Investors try new waters as Euro capital flows increase

Fierce contest for prime assets makes investors look to alternatives, writes Alex Catalano

There will be no let-up in capital flowing into European real estate this year, according to Emerging Trends in Real Estate Europe, the annual forecast jointly published by the Urban Land Institute (ULI) and PwC.

The report – based on surveys and interviews with more than 500 European industry players – found 70% of respondents expect more equity and debt will flow into their markets this year. “It is easier to get capital than to find good deals,” said one.

REC 02.15 - p 9 chartEuropean real estate remains on many investors’ must-buy list, most notably Asian sovereign wealth and North American opportunity funds. As one interviewee put it: “It’s very crowded; the number of global investors looking at Europe has an impact on prices.”

Almost two-thirds of respondents think core assets are overpriced and say they will need to take on more risk to achieve required returns in 2015.

REC 02.15 - p 9 panelLisette van Doorn, ULI Europe’s chief executive, says: “Investors have found prime assets expensive and hard to source, and have looked to find new opportunities in recovering secondary cities, secondary assets and development opportunities, as well as new or alternative real estate classes.”

This year, the move away from the traditional investment mainstays of offices and retail is noticeable. Of the six sectors rated best bets, five are “alternative” sectors, three of them variants of residential: retirement living, housebuilding for sale and the private rented sector.

For development, alternatives receive an even bigger thumbs-up, with social housing and self-storage in the top six.

Logistics, not surprisingly given demand from e-commerce, is the most popular mainstream sector, ranked as “good” or “very good” by two-thirds of respondents.

High-street shops and city-centre offices are not far behind, at around 60%, but suburban offices and business parks are near the bottom at around 30%, reflecting a “reurbanisation” process in Europe as people and businesses move back to city centres.

There has also been a shake-up in the rankings that Emerging Trends gives cities on their investment prospects. The five leading ones for 2015 are a mixture of German stalwarts and recovery plays: Berlin is top, followed by Dublin, Madrid, Hamburg and Athens.

The “safe havens” of London and Paris have slipped down the league table – London to 10th and, in a steep fall reflecting the political uncertainty and economic underperformance in France, Paris to 24th.


Institutions join opportunists in rented sector

“Private capital follows a path of least resistance and residential has been a one-way bet, because it is undersupplied,” said one respondent. Institutional and private equity is moving into the sector with some force in a handful of European markets.

In the UK, both domestic and overseas capital is targeting the private rented sector (PRS) — a small but growing market. Student housing is attracting more capital, especially in the UK, which has the most mature European market in this type of asset.

REC 02.15 - p 10 pieIn Germany, where the PRS is well-established, opportunistic capital is being replaced by institutions and retail investors. Capital is also spreading from the country’s “big seven” cities to smaller centres. One interviewee noted: “Due to continued competition and increasing price sensibility, B cities are moving into investors’ focus.”

In The Netherlands, the easing of rent controls and forced asset sales by social housing providers have sparked interest. “The Dutch rent-controlled market is restructuring so we’re seeing a lot more foreign investors buying Dutch residential,” said one pan-European debt provider. “We’re looking to finance some of those acquisitions.”

In Spain, opportunistic players are targeting housing as well as commercial property. US opportunity funds have scooped up rented housing portfolios sold by public authorities. “The one place we are buying residential is Spain, where it is deeply discounted, even if there is still 23% unemployment,” one global investor says. Domestic players such as Spain’s newly floated REITs are joining in the action.

Longer-term investors who see an opportunity to get in on the ground floor of an emerging, more professional PRS are also moving in, Warren Buffett among them.


Debt set to flow fastest in highly liquid Western European markets

Debt will be easier to access this year, especially for prime investments . For developments, credit will remain tight, but just over half those surveyedREC 02.15 - p 10 bar 1 think more will be on tap in 2015.

But the picture varies from country to country . In Western Europe’s larger, more liquid markets, debt flow is expected to improve further, as it is in recovering Southern European markets. In
the Nordics and Central and Eastern Europe, expectations are positive, but a bit less bullish.

In two countries a significant proportion predict tighter credit for real estate; 33% expect a moderate fall in Turkey, while in sanctions-strapped Russia, a whopping 56% expect substantially less debt to be available.

REC 02.15 - p 10 bar 2