Hot European Property Worries Investors Partying to Moulin RougeNeil Callanan and Patrick Gower
At the door of the Tristan Capital Partners party at the MIPIM real estate conference in Cannes, France, invitations to the most raucous party of the week are as scarce as the trophy properties investors are trying to buy.
Doormen scrutinize their clipboards as developers and brokers not on the guest list try to sweet-talk their way in to the Moulin Rouge themed party. The free-flowing champagne inside isn’t enough to wash away concerns among the biggest players that there’s a bubble building in the market for the best properties.
“It’s like 2006 again, it’s frightening,” Joe Valente, head of research and strategy at JPMorgan Asset Management, said before Wednesday’s party. “There’s excess capital chasing scarce stock. The only big difference is debt, which was readily available back in 2006 and isn’t as available today.”
Record-low returns from fixed-income investments has spurred money managers to buy real estate in a search for yield. Institutional investors will spend an additional $52.5 billion on real estate this year, with Europe a key target as funds increase their appetite for risk, broker Colliers International forecasts.
“We’ll not do trophy assets because they are too expensive,” Pierre Vaquier, who manages 54 billion euros ($57.3 billion) of property assets as chief executive officer at Axa Real Estate, said in an interview on Tuesday.
The surge in cash chasing real estate investments will push up values of the best properties in European cities, broker Cushman & Wakefield Inc. said March 10. It forecasts an 11 percent rise in the value of income-producing properties sold globally this year to 1.2 trillion euros.
“You have a lot of people who, without doing anything, make quite a lot of money and feel very smart,” Vaquier said. “Let’s be honest, what is the contribution to that? You need to be a bit disciplined to look at the situation.”
The gap between value gains and rent increases for commercial property in Europe’s most popular markets widened to 37 percent in the first quarter, the most since 2007, and compares with a 15-year average of 15 percent, according to data compiled by broker Savills Plc.
“It’s getting expensive and overpriced,” said Dennis van Vugt, chief financial officer and chief operating officer at CBRE Global Investors, which manages $90.6 billion of real estate. “In some areas you can justify it by pointing at some of the rental growth, but generally the yields are very low. Then again we’ve never had a situation where the interest rate was” effectively zero until now.
The risk now is that investors will buy lower quality, non-core properties because they’re cheap by comparison, van Nugt said Wednesday.
“If you’re an institutional investor and you’re looking to invest in core but you can’t find anything, the temptation is you begin to stray,” said Valente. “That’s the surest way of losing money.”