Union Investment Climate Index shows ongoing investor optimism

The Investment Climate Index of European Property Investors, managed by Germany's Union Investment, has been a widely-followed barometer of investment sentiment since its launch in 2005. The index is based on four indicators: market structure, the general environment, location factors and expectations, each with a weighting of 25%

The latest reading, based on interviews carried out in December and January by market research group Ipsos among investors in the UK, France and Germany, highlights Germany as the only country of the three experiencing an improvement in its investment climate.

The just-issued survey shows how investors are still primarily motivated by returns, even more so than last year, despite the advanced stage of the property market cycle. Risk appetite has increased in a market environment showing little signs of anticpating change ahead, say the researchers.

86% of the professional investors polled believe that the overall willingness to invest in commercial real estate markets in their respective countries will continue to improve or at least not decrease over the next 12 months.

“Europe is doing well. The overall macro-economic picture remains positive. The high level of investment interest in Europe, including from overseas investors, is one of the reasons why the property investment climate in the main European markets is comparatively stable, despite toughening conditions,” said Olaf Janssen, head of real estate research at Union Investment. “At the same time, the decreasing availability of prime assets combined with current prices is forcing investors to contemplate higher levels of risk.”

The research shows 51% of survey participants believing they will miss their yield targets in the next three years, as they face continuing high prices and correspondingly low returns. And even taking a five-year view, one in two of those polled see themselves failing to achieve the expected return on investment.

The relentless search for returns is boosting interest in portfolio deals, with half of respondents stating they were actively considering purchasing property portfolios – although this was heavily weighted towards UK (67%) and French investors (74%). Only 24% of German respondents are interested in potential portfolio purchases.

While up to a few years ago portfolios with a clear focus on a specific usage type were favoured, since Q4 in 2015 there is a growing trend towards mixed-use portfolios. Janssen commented, “Thanks to the current low financing costs and ability to allocate substantial amounts of capital to a single transaction, interest in pan-European portfolios has received a major boost. What’s more, overseas investors want to increase their exposure to Europe and exploit the interest rate window and weak euro to wrap up large deals this year.”

Since the last survey in May 2015, only Germany has seen a slight upward trend in its real estate investment climate. The German national index created by surveying German investors advanced by 0.6 points to 69.9 points, while for the first time since 2013, German investors are more positive about the climate for real estate investment in their country than their counterparts in France and the UK.

With a fall of 3.2 points, the UK suffered the biggest decline of any of the countries to stand at 68.3 points. Sentiment in France trailed the two other major European national property markets for the fifth year in a row, with the index for the country standing at 67.0 points (minus 1.3 points). The French index is still characterised by a comparatively high degree of volatility, which is currently probably due to the uncertainty caused by factors such as the terrorist attacks in Paris in November 2015.