The latest investment climate study carried out by Union Investment shows that the majority of real estate investors in Germany, France and the UK expect the initial rate of return on real estate to start rising again in 2019 or 2020. Only a quarter of investment decision-makers believe the real estate market cycle will continue beyond 2021. Of the 163 European property companies polled in the latest Union Investment survey, only 28 percent said they were prepared to take on more risk in order to achieve the same return. This figure is down a further 9 percentage points compared to the previous survey carried out six months ago. By far the largest proportion of investors, some 64 percent (winter 2017/18: 56 percent), plan to stick to their risk strategy and are therefore prepared to accept lower returns.
Compromises on returns
Mirroring this declining appetite for risk, European property investors are being very restrained in their yield expectations, at least over the short to medium term. Less than half of the property companies surveyed believe they will achieve their self-imposed yield targets in a timeframe of three or five years. Yield forecasts by German investors are particularly pessimistic: 55 percent of the property professionals surveyed anticipate reduced real estate returns until at least 2023.
“Tenant creditworthiness and the construction quality of properties continue to have the biggest impact on investment decisions. We can conclude that the style drift among European investors which was widely predicted to occur during this unusually long market cycle has not materialised, and we will not see it now in this cycle,” says Olaf Janßen, Head of Real Estate Research at Union Investment.
His view is backed up by the study’s finding that investment professionals are continuing to focus heavily on security. Nearly 30 percent of the investors surveyed consider security to be the most important aspect when making investment decisions. Liquidity is the top priority for 9 percent, while 58 percent say returns are the crucial factor. Only in France was risk tolerance higher compared to the previous survey in winter 2017/18. “The strong focus on security is limiting investors’ options. It is particularly striking that investment in entire market segments is being ruled out over the coming months,” said Olaf Janßen.
For real estate investors, retail properties are currently top of the list of investments to avoid. Some 63 percent of the investors polled intend to steer well clear of retail investments over the next 12 months. A major factor here is the strong reluctance of British investors to consider retail properties at present: 82 percent are aiming to avoid investing in this segment in the short term. The figure is also high in France, at 70 percent. By contrast, in Germany there is still a relatively high level of confidence in the domestic retail market, with only 40 percent of investors avoiding this segment.
The study shows that investors also intend to tread carefully when weighing up hotel investments over the next 12 months. Some 33 percent of all the companies surveyed aim to avoid hotel investments altogether, while 29 percent of respondents see a need to avoid logistics properties. The residential and office segments, by contrast, have been temporarily ruled out by only 20 percent of investors.
Opportunities in coworking
The study also examines whether the trend towards coworking provides viable opportunities for investment. This segment is considered to offer different levels of potential returns depending on the region surveyed. When asked whether they would invest in single-tenant properties let to a coworking provider, around 60 percent of survey participants said yes. Investors in France are most open to investment of this type (73 percent), followed by the UK (58 percent). In Germany, opportunities for returns in the coworking segment are still viewed with some caution: currently, only 46 percent would invest in properties with a single tenant such as WeWork or Mindspace.
By Fabian Hellbusch