Investor sentiment towards European real estate improves

Growing risk appetite sees investors implement a wider range of strategies in Europe with ‘value-add’ approach and alternative assets becoming increasingly popular, according to Invesco Real Estate.

Invesco Real Estate (IRE) has published its H2 2013 Real Estate House View: European Market Outlook, an in-depth overview of the European real estate market.

The report finds that investor risk appetite is growing in the wake of improving economic data and that a wider range of strategies is being implemented as a result. IRE said it believes that Europe remains well placed to offer a diverse range of opportunities to meet the demand and highlights some specific areas of potential.

“As Europe continues its gradual recovery we continue to believe real estate offers compelling reasons to invest, and growing risk appetite among investors in this asset class appears to reflect that,” says Kim Politzer, Director – European Research, Invesco Real Estate. “Real estate’s income characteristics can make it an attractive alternative to fixed income products right now, while improving economic fundamentals also have the potential to deliver an additional growth element.”

Prime European real estate, particularly in gateway cities such as London and Stockholm, still attracts a broad range of institutional capital and IRE believes this type of asset will continue to offer stable but relatively low returns.

For those willing to move up the risk curve, gateway cities can offer increasingly attractive opportunities for ‘value-add’ strategies in which investors acquire non-core properties with curable deficiencies such as leasing issues or poor building quality, and then make the necessary investment to turn them into core assets.

These types of cities are likely to be the earliest beneficiaries of the recovery, and increased tenant demand should initially outstrip supply as development pipelines begin to respond. A ‘manufacture-to-core’ approach should enable investors to deliver grade-A space to the market in the next two years and this has the potential to produce improved returns over traditional core investments.

The report also finds that the steadily growing market for ‘alternative’ real estate investment has continued to offer attractive returns, with hotels and residential both outperforming conventional commercial real estate in the last five years.

Looking ahead, IRE forecasts indicate that core prime logistics are likely to outperform the other sectors over the next five years, while the office sector is expected to generate the strongest rental growth over the same period. Given the prospects for improving fundamentals, we believe the office sector offers some of the best opportunities for value-add strategies.

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