Luxembourg For Finance, February 2013

Building a house that lasts

  • Share

The future may remain uncertain for many asset classes, but the outlook is looking much brighter for real estate investments. According to an EY study, both volume and transaction size look ready to exceed levels seen in 2012. Sweden, Turkey and Luxembourg are considered the most attractive markets.

Most of the 500 respondents of the 15 countries surveyed see the glass half full rather than half empty. The real estate sector is increasingly viewed as a safe haven. Three-quarters of investors surveyed say that the on-going Eurozone crisis will increase their activity in that particular area. This is a very encouraging sign; only a year ago, gloomy conditions in the Eurozone were expected to reduce European real estate asset investment activity. Michael Hornsby, Partner, Real Estate Leader at EY Luxembourg, confirms that confidence has risen since the last survey in 2012. More than two-thirds of respondents in 13 of the 15 countries surveyed rated their country as attractive for real estate investment in 2013, both in absolute terms and in comparison to other European locations. In a few cases – Sweden, Turkey and Luxembourg – all respondents viewed their country as very attractive or attractive”. Good.

There are several reasons for this dramatic change in perception by investors. Central Bank policies have reduced the immediate risk of a breakup and there has been progress towards the creation of a banking union. Yet, respondents surveyed in the 15 countries have a different view on how to deal with the crisis. Investors in Germany have maintained a similar level of confidence as before while France, like most other countries in the survey, has reversed its cautious attitude and has become exceptionally bullish:83% believe that the poor economic backdrop will drive an increase in investments. By contrast, in Sweden investors have become more bearish; only 54% have a positive outlook (down from 86% in 2012).

Inflation is seen as another driver of investment. It is not really a surprise to read that inflationary pressures will propel investors towards real estate assets in the medium term. In any case, this is true for 80% of respondents in countries like Germany, France, Belgium and Luxembourg; only Italian investors are clearly sceptical (20%).

Whatever the risk profile of investors, they all seem to agree that when it comes to financing investments, a shift from traditional bank lending to alternative sources is rather likely. Michael Hornsby explains. New regulations could help shape financing. Investors remain concerned about the impact of a more stringent regulatory environment on the availability of debt financing. In particular, the Basel III regulations that strengthened bank capital requirements and tightened rules relating to liquidity and bank leverage are viewed as having a potentially chilling effect on financing for the real estate sector.

At the same time, recent directives aimed at harmonizing other parts of the financial services industry could create new funding sources. In the case of the Solvency II regulations, a majority of respondents from most European countries see potential for insurance companies and pension funds to act as debt providers for real estate investments in the future, with only Italian respondents disagreeing.”

Among all investors surveyed, Luxembourg respondents are the most optimistic regarding the future development of transaction volume with 88% expecting an increase (compared with 53% in 2012). This optimism is likely to be fuelled by cross-border investments, with 76% of respondents anticipating an increase in transnational transactions. In that context, what impact will the demand have on prices in Luxembourg? A majority of Luxembourg investors expect purchase prices ofprime property to increase across all categories in 2013, with 64% anticipating a rise in prices for prime retail space, 59% expecting an increase in prime offices prices and 53% predicted higher prime residential prices. For peripheral areas residential prices are expected to increase (41%) or to remain unchanged (35%)”.

Who are the buyers and the sellers according to the survey?

Throughout Europe, residential real estate companies and banks are expected to be among the most active sellers in 2013, while in a majority of countries, private investors and family offices are likely to be more active as buyers. Opportunity and private equity funds, meanwhile, are likely to be extremely active on both sides of real estate transactions.