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Investor survey: Product shortage as an opportunity for innovation

Yield targets are still under pressure. European investors don’t expect the turning point to be reached before 2020. It will be interesting to see how investors use this situation.

Necessity is the mother of invention. The squeeze on available real estate products is forcing the sector to change and is boosting its innovation capability. That is the positive view of the transformation process facing many sections of the real estate industry. “The ongoing lack of products will continue to drive the trend within companies that has already been gathering pace due to the megatrends of sustainability, digitisation and urbanisation,” says Olaf Janßen, Head of Research at Union Investment Real Estate GmbH.


Over the past nine years, the industry has had to learn that the product scarcity which is pushing up prices is not a temporary phenomenon. In addition, the real estate cycle still appears to be far from a turning point. In the latest investment climate study by Union Investment, two thirds of the 151 property investors surveyed in Germany, France and the UK expected the turning point to be reached in 2020 or later. 36 percent of the investors surveyed estimate that it will be at least three years before initial returns on real estate in Europe start to rise again. Depending on investors’ expectations with regard to returns, the investment strategy may involve accepting higher risk or lower returns. According to the Union Investment survey, 37 percent of investors are currently willing to take on more risk for the same returns. However, a clear majority (56 percent) are not prepared to recalibrate their risk strategy, choosing instead to accept lower returns. 


Accordingly, around 50 percent of the investors taking part in the survey stated that they do not believe they will achieve their own yield targets, either within a timeframe of three years or five. This is supported by the consistently high value placed on security by professional investors, as reflected in the results of the survey. Security remains the most important aspect of investment decisions for 30 percent of the interviewed investors. For 15 percent, liquidity is the most important factor, while return on investments heads the list for 54 percent, as in the previous year’s survey. “These findings indicate the most common ways out of the investor’s dilemma. A third option between a wait-and-see attitude and excessive risk, although still a much less common choice, involves more innovation with calculable risks,” says Olaf Janßen.


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UK investors put their faith in logistics

Alternative strategies nonetheless still dominate, which essentially aim to tap into new product sources outside the mainstream market segments. A pointer as to where the supply pipeline will become even tighter in future is provided by investors’ assessment of the property types which are expected to perform best over the coming 12 months. The greatest potential is in logistics properties, according to 53 percent of the real estate professionals participating in the survey, followed by office properties at 26 percent of the responses. In contrast, investors are more cautious in their expectations for value growth in the hotel and retail segments over the next 12 months. Only 9 and 8 percent of investors respectively expect significant appreciation in value in these segments in 2018. Faith in the logistics segment is particularly high among UK investors. In an analysis of all major commercial property types, more than three quarters of UK investors expect to see the strongest performance in the logistics segment, including up-and-coming last-mile logistics, over the coming 12 months.


“Bearing in mind the limited supply of high-quality properties for sale, it will be interesting to see whether investors use this situation to investigate new creative products and solutions or address issues that are more complex and offer greater opportunities,” says Olaf Janßen.


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