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By Tom Bill
CANNES, France, March 14 (Reuters) - Real estate investorsare venturing out from the safety of the best buildings inEurope to gamble on edgier properties in a sign of risk-takingcreeping back into the market as the euro zone crisis recedes.
Buildings that are partially or fully vacant, with shortperiods left on the lease or in need of a revamp, are in demandwhen they weren't 12 months ago, some of the world's biggestproperty funds told Reuters at the annual MIPIM propertyconference in Cannes this week.
"We are interested in slightly compromised real estate,"said Charles Weeks, chief executive of Cornerstone Europe, whichhas $37.3 billion under management worldwide.
"Yields on core London properties may be 4.75 percent to 5percent. Compromised real estate in the same area may be 5.75 or6 percent."
Real estate yields are the annual rent as a percentage of abuilding's value and are lower in more in-demand locations.
It's a different picture from last year, at the height ofEurope's sovereign debt crisis, when lending froze especially toweakest members Italy, Spain, Ireland, Greece and Portugal, andeven threatened at one point to break the euro zone apart.
Then, investors focussed on lower-yielding but safeproperties in the best areas of cities like London, Paris andFrankfurt in an effort to simply preserve their money. Now,institutional investors are demanding higher returns.
London's reputation as a so-called safe haven during theglobal market turmoil helped drive office prices in the citycentre up 52 percent between mid-2009 and the end of 2012.
"We are looking at a fully vacant office block in a goodlocation in Munich that we wouldn't have 12 or 18 months ago,"said Martin Lemke, managing director of German fund PatriziaGewerbeInvest that has 7.7 billion euros of assetsunder management. "We're also looking at short leases or wherethere is some refurbishment to be done."
As well as riskier properties in good locations, investorsare looking at European markets where yields for the best realestate can reach seven or eight percent versus four or fivepercent for the top cities.
"Broken property in core locations and core property inbroken markets like Spain and Italy is the new trend," saidBorja Sierra, chief executive of continental Europe at realestate consultant Savills.
MILAN, MARSEILLE AND THE M4
Two of the world's biggest property funds, Axa Real Estate and Deutsche Asset and Wealth Management,which have almost 100 billion euros under management betweenthem, said they were looking at high quality office propertiesin Milan.
"We are doing due diligence on a Milan property in a goodlocation on a long lease at 7.5 to 8 percent," said Axa RealEstate chief executive Pierre Vaquier.
"We believe the spreads between prime and secondary assetsare at very interesting levels," said Pierre Cherki, head ofalternatives and real assets at Deutsche Asset and WealthManagement, who said prices for top property in the bestlocations were "very aggressive" due to the influx of wealthyindividuals and sovereign wealth funds that have parked cashthere during the financial crisis.
Other areas outside the top locations where Deutsche islooking include Marseille, Lyon and towns and cities along theM4 motorway that runs west out of London where yields can reach7 percent or above as opposed to 5 percent in central London,Cherki said.
The search for higher returns is also being driven by thefact that "sitting on the sidelines and making sure you don'tlose money is no longer an option," said Dennis Lopez, Axa RealEstate's chief investment officer.
"Pension funds are looking for returns of six to eightpercent and insurers six percent, which is driving more moneyinto real estate and away from low-yielding government bonds."
Yields on 10-year benchmark UK government bonds are hoveringaround two percent and 1.5 percent in Germany.
The European recovery mirrors that of the United States,which Lopez said was about two years more advanced, thoughEurope would be held back by the lack of financing from non-banklenders like insurers and the commercial mortgage-backedsecurities market, both of which are better established in theUnited States.
"There will still be bumps in the road like the Italianelection but our view is that there is light at the end of thetunnel," he said, referring to the February poll that left noparty able to form a government.
"We can't factor in the risk of the euro zone falling apartbut we can with prolonged weak growth or lack of growth."
Clients of architect Aedas, one of the top five biggestpractices in the world, are increasingly looking at developmentprojects in Spain, considered almost untouchable during thecrisis, said chief executive David Roberts.
Developing from scratch involves a much higher risk thanbuying an existing building with tenants already in place asinvestors are exposed to planning that can get mired inbureaucracy and construction projects that can go wrong.
Architects are among the first to know about developmentplans and a good barometer for future trends.
"You are talking about opportunity funds from North Americaand Europe and it's mainly schemes in Madrid and Barcelona witha leisure element," Roberts said.
"We are getting a lot of enquiries about what schemes wouldlook like and the financial modelling. It's not huge numbers butthe fact they are looking at all is interesting."
