Real estate investment in EMEA hits record as dry powder piles on

29 March 2018 6 min. read

Property investment in the EMEA region hit a record high last year, on the back of high levels of dry powder. This year is set to see further investment, particularly in primary and secondary and value added types, according to a new study. More than 30% of the respondents expect to spend more on real estate over the next year.

The European investment market for real estate totalled €291 billion last year, which represents a record level for the region. However, the outlook is not entirely sunny, in light of changing dynamics in Europe and across the globe, combined with a late cycle and prime yields hitting record low levels. The sector itself is currently undergoing a transformation, as alternative housing construction techniques disrupt the costs and pricing of real estate.

To better understand the market in the year ahead, CBRE conducted its annual 'Investor Intentions' survey among 350 respondents, primarily comprised of large-scale investors who exert substantial influence over the European real estate sector. In its bid to determine intentions, the survey included questions about plans for acquisition and investment on the one hand, and perceived threats and obstacles on the other.

As per the findings, not only is the investment itself expected to increase over the next year, but the optimism about the sector has gone up since last year as well, as is evident from the increase in the number of people expecting growth between early last year and early this year. For instance, 45% of the respondents expect to purchase more over this year, which is a solid factor for growth in the segment. 

Purchase and sales

Moreover, in early 2017, this number stood at 41%, indicating a more positive investor sentiment in general. 33% of the respondents expect their purchasing activity to remain in the balance this year, compared to 26% who were similarly neutral last year. Predictably, those expecting a decrease in their purchasing activity fell from last year, from 15% in early 2017 to 12% this year.

Similar trends are apparent among respondents hoping to sell assets in real estate this year. At the turn of 2018, 40% expect to sell more, compared to 36% at the turn of 2017. 29% expect their selling activity to remain in the balance, which is also an increase from 20% early last year. Meanwhile, 11% expect to sell less this year, compared to 16% at the beginning of last year.

Biggest obstacles

The intent to buy more stock creates a mixed blessing, due to its impact on asset pricing. High prices were cited as a key obstacle to investments in the EMEA; cited by 44% of respondents. However, with a larger cohort saying that they will sell, additional assets may come to market which fit in the growth category for other fund types. The availability of assets, or lack thereof, is cited as an obstacle by 34% of respondents.

Both these obstacles appear to be just as prevalent in regions outside of the EMEA as well, illustrating that these are trends impacting the global real estate market, as is competition from other investors, which took the number three spot, cited by 17% of respondents. The current market remains relatively saturated by dry powder, whereby a number of investors in the private equity industry have too much capital.

Other factors that create obstacles but were not considered of great relevance include the presence of debt, the low levels of transparency across the sector, currency risks, tax levels, and transaction costs, each of which was cited by 1% of the respondents.

Attractive investment types

In terms of the kinds of assets that are deemed the most attractive over the next year, prime and core assets are the top category, cited by 36% of respondents and representing a slight increase of 4% from last year. 30% responded saying that they would be willing to invest in good secondary assets. 

Value-add assets saw a small decrease, from 27% of the respondents last year to 25% of respondents this year, while opportunistic deals came in at 7% of respondents. Distressed assets remain an area of low interest, cited by 2% of the respondents. The focus on core and core plus reflects the wider market fundamentals, as few opportunities and few distressed assets are available in the current market.

Investor concern

The main concern for investors is a faster than expected increase in interest rates, cited by almost 30% of respondents. A fair number of respondents are also concerned about a property bubble that is waiting to burst, with the top two concerns feeding into each other. Furthermore, a global economic shock – increasingly likely in the uncertain economic and geopolitical environment – could undermine occupier demand.

Other areas of concern include a change in government policy that would make property less attractive. With large numbers currently locked out of the housing market, investor concern is unexpected. Local economic shocks could also result in a decrease in occupier demand.

Most attractive sectors

In terms of the key investment areas, industrials comes in at number one, cited by 32.7% of respondents, followed by office space at 26.4%. Residential comes in third place, cited by 21.5% of respondents as an attractive area for investment. Retail, hotels and retail high-street are seen as less interesting, at 9.6%, 8.3% and 4.6% respectively.

Jonny Hull, Managing Director of EMEA Investment Properties at CBRE, said, “While sentiment does not always translate directly into investment volumes, investor preferences do indicate which markets may see heightened activity over the next 12 months. We have seen a shift in sentiment in France for many months now, following the election of President Macron and the subsequent economic momentum this has created. Madrid has seen strong investor interest thanks to improving economic fundamentals. Limited development activity and declining vacancy rates in Amsterdam have boosted its appeal over time. The current strength of the German economy and the lack of supply continue to drive investor demand in all of its key markets.”