London's real estate investment volumes dropped sharply last year amid uncertainty over Brexit, yet the UK capital ranks as the most attractive European city for real estate investment for the sixth year running in CBRE's annual Investor Intentions Survey which was launched at Mipim.
Some 17% of respondents to the survey cited London as their preferred destination for real estate investment. Berlin has jumped to second place in 2017 from fourth position in 2016.
RCA data published in PropertyEU's Top 100 Investors publication in March indicates investment in London property was down by 50% year-on-year to €25 bn in 2016. The main reasons for the sharp drop appear to be uncertainty in the run-up to the Brexit referendum, the subsequent public vote in the referendum to leave the EU and fears among investors that the London real estate market was peaking.
CBRE's Investor Intentions Survey reveals that investors targeting European real estate still see London as the most attractive market. In terms of the immediate challenges impacting the acquisition of real estate assets, availability of product and pricing of assets are considered the greatest obstacles facing investors this year.
This is also reflected in the results for some of the other gateway cities in Europe, with Hamburg, Milan and Munich dropping out of the top 10, and Paris retaining a top-5 position as one of Europe’s most attractive cities, despite aggressive pricing and potential political risk. Meanwhile Oslo and Stockholm are prominent new entries in the top 10 most attractive investment cities, reaffirming the strong investor interest in the Nordics.
German stalwart
Whilst London was ranked the most attractive city, Germany has retained the top spot as the most attractive country for real estate investment in EMEA, preferred by 22% of respondents in the CBRE survey. The UK (20%) was once again the second most popular country and both Germany and the UK have increased in popularity from the previous year, up from 17% and 15% respectively in 2016. Investors value their relatively high liquidity and transparency.
The Nordics, with 10% of the vote, entered the top three, rising from seventh in 2016. The increased popularity of the Nordics was also reflected in high levels of investment activity during 2016, with its favourable risk return profile driving volumes 66% above the ten-year average.
More buyers than vendors
Investors also continue to show a greater desire to acquire property than dispose of it. According to the survey, 85% of investors intend to spend at least as much in 2017 as in 2016 and 41% expect to spend more. Investment style is also shifting. There is now a lower preference for core stock with investors showing a greater propensity (41%) to invest in good secondary or value–add opportunities. Whilst this varies between markets, it reflects a desire for assets where active management can be used to enhance returns in a growing economic environment where yields are compressed and interest rates are likely to rise.
Offices are perceived to be the most attractive sector in 2017, although its lead over other sectors is contracting. Investors now perceive industrial and logistics as the second most attractive sector, motivated by structural changes such as the broad-based integration of e-commerce in the supply chain and the development of logistics as an institutional investment product.
The survey also highlighted the increasing attraction of alternative investment sectors, with 71% of respondents indicating that they had already invested in alternatives whilst 64% are actively pursuing opportunities in the sector.
While 2017 will be an eventful year, with several major elections in Europe, investors' focus appears to be more concentrated on the economic climate than geopolitical events. The most frequently cited risk for 2017 was 'faster than expected interest rate rises'.
Yields and bonds
Jos Tromp, head of EMEA research at CBRE commented: 'The spread between property yields and bond yields remains close to historic highs and is consequently one of the primary motivators in attracting investors to the sector. However, in an environment of continued economic and political uncertainty, the defensive characteristics, capital value growth and attractive income profile of real estate remain important drivers of continued investor interest in the sector.'
Jonny Hull, managing director of EMEA investment properties at CBRE, added: 'Europe remains a key target for property investors globally and the economic outlook for the European economy remains positive. Whilst the core markets of the UK and Germany remain the largest investment destinations, markets such as the Nordics and CEE are increasingly important components of global investment strategies. Furthermore, cities such as Madrid and Dublin are both ranked within the top 15 most attractive European investment destinations, highlighting the popularity of Europe’s recovery markets as investors seek value-add investment opportunities.'
