Perspectives on the Investment Market in 2011

What conditions are needed to stimulate the investment market to rise?

With a better economic climate than at the beginning of last year, a return to confidence and lowering of risk aversion for many real estate players allows some optimism for 2011. The foundations for a gradual return of investment activity seem to be emerging, suggesting that 2011 may be a more dynamic year.

  • The primary guarantor of the success of the investment market is the rental market which will be active, building on the strong return of service sector businesses.
  • Banks’ increased activity will, in turn, support the efforts of investors and help facilitate their market access. They appear less timid, as evidenced by a few property transactions in late 2010.
  • In parallel, the emergence of new European “mezzanine” funds, such as those launched recently by AXA REIM, M&G or Matrix, could effectively support the banks in financing part of their debt.
  • Finally, the market has a large reserve of equity (mainly resulting from family offices and HNWIs) dedicated to real estate, and just waiting to be astutely invested.

We are hopeful that the incoming reforms of Basel III and Solvency II will not significantly hamper the aims of banks and insurance companies and that the market context should eventually show itself as favourable, in line with forecasts.

So even if “core” assets are still rare, the supply of investment products should increase slightly, with some investors taking advantage of low interest rates to improve their portfolios. In this regard, certain transactions are currently being discussed at yields approaching 5%. The expected decrease in activity from German open-ended funds should not have negative effects. A divestment strategy by these funds may give the market a number of “core” assets, and indeed create movement in the investment market.

On the other hand, a tight supply of new space in 2012 could encourage risk-taking by investors, especially since developers still have an adequate reserve of land to accommodate the short-term needs of the market and encourage investors to take new positions. This renewed investor confidence could even make them consider less secure assets at higher yields.

What is currently the typical profile of the investor in office property in Luxembourg?

The investment market in 2010 was mainly composed of foreign investors (60%) of institutional profile, oriented towards secure income-generating assets (core or core +), namely office buildings. Given the new environmental regulations, investors seem more attracted to green buildings which, contrary to older stock, will not require additional capital expenditure to bring up to expected standards.  Such green buildings will become increasingly attractive to both occupants and investors.

What is your slogan for 2011?

Ours is “Confidence returns, prudence prevails”. Do you have a better one? Tell us in comments below this post.

Note: This post is adapted from an article published in French in Le Jeudi in February 2011.

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