Investment climate Investors are facing an ever growing number of unknowns in the real estate market. Yet even in this advanced stage of the property market cycle, European property professionals are not exercising greater restraint. On the contrary, compared with the prior year even more investors are primarily motivated by returns. The increased appetite for risk is being driven by the continuing search for returns and a market environment that shows only very muted signs of a change ahead. Those are the findings of the latest property investment climate study carried out by Union Investment twice a year, which this time involved a representative survey of 171 professional property investors in Germany, France and the UK. In the opinion of the investors surveyed, there are no indications of a shift in any of the three core European property markets: 86 percent of the professional investors polled believe that the overall willingness to invest in commercial real estate markets in their respective countries will continue to improve or at least not decrease over the next 12 months. “Europe is doing well. The overall macro-economic picture remains positive. The high level of investment interest in Europe, including from overseas investors, is one of the reasons why the property investment climate in the main European markets is comparatively stable, despite toughening conditions,” said Olaf Janßen, Head of Research at Union Investment Real Estate GmbH. “At the same time, the decreasing availability of prime assets combined with current prices is forcing investors to contemplate higher levels of risk.”
In fact, 51 percent of survey participants believe they will miss their yield targets in the next three years. And even taking a five-year view, one in two of those polled see themselves failing to achieve the expected return on investment. Accordingly, many real estate investors are accepting the need for more risk to mitigate the danger of a further decline in yields. 81 percent of British investors stated in the survey that they mainly or only take property investment decisions based on returns. The Union Investment survey reveals that the search for higher returns is boosting interest in portfolio deals. Half of respondents stated that they were actively working on acquiring building portfolios. The interest in France is highest at 74 percent, followed by the UK at 67 percent. In this regard, the expectation of 80 percent of survey particip- ants that there will be more transactions in 2016 involving higher-risk portfolios in part- icular is revealing. 74 percent of the surveyed property professionals believe that investors from Asia and North America will be more active in Europe.
International investors could use portfolio deals to gain fast access to the wider European market. At 70 percent, the overwhelming majority of market players surveyed expect that more and more pan-European portfolios will come onto the market. A substantial 58 percent also believe there will be an increase in the number of portfolio deals comprising different use types. “Thanks to the current low financing costs and ability to allocate substantial amounts of capital to a single transaction, interest in pan-European portfolios has received a major boost,” said Olaf Janßen. “Overseas investors want to increase their exposure to Europe and exploit the interest rate window and weak euro to wrap up large deals this year.” European real estate investors are eager to use the associated opportunities to rebalance their portfolios or take profits, with 70 percent of both German and British investors stating that they will be more active as sellers of real estate over the next 12 months. Since the last survey in May 2015, Germany is the only country surveyed to have seen a slight upward trend in the real estate investment climate. The German national index created by surveying German investors advanced by 0.6 points. For the first time since 2013, German investors are more positive about the climate for real estate investment in their country than their counterparts in France and the UK.