PERE’s latest capital raising survey indicates €73.6 billion of private equity targeting European real estate was raised in 2021, up from €70.7 billion in 2020. Interestingly, the proportion of capital targeting logistics fell from 48 per cent to 42 per cent as residential became the dominant sector and as offices and hospitality proportions rose year on year.

Value add investors, led in many instances by private equity houses, seeking to asset manage office stock to improve ESG ratings will grow as a trend over the next couple of years. Indeed, the average yield spread between BREEAM-certified and all offices has widened by 44 basis points over the last 12 months as obsolescence risk becomes more apparent.

Resilient investment performance throughout the pandemic and the sector’s relative appeal against bond and equity markets over recent years has resulted in capital allocations to property rising from 11.7 per cent in 2021 to 12.3 per cent in 2022 across EMEA, according to Cornell University’s allocation survey, with income-producing real estate continuing to be seen as attractive.

The big shift in sentiment is that value-add has now become the most dominant investment strategy for European investors in 2022, according to INREV’s investor intentions survey, leapfrogging core strategies, which were in the ascendancy during 2021.

M&G Real Estate, for example, is working on the creation of its first European-focussed value-add fund. In light of the weight in capital which continues to focus on logistics, residential and core office sectors, we envisage some investors will be pushed up the risk curve by stubbornly full pricing and strong competition in these more sought-after sectors as they seek to fulfil their target returns.

Investors will continue to monitor inflation and the impact this will have on risk free rates, rent indexation and construction costs. Given interest rate rises observed in South Korea, and as anticipated in the US, currency-plays will likely become increasingly apparent for non-European investors.

This is particularly the case given the higher levels of domestic investment we have observed in the US and South Korea during 2021 compared to the five year averages, propelling investors to seek out geographical diversification.

We anticipate that these two investor groups will be competing for similar assets in 2022, namely large income-producing office blocks in consolidated, inner city submarkets of key European gateways. Middle Eastern outbound capital will seek to diversify a long-income office strategy across Europe, targeting markets in Italy, the Nordics, Belgium and Ireland where they have historically been less present.

Further information

Contact James Burke or Mike Barnes

Savills Investment Capital Markets