The climate is looking more favourable for real estate investment in Europe with many viewing the Eurozone debt crisis as a potential stimulus for activity, a new survey shows.

Among more than 500 real estate investors across 15 countries in Europe surveyed in late 2012 by Ernst & Young there is a change in perception that is likely to boost sentiment.

Investors still view most European countries as attractive investment destinations, particularly for non-Eurozone countries such as the UK.

The survey also found that investors expect transaction volumes to rise, driven in large part by cross border investments and think green building standards are playing a key role in many markets. However, they also perceive that speculative project developments are returning only gradually in many markets.

Overall they expect stability and also some growth potential for prime offices or rising prices for prime retail and residential property in most European countries.

‘Global capital markets are yet to regain pre-crisis levels of liquidity, but there are suggestions that the economic climate is looking more favourable for real estate investments. Both volumes and transaction size in 2013 are likely to exceed levels seen in 2012,’ said Hartmut Fründ, Global Transaction Real Estate Leader.

The report also highlights that while some new regulations are likely to make traditional sources of financing harder to access for real estate investors, alternative sources of debt funding could become more plentiful.

Almost three quarters of investors surveyed say that the continued weakness in the Eurozone economy will strengthen European investors’ activity in the real estate markets. This highlights the ongoing flight into real estate assets by investors around Europe. This is a reversal from a year ago, when the appetite for such transactions was limited as investors waited to see how the crisis would develop.

However, the picture varies across the continent. Certain non-Eurozone countries, such as the UK, are currently comparatively more attractive for real estate investments than certain Eurozone countries. Similarly the southern and some peripheral European real estate markets are viewed with relatively more caution than central or Northern European markets.

Respondents from 13 of the 15 countries also believe that inflationary pressures will propel investors toward real estate assets which are traditionally seen as a natural hedge against inflation in the medium term. More than 80% of investors in Germany, France and Switzerland agree that inflationary fears will underpin real estate investment in contrast to just 20% in Italy.

Investors remain concerned about the impact of a more stringent regulatory environment on the availability of debt financing, particularly Basel III. All those surveyed expect Basel III to make loans less appealing for banks and lead to further restraint in the mortgage business. Austria, Sweden and the UK were among the strongest proponents of this view, with 85%, 83% and 81% of respondents, respectively, saying that they were in agreement.

At the same time, other recent directives could create new funding resources. In the case of Solvency II regulation, a majority of respondents from most European countries see potential for insurance companies and pension funds to act as debt providers for real estate investments in the future, with only Italian respondents disagreeing.

‘Real estate financing has been changing and will continue to do so, affecting the financial power of potential buyers. Nevertheless, market participants expect new ways of financing to be found, since most investors anticipate a rise in transaction volumes despite new regulation,’ said Fründ.

According to the majority of respondents the price of both office and retail property across Europe is expected to rise or at least remain stable.

Office prices in peripheral locations such as the eastern part of Europe, particularly Russia and Turkey, are seen as having strong growth potential. This is also the case with retail properties.

Despite the optimism about the rising price of office properties, respondents felt it was less likely to be an investment focus in 2013 than in 2012. By contrast, investors in most countries are likely to keep at least some focus on retail properties.

Residential properties, however, will retain a strong to moderate focus in most of the countries surveyed, with the exception of Italy, Spain and Luxembourg, while in Germany and Switzerland they remain highly sought after.

Across Europe, nearly three quarters of respondents expect transaction volumes in 2013 to exceed levels seen in 2012, with only respondents in Italy disagreeing that volumes are likely to increase.

The average size of deals is also expected to rise, according to the majority of respondents, with just Spain and Italy predicting little improvement in deal size.

‘The upward trend appears to be driven at least in part by an expectation of increased cross-border investment activity, with a majority of respondents in 12 of the 15 countries surveyed predicting higher levels of interest from international real estate investors in 2013, compared with 2012,’ explained Fründ.

Nevertheless limited availability for debt funding will remain an obstacle. ‘Furthermore the ongoing price mismatch between buyers and sellers could also act as a brake on deal flows,’ he added.

2013-01-21