European real estate investors are readying themselves for an extended market cycle, according to new research from Union Investment, which surveyed 175 investors across Germany, France and the UK.
In a climate of low interest rates and low returns, the Hamburg-based fund manager found that many property professionals are resigned to a 'lower for longer' outlook and are adjusting their investment strategies accordingly.
The twice-yearly report discovered a similar picture in all three of the regions surveyed.
'Almost half of all the investment professionals questioned believe that the current property market cycle will continue for the next one to two years,' the research said. 'Some 27% of those surveyed even expect the current market cycle – which began eight years ago – to last another three years. 38% of the companies taking part in the survey believe that the current property market cycle will continue until at least 2018.'
Against this backdrop, more than half of the investors surveyed expect that they will not achieve their yield targets in the next three years, commented Olaf Janßen, head of real estate research at Union Investment. 'The search for the right balance will continue to be a key driver of investment activity in Europe in 2017. High capital availability requires risk-averse investors to become much more active in their European core markets while also exploiting return potential in opportunity markets.'
'This is likely to result in a significant rise in transaction volumes in CEE markets and also in the peripheral southern European countries in 2017,' added Janßen. As the survey shows, allocating more real estate investment outside Europe is only an option for a very small proportion of investors, with just 6% saying they would scale back European investment in favour of non-European markets.
Europe divided on future prospects
While the survey found an overall sentiment of optimism about Europe's prospects, with 35% of those questioned anticipating rising transaction volumes in Europe in 2017, around 45% thought that deal volumes would remain about the same.
French investors regard their domestic market as being in much better shape than in 2016, with a third of investors seeing an improved or significantly improved investment climate in offices and retail, while one in two believe conditions will remain unchanged.
In contrast, British investors take a much more sceptical view of the investment climate in the UK. Half of the British respondents expect the property investment climate there to deteriorate significantly in 2017, with over 75% worried that the economic situation will worsen over the next 12 months. However, the report added that 'a surprising result is that relatively few UK investors currently believe the British property market has been significantly affected by Brexit. In the survey, 52% of British investors state that Brexit has had a moderate impact on the UK property market, while 38% regard the impact as minor.'
Outside the UK, the assessment of repercussions for the UK property market is less positive. Some 33% of professional investors in Germany and 21% in France believe Brexit will lead to dramatic changes in the UK property market.
UK index lagging further behind
According to Union Investment, the EU referendum in the UK has significantly affected the Investment Climate Index. In the run-up to the vote, sentiment among UK investors reached its lowest level since 2012, as measured by the climate index. After the Brexit result, the index in the UK fell again by approximately another three points and has now reached a new low of 61.2 points. This means the UK index has fallen further behind the national index in Germany (66.5 points; down 1.0 point since the last survey) and in France (68.6 points; up 1.7 points).
'These substantial fluctuations in both directions, downward in the UK and upward in France, illustrate just how strongly investor sentiment is affected by special effects,' Janßen concluded. 'Political decisions are currently having a major impact on the markets.'
