Mountain of debt makes European real estate investment market challenging, it is claimed

Written by Ray Clancy

Thursday, 07 October 2010 08:46

A mountain of debt hanging over European real estate markets makes the sector challenging going into 2011, experts are warning.

Although investors are circling European real estate markets again, the slowing economic recovery, debt and challenges posed by new regulatory requirements should keep the prudent focused on secure income producing assets, according to AEW Europe analysts.

‘The pace of economic recovery is slowing dangerously with most economists pointing to last spring as the peak for Europe,’ Mahdi Mokrane, head of research and strategy at AEW Europe told a seminar in Munich.

‘Although deflationary forces are taking hold and risk aversion is mounting again, real estate would still have an immediate appeal for investors, were it not for the lack of suitable product, the wall of debt looming ahead and the headache caused for asset allocators by the Solvency II regulations,’ he added.

Mokrane said that prudent investors should either stay on the sidelines or buy real estate assets with secure rental income, even though the demand for these properties, relative to the available supply, makes for relatively sharp yields. This type of investment is concentrated in the most established and liquid markets and are mostly in the retail sector, which is perceived as less risky.

For those investors with a greater appetite for risk, then the more volatile, but potentially more rewarding, European office markets may be an option, the summit heard. The boldest could even consider investing in select office developments, in the expectation of profiting from a lack of development finance and a weak construction supply pipeline.

While sentiment towards European commercial property is improving, lenders to the sector have expressed surprise that investors don’t appear to be paying sufficient attention to the problems building ahead due to the lack of available financing. The latest indications suggest that the money expected to be on offer from banks may be shrinking rapidly in light of the trillion dollars of real estate debt maturing worldwide in the next three years.

The uncertainties surrounding the new Solvency II regulatory requirements for insurers in investing in leveraged real estate funds are also causing this major group of investors to opt for the safest route and to invest directly in property with no leverage, rather than choosing a closed-end fund with limited liquidity.

‘Against this uncertain market background, those investors seeking income generating strategies and that can accept high prices at a sharp yield, should look mainly to retail sectors in Germany, France, the Netherlands and some parts of the UK. If they are willing to bear more risk, then Paris office developments might be a good choice as the rental demand for sustainability built space and the limited supply could generate attractive returns,’ said Marc Langenbach, analyst at AEW Europe