With a declining propensity for risk, European property investors have eased their yield expectations and are steering clear of the UK and retail properties in particular, a bi-annual investment sentiment survey by German fund manager Union Investment reveals.
German-based investors in particular are shying away from the UK with three quarters saying they are not currently planning to invest in the UK property market.
One out of three UK investor expects conditions in the UK property market to decrease over the next 12 months while a further 56% do not expect the investment climate to improve until at least summer 2019.
‘The indicator that measures investors’ expectations of the overall economic situation in their country has declined more sharply in the UK, Germany and France than at any time in the recent past,’ commented Olaf Janssen, head of real estate research at Union Investment.
Lower yield targets
Less than 50% of the companies surveyed believe they will achieve their self-imposed yield targets in a timeframe of three or five years. Among German investors the number is even higher: 55% of the respondents are counting on reduced real estate returns until at least 2023.
Only 28% of the 163 European property firms Union Investment polled in its last survey revealed they are prepared to take more risk in order to achieve the same return. This percentage has fallen by 9 percentage points compared to the previous survey conducted in winter 2017/18.
The majority of investors (64%), on the other hand, plan to stick to their risk strategy and are therefore prepared to accept lower returns.
‘Tenant creditworthiness and the construction quality of properties continue to have the biggest impact on investment decisions,’ Janssen said.
‘We can conclude that the style drift among European investors which was widely predicted to occur during this unusually long market cycle has not materialised, and we will not see it now in this cycle,’ he added.
Change of priorities
Asked what the most important factor at the moment of making investment decisions is, 30% answered that their main focus is transaction security. Liquidity is a priority for 9%, whereas 58% considered returns as the main aspect.
‘The strong focus on security is limiting investors' options. It is particularly striking that investment in entire market segments is being ruled out over the coming months,’ said Janssen.
In every European country (excluding France) risk tolerance is lower compared to the previous survey carried out six months ago.
Investments to be avoided
The survey shows the majority of companies (63%) are avoiding retail properties as investments, with UK firms (82%) particularly negative compared to German companies (40%).
The survey also revealed a reluctance to invest in both hotels (33% saw a need to avoid them) and logistics properties (29%).
All segments need to be considered on a country-specific basis. ‘In Germany and France, scepticism regarding the long-term value of investments is apparent across the board in all the property segments covered by the survey,’ saidJanssen. ‘By contrast, UK investors are focusing their risk-avoidance strategies solely on the retail segment.’