Optimism over European real estate markets

Real estate investment volumes across Europe looks set to rise this year – helped ironically by the Eurozone crisis, according to a new report.

The European investment trend indicator from financial experts Ernst & Young summarises investors’ outlook on transactions and opinions on market attractiveness and expectations about the financing of real estate transactions.

A house divided - How Europe views prospects for real estate investment - is based on a forward looking survey of executives from organisations across Europe who invest capital in real estate assets

The report says, “Transaction volumes look set to rise in 2013, supported in large part by international investment, while the continuing Eurozone crisis and inflations fears may actually help to stimulate activity, rather than dampen it.

“Most now believe the difficult climate will act as a catalyst for increased investment in the real estate sector in 2013, rather than deterring it. Most also expect both volumes and transaction size to exceed levels seen in 2012.

“The most important finding involves a change in perception that is likely to give a positive boost to sentiment. This is that the Eurozone sovereign debt crisis, which was previously seen as undermining real estate investment, is now viewed as a potential stimulus for activity.”

Despite the financial difficulties in many European countries, they are still attracting attention from investors.

"Investors still view most European countries as attractive investment destinations; this is particularly true for non-Eurozone countries such as the UK.”

In fact, confidence in real estate has risen in most countries since the last survey, according to the report.

More than two-thirds of respondents in 13 of the 15 countries surveyed rated their country as attractive for real estate investment in 2013, both in an absolute sense and in comparison with other European locations.

In a few cases — Sweden, Turkey and Luxembourg — all respondents viewed their country as very attractive or attractive. It is also notable that many non-Eurozone-countries are rated as particularly attractive.

Poland polled the highest figures (45%) as being most very attractive for real estate investment, followed by Sweden (42%), Germany (41%) and Turkey (40%).

Only in Italy and Spain, where the Eurozone crisis continues to most affect market sentiment, do the majority rate their country as less attractive for real estate investment.

Across Europe, nearly three-quarters of respondents expect transaction volumes in 2013 to top 2012 figures. Spanish respondents are divided over whether transaction volumes will go up and down. The only country where volumes are predicted to decrease is in Italy.

The upward trend appears to be driven, at least in part, by the expectation of increased investment activity from cross-border buyers.

A majority of respondents in 12 of the 15 countries surveyed predict higher levels of interest from international real estate investors in 2013, compared with 2012. Optimism was strongest in Switzerland and Germany, where all respondents agreed international sales would improve.
Almost three-quarters of investors surveyed say that the on-going Eurozone debt crisis will increase all European investors’ activity in the real estate markets.

This is a completely different from a year ago, when gloomy conditions in the Eurozone were expected to reduce European real estate asset investment activity.

“This dramatic change could be explained in part by investors’ perception that the future of the Eurozone itself seems safer than it did a year ago. Central Bank policies have reduced the immediate risk of a breakup, while progress has been made toward a banking union that would put the currency on a stronger long term footing,” the report states.

Investors think it likely that Basel III regulation will have an adverse effect on bank financing availability for real estate investment and anticipate that insurance companies and pension funds may pick up some of the volume of debt financing for estate transactions.

But they expect transaction volumes to rise, driven in large part by cross-border international investments and think green-building standards are playing a key role in many markets, says the report.

Speculative project developments are returning only gradually in many markets, but most expect stability and also some growth potential for prime offices or rising prices for prime retail and residential property.”

The report is based on a survey of more than 500 real estate investors including selected Ernst & Young clients. Participants came from Austria, Belgium, France, Germany, Italy, Luxembourg, Netherlands, Poland, Russia, Spain, Sweden, Switzerland, Turkey, Ukraine and the UK.
One striking finding is the range of investment attitudes, objectives and priorities across Europe when more detailed questions are asked.

The traditional dividing line between mature and emerging markets is increasingly giving way to other divisions — between Eurozone and non-Eurozone countries, and between smaller groups of countries that don’t necessarily share the same immediate neighbourhood or linguistic group.
Thus, while some questions reveal differences in investor appetites between markets such as Germany and Sweden, others indicate areas of shared experience for countries as diverse as Spain and Switzerland.

There is, however, agreement among investors on the change in how real estate asset investments will be financed, with many respondents predicting a shift from traditional bank lending to other sources of capital.

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