european real estate asset investment indicator - ernst & young

Ernst & Young European real estate assets investment indicator 2012

As one door shuts, another opens

European real estate assets investment indicator 2012 2

About this reportErnst & Young’s European real estate assets investment indicator is based on a forward looking survey of executives from organizations across Europe who invest capital in real estate assets. Opinions were canvased in December 2011 by Ernst & Young and the Economist Intelligence Unit (EIU).

This report summarizes investors’ outlook on transactions and opinions on market attractiveness, together with insight into the drivers of these views and expectations around financing of real estate transactions.

Further details of individual markets, transaction pricing and asset classes may be obtained through the contacts listed on page 8.

This report is based on a survey of 534 real estate investors including selected Ernst & Young clients and regular EIU contributors. Participants were based in 12 countries: Austria, Belgium, France, Germany, Luxembourg, Netherlands, Poland, Russia, Spain, Sweden, Switzerland and the UK.

As one door shuts, another opensThe future has never been certain, but today it is less than clear, even for an asset class “as safe as houses”. While real estate asset transaction volumes might not increase across Europe in 2012, there are positive signs in a number of markets. The greater question is, however, around the financing of real estate investments. As the door to bank finance could partially shut, another might open from certain “alternative” sources.

Investors in real estate assets have different objectives and priorities. Attitudes vary with respect to risk, to capital growth versus income and to asset class and quality. But there appears to be consensus on the development of the macroeconomic environment amongst the more than 500 European investors in real estate assets we surveyed in late 2011. A clear majority of respondents are fearful of ongoing instability in the Eurozone. The present uncertainty is seen as likely to cause delays in real estate investment, financing, construction and occupation.

While there are commonalities in the views of the investors surveyed, one striking finding of this report is the range of investment attitudes, objectives and priorities across Europe. Though it might not surprise that views differ between mature and emerging markets, it might surprise that there are even differences in investor appetites between markets such as Germany, Sweden and Switzerland.

There is, however, agreement amongst investors around the change in financing of real estate asset investments. The respondents predict a shift from traditional bank lending to other sources of capital. Whether these are insurers, the equity markets or tradable securities varies across Europe.

3European real estate assets investment indicator 2012

• Outlook for transactions in real estate assets differs by country

• Market attractiveness high across Europe

• Impact of inflation on real estate investment will vary across the region

• The Eurozone crisis is likely to adversely impact activity in many markets

• Little consensus on outlook for commercial mortgage–backed securities

• Equity financing market expected to open more widely in 2012

• Insurers to increase volume of debt financing for real estate transactions

• Banks expected to partially reduce mortgage lending

Key findings


Market outlook

After a period of calm during mid-2011, the sovereign debt crisis in the Eurozone led to renewed capital markets volatility. This was compounded by weak economic data in a number of key markets. Real estate investment is particularly affected by these factors. Our survey of European investors therefore poses the question “What does 2012 hold for the real estate markets?”. Respondents to our survey offer an insight into likely transaction trends for 2012 and beyond.

Transaction outlook differs by countryAcross Europe, forty percent of all respondents expect improvement in activity levels in 2012, while a similar number disagree. There is significant variance in expectations between countries. Approximately 55% of investors in Germany, France and Luxembourg expect a recovery in volumes, whereas almost 60% in Belgium and Switzerland take the opposite view. Such disparity in investors’ views across locations demonstrates the substantial differences between local markets, and the need for investors to treat real estate assets on a country–by–country basis, rather than regionally. Further insight into which categories of real estate assets are likely to be in demand in 2012, and the pricing of these on an intra–country basis was obtained through the survey and is available on request.

Market attractiveness high across EuropeWhile the outlook for transactions involving real estate assets varies, the level of confidence in future investments across Europe is apparent. Ninety–nine percent of respondents to our survey in Germany, for example, describe their country as attractive for investment.

Across the 12 countries in our survey pool, the majority are rated highly for attractiveness. In addition to Germany, Sweden and Austria all score in the 90s%. It is interesting to note that emerging markets such as Russia and Poland are also rated highly for market attractiveness. Our survey provides more detail on which classes and regions are the cause of these trends.

Expectations of a recovery in real estate asset transaction volumes

Assessment of local market attractiveness for real estate assets

8% 48% 39% 4%1%Germany

33% 21% 17% 6% 23%France

11% 42% 29% 4% 14%Luxembourg

13% 33% 30% 15% 9%Poland

3% 38% 47% 12%Switzerland

7% 34% 22% 11% 26%UK

8% 30% 25% 11% 26%Spain

12% 21% 42% 12% 13%Russia

7% 18% 25% 11% 39%Austria

21% 40% 7% 32%Sweden

4% 15% 54% 4% 23%Belgium

6% 27% 24% 16% 27%Netherlands

38% 61% 1%Germany

32% 64% 4%Sweden

21% 71% 4%4%Austria

7% 82% 7% 4%Luxembourg

35% 53% 8% 4%Russia


25% 60% 15%Spain

15% 69% 12% 4%Belgium

30% 53% 6% 11%Poland

68%12% 14% 6%Netherlands

12% 65% 21% 2%France

17% 57% 11% 15%UK

Strongly agree Agree Disagree Strongly disagree Neutral No response Very attractive Attractive Less attractive Neutral No response


Market drivers

Inflation concerns vary across EuropeInflation levels in many European countries are around 3% with certain markets such as Russia substantially higher at around 7%. As a consequence, two thirds of respondents to our survey believe that further inflationary pressures will drive investment in real estate assets in the medium term. This may be due to expectations that certain real estate asset prices may keep pace with inflation, and the hope that resurgent demand in certain markets will outstrip overall supply. But suffice it to say that the picture varies by country.

