Signs of growing preference for European real estate

There are several indications that global investors are taking an increasingly positive view of European real estate in 2020, despite the share of global capital raised by European-focused funds having fallen over the last couple of years. This is the view taken by Capital Economics in a recent note authored by property economist Amy Wood, which suggests that demand for prime assets will hold up in 2020, despite the shaky economic backdrop.

The researchers of the Capital Economics article refer to encouraging data from Preqin, which show that the amount of global fundraising by closed-end private real estate funds in 2019 was $151bn, 2% higher than in 2018. However, like 2018 the picture was less positive for European-focused funds. Indeed, up until September last year, these funds accounted for a lower share of global fundraising, at around 16%, compared to their 23% share in 2017.

Not unsurprising perhaps, given that global fundraising was boosted by North American-focused mega funds, such as Blackstone Real Estate Partners IX, which increased the North American share of fundraising at the expense of other regions. In fact, in Q3 last year, almost 80% of fundraising globally was from North American-focused funds. 

However, it also likely reflected concerns about pricing and the ability of fund managers to achieve historic target returns, particularly given caution towards UK property and investors’ bleak assessment of the prospects for retail assets. Indeed, respondents in PWC/ULI’s Emerging Trends Europe survey have been scaling down their European return targets over the past few years.

Looking ahead, there are signs that investors want to increase their allocations to European real estate. In fact, in Q3 2019, almost 60% of private real estate investors had looked at targeting European markets over the next year, up from 50% the year before. And, although the third quarter of last year coincided with fears of recession, particularly in the US, the increased interest in European real estate is also consistent with the lower for longer outlook for interest rates, which means that prime real estate is likely to remain a relatively attractive investment.

These views are also underpinned by INREV’s 2020 Investor Intentions Survey, which we report on elsewhere in this issue of REFIRE, which showed that a sizeable share of real estate investors still prefer a core strategy this year. Still, some of the risk aversion present in European real estate strategies last year appears to have reduced. Indeed, the same survey also showed that there has been a considerable increase in those favouring a higher risk opportunistic strategy this year.

The Capital Economics researchers conclude that despite the soft macroeconomic backdrop, demand for prime assets in Europe should hold up this year. That said, given the importance of the UK in the European investment market, the risks to this outlook lie to the downside. Not surprisingly, they expect investors to remain cautious towards UK property investment so long as something like a no deal Brexit after December 2020 remains a possibility. Which, given recent utterings from Chancellor Sajid Javid, it most definitely does.