Sovereign debt risks are driving real estate fund investors to Europe's safe havens, according to INREV's latest Investment Intentions Survey. Casper Hesp looks at the results
The euro crisis continues to influence investment behaviour in the European real estate markets. The latest INREV Investment Intentions Survey shows this phenomenon extending to investors in non-listed real estate funds when looking ahead in 2012.
The survey, which gauges the sentiments of industry players in the European non-listed property funds market and identifies investment trends for 2012, found that investors' concerns about the euro crisis were a strong motivator in their choice of location and appetite for risk. It has resulted in investors demonstrating their aversion to risk as they continue to opt for core products and target the perceived safety of the Northern European markets.
Investor aversion is clearly demonstrated with 69% of investors selecting core as their preferred fund style for 2012, cementing the trend towards lower risk-return profiles which began two years ago, as the financial crisis propelled their investment strategies away from value-added and opportunity funds. This is reinforced by the more than 50% of the investors that expect to increase their allocations to core funds over the next two years.
This year, however, there were also some signs of investors preparing to capitalise on the market conditions. Interest for opportunity funds increased to 10% this year, up from 3% last year. When it came to allocations, close to half of investors were also expecting to increase their allocations to value-added in the coming two years. This is despite the fact that only 22% indicated value-added as their preferred style.
Investors also showed their lower appetite for risk through their preferred country-sector combinations. German retail was the most favoured choice in terms of future performance prospects. This is the same as 2011, but investors' preferences for German retail is now even more pronounced; 64% selected this option compared with 36% last year. This interest in the German market could be related to the euro crisis, as the country is seen as one of the most stable markets.
The Nordic markets have also increased in popularity. Nordic retail now takes second place in the country-sector rankings after being picked by almost 50% of investors compared with around 25% last year. In addition, Nordic offices is now the third most preferred sector location and the most favoured [European] office market for investors.
In contrast, markets perceived as riskier have moved down the rankings. The French office sector was in second place last year with 35% of investors. This year, it dropped to number six, having been selected by 12% of investors. This could be a result of the uncertainties surrounding France, which recently lost its triple-A status as a result of French banks' relatively high exposure to southern Europe.
The UK market has also declined in popularity. In 2011 the UK market was still well
represented, with UK offices, retail and diversified still included in the top 10. This year,
only UK office made the top 10, preferred by only 6% of the investors.
The results for investor allocations by region within Europe in the next two years also confirm investor preferences for lower-risk markets. These show a substantial difference between southern and northern Europe. Investors expect to increase their allocations to the UK, France, Germany and the Nordics. Most popular are the German and Nordic markets with 71% of the investors expecting to increase allocations. These results seem to be in line with the overall desire of investors to invest in low-risk and strong countries within Europe.
A decrease in allocations is expected in Spain, Portugal and Italy. Portugal is most out of favour with investors - more than half expect to decrease their allocations. This is slightly lower for Italy and Spain at 42%. These results show the effect of the euro crisis on real estate investments within Europe.
Allocations for non-listed property funds investing outside Europe have also grown. Almost 60% of investors expect to increase these allocations. This could also be an outcome of the euro crisis, which might result in more investors looking for real estate opportunities outside Europe.
Commitments to non-listed property funds remains solid, with 42% expecting to increase allocations, down from the 49% and 55% in the 2010 and 2011, as the industry continues to re-evaluate and evolve the product following the downturn.
Instead, allocations continue to be influenced by the trend of investor involvement, with 39% expecting to increase their allocations to joint ventures and club deals. This is a 28-percentage-point drop on 2011, although most of these investors have moved to a ‘no change' position rather than ‘decrease', indicating this will remain a strong trend for the year.
The legacy of the financial crisis is still evident as 63% of investors think fund managers' ability to raise capital will be the biggest obstacle during 2012. Investors are also very concerned about a fund manager's ability to secure financing and to achieve target returns, which were cited by 59% and 56%, respectively.
Access to expert management continues to be the most important reason for investing in non-listed real estate funds, with 85% of investors selecting this option. This has remained the top choice since the 2006 survey. However, at 53%, just over half now think that investing in non-listed property funds could allow them to take advantage of current market conditions. This indicates that despite the economic concerns, they still think there is value to be found in the current market.
The funds' place in a broader portfolio has also become more important for investors, with 28% saying that funds' risk-return profile compared with other real estate asset classes is a factor. This compares with 15% in 2011.
There is also a significant change in the reasons not to invest in non-listed property funds. 56% of investors think that market conditions and the availability of suitable products are the two main barriers to investing.
These have now overtaken alignment of interest at 44% as the top reason to not invest in non-listed property funds.
In 2011, 75% of investors cited alignment of interest, so this has dropped 31 percentage points. Alignment of interest remains a much debated topic in the industry. While the figures indicate a fall in importance, other factors have probably overtaken alignment in importance rather than it becoming a less important issue for investors.
This year's survey attracted 121 company responses, comprising 33 investors, 16 fund of funds managers and 72 fund managers.
Casper Hesp is director of research and market information at the European Association for Investors in Non-listed Real Estate Vehicles