European Real Estate resilient as Continent experiences a period of enhanced economic and political
The real estate market in Europe remains active as much of the region throws off the economic and political uncertainty seen in recent years, according to LaSalle Investment Management’s Mid-Year 2017 Investment Strategy Annual (ISA).
In Continental Europe, the first part of the year produced some encouraging economic data - particularly in the Eurozone. Real estate fundamentals are responding to the improved economic environment, with the office and industrial sectors seeing the strongest performance, the ISA finds. Even in the UK, suffering from weaker-than-expected growth and political uncertainty due to Brexit and the recent general election, the ISA notes a resurgence of investment activity driven by international capital attracted by weaker sterling and more willing sellers.
The ISA also finds that, over the past 18 months, Germany has overtaken the UK as the main driver of investment activity in the region. It also highlights the generally-positive impact that is expected on French real estate markets after the election of Emmanuel Macron as the country’s president.
LaSalle’s twice-yearly ISA looks at investment trends around the world and highlights the best investment opportunities going forward. Mahdi Mokrane, LaSalle Investment Management’s European Head of Research & Strategy said: “There continues to be a number of promising opportunities in the European real estate markets. We have seen political events across Europe continue to shape the way investors should look at the region’s medium-term outlook for real estate fundamentals. Since the start of the year, the newsflow has been quite positive and the political risks we were highlighting last year have receded significantly, particularly in Continental Europe. We recommend that investors should focus on cities and regions that demonstrate both resilience and strong long-term growth potential, in particular where the DTU+E features (demographics, technology, urbanization and environmental) have not yet been priced in. As such, we still firmly believe in the long term drivers of residential, mezzanine and stretch senior lending in the UK, but we have added multi-let industrial and urban logistics development for this year.”
In the UK, the ISA finds the most significant themes this year are:
- Given the chronic undersupply of housing in many parts of the U.K, the residential sector is expected to show capital growth and materially outperform the market average
- An uncertain Brexit process will offer windows of opportunity for long-leased retail. In periods of economic stress, supermarkets and retail parks will be challenged, with episodes of more sellers than buyers. This may present an opportunity to acquire good quality assets with long index-linked leases or well-performing assets at attractive yields
- Given the regulatory framework that traditional lenders are facing, alternative lenders that can offer attractively priced private real estate debt such as mezzanine and stretch senior lending are well placed to generate high yield coupons
- Headline rents in Central London offices have held-up well over the past year but net rents are currently falling. In the event of a hard Brexit, the expected reduction in London operations of a number of banks and EU institutional bodies will significantly impact Central London office rents and potentially create mispriced opportunities
- For more value-add or opportunistic returns, e-commerce and urban logistics will do well: E-commerce-related logistics and urban industrial are in high demand, so higher return-seeking investors should look for development opportunities in undersupplied markets
For continental Europe, the ISA notes:
- Competition for the best assets remains strong, and yields continue to fall. The weighted average prime property yield for all European markets compressed by 5bps to 4.17%, 40bps below the previous low point
- Investors seeking defensive strategies in this mature part of the capital market cycle should focus on centrally-located office submarkets as well as high street retail in cities such as Paris, Copenhagen-Malmö, Amsterdam, and Frankfurt
- As good quality retail becomes increasingly difficult to access, core+ strategies should target medium-sized urban or locally dominant shopping destinations that are in need of some form of asset management activity, particularly in France, Spain, and Poland
- Demand for urban logistics is expected to continue growing and, if the location is well chosen, underlying land values can be expected to rise as populations and the urban fabric expands
Jacques Gordon, LaSalle Investment Management’s Global Head of Research and Strategy, said: “Real estate started off the year with relatively low transaction volume - typical of the first quarter - and a simultaneous pause in the rapid run-up in both pricing and fundamentals that characterized most of last year. Supply-demand fundamentals have not been particularly volatile, and are largely responding to all the structural changes around the world as we predicted six months ago. Secular trends that we have been following for years have received more attention than ever in 2017, such as the rise of e-commerce, the aging of Millennials and Boomers, a bias toward urban and major metropolitan areas in the latest round of new construction, and the rise of the importance of environmental factors for tenant demand and asset-pricing. This report also reinforces the case for adding environmental factors to the DTU secular drivers of real estate demand; as such we do not see the US pullout from the Paris climate treaty affecting the long-term importance of these factors.”
“In our view, the gradual recognition of the DTU+E drivers puts new pressure on investors to find pockets of less-discovered value in less obvious places. In some cases that may mean looking harder at suburban markets or inner-ring urban markets where the ‘big money’ has not yet focused its attention.”