Risk aversion increases in European real estate: LaSalle

Risk aversion remains the dominant theme across European real estate markets, as highlighted in the LaSalle Investment Management mid-year 2012 Investment Strategy Annual update.

The report shows that the divide between the most sought after leased properties in major markets, and nearly everything else, is wider than ever. Risk aversion and flight to safety have risen to much higher levels with the price on core and super core real estate increasing over the last six months. Yet pricing for edge-of-core and not-yet-core real estate have not moved much at all.

Following a period of relative calm at the start of the year, a new set of destabilising factors emerged as the growth versus austerity debate was played out in French and Greek elections. Continued political and economic uncertainty is expected into 2013.

LaSallle said an orderly Greek exit is still most likely but can be endured by the European real estate economy and property markets. A disorderly exit, or further deterioration in market confidence over Spain, would introduce risks that would be much harder to manage.

An increasing investor focus on core real estate is putting a downward pressure on yields.

Investment volumes have witnessed sharp declines in Q1 2012 exacerbated by a sharp slowdown in France where the closing of the tax loophole at the end of 2011 brought forward purchases and reflected uncertainty around the outcome of the French election. LaSalle said investment volumes are likely to lower than projected six months ago, perhaps down by as much 20% compared to 2011.

Banks that are lending are only doing so in their domestic markets or in the UK, France and Germany and this is just for core assets

Commenting on the report, Alistair Seaton head of research and strategy at LaSalle Investment Management Europe said: 'The first six months of this year has proved to be a challenging period for real estate investors in Europe. The big question for international investors remains whether they should shun Europe altogether. We would argue not, as the marginalization of debt-dependent investors will continue to offer opportunities for those with equity.'

With most of the major issues in Europe yet to be resolved, LaSalle recommends that investors should focus on the markets best able to weather ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously).

Yet, the growth prospects for Central and Eastern Europe as a whole remain better than those for 'core' Europe, but focused on Turkey and Poland. Simon Marx, national director European research and strategy at LaSalle Investment Management added: 'We generally expect that low levels of current and future supply will continue to support prime rents in most markets in the near-term, and offer upside in an eventual recovery, particularly in central submarkets.

'A number of office markets, such as London, have witnessed an upturn in development activity in response to low availability and this adds to the downside risks, although scarce debt availability will limit this.

'In this environment (Europe) we recommend that investor’s focus should still be on the markets best able to weather the ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously).'