Three quarters - or 75% - of investors in European real estate polled by Union Investment Real Estate fear that investment returns will remain flat until at least 2019, with over half of those (43%) believing it will take even longer.
Only one in four real estate investors in Europe thinks that the current market cycle will peak soon and that the initial rate of return on real estate will start to rise again, the Hamburg-based investor said based on its latest property investment climate report.
The study, which is carried out twice a year, this time surveyed 168 professional property investors in Germany, France and the UK.
'In recent months, high prices for office and retail real estate in the core markets have sparked the creativity of professional investors and caused them to take a broader view of the property market. This development is already being reflected in new fund ideas,' commented Olaf Janßen, head of real estate research at Union Investment.
According to the data, an investment strategy based on 'same risk – lower return' is being pursued by 71% of investors in Germany and by 74% of respondents in the UK. Compared to the last but one survey, carried out a year ago, this represents a rise of 15 and 14 percentage points respectively among those surveyed.
In France, the tolerance of risk is somewhat higher, even in the current market environment, with 41% of investors stating that they are taking on more investment risk in order to achieve the same yield targets as before. The remaining 59% expect to achieve lower returns with the same level of risk.
Shift to alternative asset classes
Overall, the surveyed investors are sceptical about the European investment climate for office and retail real estate. Around a third are pessimistic about the prospects for offices in the next 12 months, while 51% are negative about retail real estate prospects.
In line with this, alternative asset classes are attracting attention, with logistics properties most popular at 83%, and hotel and residential both targets of 61% of the investors surveyed. Among the equivalent group of German investors, around 50% intend to focus increasingly on these three property types.
A quarter of all French respondents, 29% of the German investors surveyed and 67% of UK survey participants who have defined an alternative investment strategy are looking to acquire micro housing, which includes student housing in the survey.
Politics weighing heavy
Some 61% of French investors believe that the French real estate markets will perform better under the new administration in the Élysée Palace than was forecast prior to the election, with 48% predicting an economic upswing in the next 12 months.
With regard to the UK, 49% of respondents expect the investment climate to remain largely unchanged, while 46% anticipate an improvement, although the 'expectations' parameter for the UK is at an all-time low of 42.5 points.
Compared to the last survey six months ago, the investment climate in Germany has improved by 1.2 points to 67.7, while France has experienced an even bigger increase, rising by 3.3 points to hit a current peak of 70.3.
'The example of the UK clearly shows that political uncertainty around Brexit continues to outweigh the core data on the general economic situation,' commented Janßen. 'At the same time, some European investors have already returned to the UK markets and are finding suitable conditions for new investments if they are willing to accept more risk.'
