MIPIM 2014: Nearly £80bn of capital gripped in European “battle for assets”

Nearly £80bn of capital is currently chasing European commercial real estate as investors continue to move up the risk-curve and into markets still to fully stabilise in the ever more competitive global hunt for yield.

Direct investment in European real estate is now back to pre-crisis levels with capital availability across all regions and risk profiles expected to increase as multi-asset class investors scale up their allocations to commercial real estate.

Wealth created in Asia is flowing out of investors’ home countries across the continent and also into North America and Europe.

The resulting global “battle for assets” will be a significant trend in 2014, as characterised by the Emerging Trends in Real Estate 2014, a report on the global real estate outlook by PwC and the Urban Land Institute (ULI).

According to preliminary figures published today by DTZ Research’s fifth annual Great Wall of Money report, capital chasing global real estate – across Europe, the Americas and Asia – has risen to almost €215bn with European-chasing capital now level with the Americas.

“For the first time in two years we have seen an increase in new equity raising,” DTZ’s Nigel Almond, head of strategy research wrote. “This reflects the reduced risk aversion and continued relative attractiveness of commercial real estate.”

While the momentum within European real estate has increased considerably over the last 12 months, DTZ forecasts a run-off the pace of new investment mandates for the asset class from “real money investors,” predominantly the pension funds, insurance companies and sovereign wealth funds from Europe, America and Asia.

“As relative value diminishes with future interest rates rise, DTZ expects growth in new commitments to slow. Investors focussed on core strategies should move now whilst the range of opportunities remains broad.”

This year’s annual Great Wall of Money report – published annually since 2009 – is based on data collated from almost 3,000 global core, value-add and opportunity real estate funds. The full report is expected to be published by DTZ Research on Wednesday.

Almond added: “The increase in capital was evident in all regions except the Americas. Europe led the field with a 7% increase in new capital to $129bn (€77.6bn), with Asia Pacific recording 6% growth to USD96bn. Available capital was flat in the Americas at $129bn (€77.6bn).”

Richard Divall, head of cross border investment, EMEA at Colliers International, said of current global capital trends: “Given Europe’s economic landscape remains highly idiosyncratic and its reliance on consumption-led growth, interest rates are likely to remain low for some time, and this should lead to an increase in leveraged investment activity targeting European real estate.”

“We are also likely to see an increase in co-ownership structures, particularly semi-open ended real estate funds to allow for longer-term investment. ‘Club deals’, co-ownership, structures, joint ventures and shared ownership of unlisted property companies are likely to become the vehicles of choice for investment in real estate. These various pooled investment vehicles could become one of the main conduits for real estate investment in the future.”

Simon Hardwick, real estate partner at PwC Legal, said: “Real estate investors face unprecedented competition for core assets. The limited supply of suitable property will inevitably have an impact on prices, particularly in global gateway cities, including London.

“As a result investors will face the challenge of finding investable assets of sufficient quality in many cities in order to meet these demands. They may have to look at other opportunities and accept more risk. For example, we expect increased levels of development will regenerate buildings or revive areas as part of the ‘place making’ outlined in the report.”

Hans Vrensen, global head of research at DTZ, adds: “Based on our Fair Value Index, we expect the relative value of many commercial property markets to reduce as interest rates start rising. As a result, the window of opportunity for well-timed investing in core markets will diminish through 2014 and 2015.

“Therefore, we expect that new capital commitments will slow over time. Investors should move now before relative value is no longer available in a broad range of core markets, particularly across Europe. For those looking outside of core, we see a longer window of opportunity. As a result, we finally do expect a shift to increased fundraising for non-core, value-add strategies.”


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