Property investors search for yield in 'recovering markets'

Dublin, Madrid and Milan have been tipped as real estate markets to watch over the next few years as international investors go in search of higher yields.

Total returns in recovering prime commercial real estate markets across Europe are expected to exceed those of safe havens like London over the next five years, CBRE has predicted.

The global real estate advisor sees 2013 as an inflection point for several markets across Europe, driven by improving economic fundamentals and investor sentiment.

CBRE forecasts that better performing recovering markets will produce total returns of 9% per annum or more over the next five years, exceeding the 3-8% returns likely to be available from ‘safe haven’ markets. Investors with the mandate and appetite to take on incremental risk are therefore likely to become more active in recovering markets.

Dublin is a strong example of where this trend is already playing out, where the economic recovery is fuelling investor interest in the commercial real estate market.

In the recent CBRE European Real Estate Investor Intentions Survey, Dublin ranked above Hamburg and Frankfurt and nearly as high as Warsaw as the 'most attractive city for purchases in 2013'.

According to CBRE data, €336 mln of assets traded in the Irish market during Q1 2013. This compares with €545 mln in the entire of 2012 and is significantly higher than each of the previous three years.

In March, CBRE also increased its prime city centre office headline rent series for Dublin for the first time in six years and expects this to improve further over the coming months as competition for the best office buildings grows.

In other markets such as Madrid and Milan, a sustainable economic recovery is still not evident; however, CBRE believes anecdotal evidence suggests that certain, more-risk tolerant investor groups are increasing their presence in these markets, where future growth is not yet priced in and a recovery is anticipated.

This trend is not likely to significantly affect liquid, safe haven markets such as London, Frankfurt or Paris, whose stable fundamentals are central to the investment criteria for many income driven investors.

Neil Blake, head of UK & EMEA research, CBRE commented: 'For some time there have been mentions of the ‘wall of money’ waiting on the sidelines for real estate. 2013 is likely to be the year where we see investors coming off the fence and deploying capital into locations such as Dublin and, further down the line, potentially Madrid as well.

'Over the next five years, we expect returns on prime assets in recovering markets and even good quality secondary in places such as the UK to exceed those in safe haven markets. However, much of the activity in these markets will be limited to certain investor types able to move further up the risk curve. Markets such as London will continue to benefit from investors whose criteria focus on safety and liquidity.'