Rising Demand for "Distressed Property"
European real-estate investors are becoming disillusioned with safe assets. With fears regarding economic stability in the Eurozone weakening, they have started turning to more risky and more profitable properties. This tendency is reflected in growing attention to “second tier” properties that require improved management quality, as well as to distressed assets.
Distressed Interest
According to research conducted by the consulting company CBRE Group, more and more European investors are searching for secondary assets and assets that require additional investment in their renovation. The number of such investors is larger than last year.
This year, when asked about the type of property they would rather invest in, more than 40% of investors said they would like to purchase assets of both categories. Last year only 35% of respondents showed interest in secondary assets, and only 30% were willing to invest in real estate requiring renovation. The share of investors favoring troubled assets hadn’t really changed, making up 22%. A majority of investors (53%) found premium real estate to be the most attractive.
This year the investors are willing to take bigger risks – and they are not even counting on quick returns. This is mainly because of the boost of business confidence in the economy of the European Union.
Interest in premium assets continues, but more and more often investors are focusing on property that poses greater risk. This is largely because the premium market segment is saturated and those properties have become too expensive.
“During the crisis, investors tried to choose the most stable assets, those in which they hadn’t yet lost confidence. First they bought sovereign debts of the European states. However, not many of them got a good deal. Investors had to search for new assets,” said Dan Bihi-Zenou, head of Real Estate for Dominice & Co.
He says that some investors started investing in renovated property, figuring that receiving dividends and profits from rental property is a rather simple game. “Funds of investors surged into the least risky segments. As a rule, that meant central buildings in downtown areas of large European cities. This put great pressure on profits. Investors had to choose other real estate properties to invest in – less premium facilities and those that had lost investor confidence between 2008 and 2010,” says Bihi-Zenou.
But stable assets by no means always yield big profits. “Real estate investments in major Swiss cities can serve as an illustration,” continues Bihi-Zenou. “Net profit in such assets will most likely be lower than the borrowing costs, amounting to 1-1.5% per annum, a deal like that will hardly satisfy investors. They are starting to understand that it is the more risky assets that will most likely generate a greater profit.”
“Investors started to invest their money into ‘non-core’ assets after they had exhausted all the possibilities of investing in ‘blue chips’ in Central London,” says Cameron Sawyer, Chairman of the Board of Directors at GVA Sawyer.
We can conclude that investors’ attention is no longer limited to premium assets, which is confirmed by answers to the question of CBRE Group regarding “the sole most favored” type of assets they would like to purchase in 2013. Premium assets turned out to be the most popular answer (42%), but the majority of respondents generally favored other types of assets. Quality “second tier” assets and opportunistic assets were chosen by 25% of investors.
Not Only London and Paris
Today investors are expanding the geography of the most advantageous properties, quitting such relatively safe financial centers as London and Paris. The most cautious investors prefer investing in the German housing market, which has been virtually untouched by the economic crisis. On the contrary, it gained because of the global recession. From 2003 to 2011, Berlin’s real estate prices went up 39%, Hamburg’s 31%, Munich’s 23%, Frankfurt’s 14%, and Cologne’s 10.5%.
Investors primarily place their bets on the recovering real estate markets in such countries as Spain and Ireland, says Dan Bihi-Zenou. Now they are beginning to look with interest at non-core assets.
“It is quite possible that hidden ‘gems’ can be found on the Swiss real estate market as well,” he believes. “To judge from macroeconomic indicators, the Swiss market is distinguished by its stability. Since 1991, on the average, GDP has been increasing by 2.7% per year. The unemployment rate is less than 4.5% of the economically active population. The national debt doesn’t exceed 40% of GDP.”
The Swiss real estate market is also stable, with a vacancy rate of residential property less than 2%. In the commercial real estate sector, this indicator is an average of 2-4% country-wide. In other European countries, the vacancy rate of the commercial sector is 8-10%.
