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KEY FINDINGS:

  • It is likely that we will see a 1 per cent increase in real estate in investment fund allocations in 2014 for EU pension and insurance funds in 2014, which would amount to €60bn of freshequity.
  • This figure would be higher were it not for supply constraints and competition from sovereign wealth funds.
  • The period of safe haven investment may be ending as institutions seek greater returns to match investor expectations and growing pension fund liabilities.
  • The recent peak in equities and bonds suggests that institutional investors will look again at real estate.
  • Low interest rates may give rise to considerable further yield compression and as debt availability improves, leveraging will also support increases in investment.
  • An increase in co-ownership structures is forecasted, particularly semi-open ended real estate funds to allow for longer-term investment.

** Solvency II poses uncertain risks over the short, medium and long-terms, but new regulations are likely to lead to adaptation and new investment products, and approaches as the property sector innovates to accommodate.

Global real estate investment volumes were up 25 per cent year on year in 2013, putting global property firmly back on track. But whilst the Asia Pac property investment cycle appears to be peaking, investment in Europe and the Americas, are currently only 60 per cent of 2007 levels, meaning there is great scope for expansion.

UK institutional investment in Central London more than doubled in 2013 from €1.5 billion (£1.2 billion) to €3 billion (£2.5 billion), but despite a significant increase in investment turnover into Europe from sovereign wealth funds in the last two years to around €12 billion,European institutional investment growth from the pension and insurance funds community has not kept pace (at circa €10 billion). Colliers’ report suggests that this competition for assets has led to pent up European institutional demand which, coupled with an allocation shift from bonds and equities, could lead to a significant new wave of capital seeking higher yielding property assets across Europe.

Just a 1 per cent increase in real estate investment fund allocations for EU Pension and Insurance funds would amount to €60 billion of fresh equity; an increase Colliers believes we are likely to see in 2014. This figure would be higher were it not for lack of availability of suitable product and competition from sovereign wealth funds. Colliers also forecasts a 3 per cent shift over the next three years (€180 billion). Total investment volume across EMEA in 2013 reached €170 billion.

Walter Boettcher, EMEA Chief Economist at Colliers International, said: “The strength of the US economic recovery, the tapering of US quantitative easing, positive UK economic growth and increasing signs of European economic stability should provide the support for a continued recovery in real estate investment in the European market. These changes also suggest that the period of safe haven institutional investment may be over, with government bond rates unlikely to satisfy the return targets of institutional investors seeking to match their growing liabilities.”

Richard Divall, Head of Cross-Border Investment, EMEA at Colliers International, said: “It is noticeable that institutions in the UK are already moving. Given Europe’s economic landscape remains highly idiosyncratic and its reliance on consumption-led growth, interest rates are likely to remain low for some time, and this should lead to an increase in leveraged investment activity targeting European real estate.”

“We are also likely to see an increase in co-ownership structures, particularly semi-open ended real estate funds to allow for longer-term investment. ‘Club deals’, co-ownership, structures, joint ventures and shared ownership of unlisted property companies are likely to become the vehicles of choice for investment in real estate. These various pooled investment vehicles could become one of the main conduits for real estate investment in the future.”

Colliers’ research reveals that the biggest obstacle facing institutions is likely to be regulatory concerns, notably new capital solvency requirements:

  • The implementation of Solvency II, capital retention requirements for different investment assets held by insurance companies has become a growing concern.
  • The IORP Directive will introduce similar provisions for occupational pension schemes.

Walter Boettcher said: “Both Basel III and Solvency II are about making risk management effective and pricing in its cost via increased capital buffers. Whilst there will be some uncertainty as rules are clarified and internal models approved, the insurance industry should have the reserves to accommodate a shift in portfolio mix, where risk is properly priced according to the regulators. Institutions may find that increasing exposure to real estate through senior lending vehicles may offer the opportunities of scale, expediency and lighter regulation.”

Norges recently took this route with a Euro 2.4 billion JV deal with Prologis in Europe at end 2012, followed by a further US$ 1 billion JV deal with Prologis in the US in December 2013.

“With a good couple of years left to run of the current European property investment cycle, significant potential volumes of equity from insurance and pension fund institutions, coupled with continued appetite from SWFs and other forms of private sector capital should lead to real estate investment volumes in Europe outperforming 2013 levels – both in 2014 and 2015,” Boettcher concluded.