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Debt & Equity

European investors hit reset button

Price pressure in European investment markets is continuing to keep real estate return expectations in check.

Less than half of the professional property investors surveyed in Europe’s three largest economies believe they will achieve their yield targets in the next three years – and expectations are also subdued on a five-year view.

Photo by Cristian Santinon/ Flickr
Photo by Cristian Santinon/ Flickr

To ensure that investments continue to perform, taking profits has become essential for an increasing number of investors. But very few are relying on risk capital from America and Asia alone.

The latest investment climate study by Union Investment reveals that most European real estate investors have recalibrated their investment strategies to compensate for the adverse impact of falling acquisition yields. Professional investors in all three markets are gradually moving higher up the risk curve.

At present, the repertoire of strategic adjustments is clearly dominated by a focus on active portfolio management.

The top priority for many European investors over the next 12 months is to identify market opportunities and take advantage of the increasing pressure to invest in order to dispose of properties, either in individual transactions or as package deals.

According to the survey, 72 per cent of German investors, 84 per cent of UK investors and 52 per cent of French respondents plan to focus their investment teams more on taking profits and rebalancing portfolios.

“Contrary to their original strategies, a wide range of market players are realising gains and becoming net sellers, which is unusual. The reinvestment of proceeds remains a key challenge in an environment characterised by strong demand,” said Olaf Janßen, head of real estate research at Hamburg-based Union Investment Real Estate GmbH.

Experts agree that the window of opportunity for a more extensive cleanup of real estate portfolios is likely to close in the next six to twelve months, depending on the US Federal Reserve’s decision on interest rates.

The attention of asset managers is likely to be focused even more intensely on investment capital from Asia and America during this short time frame.

Currently, many international institutional investors are trying to enter the lucrative European real estate markets via portfolio deals in particular, or are rapidly expanding their existing exposure, aided by the strong dollar.

“The ongoing stable economic outlook combined with a favourable exchange rate make Europe an extremely attractive destination for international capital. This will fuel more high-volume sales from European portfolios,” said Janßen.

However, recent portfolio transactions in Europe have mainly been completed by European investors.

“Alongside the appeal of pocketing a healthy profit, transaction security and a structured sales process play a major role. European buyers have a home advantage here over investors from America or the Far East.”

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