Expo Real News: Investors edging towards greater risk

6 October 2016

Investment levels in EMEA fell slightly between Q3 2015 to Q2 2016, but the total was still a strong $122bn, according to a report released at Expo Real in Munich this year. The result mirrors the overall mood at this year’s event, which is decidely upbeat, despite growing concerns over whether the UK government will negotiate a hard Brexit and more immediate concerns over the health of Deutsche Bank.

“Whilst investment levels are lower than 2015, prime assets in core markets across the region remain key targets for capital, and cities such as London, Berlin, Paris, Amsterdam and Brussels have continued to attract foreign investment, particularly from the Middle East and Asia,” writes CBRE in its EMEA Investment Guide. “However, both the UK and Germany, Europe’s top two sources of capital, have increased their investment into other European markets. This is particularly true of UK investors, whose cross border investment grew 66% from H1 2015.”

At a conference held during the Munich property conference, CBRE’s global chief economist Richard Berkham rejected the idea that politics, in particular Brexit and the upcoming US elections, were behind the slightly lower levels of capital inflows into property. “I think that’s completely wrong and it has nothing to do with the politics. In my view, the slight weakenss is due to pricing: we remain at very elevated levels of pricing globally and it’s taking investors time to get used to. And a little bit of weakness in the global economy and that is adding to the slowdown in volumes.”

John Welham, Executive Director of CBRE and head of the Retail Investment Group, says that higher pricing is pushing investors into tough decisions on what to buy. “Because yields have shifted, investors can no longer invest at the level of returns that they promised their equity [partners]. Then they have two choices. They can go back to their equity and say, ‘we can’t hit those returns will you be happy with some lower returns?’. Or what they do is they take on a bit more risk to make those returns. That’s what’s driving an increasing interest in the more secondary retail side now.”

Jack Cox, Director UK & EMEA Capital Markets, says that similar decisions are being made in the logistics and industrial sector, which is aided by strong demand and limited supply. “Investors are struggling to hit promsied returns, so in terms of taking risks, so the question is can you take mispriced risk…There is real value in the shorter leased buildings,” he said. “If it’s secondary by virtue of its short income or some vacancy but it’s a good building and well located, then that short dated income is widely mispriced.”