CANNES, France (Reuters) - Real estate investors are venturing out from the safety of the best buildings in Europe to gamble on edgier properties in a sign of risk-taking creeping back into the market as the euro zone crisis recedes.
Buildings that are partially or fully vacant, with short periods left on the lease or in need of a revamp, are in demand when they weren't 12 months ago, some of the world's biggest property funds told Reuters at the annual MIPIM property conference in Cannes this week.
"We are interested in slightly compromised real estate," said Charles Weeks, chief executive of Cornerstone Europe, which has $37.3 billion (24.9 billion pounds) under management worldwide.
"Yields on core London properties may be 4.75 percent to 5 percent. Compromised real estate in the same area may be 5.75 or 6 percent."
Real estate yields are the annual rent as a percentage of a building's value and are lower in more in-demand locations.
It's a different picture from last year, at the height of Europe's sovereign debt crisis, when lending froze especially to weakest members Italy, Spain, Ireland, Greece and Portugal, and even threatened at one point to break the euro zone apart.
Then, investors focussed on lower-yielding but safe properties in the best areas of cities like London, Paris and Frankfurt 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 the global market turmoil helped drive office prices in the city centre up 52 percent between mid-2009 and the end of 2012.
"We are looking at a fully vacant office block in a good location in Munich that we wouldn't have 12 or 18 months ago," said Martin Lemke, managing director of German fund Patrizia GewerbeInvest P1ZG.DE that has 7.7 billion euros of assets under management. "We're also looking at short leases or where there is some refurbishment to be done."
As well as riskier properties in good locations, investors are looking at European markets where yields for the best real estate can reach seven or eight percent versus four or five percent for the top cities.
"Broken property in core locations and core property in broken markets like Spain and Italy is the new trend," said Borja Sierra, chief executive of continental Europe at real estate consultant Savills (SVS.L).
Two of the world's biggest property funds, Axa Real Estate AXA.PA and Deutsche Asset and Wealth Management (DBKGn.DE), which have almost 100 billion euros under management between them, said they were looking at high quality office properties in Milan.
"We are doing due diligence on a Milan property in a good location on a long lease at 7.5 to 8 percent," said Axa Real Estate chief executive Pierre Vaquier.
"We believe the spreads between prime and secondary assets are at very interesting levels," said Pierre Cherki, head of alternatives and real assets at Deutsche Asset and Wealth Management, who said prices for top property in the best locations were "very aggressive" due to the influx of wealthy individuals and sovereign wealth funds that have parked cash there during the financial crisis.
Other areas outside the top locations where Deutsche is looking include Marseille, Lyon and towns and cities along the M4 motorway that runs west out of London where yields can reach 7 percent or above as opposed to 5 percent in central London, Cherki said.
The search for higher returns is also being driven by the fact that "sitting on the sidelines and making sure you don't lose money is no longer an option," said Dennis Lopez, Axa Real Estate's chief investment officer.
"Pension funds are looking for returns of six to eight percent and insurers six percent, which is driving more money into real estate and away from low-yielding government bonds."
Yields on 10-year benchmark UK government bonds are hovering around 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, though Europe would be held back by the lack of financing from non-bank lenders like insurers and the commercial mortgage-backed securities market, both of which are better established in the United States.
"There will still be bumps in the road like the Italian election but our view is that there is light at the end of the tunnel," he said, referring to the February poll that left no party able to form a government.
"We can't factor in the risk of the euro zone falling apart but we can with prolonged weak growth or lack of growth."
Clients of architect Aedas, one of the top five biggest practices in the world, are increasingly looking at development projects in Spain, considered almost untouchable during the crisis, said chief executive David Roberts.
Developing from scratch involves a much higher risk than buying an existing building with tenants already in place as investors are exposed to planning that can get mired in bureaucracy and construction projects that can go wrong.
Architects are among the first to know about development plans and a good barometer for future trends.
"You are talking about opportunity funds from North America and Europe and it's mainly schemes in Madrid and Barcelona with a leisure element," Roberts said.
"We are getting a lot of enquiries about what schemes would look like and the financial modelling. It's not huge numbers but the fact they are looking at all is interesting."
Editing by Sonya Hepinstall