Investors rediscover an appetite for real estate returns

The sub-prime mortgage crisis and its fallout effectively froze any move towards real estate investment, but the thaw has been under way for some months, and many investors are actively engaging with property holdings again.

By no stretch of the imagination can it be called a rush, or a boom: an ‘up-tick’ is more like it. But investors burned directly or indirectly by the sub-prime mortgage crisis of 2007-2008, are turning back to real estate.

A report from Germany’s DTZ shows European real estate investment fund volumes grew to €31.4bn in the fourth quarter of 2011, a 17% increase on Q3. Annual volumes reached €110bn in 2011, up from €104bn in 2010, while domestic investment totalled €20.4bn, reflecting a market share of 65%. Over the period, non-European investors increased their exposure to the European market, as their net investment volumes reached €3.2bn in Q4.

Investment volumes are forecast to show a small fall to €107bn in 2012 mainly due to uncertainties around the eurozone sovereign debt crisis, but the building blocks for a longer term revival are being put in place, says DTZ.

Core asset class

“Despite the financial crisis over the past two years, commercial real estate remains a core asset class for many investors,” says David Green-Morgan, Global Capital Markets research director at Jones Lang LaSalle. “The year 2011 finished with a bang, and it was the activity in the European markets that grabbed the headlines in the final quarter of the year, against most people’s expectations.”

Ben Habib (pictured), CEO at First Property Group, notes that all available stats are lagging indicators. He says: “We won’t really know for another three months, but anecdotal evidence is that bank lending is lower than it was six months ago for commercial property. We are back to the 2009 mentality and will have to wait and see.”

The widely-used IPD Index has fallen in three of the last four months. Neil Turner, head of Property Fund Management at Schroders, says targets in the stronger economies such as Germany and the Nordics are obviously “top of the shopping list”, while allocations to Greece and Portugal, where there may be further falls in value, and perhaps a different currency, remain “difficult”.

He identifies Italian commercial property, where there has not been as much re-pricing as elsewhere, as an interesting opportunity. He also points to the latest annual study from De Montford university warning there are loan to value issues outstanding: “Banks over-lent to real estate in the past, and it is going to be difficult and expensive to get them to do so again in the near future.”

But for the year ahead, the fortunes of the sector are likely to be determined by macro economics. According to Matthew Richardson, director of research – real estate at Fidelity Worldwide Investment: “The rational investor sees attractive real estate yields at a cyclical high of between 6%-8% for modern well-let assets, while the nervous investor sees an illiquid market with limited access to debt.”

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