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Growing acceptance of lower real estate returns

Investment climate survey: European real estate investors are adjusting to a prolonged market cycle.

Low interest rates, low returns: the response to the question of how long the current market phase is likely to continue is beginning to become clear as European investors review their real estate strategies. The majority of professional property investors are preparing for the market cycle to last another one or two years, during which time the same fundamentals will apply. Accordingly, investors are demonstrating a greater willingness to accept lower returns on real estate investments during this phase. It has become more important than ever in this investment year to avoid additional risk and develop successful property strategies that take into account the expectation that returns are going to be lower for longer. Those are the findings of Union Investment’s latest property investment climate survey. Carried out twice a year, this latest study involved a representative survey of 175 real estate investors in Germany, France and the UK.

The picture is similar in all three countries

Whether in Berlin, London or Paris, almost half of all the investment professionals questioned believe that the current property market cycle will continue for the next one to two years. Some 27 percent of those surveyed even expect the current market cycle – which began eight years ago – to last another three years. 38 percent of the companies taking part in the survey believe that the current property market cycle will continue until at least 2018. In view of increased macroeconomic and geopolitical uncertainty, real estate investors are now gearing their investments even more closely to a “lower returns – same risk” strategy than they were last year. The last survey, conducted in summer 2016, showed that 56 percent of investors were maintaining their risk structure and were therefore prepared to accept that they would not meet the yield targets they had set themselves or those defined by their clients. That figure has now risen to 64 percent. Accordingly, the number of companies prepared to take on more risk in order to compensate for factors such as the impact of falling acquisition yields declined from 35 percent to just 30 percent.

The volume of transactions in Europe is expected to rise

This situation is reflected in the fact that over half the investors surveyed do not expect to achieve their yield targets in the next three years. “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 volumes of transactions in CEE markets and also in the peripheral southern European countries in 2017,” says Olaf Janßen, Head of Real Estate Research at Union Investment Real Estate GmbH, Hamburg. As the Union Investment survey shows, allocating more real estate investment outside Europe is only an option for a very small proportion of investors. Just 6 percent of the property professionals surveyed intend to scale back investment in Europe in favour of non-European markets.

The fundamentally positive expectations of investors in European commercial property markets are clearly evident in many responses to the survey. Some 35 percent of those questioned anticipate rising transaction volumes in Europe in the current investment year, while a further 45 percent expect transaction volumes to remain at the same level as last year. However, the difference in how the three countries viewed investment conditions is greater than it has been for a long time. After the Brexit vote, the climate index in the UK fell again by approximately three more points and has now reached a new low of 61.2 points. This means the UK index has fallen further behind the national indexes in both Germany (66.5 points, which is down 1.0 point since the last survey) and France (68.6 points; up 1.7 points).


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