Europe offers a combination of safe havens and high-risk opportunities, but no investor can ignore the undercurrent of uncertainty
On top of sharpening prices and improving economies across the continent, investment volumes into Europe are predicted to rise by as much as 13% this year. And with Western Europe fuelling global investment alongside North America, the evidence suggests that European real estate is stabilising after a rough few years.
But it is a story of improvement rather than exponential growth. And while some markets are recovering fast, others are still struggling and there is the added impact of geopolitical risks to consider – particularly in countries that border the Middle East.
There are some regions that will continue to attract investor interest thanks to their safe-haven status and particularly strong economic foundations. These include the UK, Germany and the Nordics. Then there are those like Ireland and Spain, which are more likely to be popular thanks to a plethora of opportunities to buy up distressed stock.
For investors with a greater appetite for risk, Turkey has been named as an attractive option, not least because Istanbul is predicted to be the fastest growing city in Europe over the next 25 years (see feature overleaf). But political uncertainty in the Middle East could have an impact on this part of Europe.
Moscow has also been highlighted by Cushman & Wakefield as a growth market – although the combination of tough times for the Russian economy caused by falling energy prices and the political issues with Ukraine makes this one for only the bravest of investors.
Commercial hotspots
Occupier activity across Europe is improving, according to Cushman & Wakefield – up 3.2% on 2013 – with the most active markets named as the UK, Germany and Sweden in the west and Hungary and Poland in the east.
Second-tier cities have also been highlighted as major commercial growth areas, led by Amsterdam, Madrid (see city guide below), Milan, Warsaw and Brussels, plus the gateway cities of London, Frankfurt, Paris, Stockholm, Munich and Berlin.
For opportunistic investors, other than Istanbul and Moscow, Cushman & Wakefield has highlighted Lisbon as one to watch.
Residential hotspots
The UK in general and London in particular remains the safe haven for investment in the residential sector. While Germany boasts a strong economy, the country’s prolific rental culture makes it a less attractive option for overseas interest in this sector.
Foreign developers including Knight Dragon, Greenland Group and, now, China Vanke have swooped on the London residential market. And at a Hong Kong property exhibition in February where a Hyde Park scheme was being sold to overseas buyers (see feature on page 38), the consensus was that if they weren’t going to buy in the UK capital they would rather look to New York or Sydney than other European cities.
But caution should still be exercised as with rising prices. There are concerns surrounding London’s affordability and the threat of a bubble.
Growth areas
Infrastructure is worth keeping an eye on. Not just in cities such as London and Paris, but in Istanbul, where a new airport and new tunnels under the Bosporus are being planned. Logistics and sheds in mainland Europe continue to perform well and Lyon, Antwerp, Warsaw and Prague have been cited as the main cities to look at in this sector.
Risks and challenges
The obvious risk is the continued uncertainty over the eurozone. It is an issue so much on investors’ radars
that, in relation to the UK – where an in/out referendum has been proposed in 2017 – it has even been cited as one of the main reasons why London was knocked off its top spot as the leading global financial centre by New York for the first time in seven years (see feature on page 24).
And with continued bailouts and a possible Grexit (at the time of going to print) there is mounting fear that Europe could soon become weaker than the sum of its parts. Experts have warned that if Greece does leave the EU, it would set a precedent with the potential to destroy the union.
Must-have contacts
Dmitry Mints, son of Russian oligarch Boris Mints and chairman of O1 Properties, one of Moscow’s most prolific developers.
Matt Brittin, managing director, Google UK, his decision to plant a new HQ in King’s Cross, N1C, secured the area’s reputation and had a ripple effect across the UK capital.
Jose Caireta, managing partner, Squircle Capital, fund manager and investor specialising in private equity and Spanish real estate, with a focus on Barcelona.
Daniel Van Gelder, co-founder of London developer Exemplar and chairman of the Westminster Property Association
City guide Madrid
Against the rather gloomy backdrop of Spain’s deep and well documented recession over the past five years, Europe’s fourth-biggest city is not only starting to see signs of recovery, it is being hailed as one of the continent’s most hotly anticipated growth stories.
Why invest?
Little finance for development for the past eight years has led to a lack of supply of high-quality housing and offices. The combination of a more active occupier market, limited development pipeline and increased consumer spending in retail predicts strong rental growth. This will increase Madrid’s investment appeal, leading to yield compression and enhanced growth in capital values. And the Madrid office market is expected to be one of the best-performing property sectors in Europe over the next two years. Rents are 40% off peak, capital values are low, and yields are compressing but still higher than other European cities. “This is one of the cities you can make some money in,” says Humphrey White of Knight Frank Spain.
The numbers
€700m office investment in the first half of 2014
€400m office investment in the whole of 2013
The opportunities
Offices are the preferred asset class, according to Knight Frank. Restrained development over recent years has stabilised the vacancy rate at 11.5%, and just 2% for grade-A space in central Madrid. Take-up has risen by 25% year-on-year. Bottoming out in 2013, prime rents increased by 14% in H1 2014 to stand at €28 per m2 per month. “Any grade-A space within the A30 ring road is a good bet. Areas north of the city will be next to pick up, like Arroyo de la Vega, Campo de las Naciones and then Julián Camarillo,” says Knight Frank’s White.
Stand-out scheme
After being placed on hold in 2013, Operación Chamartín, which includes the lengthening of Paseo de Castellana and the construction of 17,000 houses, was restarted by the government in late 2014 with a 20-year development plan.
Additional reporting by Sophie Easthaugh
Top tips
Soak up Madrid’s hustle and bustle from Puerta del Sol before delving into the Prado’s world-class collection of European art.
Two Michelin-starred La Terraza del Casino is the place for cutting-edge cuisine.
For post-deal drinks, hang out at Buddha del Mar.
