News »
08. August 2012 
Print
Print
Risk aversion up, investor confidence down
Risk aversion remains the dominant theme across European real estate markets, as highlighted in the LaSalle Investment Management (“LaSalle”) mid-year 2012 Investment Strategy Annual (ISA) update. The report shows that the divide between the most sought after leased properties in major markets, and nearly everything else, is wider than ever. Risk aversion and flight to safety have risen to much higher levels with the price on core and super core real estate increasing over the last six months. Yet pricing for edge-of-core and not-yet-core real estate have not moved much at all.
Key themes in the first 6 months include:
• Following a period of relative calm at the start of the year, a new set of destabilising factors emerged as the growth versus austerity debate was played out in French and Greek elections. Continued political and economic uncertainty is expected into 2013
• An orderly Greek exit is still most likely but can be endured by the European real estate economy and property markets. A disorderly exit, or further deterioration in market confidence over Spain, would introduce risks that would be much harder to manage
• Downward pressure on yields has been driven by investor focus on core real estate
• The UK remains the most liquid market in Europe for stable, core properties attracting international ‘safe haven’ investors
• The number of sellers is up in the first 6 months (from 2011) with increased trading in secondary assets and markets, most notably in the UK
• German open-ended funds have been impacted by weak inflows as investors react to new regulations. Two large funds were liquidated in May 2012. This has resulted in a raft of sales
• Investment volumes have witnessed sharp declines in Q1 2012 exacerbated by a sharp slowdown in France where the closing of the tax loophole at the end of 2011 brought forward purchases and reflected uncertainty around the outcome of the French election. Investment volumes are likely to lower than we projected six months ago, perhaps down by as much 20% compared to 2011.
• Banks that are lending are only doing so in their domestic markets or in the UK, France and Germany and this is just for core assets
• Lending above 100 million Euros is limited to a handful of banks – the size of the debt funding gap is therefore undiminished
Commenting on the report, Alistair Seaton Head of Research and Strategy at LaSalle Investment Management Europe said: “The first six months of this year has proved to be a challenging period for real estate investors in Europe. The big question for international investors remains whether they should shun Europe altogether. We would argue not, as the marginalization of debt-dependent investors will continue to offer opportunities for those with equity.” With most of the major issues in Europe yet to be resolved, LaSalle recommends that investors should focus on the markets best able to weather ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously). Recommendations for Europe from the mid-year Investment ISA update include:
• The provision of mezzanine debt finance remains the best risk-adjusted strategy for real estate investors in the near term
• Despite the retail sector coming under renewed pressure, it will still offer defensive return characteristics in the right location and of the appropriate quality
• Across all sectors, the focus on asset quality should be even sharper and only relaxed for exceptional pricing in otherwise strong markets
• Motivated sellers should continue to offer access to stock
• Refurbishment opportunities will still exist, and generally with fewer bidders, but require close scrutiny of local market dynamics
• It is still too early to target Spain and Italy given downside risks to their economies
• The growth prospects for Central and Eastern Europe as a whole remain better than those for ‘core’ Europe, but focused on Turkey and Poland
Simon Marx, National Director European Research and Strategy at LaSalle Investment Management added: “We generally expect that low levels of current and future supply will continue to support prime rents in most markets in the near-term, and offer upside in an eventual recovery, particularly in central submarkets. “A number of office markets, such as London, have witnessed an upturn in development activity in response to low availability and this adds to the downside risks, although scarce debt availability will limit this. “In this environment (Europe) we recommend that investor’s focus should still be on the markets best able to weather the ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously).”
Key themes in the first 6 months include:
• Following a period of relative calm at the start of the year, a new set of destabilising factors emerged as the growth versus austerity debate was played out in French and Greek elections. Continued political and economic uncertainty is expected into 2013
• An orderly Greek exit is still most likely but can be endured by the European real estate economy and property markets. A disorderly exit, or further deterioration in market confidence over Spain, would introduce risks that would be much harder to manage
• Downward pressure on yields has been driven by investor focus on core real estate
• The UK remains the most liquid market in Europe for stable, core properties attracting international ‘safe haven’ investors
• The number of sellers is up in the first 6 months (from 2011) with increased trading in secondary assets and markets, most notably in the UK
• German open-ended funds have been impacted by weak inflows as investors react to new regulations. Two large funds were liquidated in May 2012. This has resulted in a raft of sales
• Investment volumes have witnessed sharp declines in Q1 2012 exacerbated by a sharp slowdown in France where the closing of the tax loophole at the end of 2011 brought forward purchases and reflected uncertainty around the outcome of the French election. Investment volumes are likely to lower than we projected six months ago, perhaps down by as much 20% compared to 2011.
• Banks that are lending are only doing so in their domestic markets or in the UK, France and Germany and this is just for core assets
• Lending above 100 million Euros is limited to a handful of banks – the size of the debt funding gap is therefore undiminished
Commenting on the report, Alistair Seaton Head of Research and Strategy at LaSalle Investment Management Europe said: “The first six months of this year has proved to be a challenging period for real estate investors in Europe. The big question for international investors remains whether they should shun Europe altogether. We would argue not, as the marginalization of debt-dependent investors will continue to offer opportunities for those with equity.” With most of the major issues in Europe yet to be resolved, LaSalle recommends that investors should focus on the markets best able to weather ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously). Recommendations for Europe from the mid-year Investment ISA update include:
• The provision of mezzanine debt finance remains the best risk-adjusted strategy for real estate investors in the near term
• Despite the retail sector coming under renewed pressure, it will still offer defensive return characteristics in the right location and of the appropriate quality
• Across all sectors, the focus on asset quality should be even sharper and only relaxed for exceptional pricing in otherwise strong markets
• Motivated sellers should continue to offer access to stock
• Refurbishment opportunities will still exist, and generally with fewer bidders, but require close scrutiny of local market dynamics
• It is still too early to target Spain and Italy given downside risks to their economies
• The growth prospects for Central and Eastern Europe as a whole remain better than those for ‘core’ Europe, but focused on Turkey and Poland
Simon Marx, National Director European Research and Strategy at LaSalle Investment Management added: “We generally expect that low levels of current and future supply will continue to support prime rents in most markets in the near-term, and offer upside in an eventual recovery, particularly in central submarkets. “A number of office markets, such as London, have witnessed an upturn in development activity in response to low availability and this adds to the downside risks, although scarce debt availability will limit this. “In this environment (Europe) we recommend that investor’s focus should still be on the markets best able to weather the ongoing volatility: Germany, the UK and the Nordics (and major markets in France cautiously).”
