OUTLOOK UK: Cash-rich investors struggle to deploy funds into Europe

Whether it’s the rewards of value-add or the lure of secondary markets, there are plenty of opportunities in Europe to attract foreign investors despite the low return environment, a panel of leading experts agreed at PropertyEU's Outlook Investment Briefing which was held in London on Tuesday.

‘Seen from a US perspective the eurozone is cheap, with the currency almost at parity with the dollar,’ said Will Rowson, partner at Hodes Weill & Associates. ‘The UK is the first port of call, but pricing is keen, so now there is a new willingness to look at Germany, France and beyond, focusing on the value per m2 rather than the yield.’

Even within Europe ‘demand is huge, as investors are full of cash and need to invest,’ said Stefan Rind, chairman of the advisory board at Deutsche Real Estate Funds. ‘Insurance and pension funds are desperate for yield and willing to take on more risk, and this will drive the market.’

Prospects are positive, said Rind, who left the real estate sector in 2010 and has only recently returned. ‘I certainly would not have rejoined the party if I thought the party was about to end.’

Note of warning
Peter Hobbs, managing director of real estate research at MSCI, sounded a note of warning: ‘Do not forget the fickleness of demand and supply and of the capital markets,’ he said. ‘Look at what happened in the commodities market. Now expected returns are lower than target return, yields are being pushed down and rents are not rising enough to compensate for that.’

The question is whether there is still room for growth or whether it might be time to hunker down in anticipation of a downturn. ‘You can hear the battle going on in investors’ minds about what to do,’ said Rowson. That is why Europe is looking at the UK, Hobbs observed: ‘To see whether after its good run it has a soft or a hard landing, because there could be an indicator of what will happen on the Continent’.

Logistics is a good example of the risks that exist in all sectors, Hobbs said: ‘It has had high yields, structural forces behind it and investor appetite, but capital poured in and the sector got ahead of itself.’ A year ago bargains could be found, but now logistics is fully priced.

‘The pricing is high but there is a lot of long-term money looking for investments and going into development,’ said Rowson. ‘Our job is to pick the sweet spot for investors, and looking ahead to the next 6-12 months we see more understanding of value-add and alternative sectors where good returns can be found. Remember that the best investors and managers play a longer game. There is a lot of life left in the market.’

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By Nicol Dynes
Investment briefing correspondent