Risk perception is rising in some quarters and more investors are contenting themselves with a strategy focused on ‘same risk – lower return'.
On the face of it, prospects remain favourable for Europe’s real estate sector. Over the summer, a large number of big-ticket deals were struck in the prime office sector across the UK and the Continent with the sale of the ‘Walkie Talkie’ in London to a Hong Kong herbal medicines producer hitting the headlines as the UK’s largest-ever office investment deal and reinforcing the impression that concerns about the looming Brexit have dissipated somewhat since the May elections.
Over in Paris, Norges Bank Real Estate Management confirmed its acquisition of 6-8 Boulevard Haussman from Abu Dhabi Investment Authority (ADIA) subsidiaries while in Germany, investors targeting Berlin or Munich were no doubt pleased to learn in recent weeks that both cities are expected to have the second- and third-lowest vacancy rates in the world by 2019, at 3.1% and 3.3% respectively, according to a new report from Cushman & Wakefield.
Indeed, office vacancy rates in Europe are likely to remain lower than pre-recession levels, despite improving development activity across the region, the study found. This is good news for rental prices and recovery on this front did in fact help boost earnings at many of Europe’s listed real estate companies in the first six months of the year. The widespread lack of class A office stock affects capitals across the Continent, from Paris to Berlin and Stockholm to Milan, and new developments will need a few years to complete at a time that demand is increasing. The listed sector in Continental Europe in particular is in a sweet spot after a robust H1 performance, with stable cashflows and positive or even very strong revaluations.
Smoke signals
With the fundamentals in Continental Europe looking sound, there does not seem to be any immediate danger – at least on the supply side – that the sweet spot will turn sour anytime soon. But, to mix metaphors, there are smoke signals on the other side of the Channel where UK retail REITs and London-focused companies in particular are seeing their shares trade at a widening discount to net asset value (NAV). Industry watchers say the widening spread between NAVs and the discounts at which listed European real estate companies are trading may be seen as a bellwether of the rising risk perceived to be in the market.
Overall, however, the risk perception of equities investors is mostly focused on UK stocks at present, Peter Papadakos, an analyst with real estate research firm Green Street Advisors, noted. ‘Generally speaking, we do not see material discounts on the Continent, and the overall pan-European REIT market is trading close to spot NAVs.’
On the Continent, rental growth could offset any potential impact from rising long-term interest rates and, in any case, any correction that does occur will not be supply driven, he added. ‘Either there will be a demand-driven shock or there may be something on the credit side that could disrupt. I don’t think it will be the real estate fundamentals that will cause a correction, if there is one in the next 12 months.’
While there doesn’t seem to be any risk of a fire at present, market barometers are showing a shift in sentiment. A recent poll by Union Investment Real Estate found that 75% of investors in European real estate fear that investment returns will remain flat until at least 2019, with over half believing it will take even longer. According to the data, an investment strategy based on ‘same risk – lower return’ is being pursued by 71% of investors in Germany and by 74% of respondents in the UK. Those concerned that the market is overheating may well view this as another smoke signal.
Judi Seebus
Editor in Chief PropertyEU
