The amber light in real estate investment is turning green in Europe.
The economic factors behind real estate investing remain volatile, consultants and managers said. But there are signs of life returning to the sector in Europe — managers are beginning to market new funds following record lows in fundraising in the past year.
European institutional investors, who historically have allocated a larger portion of their portfolios to property than their U.S. counterparts, are preparing to diversify their real estate portfolios, which in many cases still show an overwhelming domestic bias compared with other asset categories. With valuations severely depressed in core markets, including the U.S., U.K. and Japan, the timing might be right to adjust their real estate portfolios, consultants said.
In addition, some European institutions are increasing their real estate investments.
Among the investors diversifying and/or raising their allocations are the £34 billion ($55 billion) BT Pension Scheme, France's e7 billion ($10 billion) French Public Service Additional Pension Scheme, Denmark's e6.2 billion Doctors' Pension Fund, the 24 billion Danish kroner ($4.5 billion) Danish Pension Fund for Engineers, Britain's £1.8 billion Avon Pension Fund and the £550 million London Borough of Islington Pension Fund.
“We've never been busier, both on the client side and on the investment side,” said Jack Foster, New York-based managing director and head of global real estate at Franklin Templeton Real Estate Advisors, which launched two opportunistic funds in Europe and the U.S. earlier this year. “Investors are seeing value in real estate.” Franklin Templeton manages about $4 billion in real estate strategies.
Others are more skeptical about investor sentiment.
“I don't see investors who are already in real estate running away (from the asset class),” said William Hill, head of property at London-based Schroders PLC, which had £7.3 billion in assets under management as of March 31, “but there's still some hesitancy to increase allocations because they don't want to get back into it at the wrong time.”
Investors are finding different ways to lower risk and gain more stability in their real estate portfolios, consultants and managers said. Diversification has become more important as many investors discovered in the past two years that strategies using listed securities displayed a higher level of correlation to stocks than previously realized. Liquidity constraints are being lifted, prompting investors that have traditionally favored direct domestic real estate to find more efficient ways of tapping into the market. Investors will also be much more cautious when investing in leveraged strategies in real estate, mirroring a similar trend in other asset classes.