CBRE Announces Results Of Survey Of European Investor Intentions For 2011
Debt Finance Shortages, Rising Interest Rates & Inflation Seen As Greatest Constraints To European Property Recovery
MIPIM / Cannes, 9 March 2011 – European investors have identified factors relating to financing and the capital markets, namely a shortage of debt finance and the impact of rising interest rates and inflation, as the greatest constraints to the European property market recovery in 2011, according to new research by CB Richard Ellis Group Inc. (CBRE). This marks a significant change in investor sentiment compared to last year, when demand-side risks in the occupational markets were considered the greatest threat and one in three investors saw a “double-dip” recession as their primary recovery concern.
The findings are part of a survey of almost 350 European real estate investors conducted by CBRE and launched at the company’s European Investment Briefing held at MIPIM, the international real estate event held annually in Cannes, France.
A shortage of debt finance and the impact of rising interest rates and inflation were each identified by around 20% of survey respondents as the greatest threats to the ongoing property market recovery this year. These concerns reflect the impact of continued credit constraints coupled with above-target inflation, rising bond yields and expectations that rate increases from the current ultra-low level are coming closer. Over the past few months there has been a sharp increase in medium-term interest rates – for example, the German 10-year government bond yield has increased from a low of 2.15% in August last year to around 3.15% now. This is increasing the cost of capital to banks and thus the rates at which those lenders who are still active are prepared to lend.
Investors’ current concerns contrast strongly with those from last year’s survey. At this time in 2010, investors were most concerned about the demand-side drivers of the property market. The possibility of a double dip recession and weakness in occupier demand featured as the greatest threats to recovery for more than half of respondents. These concerns have not gone away, but they have clearly receded. In the 2011 survey, only 29% of investors cited these as the greatest threat.
Peter Damesick, EMEA Chief Economist, CBRE, commented: “Real estate is often considered as a hedge against inflation, but this is true only to an extent and depends on the source and nature of inflationary pressure. Indexation (which is the norm in most of Europe) provides short-term protection against inflation, but this is only sustained if underlying rents also increase in line with inflation in the longer term, which requires some strength in occupier demand. The cost-push inflation that is affecting Europe at the moment, driven by currency weakness and increases in oil and raw material prices, is much less likely to lead to increases in rental value. History also tells us that if higher inflation induces tighter monetary policy, that can prove negative for property performance.”
Phillip Cropper, Managing Director of Real Estate Finance, CBRE, said: “The impact of these concerns over interest rates, inflation and a shortage of debt finance will differ greatly depending on the nature of the property an investor holds. Current buyers of prime real estate are using very little debt and are generally buying property for its bond-like qualities, rather than as an inflation hedge. The availability and cost of debt is much more significant for the secondary market, where historically levels of leverage have been higher. Currently there is very little appetite to lend on secondary property where the market perceives there to be significant tenant and leasing risk. This is unlikely to improve for a considerable time, and this is likely to impact pricing.”
The fact that investors are most concerned about these factors goes a long way to explaining one of the other findings of the survey – an increasingly negative view of secondary property. A large majority (73%) of the survey respondents expected the historically large yield gap between prime and secondary property to persist or widen further in the course of 2011. Investors’ views of when it will be appropriate for them to purchase secondary property have moved out since the 2010 survey and nearly a third of respondents thought that it would be 2013 or later before the market would be right for them.
Note to Editors
CB Richard Ellis’ European Investor Intentions 2011 ViewPoint is based on the results of an online survey in which over 340 leading investors in European real estate responded to six questions regarding their investment intentions and preferences for 2011.
Further details of the specific questions asked, and a detailed breakdown of responses, are provided in the report.
About CB Richard Ellis
CB Richard Ellis Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2010 revenue). The Company has approximately 31,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CB Richard Ellis offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.