October 29, 2015
Despite continuing geopolitical uncertainties close to home (Ukraine, Greece) the continental European property markets are now on a general upswing which we expect to continue in the medium term. Led by Scandinavia and Germany, and trailed by Italy, every region is anticipating a pick-up in rental growth and continuing falls in yields. In some markets (Germany, Poland) this anticipation is solidly based on continuing positive trends in GDP growth, in other markets it reflects more a sense of hope that 6 -7 years of stagnation must be due to end soon despite any clear evidence it will.
The dominant influence is liquidity, with very substantial amounts of capital from North America, the Middle East and Asia now combining with Eurozone quantative easing. The heady combination of plentiful equity and cheap debt, allied to a perception of relative value and a weak Euro exchange rate, is driving investment flows both into European sub-markets with sound fundamentals and other sub-markets with continuing structural economic issues, high vacancy levels and questionable prospects. Purchasing pressure has driven prime yields substantially downwards and secondary yields are now following suit. Even in markets with 18% vacancy. But where is the rental growth?
There is no doubt that the Eurozone is entering a cyclical upswing but the demographic, competitive and structural challenges faced by the Continent and exposed by the financial crises have not been solved. Consequently, the prospects for real rental growth to justify the inward movement in yields must be questionable. Without this growth, yields will move inexorably outwards as borrowing costs rise later in the cycle and the potential for value loss is substantial.
So in our opinion the winners in European real estate over the next years will be those who can identify and access the sub-markets with real occupational growth prospects ( and there are some) rather than those exhibiting short-term mispricing. The latter may offer an interesting return, but only by a short-term trading strategy. And accessing rental growth in any sustainable way requires local presence, long term.
Guy Barker LLB FRICS
Palmer Capital European Managing Director