“On the Swiss market, there are possibilities for investing in non-residential property located on the central streets of Swiss cities. But they can also be found in more remote districts. Investments in such assets can be very profitable as the global economy recovers,” says Bihi-Zenou.
However, such assets require a vigorous management style or even restructuring. They are a bad match for large investment funds that need to quickly deploy hundreds of millions. But niche players who have the know-how might be interested.
“Today, investors aim at diversification of their portfolios towards risky assets. I believe that investors will closely follow the cities that were generating good profits before the crisis. That means German cities first of all (Berlin, Frankfurt, and Dusseldorf). It is also advantageous to invest in the real estate markets that are starting to recover. Barcelona, Madrid, and Dublin are among the best prospects for investors,” added Peter Mindenhall, researcher at IPIN Global.
Cameron Sawyer of GVA Sawyer considers Moscow a most attractive market for foreign investors. For example, Morgan Stanley Real Estate Fund (MSREF) is now in the process of buying the Metropolis shopping center for $1 billion. And last year, the Fund bought the Galeria shopping center in St. Petersburg for $1.1 billion. It was the biggest investment deal in Europe last year.
But demand for Russian real estate among the investors extends only to already existing assets. Very few investors are ready to invest in new projects, although now is the best time to do it. There are not enough new properties on the Russian market, but demand is increasing, while the economic situation in the country is gradually improving. Moreover, Russia has a lot of relatively inexpensive land. Those who decide to invest in new properties will make a good profit, Sawyer believes.
Bilyana Pearson, Deputy Director General and Head of Real Estate at East Capital, believes it is profitable to invest in the German, Scandinavian, and Baltic real estate markets. In general, they look very attractive. Investments in large cities of developing countries, for instance Istanbul, could also become very profitable.
“Investors are interested in the real estate markets of Hamburg and Munich, which are distinguished by reliable demand from tenants and supported by the strong German economy. Russian and Polish markets could also turn out to be attractive, although investor activity at the moment is limited to Moscow and Warsaw,” says Walter Boettcher, Chief Economist of Colliers International.
Nevertheless, in his words, we can’t say that investors are investing in “second tier” assets with great enthusiasm. The growing deficit of really high-quality assets suggests that investors are not yet willing to sell expensive properties.
Eurobank Property Services concludes that today is the most advantageous time to invest in Romanian real estate, since the market is at the cusp of rising prices.
Last year, prices for the Romanian real estate declined, on the average, only by 0.8%. In some regions of the country the percentage even rose. For instance, property in Bucharest in 2012 rose in price an average of 7%. In other districts, where prices continue to decrease, this drop is starting to considerably decelerate. Positive trends are also observed in the country’s economy. The government is making every effort to efficiently finance its debts, and according to forecasts, Romanian GDP will increase by 1.1% by the end of 2013.
Investments in the Italian market might turn out to be advantageous as well. According to a survey by the largest research company in the world, GfK Group, 61% of heads of Italian companies firmly believe that their investments in their country’s real estate will be profitable within a year. Foreign investors also have a positive attitude, despite the fact that Italy hasn’t yet overcome the consequences of the world financial crisis.
Experts think the trend toward a shift of investors’ interest towards quality “second tier” assets, and the increase of their activity in that sector which was observed on the European markets starting from the last quarter of 2012, will be gathering speed throughout this year. They expect that the majority of real estate investors will sooner or later start quitting the relatively safe financial centers. Since it is still difficult to get loans, the number of new projects will most likely decline this year, says Cameron Sawyer, of GVA Sawyer.
“Investors are now choosing between the center and the periphery, between premium and second tier assets. But strong competition on the European real estate market can motivate investors to take greater risks, thus, to make more profit,” according to Daniel McHugh, head of European Real Estate at Standard Life Investment.
Nevertheless, a majority of investors believe that investors’ interest in the key markets will not attenuate. Demand for premium properties will survive along with high prices for such assets.
Автор: Vera Kozubova
World Economic Journal, April 2013
