European property investors forego yields for stability

Aug.August 13, 2012 01:30 PM

Frightened by the debt crisis, European real estate investors are focusing on safe bets in financially stable cities, such as London, Paris and Berlin. But according to Reuters, in doing so, these investors are losing out on better deals in smaller cities. The best office spaces on the best blocks in London’s financial district yield approximately 5.5 percent in annual rent as a percentage of the property’s value and London’s luxury retail properties in prime locations often produce yields below 4 percent.

But property yields are significantly more rewarding in regions where investors have been scared away. And properties in these locations with long-term leases can be just as stable.

For example, Fidelity Worldwide Investments, which owns an office block in the small British city of Bournemouth, sees an 8.25 percent yield on the property without much risk, since it is leased to a government agency for eight years. According to Matthew Richardson, Fidelity’s director of European real estate research, the property could lose 52 percent of its value and it would still prove a better return on investment than a government bond.  “You can’t assume all property outside the best areas is junk,” Richardson said.

The trend has proven true in New York City, too, where foreign investors have focused almost solely on top-tier properties that generate the smallest yields. [Reuters]Christopher Cameron

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