Editor's Choice: A hard act to follow

Will 2015 prove to be the peak of the current cycle, the year that investors pumped just a smidgeon above €300 bn into European property markets?

The evidence is stacking up that it may be. Real Capital Analytics, for example, expects 2016 will be a strong, but not record-breaking year after a flurry of deals completed in the final quarter of 2015 helped nudge the full-year volume past the previous peak of the market in 2007.

A similar scenario is playing out on the European stage for real estate loan deals. The corporate finance team at Cushman & Wakefield believe 2015 will be a difficult year to beat after transaction volume rose to a record of €86 bn.

As real estate analysts continue to crunch the data for the past 12 months, more records will no doubt be broken. The UK remains the biggest market by volume and saw a record £71 bn invested in 2015, but other countries and regions also outperformed in the 12-month period. For example, property market transactions surged to a record level of almost €40 bn in the Nordics while Germany doubled retail investment volumes to move past the UK and become the busiest retail investment market in Europe.

A distant memory
In light of the recent turmoil that has affected equity markets and pessimism regarding growth prospects for the global economy, 2015 might now seem a distant memory. While the jury is still out on whether 2015 will prove to be the peak of the current cycle, there are enough dissimilarities with 2007 to dispel feelings of déjà vu.

Commenting on the overall prospects for the European real estate market at the recent ULI conference in Paris, Isabelle Scemama, CEO of AXA REIM SGP, conceded that the repercussions of geopolitical events could have an impact. But, she added, the low oil price and euro should support growth. ‘The picture is not too bad for Europe…There is no debt oversupply, which is very different to the last cycle. The fundamentals are good.’

In contrast to the previous cycle, supply levels remain broadly under control and there are few, if any, pockets of saturation in Europe. As a result, a resurgence of rental growth is still expected in many markets.

Another major difference between this cycle and the previous one is that the big increase in cross-border investment has come from the non-European players. These ‘global’ investors bought €95.5 bn of European real estate in 2015, up from €65.7 bn in 2014 and €63.4 bn in 2007. Not only has the amount of money coming into Europe increased by more than 50% since the previous peak, the source of this capital has also widened considerably.

In the past few years, Europe’s property markets have seen an influx of capital from new sources and it is the flow of money westwards from Asia in particular, but also the Middle East, that is driving overall volumes to new records. According to data from RCA, the Qataris were the third biggest global investors in 2015, while Chinese, Taiwanese, Singaporean, South Korean and Thai investors all purchased more than €1 bn of stock.

Sea-change
‘This represents a sea-change from 2007 when, aside from the US, the biggest global players in the market were the Israelis and the Australians,’ writes Tom Leahy, director of market analysis EMEA at RCA, in a commentary in the latest edition of Top 100 Investors.

It is not just the investor groups buying in Europe that have widened. Their geographical focus has also broadened, with 69 active markets in Europe in 2015, compared with 45 in 2012, according to RCA data. This would seem to indicate, Leahy argues, that as investors get more comfortable with investing in Europe they are happier to move out of the major metropolitan areas like London and Paris. ‘It also shows how the real estate market recovery has spread out from the core markets of the UK, France and Germany, and into the rest of Europe.’

Recent deals in mainland Europe by Taiwanese and Korean investors add strength to this argument. At the same time, as the European property arena becomes increasingly global, with almost half of all transactions now involving a non-European buyer or seller, macroeconomic worries over the health of the global economy absolutely have the potential to derail positive market momentum.

A more fundamental concern relates to the weight of capital that has pushed yields to historic low levels in many countries and cities, writes Peter Hobbs, managing director and head of real estate research at MSCI, in a contribution in PropertyEU’s latest edition of Top 100 Investors. Spreads with bond yields and finance cost remain wide, but the absolute level of real estate yields is an important indicator of real estate pricing, he argues: ‘There are a number of warning signals that should be heeded, and there is a series of lessons from previous crises that can strengthen discipline and risk management in anticipation of potential downturn,’ he warns.

While 2015 may be a hard act to follow, there are plenty of advisors forecasting another buoyant year and even the most cautious market watchers are anything but pessimistic. In any case, the significant variations in performance across countries, cities and property types mean that there is still something for almost everybody in Europe.

A downturn may be on the horizon, but to quote Hobbs once more, it is too early to call the end of the ‘post-GFC real estate recovery’ let alone the start of a major real estate crisis.

Judi Seebus
Editor in Chief