Given the current market environment in Spain, it is not surprising that investors in Spanish real estate assets show one of the weakest views that inflation will prompt activity — with barely half seeing this as a driver of real estate asset investment. On the other hand, 88% of German investors agree that inflation will lead to an increased number of real estate asset transactions. A similar number in Switzerland take this view as well.

Eurozone instability will moderate investmentAlmost three–quarters (72%) of investors surveyed expect the ongoing Eurozone debt crisis to reduce European real estate asset investment activity. There is, however, some variance in the intensity of this view across countries.

Investors in Sweden, a market infrequently connected with the ongoing crisis, are the most concerned with 86% believing activity will be adversely affected by the turmoil. Of Eurozone members, investors in Germany are the most comfortable with only 52% noting the same caution. It may therefore be inferred that local market economics weigh more heavily on the minds of investors, than broader regional volatility. This picture is further clarified by the result in Switzerland, where 50% do not see the Eurozone crisis as likely to affect activity levels substantially. Further insight into such country–level macro–trends is available through the Ernst & Young professionals listed on page 8.

Inflationary concerns will drive real estate asset investment Eurozone crisis will reduce real estate asset investment

Strongly agree Agree Disagree Strongly disagree Neutral No response Strongly agree Agree Disagree Strongly disagree Neutral No response


24% 64% 12%Germany

25% 44% 15% 4% 12%France

8% 61% 19% 12%Belgium

9% 59% 15% 2% 15%UK

20% 46% 22% 4% 8%Russia

21% 43% 18% 7% 11%Luxembourg

15% 48% 17% 7% 13%Poland

7% 50% 25% 4% 14%Austria

4% 50% 32% 7% 7%Sweden

9% 43% 26% 11% 11%Spain

8% 53% 27% 4% 8%Netherlands

14%25% 61% 14%Sweden

17% 66% 11% 6%Poland

26% 57% 13% 2%2%Spain

22% 57% 13% 2%6%UK

29% 49% 12% 8% 2%France

14% 61% 18% 7%Austria

25% 47% 14% 7% 7%Luxembourg

15% 56% 23% 2%4%Russia

12% 53% 23% 12%Belgium

14% 38% 30% 18%Germany


14% 57% 27% 2%Netherlands


Real estate asset funding

No consensus on CMBS marketInvestors across Europe have divergent views on the prospects for a revival of the Commercial Mortgage–Backed Securities (CMBS) market in 2012. An equal number (43%) have a positive outlook on this funding source, as have a negative view. A more insightful trend, however, emerges at a country level.

Investors in some of the more “mature” economies surveyed are the most pessimistic about prospects for CMBS. Only 29% of those in Germany for example, where financial markets are relatively developed, see the upside for CMBS issuance. And in the UK, where CMBS levels were significant before the 2008 crash, only 41% see the market coming back next year. But in less mature rapid–growth markets such as Poland and Russia, more confidence abounds. This may be due to the relative lack of CMBS issuance pre–crisis and the comparatively unscathed nature of investors in real estate financial instruments in those markets.

With the uncertain nature of CMBS funding, further analysis is warranted on a country and intra–country level.

Hope for further equity financingOf the investors surveyed, 42% expect that equity capital markets will become more attractive in 2012 for real estate asset investors. This is hardly a pronounced trend, but following the volatility in equity markets in 2011, suggests a more positive picture than some commentators and analysts have projected.

As with many of the other topics analyzed by this report, there is a wide variation in trends by country. Germany, a market more resilient to ongoing turmoil than most, sees only 16% of respondents predicting improvement next year. On the other hand, Spain, a market in some distress, sees 60% of respondents with hopes and expectations of an upturn in equity financing for real estate investments next year.

Further insight on financing options from the survey is available on a country by country basis.

