A live poll of 150 real estate investors undertaken at Knight Frank’s annual European Breakfast, held at Claridge’s, London, earlier this month confirmed continuing appetite for European real estate markets despite on-going political uncertainty and a low growth economic environment.
Almost 40% of those polled saw demand for European commercial property being much or slightly stronger in 2017 with a similar proportion believing that there will be a further hardening of yields as a result.
· Geographically, Core Europe remains alluring with a quarter of respondents viewing Germany as their preferred investment market, while more than 1 in 10 regard Benelux as a target market.
· As investors search for value, and as economic fortunes in Europe’s peripheral markets further improve, 15% of respondents also viewed Spain as being firmly in their sights.
· More than a third of respondents chose Industrial & Distribution assets as their preferred sector – reflecting, in part, the strength of underlying occupational demand as retailers continue to overhaul their supply chains
· Second, the specialist asset classes – hotels, healthcare, automotive and student accommodation – are being targeted by almost a quarter of those investors surveyed – reflecting an appetite for diversification and income security as well as a means of accessing assets that will benefit from longer term structural shifts in Europe’s demography.
The survey also provided insights into how Brexit is influencing investor sentiment. More than half of the investors surveyed believe that the exit of the UK from the EU will bring an increase in European leasing transactions while a further third saw no tangible impact in Europe’s occupational markets. The impact of Brexit on investor strategy had a similar tone – with 4 in every 10 respondents believing that the decision taken by the UK will fuel increased allocations to European Commercial real estate going forward, while a third suggested that their investment strategy remains unaltered.
Occupier markets
Despite continued political uncertainty and noise around the risks to the future of an integrated Europe, leading indicators suggest that the European economy remains on the path of moderate recovery. Europe continues to support fully functional real estate markets that present opportunities and robust performance.
Occupier market activity has remained strong across a range of European cities in 2016. Aggregate office take-up in the major markets monitored by Knight Frank has risen significantly, and rental growth has continued in core cities, fuelled by robust and improving demand coupled with impoverished levels of quality supply.
A number of European markets are now seeing prime rental levels at a 10-year high – notably the major German markets, Stockholm and Amsterdam. However, prime rents remain below their 10-year highs in a substantial number of other markets, suggesting that there is significant rental growth potential before new market benchmarks are achieved. Madrid, Prague and Warsaw are all notable in this respect while Paris is still short of that 10-year high-water mark.
Knight Frank has observed increased demand for office space in Tier-2 cities on the back of the primacy of creative and tech industries. Particularly dynamic take-up trends have been seen in cities such as Berlin and Dublin, as well as in markets such as Warsaw and Prague, which have benefited from demand generated by business restructuring and business process outsourcing.
Lee Elliott, Head of Commercial research commented: “As the noise produced by European politics gets ever louder, the region’s occupational markets continue to function. The growth of tech and creative industries in markets such as Dublin and Berlin has been one source of activity, while an unprecedented phase of business restructuring has fuelled demand in markets such as Warsaw, where talent is available alongside operational cost advantage. Although increased business caution may feature as the Brexit divorce proceeds, for the time being disrupted occupiers continue to seek space solutions across Europe.’”
Capital Markets
Although European commercial property investment volumes have decreased year-on-year, 2016 remains on course to be the second most active year since the Global Financial Crisis.
Real estate continues to be an attractive asset class when set against a backdrop of negative German government bond yields and 10-year euro swap rates at just 0.3%. Rental growth is coming through and a new wave of capital has emerged from Sovereign Wealth Funds and High Net Worth Individuals.
Knight Frank predicts further capital growth across a number of major European markets. Rising capital values will be increasingly driven by rental growth, particularly in core cities. Investors prepared to take vacancy and void risk in established locations will prosper on the back of the improving occupational markets.
While the pace of yield compression is expected to slow, there is room for yields to harden further in specific markets, as part of an on-going adjustment to the current low interest rate environment. Prime yield compression is most likely in those markets that have a slight delay in performance, such as Amsterdam, Berlin, Dublin, Madrid and Stockholm.Investment transactions in Germany, France and the Netherlands may slow due to hesitation over elections in 2017; however, as with the Scottish and Brexit referendums, this may only be a temporary slowing of activity before the markets recover.
Mike Bowden, Partner, European Capital Markets, commented: “European real estate continues to have excellent fundamentals, despite the political uncertainty that clouds the outlook for the next 12 months. While it is understandable that this will lead to some investor caution, we advise investors to continue with their current investment strategies and take opportunities where they can. Investors should remain patient as there will be opportunities that will inevitably arise from political instability during 2017.”
