Union Investment
Union Investment
Union Investment’s Investment Climate Index was launched in 2005, and has been carried out without interruption at six-monthly intervals since 2008.
The latest investment climate study carried out by heavyweight fund manager Union Investment provides a clear indication of a shift in sentiment among institutional property investors, and an expectation that the cyclical turning point is imminent in European real estate markets.
Professional investors are lowering their yield expectations and planning to give a wide berth to UK and retail properties, the influential survey suggests. Investors say they are increasingly worried about misallocating capital, and accordingly, yield targets are being re-assessed. A majority expect the initial rate of return on real estate to start rising again in 2019 or 2020. Only a quarter believe the real estate market cycle will continue beyond 2021.
A total of 163 German, French and British investors were surveyed for the bi-annual “Investment Climate Index” on investor intentions, with only 28% saying they were now prepared to take on more risk in order to achieve the same return – down 9 percentage points on the last such survey six months ago.
Less than half of the property companies surveyed believe they will achieve their self-imposed yield targets in a timeframe of three or five years. Yield forecasts by German investors are particularly pessimistic, with 55% of the property professionals surveyed anticipating reduced real estate returns until at least 2023.
The survey results show that German-based investors in particular are backing away from further investment in the UK, with nearly three out of four respondents saying they have no plans to invest in the UK market.
According to Olaf Janssen, head of Real Estate Research at Union Investment, “Tenant creditworthiness and the construction quality of properties continue to have the biggest impact on investment decisions. 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.”
His view is supported by the study’s finding that investment professionals are continuing to focus heavily on security. Nearly 30% of the investors surveyed consider security to be the most important aspect when making investment decisions. Liquidity is the top priority for 9%, while 58% say returns are the crucial factor. Only in France was risk tolerance higher compared to the previous survey in winter 2017/18. “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.
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,’ said Janssen. ‘By contrast, UK investors are focusing their risk-avoidance strategies solely on the retail segment.’
Co-Working: The study also specifically looked at the Co-working segment and its attractions for investors. When asked whether they would invest in single-tenant properties let to a co-working provider, around 60% of the survey participants said yes. Investors in France are most open to investment of this type (73%), followed by the UK (58%). In Germany, however, opportunities for returns in the co-working segment are still viewed with a degree of caution: currently, only 46% would invest in properties with a single tenant such as WeWork or Mindspace.
Overall expectations: “While the other indicators have proven to be largely stable across all the regions surveyed, the indicator that measures investors’ expectations of the overall economic situation in their country, the performance of their own company and the investment climate has declined more sharply in all three countries than at any time in the recent past,” said Janssen.
In Germany, this “expectation” indicator has fallen more than six points since it was last measured and now stands at its lowest level for more than three years, with 55.7 points out of a possible 100. In France, the indicator has fallen by nearly five points to 60.8. In the UK, the “expectation” indicator has reached an all-time low of just 41.2 points.
Union Investment’s Investment Climate Index was launched in 2005, and has been carried out without interruption at six-monthly intervals since 2008. The index is based on four indicators: market structure, the general environment, location factors and expectations, each with a weighting of 25%. For the latest index reading, market research institute Ipsos conducted interviews between May and July 2018 with 163 property companies and institutional real estate investors in Germany (57), France (56) and the UK (50).
