Union Investment: Calculated compromises - Europe's property investors realign their strategies

Investor Survey

In their attempts to escape the 'core property trap', European real estate companies are showing little willingness to take on greater investment risk. As revealed by the latest investment climate study by Union Investment, investors remain exceedingly cautious about making compromises. There is still no sign of the anticipated switch to more profitable and therefore higher risk investments – either inside or outside of Europe. For the study, market research institute Ipsos surveyed 150 investment decision-makers from real estate companies headquartered in Germany, France and the UK.

“Safety-oriented property investors in particular need to consider alternative investment strategies in the wake of the financial crisis. Avoiding risk by focusing exclusively on the best properties in the best locations can involve falling into a trap,” said Dr. Reinhard Kutscher, Chairman of the Management Board of Union Investment Real Estate GmbH, Hamburg. Around two thirds (65%) of the real estate investors questioned stated that the European financial crisis has had a significant impact on their investment strategy. Unsurprisingly, concentrating on the Western European core markets (57%) was one of the major strategic changes made or planned for the next 12 months. “Core properties in sought-after European markets are expensive, though. Very high entry prices are the high-risk flipside of an inflexible risk-avoidance strategy,” commented Kutscher.

For over half of the investors surveyed (57%), an alternative is to invest more in buildings that are let to several tenants rather than just one. A greater proportion of secondary locations (38%), of smaller properties (36%) or logistics properties (33%) are among the other strategic options considered. In comparison, only a small percentage of the investors surveyed intend to boost their emphasis on non-European investment (22%) or aim for wider diversification by increasing the proportion of hotel properties (17%).

At the same time, only a minority of European investors see stiff competition for core real estate as a reason to review the risk profile of their investments. Only 32% of the investors surveyed intend to take on increased investment risk as a result of strong demand for core properties. 59% are unwilling to assume more risk. However, the study shows substantial regional variations here: 59% of UK investors, 12% of German respondents and 28% of French participants were prepared to take on greater risk due to the current price of core real estate. UK and German investors agree in their assessment of the property investment climate: The six-monthly Investment Climate Index compiled by Union Investment exceeded the 70-point threshold in both countries for the first time since autumn 2011, indicating a more favorable environment. The French are more pessimistic, with the index falling by almost three points to 61.5.

Increased willingness to compromise

Among those surveyed who were ready to take on higher risk due to the demand for core properties, the results reveal the following picture with regard to the specific type of risk: 81% would be prepared to accept shorter lease periods, 66% plan to focus more on development projects and 52% would accept a lower level of pre-letting on projects. Compromises in terms of location quality or sustainability, by contrast, were only acceptable to 33% of those surveyed. Only 13% could envisage compromising on the construction quality of properties.

Some investors are asking themselves whether purchasing property in the less sought-after European investment regions could be a way of achieving higher returns with a manageable level of risk. “Timing is key here. Investors' assessments as to which markets have already bottomed out in terms of rentals and purchase prices vary considerably,” said Kutscher. Asked about rents and transactions, property professionals expect Spain (57% of those surveyed), Italy (47%), France (37%) and Portugal (35%) to experience significant price corrections over the next 18-24 months. Comparatively few investors believe there will be substantial price corrections in the Netherlands (17%), the UK (12%) or Ireland (11%).

The study also found that the sustainability mega trend in conjunction with the switchover to renewable energy is the factor which will have the greatest impact on the European property industry over the next ten years, according to investors. In second place was urbanization, followed by digitalization and globalization.

Source: Union Investment

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