Structural shifts put pressure on investors

The withdrawal of heavyweight lenders Eurohypo and Société Générale at the end of last year marks a sea change for the European real estate industry, according to the 2012 Emerging Trends report.

‘Once symbols of a recovery, Eurohypo and SocGen now represent the market’s fragility, demonstrating how quickly sentiment can reverse in the current climate and how what the industry faces is so much more complicated than first thought. These two cases throw into sharp relief the structural shifts under way in the European property industry and signal that 2012 will be the year that their real effects will begin to be felt.’

Uncertainty has taken on a new dimension since 2009, commented one of the respondents interviewed for the annual report by ULI and PwC on the state of the real estate industry. ‘We didn’t understand what the definition of uncertainty was back then. Now we do. Even the economists admit they don’t know what is going on. We are in a truly unique time.’

A key question facing the industry is how long the downturn will last. Is 2012 year three of a five-year recovery, or year three of a 10-year recovery? One thing is clear: occupier sentiment has nose-dived in the past six months and some investors are even writing 2012 off as a lost year. While there is equity in the market, it will not enter at current prices, yields and expected return, noted one respondent. ‘The current market offers such a different way to do business that no business is being done.’

The report’s authors advise that strategies must be created without much faith in the outside world - be it the economy, banks, occupiers, capital values, or capital-raising capabilities. And decisions must be guided by rigorous underwriting, focus on cash flow and capital expenditure with few assumptions about much else.

‘Real estate has become a very granular business - there are so many different possible outcomes,’ noted one interviewee. ‘You have to underwrite each specific situation on its own merits. For the right investors, skill sets, and capital, incredible investments are possible. But lots of questions need to be answered before you do anything.’

Some investors reported they are preparing for long-term economic headwinds and uncertainty by applying a ‘fixed income-style analysis’ to real estate: assessing the riskiness of the income stream for the full term of the lease. But not everyone is so wary: those with asset management capabilities see a ‘wealth of opportunity’ in offbeat places and sectors in 2012. With some core markets becoming overpriced, appetite for riskier investments in value-added, opportunistic, debt acquisition or development is growing. The survey found that 53% of allocations in 2012 would be in riskier value-added, opportunistic, debt acquisition or development while core or core-plus investment is expected to account for only 47%.