Following Angela Merkel's election win in Germany, and as 30,000-plus delegates head to Munich for Expo Real, the outlook for European property markets could not be brighter, writes Andrew Sim, Knight Frank’s new head of global capital markets.

andrew sim knight frank

Andrew Sim Knight Frank

Unpredictable European elections cast a shadow over the global real estate market as investors headed to Mipim back in March.

Now, with Angela Merkel’s historic fourth term as German Chancellor secured and with 30,000-plus delegates heading to Munich for the capital markets bonanza at Expo Real, the mood is much brighter.

And if the mood in Britain appears tense with Prime Minister May having badly miscalculated her June election gamble, there is still unlikely to be another general election before 2021 or 2022.

With the Eurozone showing good economic growth for the first time since the Global Financial Crisis property, markets across the Continent have stabilised, so here is my prognosis for the next year across Europe’s main real estate markets:

Germany
First, Germany: we are consistently seeing more German money heading towards the UK, and many of the fund managers I’m due to meet at Expo Real see more value in the UK than at home. In Germany yields have continued to compress, with offices in central business districts trading at record levels and record demand forcing up prices.

In our latest analysis of the German market released this month we show that transaction volumes rose by 30% in the first half of 2017, with Dusseldorf, Cologne and Stuttgart all seeing volumes rising by more than 70%.

My forecast?

With German leasing markets also appearing to be lifted by Brexit, strong investor demand is under-pinned by good occupational demand, and we can only see Germany maintaining its position as Europe’s most active market with a healthy flow of new money from Asia and further yield compression on the way.

France
How about France?

President Macron’s election has given the market a tremendous lift after the malaise of the Hollande years – and the momentum is strong.

There is belief and activity, with the vacancy rate on Paris’s Ile de France falling sharply to 6.6%. In the CBD vacancy rates are now 3.1%. Our view is that the occupational market is set to strengthen further as well, and moving forward we expect the tech sector to account for up to 15% of total employment in Paris.

This is underpinning a strong investment market, with prime yields sitting between 3% and 3.25% now at record lows for the best CBD locations.

What do I expect for France for the rest of 2017?

Within Knight Frank we are anticipating the completion of a number of significant high profile investment transactions in the second half of 2017, and while French investors accounted for 63% of transactions in the first half of the year there is still growing demand from overseas buyers too.

United Kingdom
Which leaves the United Kingdom. While the Eurozone has seen a return to growth, Britain has lagged behind in the wake of its decision to leave the European Union.

However, the collapse into recession and steep losses predicted by Her Majesty’s Treasury in the event of a `Leave’ vote has not materialised, and in fact Britain is now experiencing record low levels of unemployment.

In contrast to what many commentators say, London in particular is continuing to power ahead, with confidence indices rising and office take-up by the tech and creative sectors actually having increased in the first half of 2017 compared with the same period in 2016.

Amazon has announced plans to double the size of its London-based research & development workforce, and Deutsche Bank has hit the headlines across Europe by agreeing a pre-let deal on a new London office even with Brexit less than two years away.

The upshot is that London remained the most active investment market in Europe in the first half of 2017, with prices having risen to pre-referendum levels despite an air of uncertainty.

My prediction for London for the next six months?

We expect an increase in activity as the prospect of a two- or three-year `transitional’ deal for Britain when leaving the European Union sinks in, leaving more and more investors expecting the return of the London capital markets `status quo’.

To sum up: Europe’s real estate markets are generally in better shape than at any time since the Global Financial Crisis. In many markets we are cyclically well advanced up the pricing curve but there is still value to be had against a background of positive sentiment which will no doubt be felt at the Expo fair.