European real estate investors eye infrastructure in 2009

A survey of European real estate fund managers and investors also reveals that private property vehicles and ‘conservative’ institutional investors will be the investment driving force in the next 12 months.

European real estate investors are beginning to look more to infrastructure as a place to invest, though private property funds are set to be the main driving force behind investment in the European market after raising more than €23 billion in equity during 2008.

Anything that is government-backed is a good place to be in this environment.

Survey respondent

The PricewaterhouseCoopers/Urban Land Institute 2009 Emerging Trends in Real Estate Europe report revealed that, while few investors have yet moved into the asset class, more are looking into it this year.

One survey participant admitted taking stakes in global infrastructure funds to gain experience in the asset class, while others said “road infrastructure,” “energy parks and cable networks” were good sectors for investment. “Anything that is government-backed is a good place to be in this environment,” one respondent told the report.

The heightened interest in infrastructure is part of a larger trend of investors looking to more niche property sectors, including student housing, self-storage, caravan parks, nursing homes, health care facilities, car parking, data centres.

But funds with capital are not planning a buying spree just yet – with many planning to “keep” their powder dry amid expectations valuations across the continent will drop further.

The report said many funds were “hunkering down in the trenches” as they tried to deal with falling prices and declining fund valuations, which were endangering both banking covenants and managers’ fees.

As one fund manager told the report: “I have told my people, ‘Let’s keep our powder dry, watch the market, and then strike.’ ”

Private property funds own approximately €280 billion of European real estate, about two-thirds of it continental and one-third in the UK. According to Morgan Stanley, the report said, more than €10 billion of that was owned by funds whose LTV covenants were more than 75 percent. “That is, either already or in danger of going under water,” the report added.

Germany emerged as a top destination for investors in 2009 as many seek safety from volatile markets.  Munich and Hamburg were the top two investment destinations, the report said, followed by Istanbul, Zurich, London and Moscow. Munich and Hamburg were in fourth and third place respectively in the 2008 report.