The European real estate outlook has in the last 12 months been marred by political uncertainty think through the Dutch, French and German elections as well as the shadow of Brexit that has been hanging over the region. The continent has however been rather resilient, lifted by sustained flows of capital from investors globally. European investment volumes for the first half of 2017 came in at $114 billion, a 7% improvement on the same period in 2016, this according to real estate experts JLL.
It would of course be an overstatement to say that fears and uncertainty have evaporated. There is no debating that much work is still needed on the Brexit front, but, by-and-large, the predictions of a crashing UK economy and a subsequent wave of depression overtaking Europe and beyond has largely been relegated into the "got that wrong" archives.
From a macro-economic standpoint, the historically low interest rate environment is also expected to persist, supporting real estate assets in the short- to medium-term future.
Market returns have been somewhat disappointing however. Consider the FTSE EPRA/NAREIT Global Real Estate Index Series which shows that European REITs and listed real estate companies performed poorly relative to the rest of the world.
Total returns in USD for period 1 January 2017 - 31 July 2017:
European component: 1.7%
Global (excluding European component): 10.1%
A few choice highlights
The United Kingdom
The UK markets have surprised many given the doom-and-gloom forecasts and initial market reactions to the "leave" vote. But as reported on previously, the housing market has fared surprisingly defensively and investment activity was on the up, rising around 18% in the first half of 2017.
"If there’s a country where we’ve been positively surprised about investment volumes, it’s the UK," says Peter Papadakos, managing director at Green Street Advisors in London.
Hans Op ’t Veld, head of listed real estate at Dutch pension fund PGGM, has indicated that "the [UK] investment market looks pretty good, particularly prime assets in London. Pricing has held up quite well so far."
There are currently around 50 UK REITs, a milestone number hit in a milestone year for the industry, as 2017 marks 10 years since the first UK REIT was created.
German real estate investment has been a favourite pick among Global Listed Property Fund managers for a number of years now and JLL’s data indicates a 25% upswing in investments flows this year up until the end of July. The attraction in Germany continues to be the relatively cheap access to financing, the stellar demand for accommodation, especially, and the relatively cheaper entry price compared to more expensive markets like France and the UK.
But while residential property in Germany has attracted much interest over the last 12 to 18 months particularly, the office market is also emerging as a growing sector of interest to investors. According to Steve Buller, portfolio manager at Fidelity Investments, rental growth in the office segment of the market in cities such as Hamburg, Frankfurt and Berlin are all positive signs for that space.
President Emmanuel Macron has managed to, in a very short period of time, strengthen investor confidence. By virtue of defeating a populist threat at the poles and then going on to (so far) say the right things, expectations are currently high in France that Macron will steer the country forward economically.
Joe Valente, head of research and strategy for European real estate at J.P. Morgan Asset Management, has been on record recently as saying that the French real estate offering is a "hot market." One need only look at the enormous flows coming into the market, predominantly in the open-ended fund space to see his point.
Spanish real estate investment volumes have surged 51% in the first half of 2017 according to JLL. Even South African REITs have been buying up Spanish assets. In July of this year I penned a piece about JSE-listed REIT, Vukile Property doing just this: ’Hola’: Vukile Property make inroads into Spain.
Spanish real estate makes up a relatively small part of the global institutional market, but choice assets are fetching good prices and the interest is growing encouragingly as the general economy continues to improve and investor confidences picks up.
REITs have been established in a number of major European countries, but of interest to the global investor will be the new opportunities in Europe, most notably, in Poland.
Again, South African listed REITs haven’t been shy in upping their exposure to Polish assets recently. Here’s an article I wrote about the topic earlier in the year: Why Are JSE REIT Investors Infatuated With Poland?
Polish REIT legislation is widely anticipated to be entrenched in law in early 2018, welcome news considering Poland is the most developed financial market in Central and Eastern Europe. The country also boasts the most sizable stock exchange in the region.
Schroders, the popular Asset Manager, are projecting annual total returns of between 5% and 7% for investment-grade European real estate between 2017 and the end of 2020. The growth is expected to come from a stable increase in rental growth over the same period.
Sara Borchersen-Keto - European Real Estate Investment Outlook Looks Bright – REIT.com
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: firstname.lastname@example.org
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.