Low interest rates to drive returns down further - survey

The historically low interest rates in Europe are expected to result in a further drop in returns on property investment, making it harder for investors to achieve their targets, according to a survey by Hamburg-based Union Investment Real Estate.

Although security and value preservation continue to be dominant motives for property investment, the current low interest rates are making it ever more difficult for investors to achieve adequate, low-risk investment returns, the survey found.

Of the 164 property investors surveyed in Germany, France and the UK, only half believe they will achieve their yield targets in the next three years. With regard to the next five years, investor expectations were only marginally better, the survey revealed.

‘The latest ECB decision has further increased the pressure to revisit real estate investment strategies,’ said Olaf Janßen, head of real estate research at Hamburg-based Union Investment Real Estate. ‘Falling acquisition yields are having an increasingly adverse impact on investment outcomes. In order to ensure that their investments continue to perform, the more risk-averse investors are being forced to make a raft of adjustments.’

Nonetheless, European investors remain cautious in terms of strategy and there is still no sign of the anticipated shift towards higher-risk investments in a bid to escape low returns. Union Investment found that only a relatively small group of investors are considering boosting their exposure to non-European investments or to segments with higher returns such as hotels and logistics.

Around 37% of investors are prepared to take on greater risk due to price pressure in European investment markets, unchanged from the previous survey in summer 2014.

‘The core segment remains a safe harbour and despite the current high prices investors still expect it to deliver stable performance,’ Janßen continued. ‘The letting markets in most core European countries are in relatively good shape at the moment. Companies are doing well. As long as the investment conditions are right – in terms of the lease and the income potential of the location – investors see no reason to change their investment style or diversify into different regions or sectors.’

Compared to last year's survey, investors are now more willing to accept shorter lease periods when acquiring properties and to seek slightly higher returns via development projects, while also accepting lower pre-letting rates in such cases. Over half of the surveyed investors aim to boost their performance by increasing the proportion of secondary cities in their portfolio and focusing on European core markets.