The competition for prime assets in Europe’s major real estate markets is leading investors to turn to recovering markets such as Ireland and Spain, regional cities and secondary property in search of returns, according to Emerging Trends in Real Estate® Europe 2014, a forecast published jointly by the Urban Land Institute (ULI) and PwC. Emerging Trends in Real Estate® Europe 2014 finds that 71% of respondents think that a shortage of suitable assets for acquisition will have a moderate or significant impact on their business during 2014. As a result of this increasing competition, 59% per cent of respondents believe that prime property in Europe’s core markets has now become over-priced.
The report highlights that investors are becoming increasingly comfortable with taking more risk in search of returns. One of the biggest beneficiaries of this is Dublin, which has risen dramatically in the city investment rankings, moving up from 20th in last year’s report to second in 2014. Dublin’s real estate market has been transformed from a “no-go” location among investors only two years ago, to being one of the hottest markets in Europe, with both domestic and international investors attracted by pricing levels and Ireland’s improving economic outlook. The report finds that 51% of respondents now see good buying opportunities in Ireland.
The weight of international capital is leading investors to also turn to other recovering markets, such as Spain. The report highlights that 67% of respondents believe that there are now good buying opportunities in Spain, with the acquisition of the Parque Principado mall in Oviedo by Intu and the Canadian Pension Plan Investment Board for €162 million highlighted as an indicator of mainstream interest in the market. However, sceptics argue that debt is very hard to attain and that it is a risky market to invest in before there are signs of any growth.
The competition for core assets has also led to an increase in investors looking beyond prime assets in major European markets such as London, Munich and Paris, and instead buying solid income producing assets in secondary cities. For example, office investors in Munich can achieve yields of approximately 4%, but those willing to invest in smaller German markets such as Stuttgart can achieve up to 6.5%. Investors are also looking to acquire secondary properties in major markets, which have good existing income streams or which, with careful asset management, could be transformed into core assets.
An interesting consequence of the “Battle for Assets” is that investors are increasingly considering development as a way of adding high quality assets to their portfolios. The report demonstrates that 71% of respondents believe that development is an attractive way to acquire prime property.
“The resurgence of investment in Ireland and how far the Spanish real estate market recovers, will be two of the key stories in 2014” commented Joe Montgomery, chief executive of ULI Europe. “Investor appetite in Dublin has been growing over the past 12 months with significant volumes of international capital chasing the best assets. Investor interest is now moving to Spain, where there are signs that opportunistic investors, who entered the market when Sareb opened for business last year, are now being followed by mainstream institutions. However, with limited signs of tenant demand and rental growth, questions remain as to how far the market recovery can go.”
Simon Hardwick, real estate partner at PwC Legal, said “We believe the real estate investment market in 2014 will be dominated by a battle for assets. International capital will continue to flow into Europe, seeking to acquire prime assets in core locations. Intense competition for the limited supply of suitable property will inevitably continue to have an impact on prices – particularly in global gateway cities, including London. This will result in investors having to look at other opportunities and to accept more risk. This is reflected in the renewed interest in development, as well as the fast improving outlook for “non-prime” locations and properties. However, we are skeptical about whether the positive sentiment will lead to a headlong rush into the most risky markets. Investors’ interest remains focused primarily on sustainable returns from quality assets in good locations.”
The report highlights that there will be significant capital available in Europe’s real estate markets during 2014 with 71% of respondents believing there will be an increase in equity for refinancing or new investment this year. Although some of the equity will be domestic, significant investment is expected to continue to flow from sovereign wealth funds, especially those based in Asia. Nearly 80% of respondents believe that capital from Asia Pacific will increase during 2014, with 67% of respondents believing that capital from The Americas will increase this year.
The outlook for real estate debt availability is also improving, with 51% of respondents expecting the availability of debt for refinancing or new investment will increase this year, with only 15% of respondents expecting it to become more scarce. However, respondents were not expecting dramatic improvements to pre-recession levels and there remain significant geographical differences in perspective. The UK was the most upbeat on the prospects for debt with nearly 90% expecting greater availability, while southern European and Benelux countries were more cautious on the outlook.