In 2016 the UK was the largest commercial investment market in Europe at €59.1bn, followed by Germany at €52.7bn, France at €27.4bn and Sweden at €14.8bn. With the geopolitical landscape looking increasingly uncertain as 2017 unfolds, high competition for prime assets in the core markets is expected to intensify as the established real estate of these countries remains a reliable, transparent and safe place to store value for the foreseeable future.
Indeed, due to downside risks and uncertainty caused by the unpredictable outcome of upcoming elections in France and Germany, investors will look for opportunities that enable them to diversify across sectors, including non-prime, value-add opportunities.
Bearing in mind the increasing competition for the limited supply of product, the geographical relevance of core vs non-core is becoming less important and focus is shifting towards ‘asset fundamentals’. The quality of an asset, its location and micro-market characteristics will be decisive when selecting prime and value-add opportunities across all geographies.
Prime yields for core assets in European gateway cities have moved in rapidly since 2010 as investors have found a new role for real estate in their portfolios and competition for assets has mounted. Despite the fact that prime yields in most locations have reached or even exceeded their past peak, we may see further – albeit modest – yield compression due to the historically low risks.
Given the limited prospects for significant capital growth, investors are searching for sustainable income streams. Markets and sectors with rental growth potential will be high on their agendas. Barcelona, Dublin and Madrid are some of the cities where we expect positive rental growth trends in the retail sector. The first two, alongside Stockholm and Berlin, are also the top cities for office rental growth.
Investors with long-term European strategies are also turning to alternative assets that offer stable income streams in the residential sector. Student housing, healthcare and multi-family assets are gradually becoming more institutionalised and developed and run by specialist developers and operators.
Prime yields in some of these segments can already be quite low but they may offer long-term income stability and rental growth prospects. The markets in the UK, Germany, the Netherlands, France, Spain, Sweden and Finland have already experienced significant investment volume growth in recent years and we expect this trend to continue.
The prospects for commercial property markets depend heavily on the macro-economic situation and it remains to be seen if 2017 will bring more unexpected political or financial shocks. Either way, we believe that European real estate will be a target for European investors, who are looking for less volatile investments and higher returns than the ones offered by other asset classes, and global investors, who seek to diversify and benefit from exchange-rate movements.
Read more: European Investment Briefing