Despite recent turmoil in the debt and equity markets as a result of the sovereign debt crisis in Europe, core, prime real estate is still deemed a safe-haven investment. In the U.K., a low-interest-rate environment continues to support real estate’s risk premium. In Europe, concerns over the strength of the real estate outlook have deepened, but European real estate still looks attractive on an income-yield basis relative to government bonds, which look overpriced, as well as cash.
Because of the possibility of a double-dip recession, some investors may consider it a bad time to invest in an asset class that is tied to the economy, given that the retail and leisure sectors, for example, are linked to how consumers feel, how much they are willing to spend, and how well the economy is doing.
Confidence in the real estate investment market has wavered over the last few weeks. At the start of the year, strong growth was expected in European investment on the back of secondary property coming to the market, with prime stock now being fully priced. However, that hasn’t happened; European growth has, in fact, petered out in the investment market.
Research conducted by multinational property services firm Knight Frank shows continuing polarization in performance of European property. Strong investor demand is evident in core western Europe, along with the Nordic countries and central Europe, yet interest in more peripheral markets remains down on last year.
In the opinion of Joe Montgomery, chief executive of ULI Europe, “there exist safe-haven places regarded as core, such as central business districts in London and Paris, as well as other relatively stable markets that have a history of consistent return, but people are getting progressively more cautious about second cities, and even some places in emerging parts of eastern Europe have shown oversupply. In Prague, for example, there are supermarket and mall developments that have underperformed due to oversupply.”
Against a backdrop of uncertainty, deals are taking longer to close because investors are being more selective and are looking more closely into the details of deals. As a result, a further slowdown is anticipated during the remainder of this year.
Nonetheless, there has not yet been a significant outflow of capital. Broadly speaking, there remains a stable balance between buyers and sellers of open-ended products.
Core properties will continue to attract investors, but secondary property may struggle to generate interest because it is difficult for investors to take the risk at this stage. Montgomery sees “a migration to the core—everyone’s chasing that and prices are escalating. Anything that’s carrying even a moderate amount of risk is being left behind. There is very much a flight-to-quality mentality.”
Knight Frank agrees that investors remain focused on income-producing prime properties and are generally reluctant to consider buying an asset unless it “ticks all the boxes.” It adds that banks are largely unwilling to finance secondary property deals.
The economic turmoil means investors in all asset classes are taking a more risk-averse approach. Within real estate there is a leaning toward stable assets in safe-haven locations, which tend to hold liquidity, and a move away from poorer-quality real estate.
Investor confidence may have been shaken, but Joe Montgomery insists that “well-selected real estate still holds it own against other asset classes.”