More capital will be targeted towards European real estate than can be invested, a survey of senior real estate professional and investors has found.
The PricewaterhouseCoopers/Urban Land Institute Emerging Trends in Real Estate Europe report collated interviews with more than 250 real estate professional from investors, asset managers, developers, banks and advisers about the prospects for European real estate in 2005.
It found 16.3% of respondents believed the European market would be “substantially oversupplied” with capital in 2005 (compared with 11% in 2004), while 42.2% said the market would be “moderately oversupplied”.
“More equity capital is expected from every part of the world, attesting to the growing globalisation of European real estate investment. Asian, Middle Eastern, Australian, and US investors are all expected to commit increased amounts of capital this year. This comes on top of expanding capital allocations everywhere in Europe,” the report said.
It added: “The sources are myriad: private partnerships, private property vehicles, pension funds, private equity groups, syndicates and consortia, insurance companies, private companies, venture capital firms, publicly listed companies and high-net-worth individuals.”
The report suggested the enthusiasm for real estate was driven by expected returns and those surveyed said they believed European real estate would outperform equities and bonds worldwide (see chart above right). As a consequence of the oversupply of capital and the tight supply of prime institutional grade real estate, investors are broadening their idea of what type of properties can be invested in.
The report said: “The difficulty in obtaining prime assets and the heady prices they command has led to core investors, who were previously known for their conservative investment policies, moving up the risk curve in order to obtain product.
“As a result, assets that were once shunned, such as offices with short leases and tired retail centres in secondary cities, are now in demand. There is also a lot more forward funding, particularly in retail.”
Real estate experts said the best investment markets for solid risk-adjusted returns in 2005 will be Paris, Milan, and London, as all three were seeing an improvement in occupier markets and had reasonably good fundamentals. The markets that garnered that the most “buy” recommendations were in Prague, Warsaw, and Budapest. Their economic growth is projected to be double that of the EU average and properties in those cities offer higher yields. Respondents said development would be most successful outside the EU, with Istanbul in Turkey said to be the best destination – but at high risk.