Amid a background of low economic growth, weak occupier demand and little or no upward rental movement will continue to characterise the European real estate landscape in the year ahead, according to Marcus Cieleback, head of research at listed German company Patrizia.

Amid a background of low economic growth, weak occupier demand and little or no upward rental movement will continue to characterise the European real estate landscape in the year ahead, according to Marcus Cieleback, head of research at listed German company Patrizia.

Indeed, the question is whether 2014 will be much different to the previous 12 months, Cieleback noted during a PropertyEU Outlook Investment Briefing at the Frankfurt office of law firm Taylor Wessing on Wednesday.

One change he does expect is a stronger interest in value add product. The willingness to move up the risk curve is being driven by a desire for higher returns, he said. ‘Investors are starting to realize they need to move up to value add as they need higher returns. At the same time, they don’t want higher risks.’

That paradox is leading to an interesting new phenomenon, he added. ‘We’re seeing name changes for some products, we’re seeing core+ used for products that used to be called value add. It’s all about making investors feel comfortable.’

The European real estate market may be starting to normalize, but the public debt situation will remain largely unchanged in the next 12 months, Cieleback added. ‘No end is yet in sight for Europe’s public-sector debt. That is here to stay. I don’t see any new trend or turning point ahead.’

Cieleback said that the recent decision by the European Central Bank to lower its key interest rate did not augur well for the year ahead. ‘What does the ECB know about Europe that it has lowered its interest rates. Does it see an inflation threat? The signal that the ECB has given does not make us feel very confident about what’s happening in Europe in the next 12 to 18 months.’

In any case, economic growth will remain divergent across Europe over the next year, Cieleback predicted. ‘What we have seen since the crisis is a changed growth path. Germany’s growth path is relatively steep, but France is lower and the country is becoming unpredictable. Reforms are necessary in France, but it’s unclear what is happening. One week it’s going right, the next it’s going left. Investor interest in France will remain high as it is one of the most liquid markets in Europe. But given the economic situation, that may change.’

The implications of new regulation also remain unclear, Cieleback said. In fact, new regulations will not stop a new crisis from occurring, he argued. ‘A new crisis will simply be different. The upshot is that this will keep investor intentions at the low end of the risk spectrum.’

Daniel Ajzenszteijn, partner at Taylor Wessing, is also concerned that the new German government will usher in new regulation in the next two to three years. ‘A lot is still unclear, but heavy regulation could curtail financing further and that would restrict investment.'

Regulation has become a fact of life, noted Gereon Kolhgruber, deputy head of Germany & investment director at AEW Europe. ‘We’re seeing more and more regulation and it costs money and time, but investors have to deal with it. The only good news is that all investors have the same problem.’

Occupier sentiment will remain cautious in the coming year, predicted Thilo Wagner, director of property at Henderson Global Investors. After a period of growth, occupiers are putting their feet on the brakes and the growth in capital markets is not being paralleled by rising tenant demand, he pointed out.

‘In the office sector, we’re seeing that companies are taking longer to make a move. All costs are taken into account. We’re also seeing more caution on the retailer front, the big boom is behind us. Retailers have realized that it may be not a good idea to open 80 to 100 stores a year, that’s not sustainable and now they are back to 10-15 stores.’