of UK and German investors respectively said they would take that chance.
More said they were resigned to 'same risk – lower return' approaches, with 56% of German investors, 52% of French and 60% of British professionals in agreement.
'Although there has been a significant rise in the focus on returns, this has not translated into much action yet. There is still no sign of a general shift towards higher-risk investments,' confirmed Olaf Janßen.
Overall, while the climate index in France appears to be stabilising after a long downturn, in Germany and the UK investor sentiment showed an unexpectedly strong dip, with falls of 2.4 and 4 points respectively.
The survey was completed at the end of June, pre-Brexit, but showed a declining mood amongst British professionals of 64.3. For the first time since 2010, the climate index in the UK fell below that of Germany (67.5) and France (67.0).
'Overall, investors are losing confidence in their respective property markets,' said Janßen. 'Sentiment is being hit by numerous uncertainties, which are increasingly driven by developments in the capital markets. The next six months will show whether Germany’s climate index will be influenced by special effects and decline further, reaching the low level seen in France and the UK,' he concluded.