Expectations for revival of Commercial Mortgage Backed Securities market

Equity capital markets will become more attractive for real estate assets


11% 47% 24% 11% 7%Poland

13% 41% 19% 10% 17%France

12% 42% 23% 13% 10%Russia

11% 36% 30% 4% 19%Luxembourg

11% 35% 25% 29%Sweden

12% 34% 23% 8% 23%Austria

8% 35% 37% 8% 12%Spain

4% 37% 26% 24% 9%UK

8% 30% 31% 4% 27%Belgium

4% 33% 35% 22%Netherlands 6%

5% 24% 54% 16%Germany 1%

3% 32% 41% 21%Switzerland 3%

13% 47% 15% 8% 17%Spain

11% 45% 26% 7% 11%Austria

13% 40% 28% 13% 6%Poland

13% 39% 23% 25%France

29% 21% 29% 7% 14%Luxembourg

6% 43% 41% 2% 8%Netherlands

16% 30% 30% 6% 18%Russia

6% 40% 26% 9% 19%UK

8% 28% 24% 8% 32%Belgium

11% 25% 39% 4% 21%Sweden

16% 60% 24%Germany

Switzerland Question not included in Swiss survey


Insurers to provide increased debt fundingAs volatility in capital markets continues, reliance on traditional funding sources is proving challenging. And so attention has turned to “alternative” sources of debt finance such as insurance companies. Over half of survey respondents (55%) believe that insurers are likely to become more active providers of debt financing for real estate assets in the coming year. Given developments around insurance regulation, namely Solvency II, this would seem to resonate. And since insurers often aim to immunize (i.e., match) the time horizons of at least some part of their portfolio with their liabilities, investments in bricks and mortar seem worthy of consideration.

But the picture is not consistent across the European market. While around half of respondents in most countries see increased insurer funding as likely, only 36% of investors in Austria share this view. On the other end of the spectrum, an overwhelming 85% of Germany–based respondents are of the belief that new debt finance is likely to originate from the insurance industry.

Banks to limit funding in some cases Ongoing difficulties in the banking markets have caused a number of high–profile failures and retrenchment from lending to certain asset classes, including real estate. Fifty percent of respondents to our survey expect this trend to continue over the coming year and for lenders to reduce the availability of capital for real estate loans. While other funding sources such as insurers, equity and CMBS may become increasingly available in some cases for lending to real estate in 2012, it is unclear whether these new funds will cover the shortfall from banks who may be stepping back.

The exact level of bank aversion to real estate financing varies substantially by market. Less than one–third of investors in Austria expect such a reduction in funding to occur. While those in neighboring Germany are more pessimistic, with a clear majority of 70% taking this view. The lack of consistency among neighbors, let alone across Europe, in this respect is obvious. Investors wishing to access funds to finance real estate investments would be well advised to seek further insight into market trends.

Insurers to act increasingly as debt providers for real estate assets

Banks to become less willing to finance real estate loans


31% 54% 14% 1%Germany

58% 23% 19%Belgium

14% 41% 18% 2% 25%Netherlands

13% 41% 19% 6% 21%UK

11% 43% 25% 4% 17%Poland


21% 30% 17% 32%Spain

10% 39% 37% 4% 10%Russia

18% 29% 18% 4% 31%Sweden

18% 29% 25% 7% 21%Luxembourg

13% 29% 12% 19% 27%France

11% 25% 25% 39%Austria

26% 44% 24% 5% 1%Germany

4% 47% 35% 6% 8%Russia

9% 42% 19% 6% 24%UK

19% 31% 24% 9% 17%Poland

17% 32% 21% 13% 17%France

21% 26% 28% 4% 21%Spain

18% 29% 32% 21%Sweden

11% 35% 11% 14% 29%Luxembourg

15% 31% 19% 8% 27%Belgium

14% 31% 33% 2% 20%Netherlands


7% 25% 32% 4% 32%Austria

About Ernst & Young

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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Further insight

Contacts

Further analysis of individual markets, transaction pricing and asset classes may be obtained through your usual Ernst & Young advisor, or any of those listed below.

EMEIA TAS Real Estate

Sector Leader - Hartmut Fründ + 49 6196 996 26351 [email protected]

Country

Austria — Alexander Wlasto + 43 1 21170 1306 [email protected]

Belgium — Tristan Dhondt + 32 2 774 6017 [email protected]

France — Jean–Roch Varon + 33 1 46 93 63 89 jean–[email protected]

Germany — Christian Schulz–Wulkow + 49 30 25471 21235 christian.schulz–[email protected]

Luxembourg — Alexander Flassak + 352 42 124 8491 [email protected]

Netherlands — Tristan Dhondt + 32 2 774 6017 [email protected]

Poland — James Foley + 48 22 557 7000 [email protected]

Russia — Olga Arkhangelskaya + 7 495 755 9854 [email protected]

Spain — Francisco Fernandez Romero + 34 915 727 7303 [email protected]

Sweden — Daniel Öberg + 46 70 666 90 82 [email protected]

Switzerland — Rolf F. Bach + 41 58 286 3870 [email protected]

United Kingdom — Fraser Greenshields + 44 20 7951 7151 [email protected]

General Enquiries

Marketing Director — Leor Franks Transaction Advisory Services

+ 44 20 7951 8708 [email protected]

Marketing Director — Karin Vogt Transaction Real Estate

+ 49 6196 996 16230 [email protected]

Acknowledgments

Our thanks to the 534 European investors who contributed to this survey and to the Economist Intelligence Unit for conducting research in 10 of the countries covered.

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