Cannes, France: Real estate investors are venturing out from the safety of the best buildings in Europe to gamble on edgier properties in a sign of risk-taking creeping back into the market as the Eurozone crisis recedes.
Buildings that are partially or fully vacant, with short periods left on the lease or in need of a revamp, are in demand when they weren’t 12 months ago. “We are interested in slightly compromised real estate,” said Charles Weeks, chief executive of Cornerstone Europe, which has $37.3 billion (Dh137.18 billion) under management worldwide. “Yields on core London properties may be 4.75 to 5 per cent. Compromised real estate in the same area may be 5.75 or 6 per cent.”
Real estate yields are the annual rent as a percentage of a building’s value and are lower in more in-demand locations.
It’s a different picture from last year, at the height of Europe’s sovereign debt crisis. Then, investors focussed on lower-yielding but safe properties in the best areas of cities like London, Paris and Frankfurt in an effort to simply preserve their money. Now, institutional investors are demanding higher returns.
London’s reputation as a so-called safe haven during the global market turmoil helped drive office prices in the city centre up 52 per cent between mid-2009 and the end of 2012.
“We are looking at a fully vacant office block in a good location in Munich that we wouldn’t have 12 or 18 months ago,” said Martin Lemke, managing director of German fund Patrizia GewerbeInvest that has 7.7 billion euros of assets under management. “We’re also looking at short leases or where there is some refurbishment to be done.”
As well as riskier properties in good locations, investors are looking at European markets where yields for the best real estate can reach 7 or 8 per cent versus 4 or 5 per cent for the top cities. “Broken property in core locations and core property in broken markets like Spain and Italy is the new trend,” said Borja Sierra, chief executive of continental Europe at Savills.
Two of the world’s biggest property funds, Axa Real Estate and Deutsche Asset and Wealth Management, which have almost 100 billion euros under management between them, said they were looking at high quality office properties in Milan. “We are doing due diligence on a Milan property in a good location on a long lease at 7.5 to 8 percent,” said Axa Real Estate chief executive Pierre Vaquier.
“We believe the spreads between prime and secondary assets are at very interesting levels,” said Pierre Cherki, head of alternatives and real assets at Deutsche Asset and Wealth Management, who said prices for top property in the best locations were “very aggressive” due to the influx of wealthy individuals and sovereign wealth funds that have parked cash there during the financial crisis.
Other areas outside the top locations where Deutsche is looking include Marseille, Lyon and towns and cities along the M4 motorway that runs west out of London where yields can reach 7 per cent or above as opposed to 5 per cent in central London.
The search for higher returns is also being driven by the fact that “sitting on the sidelines and making sure you don’t lose money is no longer an option,” said Dennis Lopez, Axa Real Estate’s chief investment officer.
“Pension funds are looking for returns of 6 to 8 per cent and insurers 6 percent, which is driving more money into real estate and away from low-yielding government bonds.”