Gap widens between quality and the rest in Europe real estate markets

Risk aversion and flight to safety in European property markets have risen to much higher levels, with the price of core real estate increasing over the last six months, while the price of less attractive assets has hardly moved at all.

The latest investment strategy report from LaSalle Investment Management shows the divide between the most sought after leased properties in major markets, and nearly everything else, is wider than ever.

LaSalle said that following a period of relative calm at the start of the year, new 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,” the report noted.

“A disorderly exit, or further deterioration in market confidence over Spain, would introduce risks that would be much harder to manage.”

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 H1 (from 2011) with increased trading in secondary assets and markets.
German open-ended funds have been impacted by weak inflows as investors react to new regulations. Two large funds were liquidated in May 2012, which resulted in a raft of sales.

Investment volumes declined sharply in Q1, 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 projected six months ago, perhaps down by as much 20% compared to 2011, the report said.
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 €100m is limited to a handful of banks, so the size of the debt funding gap is therefore undiminished.

Alistair Seaton, head of research and strategy at LaSalle Investment Management Europe, said the first six months of the year were challenging.

“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 major issues in Europe yet to be resolved, LaSalle recommends investors focus on the markets best able to weather volatility: Germany, the UK and the Nordics. It said the provision of mezzanine debt finance remains the best risk-adjusted strategy for real estate investors in the near term.

Across all sectors, the focus on asset quality should be even sharper and only relaxed for exceptional pricing in otherwise strong markets.

Despite the retail sector coming under renewed pressure, it will still offer defensive return characteristics in the right location and of the appropriate quality, LaSalle said.

In a warning to bargain hunters, LaSalle said 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.

LaSalle Investment Management is part of the New York-listed Jones Lang LaSalle group which has some $47bn of assets under management of private and public property equity investments.

It is active across a range of real estate capital and operating markets including private and public, debt and equity and our clients include public and private pension funds, insurance companies, governments endowments and private individuals.

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