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Funds Show Risk Appetite by Spending on Development

Money managers will allocate more capital to European funds backing construction projects as they see short-term value in taking on more risk, according to a survey published today.

Twice as many investors and money managers than last year plan to buy into value-added funds, or 43 percent of the 155 surveyed by the European Association for Investors in Non-Listed Real Estate Vehicles. Value-added funds increase returns by investing some of their capital in property development or in space that may become vacant and then leasing it.

“Investors are beginning to look for opportunities further up the risk curve as opposed to concentrating solely on core, which has dominated the market for the last couple of years,” said Casper Hesp, director of research and market information for the Amsterdam-based association.

Real estate lending in western Europe will continue to stagnate this year as banks shun risk, Matthew Cutts, head of lenders and investors at London-based EC Harris LLP wrote in a document posted to the consulting firm’s website yesterday. That makes development appealing to European funds because the shortage of bank financing for construction means fewer new offices and shopping malls and less competition for tenants.

Germany is Europe’s top location for investors, fund managers and “fund of funds” managers, according to the survey. Scandinavia was the second choice for investors and the U.K. was No.2 among fund managers and fund of funds managers.

The group defines core as a fund that invests mainly in income-producing investments, has low debt, little or no development exposure and generates a high proportion of return through income.

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