A week or so back, we completed our transaction-by-transaction count of direct commercial real estate investment in Europe. The result? A slight slowdown in activity in Q3, though still up on a year ago. It’s normally slower in the summer, true, but I think an additional reason is the perception that prices have risen too sharply against the fragile economic and occupational backdrop. This is particularly true in the UK where investor confidence has softened ever since the end of 2009, following an enormous bounce back in returns.

The UK, where the recovery has been the earliest and the strongest so far, has been the focus for many of the global funds, accounting for 43% of total European investment – the highest proportion since 2002. And due to the imbalance of supply and demand, I am certain the performance of high quality assets will continue upward as long as supply remains low.

It seems crazy that the best thing to do in a commercial property crisis is to keep your head in the sand. But this broadly characterises the behaviour of the banks… but maybe turning a blind eye will prove the best option with bad loans. The ‘close your eyes and cross your fingers’ policy, whilst hoping that a rebound will solve all the problems has so far supported investment values through limited supply of investment stock. But how long can this policy be maintained?

There seems to be a significant disconnect between what investors hope to achieve, and what is feasible in a market that remains fraught with challenges. Key to this is the continued lack of financing, the gap between buyer and seller price expectations, and uncertainty over the volume of distressed properties coming to the market. The banks’ behaviour has been facilitated by massive government intervention, in some cases nationalisation. This has meant that banks haven’t had to mark their loans to market. Unless banks are forced to act, they will continue to release properties slowly and spread the pain as long as possible.

Consequently, I think waiting for a flood of distressed assets is an act of self-delusion. Investors will have to take on more risk to generate higher returns or adjust their return expectations.