Economic outlook for Europe remains fragile, says Colliers

The ongoing fragility of the economic recovery in Europe remains a key concern for real estate investors, according to Walter Boettcher, director of research and forecasting at Colliers International.

'In Europe, the entire real estate sector is looking at occupier markets in the hope that the demand that comes on the back of expansionary economics will start to firm. I keep waiting for Europe and the eurozone to start registering a little stronger growth - and I keep getting disappointed,' Boettcher said.

'It seems as if the market is 18 months away from recovery being fully implemented at any one time,' added Jonathan Lurie, managing director at Blackstone's real estate group. 'But,' he continued, 'we should not only focus on demand, but also on new supply. Ultimately the places where supply has been constrained is where rents will grow'.

Richard Divall, head of cross-border capital markets at Colliers International, agreed that occupier dynamics would remain very important to investment in 2015. 'We're starting to see rental growth in London and some German cities. But it's very very important to look at each country separately. Spain, for example, has very high unemployment while the Netherlands has very high vacancy levels.'

On a positive note, the economic environment in Europe is now looking slightly more stable, and it is going to stay positive over the next quarter or so, Boettcher predicted. Indeed, the market collectively heaved a big sigh of relief last week when the latest economic indicators showed that Germany and France have not gone into recession. 'But you know you've got a way to go if that sort of data - that a country is not going into recession - is viewed as a positive signal,' Boettcher noted.

Overall, the performance of the global economy is mixed, he continued. 'Germany is looking expansive again and the UK and the US are performing well. Spain is as well, but that country is coming from a low base.'

Market fundamentals
The most important thing, according to Philip la Pierre, head of investment management at Union Investment, is not to forget the fundamentals. 'There are growth scenarios and non-growth scenarios. Bonds have a habit of paying back money, real estate doesn't always,' he said.

Nevertheless, financing conditions have significantly improved in the past couple of years, he added. 'There's still enough music in financing relative to bonds. Financing has become very competitive and the market is very crowded. What you need to be aware of going forward is income.'

At the same time, German investors have very little choice with bund yields at historic lows, argued Mike Sales, managing director for Europe at TIAA Henderson Real Estate. 'Property still looks attractive on a relative basis. If you see where yields are, they are still at a healthy premium to bonds.'

'The German market has a really interesting dynamic,' he added. 'The last thing investors are going to do is put their capital back into the bund market. With real estate they can fetch net yields of between 6 and 7% and 8% cash on cash. Over a 10-year period, they're looking at 6% IRRs. Real estate solves - or at least puts off - the problem they currently have.'

Sales warned, however, that some investors are losing sight of the exit with yields in some of the big global financial centres in particular looking very sharp. 'If you look at the amount of rental growth you need to recover on some of those yields, it looks like the exit is being underestimated and that buyers are forgetting that one day they should be selling this building. But that is more specific to the big financial cities.'