Europe set to attract greater real estate capital flows thanks to trends linked to Demographics, Tec
1 July 2014 - Global investors are increasing their allocations to European real estate, with growing interest in some of the markets most affected by the financial crisis, according to LaSalle Investment Management’s Mid-Year 2014 Investment Strategy Annual (ISA).
LaSalle’s twice-yearly ISA looks at investment trends around the world and highlights the best investment opportunities going forward. The global report reveals that the starkest upside surprises are found within Europe—the fastest growing G-7 countries in 2014 (UK and Germany), the biggest drops in sovereign rates (Ireland, Italy and Spain), and the most creative Central Banks (the ECB’s negative interest rates and the Bank of England conditioning the market to expect rising interest rates).
Mahdi Mokrane, LaSalle Investment Management’s Head of Research & Strategy, Europe said: “The positive momentum in Europe is probably well grounded and it is no surprise that global investors are up-weighting to European real estate. Capital flows into the region continue to progress and there is now increased appetite for risk in Core markets and more interest in markets that were previously not on international investors’ radar screens such as Spain, Italy and Central Europe.
“However these broad trends can’t hide the fact that Europe’s real estate markets continue to run at different speeds. At the forefront is London and the wider South East UK, which boast both appealing real rental growth prospects in central locations, along with more attractively-priced income in London’s transit-linked submarkets such as Hammersmith, King’s Cross or Farringdon. We believe long-leased (inflation) index-linked assets in alternative sectors such as student housing, hotels, and healthcare, are attractive for defensive core strategies. Whilst there are mounting risks of an overheating housing market in parts of London, the supporting values in this undersupplied sector bode well for many residential or lodging-based investment strategies. This extends to the private rented residential sector and hotels.”
Other key findings about the European market from the ISA include:
LaSalle continues to believe in the benefits of near-Central Business District office strategies linked to Demographics, Technology and Urbanization (DTU) trends in Gateway cities such as London, Paris, Berlin and Munich
Alongside the UK, the other attractive higher-growth markets in Europe are Sweden and Poland
Value added strategies in the UK include undertaking refurbishments, securing tenants for larger schemes prior to construction, or forward-funding existing projects. The best prospects are for those locations that are aligned with once-in-a-generation infrastructure projects such as London’s Crossrail scheme linked to changes in DTU. Mokrane added: “Moving up the risk curve, we think there is a case for office development strategies in Paris whose market is less reliant on an expanding economy and Germany where we expect solid city–level growth for Tier 1 cities. Both strategies capitalize on a long-standing undersupply of modern stock in key occupier markets.”
Looking at the global real estate market as a whole, Jacques Gordon, Global Head of Research and Strategy for LaSalle Investment Management said: “The fifth year of a below par recovery in the broader economy is slowly improving the fundamentals of global real estate demand. The result is that real estate prices are rising faster than net operating income and so yields and expected returns continue to fall, on a go-forward basis.
Our guidance at the beginning of the year to seek out themes linked to Demographics, Technology and Urbanization to boost NOI and counteract the tendency for returns to fall in a low-interest rate environment, has worked out very well for many of our portfolios. The challenge now is that these themes are becoming much more in the mainstream and the growth is getting fully-priced.”
Some of the trends from other regions that the ISA found include:
US and North America
- Ongoing DTU trends will provide benchmark-beating strategies across all property types
- Value add and build/renovate to core strategies are increasingly attractive in the US given high takeout values and improving economic growth and real estate fundamentals
- Retail is LaSalle’s top core property type, but higher prices have made the sector less compelling
- Given low yields for core properties, some specialty/niche property types such as medical office, parking and truck terminals will deliver higher long-term returns
- Industrial and edge of CBD offices remain top picks in Canada
- In Mexico, strong industrial and office markets support our overweight in US dollar denominated industrial and office properties, with good opportunities across the risk spectrum.
- REITs had a record equity raising year in 2013 and while that slowed in early 2014, a recent upswing in performance could reverse that trend
- Private equity fundraising has also been on the rise, although not yet on the scale of 2006
- The competition for core assets is intense and in most markets they are fully priced
- Stabilized logistics is also one of the better core options in the region and our unlevered return forecast of 6% or over is broadly in line with the ISA
- Japanese suburban retail remains one of the few core sectors which are attractively priced.